UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2001
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from ______________ to _______________
Commission File Number 0-23852
MRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2448516
(State or other jurisdiction (I.R.S employer
incorporation or organization) identification number)
100 CROSBY DRIVE, BEDFORD MASSACHUSETTS 01730
(Address of principal executive offices, including zip code)
(781) 280-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 22,755,239 shares of common stock, $.01 par value per share,
as of January 31, 2001.
MRO SOFTWARE, INC.
10-Q INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements Page
Consolidated Balance Sheets (unaudited) as of December 31,
2001 and September 30, 2001. 3
Consolidated Statements of Operations (unaudited) for the
three months ended December 31, 2001 and 2000. 4
Consolidated Statements of Cash Flows (unaudited) for the
three months ended December 31, 2001 and 2000. 5
Notes to Consolidated Financial Statements (unaudited). 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURE 21
2
MRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS DECEMBER 31, SEPTEMBER 30,
2001 2001
---------- ----------
(IN THOUSANDS)
Current assets:
Cash and cash equivalents $ 49,640 $ 42,115
Marketable securities 4,528 5,532
Accounts receivable, trade, less allowance
for doubtful accounts of $3,953 at December 31, 2001
and $3,849 at September 30, 2001, respectively 38,316 42,746
Prepaid expenses and other current assets 6,646 5,099
Deferred income taxes 3,047 3,045
---------- ----------
Total current assets 102,177 98,537
---------- ----------
Marketable securities 705 707
Property and equipment, net 11,124 11,669
Intangible assets, net 48,482 52,353
Other assets 2,086 2,082
Deferred income taxes 7,076 6,105
---------- ----------
Total assets $ 171,650 $ 171,453
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 16,868 $ 16,445
Accrued compensation 8,180 10,789
Income taxes payable 811 823
Deferred revenue 22,128 19,893
---------- ----------
Total current liabilities 47,987 47,950
---------- ----------
Other long term liabilities 98 150
Stockholders' equity
Preferred stock, $.01 par value; 1,000 authorized,
none issued and outstanding
Common stock, $.01 par value; 50,000 authorized;
22,438 and 22,250 issued at December 31, 2001
and September 30, 2001, respectively 224 223
Additional paid-in capital 90,095 88,059
Deferred compensation (258) (285)
Retained earnings 34,919 36,844
Accumulated other comprehensive loss (1,415) (1,488)
---------- ----------
Total stockholders' equity 123,565 123,353
---------- ----------
Total liabilities and stockholders' equity $ 171,650 $ 171,453
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
3
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
-----------------------------------
2001 2000
---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Software $ 13,825 $ 12,597
Support and services 32,651 28,871
---------- ----------
Total revenues 46,476 41,468
---------- ----------
Cost of revenues:
Software 1,107 466
Support and services 16,946 16,069
---------- ----------
Total cost of revenues 18,053 16,535
---------- ----------
Gross profit 28,423 24,933
Operating expenses:
Sales and marketing 16,016 21,086
Product development 6,667 5,560
General and administrative 4,728 4,246
Amortization of goodwill and other intangibles 3,903 3,636
---------- ----------
Total operating expenses 31,314 34,528
---------- ----------
Loss from operations (2,891) (9,595)
Interest income 272 370
Other (expense)/income, net (3) 275
---------- ----------
Loss before income taxes (2,622) (8,950)
Benefit from income taxes (697) (1,255)
---------- ----------
Net loss $ (1,925) $ (7,695)
========== ===========
Net loss per share, basic and diluted $ (0.09) $ (0.35)
---------- ----------
Shares used to calculate net loss per share
Basic and diluted 22,311 22,083
The accompanying notes are an integral part of the consolidated
financial statements.
4
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
-----------------------------------
2001 2000
---------- ----------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss $ (1,925) $ (7,695)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 5,296 5,022
Loss on sale and disposal of property
and equipment -- 60
Amortization of premium on marketable securities 16 4
Stock-based compensation 27 19
i2 warrant expense -- 3,287
Deferred income taxes (973) (1,904)
Changes in operating assets and liabilities, net of effect of
acquisitions:
Accounts receivable 4,430 5,508
Prepaid expenses and other assets (1,577) (116)
Accounts payable and accrued expenses 370 853
Accrued compensation (2,609) (2,331)
Income taxes payable (12) 2,313
Deferred revenue 2,235 1,151
---------- ----------
Net cash provided by operating activities 5,278 6,171
---------- ----------
Cash flows from investing activities:
Acquisitions of property and equipment and other
capital expenditures (855) (2,029)
Sale of marketable securities 980 2,058
---------- ----------
Net cash provided by investing activities 125 29
---------- ----------
Cash flows from financing activities:
Payment of line of credit -- (2,278)
Proceeds from exercise of stock options 2,037 315
---------- ----------
Net cash provided by/(used in) financing activities 2,037 (1,963)
---------- ----------
Effect of exchange rate changes on cash 85 509
---------- ----------
Net increase in cash and cash equivalents 7,525 4,746
Cash and cash equivalents, beginning of period 42,115 31,584
---------- ----------
Cash and cash equivalents, end of period $ 49,640 $ 36,330
========== ==========
The accompanying notes are an integral part of the consolidated
financial statements.
5
MRO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of MRO Software, Inc. ("MRO") and its majority-owned subsidiaries
(collectively, the "Company"), as of December 31, 2001 and have been prepared by
the Company in accordance with generally accepted accounting principles for
interim reporting and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. All intercompany accounts and transactions have been eliminated.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair presentation of the Company's financial
position, results of operations and cash flows at the dates and for the periods
indicated. The results of operations for the periods presented herein are not
necessarily indicative of the results of operations to be expected for the
entire fiscal year, which ends on September 30, 2002, or for any other future
period.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended September
30, 2001 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on December 28, 2001.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
B. INCOME PER SHARE
Basic income (loss) per share is computed by dividing net income or loss
available to common shareholders by the weighted average number of common shares
outstanding. Diluted net income (loss) per share is computed by dividing net
income (loss) available to common shareholders by the weighted average 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.
6
Basic and diluted net loss per share are calculated as follows:
THREE MONTHS ENDED
-------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 12/31/01 12/31/00
-------- --------
Net loss $ (1,925) $ (7,695)
Denominator:
Weighted average common shares
outstanding-basic 22,311 22,083
Effect of dilutive securities (1) -- --
Weighted average common shares
outstanding-diluted 22,311 22,083
======== ========
Net loss per share-basic & diluted $ (0.09) $ (0.35)
(1) Options to purchase shares of the Company's common stock of 1,033,966 and
2,181,697 for the three months ended December 31, 2001 and 2000, respectively,
were outstanding but were not included in the computations of diluted net 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 1,026,000 and 168,000 for the three months ended December
31, 2001 and 2000, respectively, were excluded from the computation of diluted
net loss per share, as the effect was anti-dilutive due to the Company's net
loss.
7
C. COMPREHENSIVE LOSS:
The following table reflects the components of comprehensive net loss:
THREE MONTHS ENDED
DECEMBER 31,
-----------------------
(IN THOUSANDS) 12/31/01 12/31/00
------- -------
Net loss $(1,925) $(7,695)
Other comprehensive net loss,
Net of tax:
Unrealized (loss)/gain on securities arising during period (9) 4
Foreign currency translation adjustment 82 529
------- -------
Comprehensive loss $(1,852) $(7,162)
======= =======
D. SEGMENT INFORMATION, GEOGRAPHIC DATA AND MAJOR CUSTOMERS:
In the previous fiscal year (fiscal 2001), the Company operated in two
reportable industry segments: (1) the development, marketing and support of
"Demand-Side" software products and services, consisting of MAXIMO(R)
Enterprise(TM) and MAXIMO(R) Extended Enterprise(TM) and (2) the development,
marketing and support of "Supply-Side" software products and services,
consisting of Online Commerce Services ("OCS") and catalog content management.
During fiscal 2001, the Company's management assessed the operating results of
these segments separately and allocated resources accordingly.
During the prior fiscal year, we found that certain elements of our
"Supply-Side" offerings could be sold into our MAXIMO customer base, and that
our "Demand-Side" customers could influence their online trading partners to
subscribe to OCS as a means of achieving supply-chain integration. In August
2001, we acquired the Collego Catalog Manager product, which supplements the
product offerings available to our "Demand-Side" customers, and will also become
integrated into OCS on the "Supply-Side". As a result, the Company began to
market all of its products and services as components of a single integrated
solution set which address the broad range of business needs for asset-intensive
companies and their business partners. In the current fiscal year (fiscal 2002),
the Company is operating in one reportable industry segment: providing
e-Business solutions for asset-intensive companies.
During the quarter ended December 31, 2001, the Company consolidated its sales
and marketing functions and blended its "Demand" and "Supply-Side" operations in
order to focus on one industry segment, providing e-Business solutions.
Beginning in fiscal 2002, the "Demand-Side" product offerings have been re-named
Strategic MRO, and the "Supply-Side" product offerings have been split into two
distinct products groups: Online Commerce Services ("OCS") and Enterprise
Catalog Management. Strategic MRO, OCS and Enterprise Catalog Management
represent the three product groups of the Company. The Company reports revenues
per these three product groups but does not allocate operating expenses to these
three product groups. The Company's management assesses its operating results on
an aggregate basis to make decisions about resources to be allocated to
8
the various product groups. All segment-reported financial information contained
in this report has been restated to reflect the Company's repositioning to one
industry segment, effective in the first quarter of fiscal 2002.
The Company manages its business across 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 was as follows:
THREE MONTHS ENDED
DECEMBER 31,
-------------------------------
(IN THOUSANDS) 2001 2000
-------- --------
Revenues:
United States $ 28,928 $ 25,894
Other Americas 2,131 2,541
Intercompany revenues 3,373 961
-------- --------
Subtotal $ 34,432 $ 29,396
Europe/Middle East and Africa 12,712 10,114
Asia/Pacific 2,705 2,919
Consolidating eliminations (3,373) (961)
-------- --------
Total revenues $ 46,476 $ 41,468
======== ========
The Company has subsidiaries in foreign countries, which sell the Company's
products and services in their respective geographic areas. Intercompany
revenues primarily represent shipments of software to international subsidiaries
and are eliminated from consolidated revenues.
E. COMMON STOCK:
In December 2000, the Company issued a warrant to i2 Technologies, Inc. ("i2")
under which i2 has 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. The warrant has not been exercised as of
December 31, 2001.
F. ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141") "Business Combinations",
which requires the purchase method of accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method. In
addition, SFAS 141 establishes specific criteria for the recognition of
intangible assets separately from goodwill and requires unallocated
9
negative goodwill to be written off immediately as an extraordinary gain. The
provisions of SFAS 141 have been adopted as of July 1, 2001. The adoption of
SFAS 141 has not changed the method of accounting used in previous business
combinations initiated prior to July 1, 2001.
In June 2001, the FASB also issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142") "Goodwill and Other Intangible Assets", which is effective
for fiscal years beginning after December 15, 2001. Certain provisions shall
also be applied to acquisitions initiated subsequent to June 30, 2001. SFAS 142
requires, among other things, the discontinuance of amortization related to
goodwill and indefinite lived intangible assets. These assets will then be
subject to an impairment test at least annually. In addition, the standard
includes provisions upon adoption for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles and reclassification of certain intangibles out of
previously reported goodwill. The Company will adopt SFAS 142 effective October
1, 2002, which will result in the Company no longer amortizing its existing
goodwill. At December 31, 2001, goodwill approximated $61.4 million and
accumulated goodwill amortization approximated $22.8 million. In addition, the
Company will be required to measure goodwill for impairment as part of the
transition provision of SFAS 142. The Company is required to complete transition
impairment tests no later than March 31, 2003. Any impairment resulting from
these transition tests will be recognized as the cumulative effect of a change
in accounting principle. The Company will not be able to determine if an
impairment will be required until completion of such impairment tests.
In October 2001, the FASB issued SFAS. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"). SFAS 144 provides guidance on the
accounting for the impairment or disposal of long-lived assets. The objectives
of SFAS 144 are to address issues relating to the implementation of SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of", and to develop a model for long-lived assets to be disposed of
by sale, whether previously held and used or newly acquired. SFAS 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and will become effective for the Company commencing October
1, 2002. The Company is currently evaluating the impact that this statement will
have on its results of operations and financial position.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q, as well as documents incorporated herein by
reference, may contain forward-looking statements (within the meaning of section
27A of the Securities Act of 1933, as amended, and section 21E of the Securities
Exchange Act of 1934, as amended). The following and similar expressions
identify forward-looking statements: "expects", "anticipates", and "estimates".
Forward-looking statements include, without limitation, statements related to:
the Company's plans, objectives, expectations and intentions; the timing of,
availability and functionality of products under development or recently
introduced; and market and general economic conditions. Important factors that
could cause actual results to differ materially from those suggested by the
forward-looking statements for various reasons, include those discussed under
the heading "Factors Affecting Future Performance" below. These forward-looking
statements speak only as of the date of this Quarterly Report, and the Company
disclaims any obligation to update such forward looking statements as a result
of any change in circumstances or otherwise.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial conditions and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires that
management make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. The Company's management continually
evaluates its estimates based on historical experience and other various
assumptions that are believed to be relevant and reasonable. Based on the
results of the evaluation, management may adjust its estimates and the carrying
values of assets and liabilities.
The Company believes that the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements. First, the Company maintains allowances for
doubtful accounts, which reflect the Company's estimate of the amounts owed by
customers that customers will be unable to pay. 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 December 31, 2001, adequately
covers any potential credit risks. However, if the financial condition of our
customers deteriorates and they are not able to make payments in excess of our
estimates, then we may need to increase our allowance reserves. Second, the
Company computes deferred income taxes based on the differences between the
financial statement values and the tax basis of assets and liabilities using the
tax rates in effect for the years in which the differences are expected to
reverse. The largest component of the Company's deferred tax asset is
attributable to tax deductible goodwill. The Company has not recorded a
valuation allowance related to goodwill amortization because we expect to
realize taxable income in fiscal 2002 and in future periods, and it is more
likely than not that all of the net deferred tax assets will be realized.
Management will continually assess the realizability of its net deferred tax
assets. In the event the Company determines that it cannot realize the net
deferred tax assets, an adjustment to the net deferred tax assets will be
required and will result in a charge to income in the period such a
determination is made.
OVERVIEW
MRO Software, Inc. provides e-Business solutions for asset intensive companies.
Through our unique combination of domain expertise in maintenance, repair and
operations and enterprise asset maintenance ("EAM") software products, and
through our hosted solutions that enable manufacturers and distributors to
participate in e-commerce, the Company provides a comprehensive industrial
supply chain solution. The Company's Strategic MRO, Online Commerce Services and
Enterprise Catalog Management solutions allow customers to streamline their
internal processes and compete more efficiently in an increasingly collaborative
and electronic market. Our Strategic MRO solutions (MAXIMO(R)) help companies in
asset intensive industries increase their return on assets while decreasing
their operational costs, including the costs of transacting with their
suppliers. Our OCS solutions provide the tools and technology to enable
distributors and manufacturers of industrial parts - through one catalog and one
connection - to gain exposure to all types of buyers via multiple marketplaces
and exchanges. The Enterprise Catalog Management products are the Internet-based
content management tools and cataloging services, which supplement the OCS
offerings with powerful online industrial catalog applications and broaden
MAXIMO's product functionality.
In the previous fiscal year (fiscal 2001), the Company operated in two
reportable industry segments: (1) the development, marketing and support of
"Demand-Side" software products and services, consisting of MAXIMO(R)
Enterprise(TM) and MAXIMO(R) Extended Enterprise(TM) and (2) the development,
marketing and support of "Supply-Side" software products and services,
consisting of Online Commerce Services ("OCS") and catalog content management.
During fiscal 2001, the Company's management assessed the operating results of
these segments separately and allocated resources accordingly.
During the prior fiscal year, we found that certain elements of our
"Supply-Side" offerings could be sold into our MAXIMO customer base, and that
our "Demand-Side" customers could
11
influence their online trading partners to subscribe to OCS as a means of
achieving supply-chain integration. In August 2001, we acquired the Collego
Catalog Manager product, which supplements the product offerings available to
our "Demand-Side" customers, and will also become integrated into OCS on the
"Supply-Side". As a result, the Company began to market all of its products and
services as components of a single integrated solution set which address the
broad range of business needs for asset-intensive companies and their business
partners. In the current fiscal year (fiscal 2002), the Company is operating in
one reportable industry segment: providing e-Business solutions for
asset-intensive companies.
During the quarter ended December 31, 2001 the Company consolidated its sales
and marketing functions and blended its "Demand" and "Supply-Side" operations in
order to focus on one industry segment, providing e-Business solutions.
Beginning in fiscal 2002, the "Demand-Side" product offerings have been re-named
Strategic MRO, and the "Supply-Side" product offerings have been split into two
distinct products groups: Online Commerce Services ("OCS") and Enterprise
Catalog Management. Strategic MRO, OCS and Enterprise Catalog Management
represent the three product groups of the Company. The Company reports revenues
per these three product groups but does not allocate operating expenses to these
three product groups. The Company's management assesses its operating results on
an aggregate basis to make decisions about resources to be allocated to the
various product groups. All segment-reported financial information contained in
this report has been restated to reflect the Company's repositioning to one
industry segment, effective in the first quarter of fiscal 2002.
RESULTS OF OPERATIONS
REVENUES
Three Three
Months Months
Ended CHANGE Ended
(in thousands) 12/31/01 % 12/31/00
- --------------------------------------------------------------------------------
Software licenses $13,825 10% $12,597
Percentage of total revenues 30% 30%
Support and services $32,651 13% $28,871
Percentage of total revenues 70% 70%
Total revenues $46,476 12% $41,468
The Company's revenues are derived primarily from two sources: (i) software
licenses, and (ii) fees for support and services, including support contracts,
training and consulting services, Online Commerce Services subscription fees,
electronic commerce transaction fees, and catalog services. The Company has
organized its product offerings into three product groups: (1) Strategic MRO
products and services, (2) Online Commerce Services and (3) Catalog Management
products and services. Strategic MRO products consist of the MAXIMO software
products and services. Online Commerce Services are the application service
provider fees that
12
enable manufacturers and suppliers to engage in online commerce according to
their needs. Enterprise Catalog Management products consist of the Collego
Catalog Manager software products and services, as well as content
normalization/cataloging services and applications.
Software license revenues increased 10% or $1.2 million in the three months
ended December 31, 2001 over the comparable quarter of the prior year. Strategic
MRO software license revenues for the three months ended December 31, 2001
increased 8% to $13.6 million from $12.5 million over the comparable period. The
Company attributes this increase to an increase in the number of software
licenses sold to a diverse group of customers. In September 2001, the Company
released MAXIMO Version 5.0. a pure Internet architectured product. With the
general availability of MAXIMO Version 5.0, the Company expects that demand from
its installed base and new customers will continue to increase. However, the
Company can make no assurances that this new version will be as successful or
better received than its prior versions of MAXIMO.
Support and services revenue increased 13% or $3.8 million over the comparable
quarter. Support revenues were $12.8 million and $11.0 million for the three
months ended December 31, 2001 and 2000, respectively. Support revenues have
increased as a result of an increase in the number of customers supported by the
Company, as well as a strong renewal rate for the current quarter. Strategic MRO
support revenues represented 99% and 98% of total support revenues for the three
months ended December 31, 2001 and 2000, respectively. Service revenues were
$19.9 million and $17.8 million for the three months ended December 31, 2001 and
2000, respectively. The increase is attributable to an increase in demand for
Strategic MRO services, partially offset by a decrease in catalog services
(content normalization). The decrease in catalog services compared to the three
months ended December 31, 2000, was due to the expiration of a large content
normalization contract for which the Company recognized revenues during the
comparable period, and which was completed during the second quarter of fiscal
2001. Strategic MRO service revenues represented 82% and 77% of total services
revenues for the three months ended December 31, 2001 and 2000, respectively.
Strategic MRO revenues represented 92% and 89% of total revenues for the three
months ended December 31, 2001 and 2000, respectively. The increase in the three
months ended December 31, 2001 over the comparable period is attributable to an
increase in the number of software licenses sold as well as increases in the
demand for services. Online Commerce Services represented 2% and 1% of total
revenues for the three months ended December 31, 2001 and 2000, respectively.
The adoption rate of these services by the industrial supplier community has
been slower than anticipated and may continue to be slow over the balance of the
fiscal year. Catalog Management revenues represented 6% and 10% of total
revenues for the three months ended December 31, 2001 and 2000, respectively.
The decline is attributable to a decrease in the demand for content
normalization services. The Company has not yet realized any revenues from its
Collego Enterprise Catalog Manager product, but expects to recognize revenue in
the second half of this fiscal year. While OCS and the Catalog Manager products
do not currently comprise a significant portion of total revenues, these
products are an essential element of the comprehensive industrial supply chain
solution for asset intensive companies and the Company will continue to invest
resources in these products.
13
COST OF REVENUES
Three Three
Months Months
Ended CHANGE Ended
(in thousands) 12/31/01 % 12/31/00
- --------------------------------------------------------------------------------
Software licenses $ 1,107 138% $ 466
Percentage of software licenses 8% 4%
Support and services $16,946 5% $16,069
Percentage of support and services 52% 56%
Total cost of revenues $18,053 9% $16,535
Percentage of total revenues 39% 40%
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, and certain employee costs related to software duplication,
packaging and shipping. The increase in the cost of software license revenues
for the three months ended December 31, 2001 compared to the comparable period
was due primarily to an increase in the amount of royalties paid to a
third-party vendor due to a large software contract concluded during the current
quarter.
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. The
increase in cost of support and services for the three months ended December 31,
2001 compared to the comparable period was attributable to the hiring of
additional employees for the Company's support and services organizations,
service incentives paid to employees based on the increase in service revenues
and the use of third-party consultants. The decrease in cost of support and
services as a percentage of support and services revenues for the three months
ended December 31, 2001 compared to the comparable period is mainly attributable
to a decrease in travel related costs for the services organization due partly
to management's focus on streamlining these costs.
OPERATING EXPENSES
Three Three
Months Months
Ended CHANGE Ended
(in thousands) 12/31/01 % 12/31/00
- --------------------------------------------------------------------------------
Sales and marketing $16,016 (24%) $21,086
Percentage of total revenues 34% 51%
Product development $ 6,667 20% $ 5,560
Percentage of total revenues 14% 13%
General and administrative $ 4,728 11% $ 4,246
Percentage of total revenues 10% 10%
14
The decrease in sales and marketing expenses for the three months ended December
31, 2001 compared to the comparable period was primarily attributable to a
one-time charge of $3.3 million for a warrant issued to i2 Technologies, Inc.
("i2") and a write off a $1 million receivable from a company that filed for
bankruptcy protection in December 2000. Also contributing to the decrease in
sales and marketing expenses is a decrease in sales support and marketing
personnel, advertising and promotional expenses and lower travel costs.
Management is focused on streamlining sales and marketing expenses in line with
revenue expectations.
The increase in product development expenses was primarily due to the hiring of
additional employees to further develop the Company's Collego Enterprise Catalog
Manager product offerings. In September 2001, the Company released MAXIMO 5.0, a
pure Internet product developed on open standards component architecture. The
Company will continue to make enhancements to MAXIMO 5.0, as well as its other
product offerings. The increase in product development expenses is also
attributable to translation of the Company's products to foreign languages.
The increase in general and administrative expenses for the three months ended
December 31, 2001 compared to the prior period was primarily due to salaries and
related benefits, as well as other expenses to support the increase in revenues
and global expansion of the Company. Management is focused on streamlining
general and administrative expenses in line with revenue expectations.
NON-OPERATING EXPENSES
Three Three
Months Months
Ended CHANGE Ended
(in thousands) 12/31/01 % 12/31/00
- --------------------------------------------------------------------------------
Interest income $ 272 (26)% $ 370
Other (expense) income $ (3) (101)% $ 275
Interest income is attributable to interest earned on marketable securities and
cash and cash equivalents. Interest rates have declined over the prior year and
thus the Company earned less on its investments.
Other expense was primarily attributable to currency translation losses in the
current quarter. To date, the Company has not engaged in currency hedging
transactions.
BENEFIT FROM INCOME TAXES
The Company's effective tax rate was a benefit of 27% and 14% for the quarters
ended December 31, 2001 and 2000, respectively. The reduction of the tax rate
benefit from 35% is due to the non-deductible nature of certain intangible and
goodwill costs. The current effective tax rate also reflects the full tax
benefit of deferred tax assets arising from future deductible temporary
differences, consisting mainly of tax-deductible goodwill.
15
The Company currently expects taxable income in fiscal 2002 and in future
periods and it is more likely than not that all of the net deferred tax assets
will be realized. The amount of net deferred tax assets considered realizable as
of December 31, 2001, could be reduced based on changing conditions. Management
will periodically assess the realizability of the net deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, the Company had cash and cash equivalents and
marketable securities of approximately $54.9 million and working capital of
$54.2 million.
Cash provided by operations was $5.3 million for the three months ended December
31, 2001 primarily attributable to the collection of accounts receivables.
Cash provided by investing activities was $125,000 for the three months
ended December 31, 2001 due to the sale of marketable securities, offset by
acquisitions of capital assets.
Cash provided by financing activities was $2.0 million for the three months
ended December 31, 2001 due to proceeds from the exercise of employee stock
options.
As of December 31, 2001, the Company's principal commitments consist primarily
of office leases for its U.S. and European headquarters. Under the terms of the
U.S. lease agreement, upon termination of the lease, the Company has the right
to extend the lease for an additional six year term for an agreed upon fixed
cost. The lease terminates on November 30, 2003. The Company leases its
facilities and certain equipment under non-cancelable operating lease agreements
that expire at various dates through June 2006.
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. On
December 20, 2001, the Company announced its intention to purchase Datastream
Systems, Inc., for a price of $6.00 per share, consisting of $1.00 in cash and
$5.00 in the form of the Company's Common Stock, representing a total purchase
price of approximately $121.5 million, of which $20.2 million would be payable
by the Company in cash. A copy of the Company's offer was filed with the SEC on
Form 425. As of the date of this Quarterly Report, Datastream has rejected the
Company's offer.
The Company believes that its current cash balances and marketable securities
will be sufficient to meet its working capital and capital expenditure
requirements through at least December 31, 2002. Should the Company acquire
Datastream Inc. under the terms of its offer as described above, the Company
believes that its current cash balances and marketable securities combined with
cash flow from operations will be sufficient to meet its working capital and
capital expenditure requirements through at least September 30, 2002. 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. The Company has no debt obligations. The Company expects that its
cash flow from operations will be sufficient to meet its working capital and
capital expenditure requirements through at least December 31, 2002. The factors
which might impact the Company's cash flows are the same factors which might
impact the Company's business and operations generally, as described below under
the heading "Factors affecting Future Performance". Should the Company
experience a downturn in cash flows from
16
operations, the Company's capital reserves (cash balance plus marketable
securities) will be sufficient to meet its working capital and planned capital
expenditure requirements through at least December 31, 2002. All of the
Company's long-term commitments (consisting mainly of operating equipment leases
and office leases) require payments, which do not substantially increase over
time more than commercially reasonable.
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 authorized officers, directors, employees,
agents and representatives of the Company, acting on its behalf, may include
forward-looking information which will be influenced by the factors referenced
below, and by other assumptions, risks and uncertainties. Forward-looking
information is based on assumptions, estimates, forecasts and projections
regarding the Company's future results as well as the future effectiveness of
the Company's strategic plans and future operational decisions. Forward-looking
statements made by or on behalf of the Company are subject to the risk that the
forecasts, projections, and expectations of management, or assumptions
underlying such forecasts, projections and expectations, may become 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. Certain important factors that could affect the Company's
actual results and actions and could cause such results and actions to differ
materially from any forward-looking statements made by or on behalf of the
Company are set forth on pages 18-24 in the Company's Annual Report to
Stockholders for fiscal 2001 under the heading "Factors Affecting Future
Performance", and are incorporated herein by reference.
OTHER RISK FACTORS
The factors referenced above and incorporated herein by reference are not a
complete description of all risk factors relevant to the Company's future
performance, and should be read and understood together with and in the context
of similar discussions which may be contained in the documents that the Company
files with the SEC in the future.
NO REVISIONS OR UPDATES TO FORWARD-LOOKING STATEMENTS
The Company undertakes no obligation to release publicly any revision or 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.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
The Company's primary exposures to market risk are the effect of fluctuations in
interest rates earned on its cash and cash equivalents and marketable securities
and exposures to foreign currency exchange rate fluctuations.
At December 31, 2001, the Company held $54.9 million in cash and cash
equivalents and marketable securities consisting of taxable and tax-exempt
municipal securities. Cash equivalents are classified as available for sale and
valued at amortized cost, which approximates fair market value. A hypothetical
10 percent increase in interest rates would not have a material impact on the
fair market value of these instruments due to their short maturity.
The Company develops its products in the United States and markets them in North
America, Europe, Middle East and Africa, Australia, Asia Pacific and Latin
America. As a result, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. Currently, the Company has no hedging contracts.
18
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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)
4. Instruments defining the Rights of Security Holders, Including
Indentures
4.1 Specimen certificate for the Common Stock, $ .01 par value, of the
Company
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
19
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)
(b) Reports on Form 8-K
There were no current reports filed on Form 8-K for the three months
ended December 31, 2001.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MRO SOFTWARE, INC.
Date: February 14, 2002 By: /s/ Peter J. Rice
----------------- -----------------
Peter J. Rice
Executive Vice President -
Finance and Administration,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
21
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE
- --- ----------- ----
3.1 Amended and Restated Articles of Organization of the Company (included as Exhibit 3.3 to the
Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated herein by
reference)
3.2 Restated By-Laws of the Company, as amended (included as Exhibit 3.2 to the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 1996 File No. 0-23852 and incorporated herein
by reference)
3.3 Amendment to By-Laws adopted on February 1, 2001 (included as Exhibit 3.3 to the Company's Current
Report on Form 10-Q for the quarter ended March 31, 2001, File No. 0-23852 and incorporated herein
by reference)
3.4 Form of Certificate of Designation of Series A Junior Participating Preferred Stock of MRO Software,
Inc. (which is attached as Exhibit A to the Rights Agreement included as Exhibit 4 (b) to the
Company's Current Report on Form 8-K dated February 2, 1998, File No. 0-23852, and incorporated
herein by reference)
3.5 Amendment to Articles of Organization adopted on December 15, 1999 (included as Exhibit 3.4 to the
Company's Form 10-Q for the quarter ended December 31, 1999, File No. 0-23852, and incorporated
herein by reference)
3.6 Amendment to Articles of Organization, dated March 6, 2001 (included as Exhibit 3.4 to the Company's
Current Report on Form 8-K dated March 9, 2001, File No. 0-23852, and incorporated herein by
reference)
4.1 Specimen certificate for the Common Stock, $ .01 par value, of the Company
4.2 Article 4B of the Amended and Restated Articles of Organization of the Company (included as Exhibit
4.1 to the Company's Registration Statement on Form S-1, Registration No. 33-76420, and incorporated
herein by reference)
4.3 Rights Agreement dated as of January 27, 1998, between the Company and BankBoston, N.A. as Rights
Agent (included as Exhibit 4 (a) to the Company's Current Report on Form 8-K dated February 2, 1998,
File No.0-23852, and incorporated herein by reference)
4.4 Form of Certificate of Designation of Series A Junior Participating Preferred Stock of 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)
22