SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT TO APPLICATION OR REPORT
Filed pursuant to Section 12, 13 or 15(d)
of the Securities Exchange Act of 1934
Date of Report (date of earliest event reported): August 12, 2002
------------------------------------------------- --------------
MRO SOFTWARE, INC.
------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-2448516
------------- ----------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
0-23852
-------
(Commission File 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)
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Current Report on Form 8-K,
originally filed with the Securities and Exchange Commission on June 14, 2002,
as set forth in pages attached hereto:
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS FOR MAINCONTROL, INC.
The following financial statements relating to the acquisition are attached
hereto:
Page No.
--------
Report of PricewaterhouseCoopers L.L.P., Independent Public
Accountants,as to MainControl, Inc. : 5
Consolidated Balance Sheets of MainControl, Inc as of
September 30, 2000 and 2001 6
Consolidated Statements of Operations of MainControl, Inc. for the
years ended September 30, 2000 and 2001 7
Consolidated Statements of Stockholders' Deficit for MainControl, Inc.
for the years ended September 30, 2000 and 2001 8
Consolidated Statements of Cash Flows for Maincontrol, Inc.
for the years ended September 30, 2000 and 2001 9
Notes to Consolidated Financial Statements 10
Consolidated Balance Sheet of MainControl, Inc as of March 31, 2002
(Unaudited) 30
Consolidated Statements of Operations of MainControl, Inc. for the six
months ended March 31, 2001 and 2002 (Unaudited) 31
Consolidated Statements of Cash Flows for Maincontrol, Inc. for the six
months ended March 31, 2001 and 2002 (Unaudited) 32
Notes to Consolidated Financial Statements (Unaudited) 33
(b) PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following Pro Forma Combined Condensed financial statements
are attached hereto:
Pro forma Combined Condensed financial information of
MRO Software, Inc. and Subsidiaries 34
Pro Forma Combined Condensed Balance Sheet as of March 31, 2002
(unaudited) 36
Pro Forma Combined Condensed Statement of Operations for the year
ended September 30, 2001 (unaudited) 37
2
Pro Forma Combined Condensed Statements of Operations for the six
months ended March 31, 2002 (unaudited) 38
Notes and Assumptions to Pro Forma Combined Condensed Financial
Information (unaudited) 39
(c) EXHIBITS
23.1 Consent of PricewaterhouseCoopers, L.L.P., Independent
Public Accountants, dated August 12, 2002
3
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: August 12, 2002
MRO Software, Inc.
By: /s/ Peter J, Rice
----------------------------------
Peter J. Rice
Executive Vice President Finance &
Administration and Treasurer
(Principal Financial Officer)
4
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of MainControl, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of changes in stockholders'
deficit and of cash flows present fairly, in all material respects, the
financial position of MainControl, Inc., and its subsidiaries at September 30,
2001 and 2000, and the results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which 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.
As discussed in Notes 3 and 8, at dates beginning July 1, 2003 through
December 1, 2005, 50% of the Series A, B, C and D preferred stock becomes
mandatorily redeemable, and 100% becomes mandatorily redeemable at dates
beginning January 1, 2004 through December 1, 2007, upon the affirmative vote of
67% of the Series A, B, C and D preferred stockholders, respectively.
February 21, 2002
5
MAINCONTROL, INC
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30,
(in thousands,except share data) 2000 2001
-------- ---------
Current assets:
Cash and cash equivalents $ 9,643 $ 3,731
Accounts receivable, less allowance for
doubtful accounts of $853 and $130 3,730 2,287
Other current assets 1,014 530
-------- --------
Total current assets 14,387 6,548
-------- --------
Fixed assets, net 2,005 1,251
Investment in joint venture 264 --
Other non-current assets 15 448
-------- --------
Total assets $ 16,671 $ 8,247
======== ========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 806 $ 220
Accrued payroll 1,986 2,034
Accrued expenses 761 623
Accrued restructuring charges -- 554
Accrued royalties 146 228
Deferred revenue 1,948 2,427
Current portion of long-term debt 978 863
Short-term borrowings -- 500
Other current liabilities 44 81
-------- --------
Total current liabilities 6,669 7,530
-------- --------
Accrued restructuring charges -- 402
Non-current portion of long-term debt 1,018 115
Other non-current liabilities -- 772
Subordinated convertible debt -- 5,047
-------- --------
Total liabilities 7,687 13,866
-------- --------
Commitments and contingencies (Note 14)
Mandatorily redeemable preferred stock:
Convertible preferred stock, $0.001 par value;
20,000,000 shares authorized;16,182,717 shares
issued and outstanding. 68,324 63,463
-------- --------
Stockholders' Deficit
Common stock, $.001 par value;30,000,000 authorized;
7,976,907 and 7,990,094 shares issued and outstanding 8 8
Additional paid-in capital -- --
Deferred stock-based compensation (879) (235)
Accumulated deficit (58,385) (68,753)
Accumulated other comprehensive loss (84) (102)
-------- --------
Total stockholders' deficit (59,340) (69,082)
-------- --------
Total liabilities, mandatorily redeemable preferred stock
and stockholders' deficit $ 16,671 $ 8,247
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
6
MAINCONTROL, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share data) YEAR ENDED SEPTEMBER 30,
2000 2001
---------- ----------
Revenues:
License $ 8,756 $ 5,341
Maintenance 1,939 2,803
Professional Services 5,146 5,871
Joint venture development fees 1,786 --
---------- ----------
Total revenues 17,627 14,015
---------- ----------
Cost of revenues:
License, exclusive of non-cash stock-based
compensation of $5 and $0 1,611 327
Maintenance, exclusive of non-cash stock-based
compensation of $2 and $1 947 364
Professional services, exclusive of non-cash stock-based
compensation of $11 and $7 2,062 2,557
---------- ----------
Total cost of revenues 4,620 3,248
---------- ----------
Gross profit 13,007 10,767
---------- ----------
Operating expenses:
Product development, exclusive of non-cash stock-based
compensation of $114 and $51 9,672 5,772
Sales and marketing, exclusive of non-cash stock-based
compensation of $204 and $86 15,686 14,288
General and administrative, exclusive of non-cash
stock-based compensation of $88 and $86 5,358 3,375
Non-cash stock-based compensation 425 231
Restructuring charges -- 1,776
---------- ----------
Total operating expenses 31,141 25,442
---------- ----------
Loss from operations (18,134) (14,675)
Interest income 579 177
Interest expense (189) (354)
Non-cash debt issue costs -- (409)
---------- ----------
Loss before equity in (loss) income of
joint venture (17,744) (15,261)
Equity in loss before equity in (loss) income of
joint venture (1,397) 44
---------- ----------
Net loss (19,141) (15,217)
Accretion of mandatorily redeemable preferred stock (13,193) 4,861
---------- ----------
Net loss available for common shareholders $ (32,334) $ (10,356)
========== ==========
Basic and diluted net loss per common share $ (4.06) $ (1.30)
Weighted-average number of common shares used in
computing basic and diluted net loss per common share 7,965,455 7,987,855
The accompanying notes are
an integral part of the consolidated financial statements.
7
MAINCONTROL, INC
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED OTHER TOTAL
(in thousands, except ------------------- PAID-IN STOCK-BASED ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
share data) SHARES AMOUNT CAPITAL COMPENSATION DEFICIT INCOME (LOSS) DEFICIT
--------- ------ ---------- ------------ ----------- ------------- --------------
Balance, September 30, 1999.. 7,957,029 8 -- (1,352) (26,031) (36) (27,411)
Exercise of stock options.. 76,753 1 -- -- 46 -- 47
Purchase of common stock
subject to repurchase
rights.................... (56,875) (1) -- -- (17) -- (18)
Deferred compensation
related to stock option
grants.................... -- -- (48) 48 -- -- --
Non-cash stock-based
compensation.............. -- -- -- 425 -- -- 425
Accretion of redeemable
preferred stock........... -- -- 48 -- (13,242) -- (13,194)
Comprehensive loss:
Net loss.................. -- -- -- -- (19,141) -- (19,141)
Foreign currency
translation............. -- -- -- -- -- (48) (48)
--------
Total comprehensive loss.. (19,189)
--------- ------ ----- ----- -------- ---- --------
Balance, September 30, 2000.. 7,976,907 8 -- (879) (58,385) (84) (59,340)
Exercise of stock options.. 32,562 -- 27 -- -- -- 27
Purchase of common stock
subject to repurchase
rights.................... (19,375) -- (12) -- -- -- (12)
Deferred compensation
related to stock option
grants.................... -- -- (15) 413 (398) -- --
Non-cash stock-based
compensation.............. -- -- -- 231 -- -- 231
Issuance of warrants....... -- -- 388 -- -- -- 388
Accretion of redeemable
preferred stock........... -- -- (388) -- 5,247 -- 4,859
Comprehensive loss:
Net loss.................. -- -- -- -- (15,217) -- (15,217)
Foreign currency
translation............. -- -- -- -- -- (18) (18)
--------
Total comprehensive loss.. (15,235)
--------- ------ ----- ----- -------- ---- --------
Balance, September 30, 2001.. 7,990,094 $ 8 $ -- $(235) $(68,753) $(102) $(69,082)
========= ====== ===== ===== ======== ===== ========
The accompanying notes are an integral part of the consolidated
financial statements
8
MAINCONTROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 2000 2001
--------- ---------
Cash flows from operating activities:
Net loss $(19,141) $(15,217)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 832 1,177
Impairment of fixed assets -- 277
Provision for bad debts 948 (201)
Non-cash stock-based compensation 425 231
Non-cash debt issue costs -- 409
Equity in loss (income) of joint venture 1,397 (44)
Changes in assets and liabilities:
Accounts receivable 1,724 1,645
Other current assets (276) 485
Other non-current assets 295 (145)
Accounts payable (155) (584)
Accrued payroll (176) 40
Accrued expenses (309) (140)
Accrued restructuring charges -- 955
Accrued royalties (263) 84
Deferred revenue 1,033 478
Other current liabilities (163) 15
Other non-current liabilities (45) 772
-------- --------
Net cash used by operating activities (13,874) (9,763)
-------- --------
Cash flows from investing activities:
Purchase of contract rights -- (585)
Investment in joint venture -- 307
Purchase of fixed assets (1,370) (400)
-------- --------
Net cash used in investing activities (1,370) (678)
-------- --------
Cash flows from financing activities:
Short-term borrowings -- 500
Proceeds from long-term debt 1,369 --
Repayment of long-term debt (606) (1,018)
Net proceeds from sale of common stock and exercise of
stock options 47 27
Proceeds from subordinated convertible debt -- 5,047
Net proceeds from sale of Series D preferred stock 17,691 --
Purchase of stock subject to repurchase rights (18) (12)
-------- --------
Net cash provided by financing activities 18,483 4,544
-------- --------
Effect of exchange rate changes on cash (21) (15)
Net decrease in cash and cash equivalents 3,218 (5,912)
Cash and cash equivalents, beginning of year 6,425 9,643
-------- --------
Cash and cash equivalents, end of year $ 9,643 $ 3,731
======== ========
Supplemental disclosure of non-cash investing and
financing activities:
Accretion of redeemable preferred stock (Note 8) $ 13,194 $ (4,861)
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
9
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
MainControl, Inc., (the "Company" or "MainControl"), a Delaware
corporation, provides technology asset management software and services
that enable organizations to manage their technology. Technology includes
traditional technology assets of an organization, such as desktop and
laptop computers, servers, software, network equipment, telecommunications
equipment and mobile devices, as well as technology assets such as web
servers, Internet-security software and e-commerce software.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements, which were prepared using
accounting principles generally accepted in the United States of America
(U.S. GAAP), include the accounts of the Company and its wholly owned
subsidiaries located in the United Kingdom, Germany and Israel, and are
presented in U.S. Dollars. Inter-company accounts and transactions have
been eliminated. The Company accounts for its joint venture investment
under the equity method of accounting (see Note 5).
Revenue Recognition
The Company recognizes revenue in accordance with the provisions
of Statement of Position (SoP) No. 97-2, "Software Revenue Recognition", as
amended. The Company generates revenue from licenses and sublicenses,
software development, maintenance and post contract customer support and
professional services. Revenue from licenses is recognized upon delivery,
provided that the fee is fixed and determinable, an arrangement exists, no
significant obligations remain and collection of the resulting receivable
is probable. Sublicense fees from software sales through distributors,
resellers and original equipment manufacturers are recorded as revenue when
the related software is delivered to the end-user. Revenue from
non-refundable guaranteed minimum license payments for which a product
master has been delivered is recognized in the period payment is received
or the period in which the contracted minimum number of licenses are
delivered to end-users, whichever is earlier. Notwithstanding the
foregoing, if acceptance is uncertain, revenue recognition is deferred
until customer acceptance is achieved.
Revenue from the Company's fiscal 2000 development contract with
its joint venture, ValueSolution, was recognized as work was performed
under a time and materials arrangement whereby development fees were billed
based on pre-established rates subject to a maximum total fee based on
certain percentages of the joint venture's annual sales (see Note 5).
Revenue from all other software development contracts involving significant
production, modification or customization of software is recognized using
the percentage-of-completion method, based on the relationship of costs
incurred to the total estimated costs of the project.
Maintenance and post contract customer support revenue is
recognized ratably over the term of the support period. Professional
services revenue, which consists primarily of training and consulting, is
recognized as work is performed. For contracts with multiple elements,
including licenses, maintenance and post contract customer support and
services, the fair value of maintenance and post contract customer support,
based on contractual renewal rates, is recorded as deferred revenue and is
recognized ratably over the term of the respective agreement. The fair
value of services, based on our standard hourly billing rates when services
are
-10-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
sold separately, is deferred and recognized over the period that the
services are performed. The Company does not provide for specific upgrades
on new software products.
Under distribution agreements between the Company and its
distributors, MainControl is generally entitled to royalties calculated as
50% of the sales price of license and maintenance revenues to end-users. In
instances where the Company provides substantial sales and customer support
to a distributor, the related revenue is presented on a gross basis in the
Company's statement of operations, with the proceeds from the sale retained
by the distributor presented as a distributor commission in the Company's
cost of revenue. The amount of distributor commissions related to license
and maintenance, which is included in cost of revenue for fiscal years 2000
and 2001 was approximately $85,000 and $0, respectively.
During fiscal year 2000, the Company entered into a non-monetary
transaction, whereby the Company received advertising services as
consideration for issuing a license to use the Company's software product.
The Company recognized revenue under the transaction equal to the fair
market value of the advertising services received during the period. During
fiscal year 2000 and 2001, the Company recognized $75,000 and $225,000 of
revenue in connection with the transaction, respectively.
Deferred revenue relates primarily to maintenance, professional
services and licenses and is recorded when customer payments are received
in advance of the performance of the related maintenance or service or in
advance of delivery of the license. This revenue is recognized as the
services are performed, generally within one year, or upon delivery of the
license. Additionally, as of September 30, 2000, deferred revenue included
$225,000 of product revenue to be recognized in connection with the
Company's aforementioned non-monetary transaction and represents the fair
market value of advertising services received during fiscal year 2001.
Software Development Costs
The Company has charged all costs for the development and
enhancement of its software products to research and development expense as
incurred. Statement of Financial Accounting Standards (SFAS) No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed", requires capitalization of certain software
development costs incurred subsequent to technological feasibility and
prior to general release of the software. Based upon the Company's
development process, technological feasibility is established upon
completion of a working model. The period between technological feasibility
and general release is relatively short and the costs incurred during this
period have been insignificant for capitalization.
Use of Estimates
The preparation of financial statements in conformity with U.S.
GAAP requires the Company 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 revenue and expenses during the reporting period.
Actual results may differ from the recorded estimates.
Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less to be cash equivalents. Cash
equivalents consist primarily of money market accounts with commercial
banks.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist principally of temporary cash
investments and accounts receivable. The Company restricts placement of
-11-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
investments to financial institutions evaluated as highly creditworthy.
Substantially all of the Company's receivables are from well-established
companies. The Company considers its accounts receivable, net of allowance,
to be fully collectible. During fiscal year 2000 the Company recorded
$948,000 in bad debt expense and a recovery of $201,000 during fiscal year
2001. During fiscal year 2000 and 2001, the Company wrote-off $95,000 and
$522,000 of accounts receivable, respectively.
Revenues and receivables were concentrated with the following
customers (amounts represent percentage of total revenue and accounts
receivable, respectively):
REVENUES
2000 2001
---- ----
Customer A................. *% *%
Customer B................. * 12
Customer C................. * *
Customer D................. * *
Customer E................. 16 *
Customer F................. 11 *
Customer G................. * *
Customer H................. * *
Customer I................. 10 *
Customer J................. * *
*represents less than 10% of total
ACCOUNTS RECEIVABLE
2000 2001
---- ----
Customer A................. *% 19*%
Customer B................. * *
Customer C................. * 17
Customer D................. * 13
Customer E................. * *
Customer F................. 15 *
Customer G................. 17 *
Customer H................. 12 *
Customer I................. * *
Customer J................. * 13
*represents less than 10% of total
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts
receivable and accounts payable approximate their fair values due to the
relatively short maturity of those instruments. The carrying amount of
long-term debt approximates fair value because the interest rates on these
instruments change with market interest rates. The estimated fair value of
the subordinated convertible debt is based on the current rates available
to the Company for debt with similar terms and maturities, and approximates
the carrying value.
Fixed Assets
Fixed assets are stated at historical cost, net of accumulated
depreciation and amortization. Depreciation and amortization are computed
using the straight-line method over estimated useful lives of three
-12-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to five years for computers and equipment, five to seven years for
furniture and equipment, the shorter of five years or the term of the
underlying lease for leasehold improvements and seven years for
automobiles.
The Company periodically reviews fixed assets for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recovered.
Translation of Foreign Currencies
The functional currencies of the Company's foreign subsidiaries
are the local currencies. Accordingly, all assets and liabilities are
translated into U.S. Dollars, the reporting currency, at current exchange
rates as of the respective balance sheet date. Revenues and expenses are
translated at the average rates prevailing during the reporting period.
Cumulative translation gains and losses are reported as a separate
component of accumulated other comprehensive loss in stockholders' deficit.
Receivables Denominated in Foreign Currencies
At September 30, 2000 and 2001, the Company had approximately
$1,257,000 and $878,000 respectively, of receivables denominated in foreign
currencies. The net loss on foreign currency re-measurement and exchange
rate changes for fiscal years 2000 and 2001 was approximately $178,000 and
$26,000 respectively.
Restructuring Charges
The Company records charges for costs associated with a
restructuring plan only when the plan is committed to by the Company, the
costs associated with the plan are incremental to other costs incurred by
the Company in the conduct of its activities prior to the commitment date
and will be incurred as a direct result of the plan, the costs associated
with the plan represent amounts to be incurred by the Company under a
contractual obligation that existed prior to the commitment date and will
either continue after the plan is completed with no economic benefit to the
Company or be a penalty incurred by the Company to cancel the contractual
obligation, and the cost of the components of the plan being accrued for
can be reasonably estimated.
Mandatorily Redeemable Preferred Stock
The Company carries its mandatorily redeemable preferred stock at
original issue price with periodic adjustments to accrete the carrying
value to its redemption value by the earliest possible date of stockholder
initiated redemption (see Note 8).
Earnings per Share
Basic earnings per share is calculated using the weighted-average
number of common shares outstanding during the period. Diluted earnings per
share is computed using the weighted-average number of common and potential
common shares outstanding during the period, except if anti-dilutive. For
all years presented potentially dilutive common shares consisting of (i)
incremental common shares issuable upon conversion of the mandatorily
redeemable preferred stock and subordinated convertible debt (using the
if-converted method) and (ii) shares issuable upon the exercise of stock
options and warrants (using the treasury stock method) were excluded from
the calculation of diluted net loss per share, as their effect would have
been anti-dilutive.
-13-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Non-Cash Stock-Based Compensation
The Company accounts for non-cash stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees", and related
interpretations. Under APB 25, compensation cost is measured as the excess,
if any, of the market price of the Company's common stock at the date of
grant over the exercise price of the option granted. Compensation cost for
stock options, if any, is recognized over the vesting period. The Company
provides additional pro forma disclosures as required under SFAS No. 123,
"Accounting for Stock-Based Compensation" (see Note 9).
Income Taxes
The Company provides for income taxes using an asset and liability
approach. The asset and liability approach requires the recognition of
deferred tax assets and liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the
tax bases of the assets and liabilities. A valuation allowance is recorded
if, based on the evidence available, it is more likely than not that some
portion or all of the deferred tax asset will not be realized.
New Accounting Pronouncements
In October 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144
supercedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." FAS 144
applies to all long-lived assets (including discontinued operations) and
consequently amends Accounting Principles Board Opinion No. 30, "Reporting
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business." FAS 144 is effective for financial statements issued for fiscal
years beginning after December 15, 2001. The Company is currently reviewing
the provisions of this statement.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141, "Business Combinations" ("FAS 141") and No. 142,
"Goodwill and Other Intangible Assets" ("FAS 142"). FAS 141 requires that
all business combinations be accounted for under the purchase method only
and that certain acquired intangible assets in a business combination be
recognized as assets apart from goodwill. FAS 142 requires that ratable
amortization of goodwill be replaced with periodic tests of the goodwill's
impairment and that intangible assets other than goodwill be amortized over
their useful lives. FAS 141 is effective for all business combinations
initiated after June 30, 2001 and for all business combinations accounted
for by the purchase method for which the date of acquisition is before June
30, 2001. The provisions of FAS 142 will be effective for fiscal years
beginning after December 15, 2001. The Company is currently reviewing the
provisions of these statements.
3. LIQUIDITY
During November 2001, management completed a workforce reduction
and restructured operations (see Note 6). While management's fiscal year
2002 budget projects that cash flow from operations will be close to
breakeven later in the year after the effect of the restructuring is
realized, cash flow from operations for the full fiscal year will be
negative due to the costs of restructuring and higher cost levels prior to
the restructuring. During the four-month period ended February 2002, the
Company completed a $7 million private-placement offering in the form of
subordinated convertible promissory notes. In addition, the Company
anticipates it will
-14-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
be able to expand its revolving credit facility available under its
existing bank line by up to $2.2 million (see Note 7).
Management believes that the Company's cash balance of $3.7
million, at September 30, 2001, along with cash generated from the
subordinated convertible debt offering will be sufficient to fund negative
cash flow from operations in fiscal year 2002 and meet its obligations as
they become due for the foreseeable future. Management is seeking an
expansion of its credit facility in the event receivable collections fall
behind budget. If existing available cash is insufficient and if the
expanded line of credit is required but not expanded, management believes
that it has the intent and ability to reduce expenses in order to ensure
that the Company can continue to meet its obligations through the
foreseeable future. However, there can be no assurance management's plans
will be successful.
Beginning July 1, 2003, upon an affirmative vote of the holders of
67% of the outstanding Series A preferred stock, 50% of the Series A
preferred stock is redeemable at the greater of the original issue price
per share plus accrued dividends or fair value plus accrued dividends.
Series A preferred stockholders could redeem 3,150,000 shares, which
represents 50% of the total shares outstanding. Upon an affirmative vote by
the shareholders to redeem the shares, the Company would be required to pay
a minimum of $3,150,000 plus accrued dividends for to the Series A
preferred stockholders. On February 19, 2002, redemption during the period
January 1, 2002 to June 30, 2003 was waived by holders of more than 33% of
the outstanding Series A preferred stock.
At dates beginning July 1, 2003 through December 1, 2005, 50% of
the Series A, B, C and D preferred stock becomes mandatorily redeemable,
and 100% becomes mandatorily redeemable at dates beginning January 1, 2004
through December 1, 2007, upon the affirmative vote of 67% of the Series A,
B, C and D preferred stockholders, respectively (see Note 8). Management
believes the likelihood of redemption during the foreseeable future is
remote, based on the continued and significant investment of the initial
preferred stockholders in subsequent preferred stock rounds as well as
their investment in the Company's subordinated convertible debt rounds
during 2001 and 2002.
-15-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. FIXED ASSETS
Fixed assets consist of the following amounts at:
SEPTEMBER 30,
---------------------
(in thousands) 2000 2001
-------- --------
Computer equipment...................... $ 2,036 $ 2,376
Office furniture and equipment.......... 1,062 1,070
Leasehold improvements.................. 238 269
Automobiles and other.................. 59 66
-------- --------
3,395 3,781
Less: Accumulated depreciation and
amortization.......................... (1,390) (2,529)
-------- --------
$ 2,005 $ 1,252
======== ========
In connection with the Company's fiscal year 2001 restructuring,
the Company recorded an asset impairment charge of $277,207 for the
write-down of fixed assets consisting primarily of furniture and leasehold
improvements (see Note 6).
Depreciation expense for fiscal years 2000 and 2001 was $832,000
and $877,000, respectively.
5. JOINT VENTURE
In December 1998, the Company formed a joint venture,
ValueSolution GmbH & Co. KG (ValueSolution) with USU Softwarehaus
Unternehmensberatung AG (USU). ValueSolution is a limited partnership
organized under the laws of Germany to develop, enhance and market
information technology asset management software. MainControl purchased
from USU a 50% interest in ValueSolution with a two-vote majority for
$603,000. Additionally, in August 1998 the Company issued 750,000 shares of
common stock to USU for $465,000. These shares were subject to repurchase
until ValueSolution was formed in December 1998. In addition, in April 1999
the Company issued 50,000 shares of common stock to a consultant in
exchange for services performed in connection with the establishment of the
joint venture.
The carrying amount of the joint venture investment was determined
as the total of the net cash consideration paid, plus an amount for the
total shares issued related to the investment at an estimated market price
of the Company's common stock as follows:
(in thousands)
800,000 shares of common stock....................... $ 2,576
Less cash received for common L stock................ (465)
-------
Total value of common stock contributed.............. 2,111
Cash payment......................................... 603
-------
Total consideration paid............................. 2,714
50% interest in cash contributed by USU.............. (30)
-------
Difference between cost basis and equity in net
assets of the joint venture on date of acquusition.. $ 2,684
=======
The difference of approximately $2,684,000 between the carrying
amount of the joint venture investment and the Company's underlying equity
in net assets of the joint venture was assigned to software and was
amortized over the estimated software life of approximately two years.
Amortization of approximately
-16-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$1,534,000 and $0 of this difference is included in equity in loss of the
joint venture for fiscal years 2000 and 2001, respectively.
Under the terms of the joint venture agreement, certain matters
and key decisions such as operating decisions and appointment and removal
of managing directors require the consent of all partners, thus eliminating
the Company's ability to exercise control over matters other than the
development and enhancement of the software contributed to the joint
venture by USU. The Company accounts for its interest in the joint venture
in accordance with the equity method of accounting.
The Company and USU maintain exclusive software distribution
rights in exchange for royalty payments to the joint venture equal to 30%
of net software sales and maintenance fees during fiscal years 2000, and 2%
during fiscal year 2001. Additionally, during fiscal year 2000, the Company
provided software development support to the joint venture in exchange for
monthly software development fee payments from the joint venture based on
pre-established rates under a time and materials arrangement. The Company
did not provide software development support to the joint venture during
2001. Software development expense in support of the joint venture's
software development was recorded as research and development expense in
the period incurred. Payments to the Company from the joint venture for
software development were limited to certain percentages of the joint
venture's annual sales, which are comprised solely of royalties. However,
the Company was not limited in performing software development activities
in support of the joint venture's software and incurred expenses in excess
of amounts paid by the joint venture. Since the Company maintains
distribution rights to the joint venture's software, it recovers research
and development expenses incurred in excess of amounts paid by the joint
venture through revenues generated by sales of the joint venture's
software.
During October 2000, the Company and USU amended the terms of the
joint venture agreement. Under the amended terms, each party holds an
irrevocable license to develop and market ValueSolution's asset management
software. The Company's development agreement to provide software
development support to the joint venture was terminated and, in exchange
for reduced royalty payments to the joint venture, each party independently
bears their respective costs of and associated rights in future development
of the software. The reduced royalty payments equal 2% of each parties'
respective net software sales and maintenance fees during fiscal year 2001
and are further reduced to 1% thereafter.
During fiscal years 2000 and 2001, the Company recognized
$1,787,000 and $0, respectively, in software development revenue in
connection with joint venture software development activities and incurred
$2,180,000 and $0, respectively, in research and development expenses in
excess of amounts paid by the joint venture. Additionally, during fiscal
years 2000 and 2001, the Company incurred $1,477,000 and $97,000 $14,000,
respectively, in royalty expense payable to the joint venture in connection
with software sales. (see Note 13). At September 30, 2001, the Company had
accounts payable to ValueSolution of $62,000.
6. RESTRUCTURING CHARGES
During fiscal year 2001 the Company announced and completed an
expense reduction plan focused on improving operational efficiencies and
the implementation of measures in order to reduce planned expenses.
The Company reduced its workforce by 38 positions affecting
all functional areas of the Company. Employee separation benefits under the
plan totaled $354,440 consisting primarily of severance and fringe
benefits. In addition, the Company consolidated excess office space within
its corporate headquarters and recorded charges of $1,144,229 related to
vacant space prior to securing subtenants, expected losses on subleases,
brokerage commissions and other costs. Expected losses on subleases will be
paid over the lease term through November 2004. The Company recorded an
asset impairment charge of $277,207 related to the write-down of fixed
assets consisting primarily of furniture and leasehold improvements.
-17-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth an analysis of the components
of the fiscal 2001 restructuring charge and the payments made against the
accrual through September 30, 2001:
Committed
Workforce Excess Asset
(in thousands) Reduction Facilities Impairments Total
---------- ----------- ------------ --------
Restructuring Provision:
Workforce reduction................... $ 354 $ -- $ -- $ 354
Lease commitments and expected
losses on subleases.................. -- 1,144 -- 1,144
Fixed asset impairment................ -- -- 277 277
------ ------- ------ -------
Total................................ 354 1,144 277 1,775
Cash paid............................... (166) (376) -- (542)
Non-cash charges........................ -- -- (277) (277)
---------- ------- ------ -------
Accrual balance, September 30, 2001.. $ 188 $ 768 $ -- $ 956
========== ======= ====== =======
Subsequent to September 30, 2001, the Company announced and
completed in November 2001, another workforce reduction of 20 positions
affecting all functional areas of the Company and discontinued its
subscription-based hosted software offering. Restructuring charges under
the November 2001 plan totaled approximately $810,000, consisting primarily
of employee separation benefits and costs to be incurred under
non-cancelable commitments to purchase application hosting services for the
Company's subscription-based hosted software offering and third-party
software subscription services, which provide no future economic benefit.
7. DEBT
Bank Financing
During April 1999, the Company entered into a debt agreement with
a bank in the form of a $796,000 revolving line of credit, a $2,055,000
equipment term loan and a $565,000 note payable, as amended in April 2001,
(collectively, the Debt Agreement). Debt obligations are collateralized by
the Company's assets. Borrowings under the revolving line of credit are
limited to a borrowing base equal to seventy five percent of eligible
accounts receivable, as defined in the agreement. Under the terms of the
agreement, the Company is restricted from paying any dividends or making
any other distributions in relation to the Company's capital and the
Company is required to maintain a quick ratio of at least 1.5 to 1.0 and
quarterly revenue levels, subject to certain restrictions, of at least
$3,700,000 and $4,900,000 for the quarters ended March 31, 2001 and June
30, 2001, respectively, and $5,900,000 for quarters ending thereafter. The
Company was also required to receive a minimum of $10 million from an
equity event on or before September 30, 2001, exclusive of proceeds
received from the issuance of subordinated convertible promissory notes in
March and April 2001. Interest on the outstanding equipment term loan and
note payable accrues at the bank's prime rate plus 1% and is payable
monthly. Interest on amounts outstanding under the revolving line of credit
accrues at the bank's prime rate plus .5% and is payable monthly. At
September 30, 2001, the bank's prime rate was 6.0%.
-18-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amounts outstanding under the Debt Agreement consist of the
following at:
SEPTEMBER 30,
------------------
(in thousands) 2000 2001
------- ------
Note payable--Principal due in equal monthly installments
through May 2002; interest due monthly.................... $ 342 $ 137
Equipment term loans--Principal due in equal monthly
installments through periods ending between May 2002 to
December 2002; interest due monthly....................... 1,654 841
------ -----
1,996 978
Less current portion....................................... (978) (863)
------ -----
$1,018 $ 115
====== =====
During October 1999, the Company obtained a $296,000 irrevocable
standby letter of credit, which guarantees the Company's performance to its
landlord (see Note 14).
Prior to September 30, 2001, the Company received a total of
$2,055,000, $565,000 and $500,000 under the equipment term loans, note
payable and revolving line of credit, respectively. No remaining amounts
are available under the equipment term loans or note payable.
During the three month period ended October 30, 2001, the
Company's quick ratio fell below the 1.5 to 1.0 minimum covenant
requirement. During the three quarter's ended December 31, 2001, the
Company's revenue fell below the required $4.9 million, $5.9 million and
$5.9 million minimum covenant requirement, respectively. Additionally, the
Company did not receive the $10.0 million minimum requirement from an
equity event on or before September 30, 2001.
During February 2002, the Company executed a commitment letter
from the Bank agreeing to amend the Debt Agreement to waive all technical
defaults of its financial covenants arising prior to January 31, 2002,
to modify the financial covenants, and to increase the revolving line of
credit to $3.0 million and to increase interest on amounts outstanding
thereunder to the bank's prime rate plus 1.0%. The modified financial
covenants will require the Company to maintain a quick ratio of at least
1.5 to 1.0, subject to certain adjustments, and a consolidated maximum net
loss of $2.3 million and $3.0 million for the six and nine month period
ending June 30, 2002 and September 30, 2002, respectively, to be reset
thereafter. After allotment for the $296,000 irrevocable standby letter of
credit and the $500,000 advance outstanding, the revolving line of credit
available to the Company will equal $2,204,000 and will expire on
January 31, 2003.
In connection with the April 2001 amendment, the Company issued a
warrant to purchase 22,289 shares of Series D preferred stock, which
expires in April 2006. Pursuant to the February 2002 commitment letter,
upon amendment of the Debt Agreement the Company will issue a warrant for
an additional 21,759 shares of Series D preferred stock, which will expire
in February 2009. Both warrants are exercisable for $5.0635 per share and
the number of shares and exercise price may be adjusted subject to
anti-dilution provisions and under certain other events. Upon expiration,
unexercised warrants will be automatically exercised by way of a "cashless"
conversion. The April 2001 warrant was assigned an amount determined in
accordance with the requirements of APB 14, "Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants" (APB 14), equal to
$47,000, which amount is considered pre-paid debt issue costs and accreted
as non-cash debt issue costs over the revolving line of credit term,
approximately one year.
Subordinated Convertible Promissory Notes
During March and April 2001, the Company completed a $5,047,000
private placement debt offering in the form of subordinated convertible
promissory notes ("First Round Notes"). During the four month period ended
February 2002, the Company completed a second private placement debt
offering totaling $6,941,000 ("Second Round Notes") (collectively "Notes").
The Notes carry an annual interest rate of 8%, compounded quarterly and
principal and accrued interest mature two years from date of issuance. The
Notes are subordinate to the Company's preexisting or future obligations
arising under its existing Debt Agreement. Concurrent with the offerings,
the Company issued stock purchase warrants with warrant coverage equal to
20% of the original principal balance. The warrants expire upon the
earliest of (a) the end of a five year term, (b) upon a qualified initial
public offering of the Company's common stock or (c) upon a qualified
change in control of the Company.
-19-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the event the Company completes a qualified private placement
of its capital stock with gross proceeds to the Company of at least $4
million, the Notes, plus accrued interest, automatically convert into and
the warrants become exercisable for, shares of the capital stock at (i) a
price equal to the price per share received, in the case of the warrants
and First Round Notes, (ii) the price per share received less a discount of
2-1/2% per full month from the date of the note, up to a maximum discount
of 30%, in the case of the Second Round Notes, or (iii) if a qualified
private placement of at least $4 million is not completed by the time of a
qualified change in control of the Company or March 31, 2002, as amended,
at the option of the holder, the Notes and accrued interest are convertible
into and the warrants are exercisable for, Series D preferred stock at a
price equal to $0.25 per share.
In the event of a change in control of the Company prior to
conversion or maturity, the Notes automatically mature and become payable
for an amount equal to three times the outstanding principal balance, plus
accrued interest, and the warrants become exercisable for the number of
shares of Series D preferred stock equal to the 20% warrant coverage
dividend by 75% of the amount of consideration to be received for one share
of Series D preferred stock upon the change in control at an exercise price
of $0.25 per share.
The warrants issued in connection with the First and Second Round
Notes were assigned amounts determined in accordance with the requirements
of APB 14 equal to $388,000 and $1,232,000, respectively. These amounts are
considered discounts on the notes payable and accreted as non-cash debt
issue costs over the expected debt term.
8. MANDATORILY REDEEMABLE PREFERRED STOCK
In April 1996, the Company completed a private placement of
6,300,000 shares of Series A preferred stock at a price of $1.00 per share.
Net proceeds to the Company after issuance costs were approximately
$6,237,000. In September 1997 and December 1997, the Company completed a
private placement of 2,086,982 and 601,189 shares, respectively, of Series
B preferred stock at a price of $3.72 per share. Net proceeds to the
Company after issuance costs were approximately $7,717,000 and $2,230,000,
respectively. During the period of December 1998 through June 1999, the
Company issued 3,689,065 shares of Series C preferred stock at a price of
$3.795 per share. Net proceeds to the Company after issuance costs were
approximately $13,942,000. In January 2000, the Company completed a private
placement of 3,505,481 shares of Series D preferred stock at a price of
$5.0635 per share. Net proceeds to the Company after issuance costs were
$17,691,000.
Upon liquidation, (i) holders of Series D preferred stock in
preference to holders of Series A, Series B and Series C preferred stock
and holders of common stock, (ii) holders of Series C preferred stock in
preference to holders of Series A and Series B preferred stock and holders
of common stock and (iii) holders of Series A and Series B preferred stock
in preference to holders of common stock are entitled to receive an amount
equal to the original issue price paid per share, as adjusted for certain
defined recapitalization events, plus accrued dividends, if any.
Upon the affirmative vote of holders of 67% of the outstanding
Series A preferred stock, each outstanding share of Series A preferred
stock is mandatorily redeemable by the Company at the greater of the
original issue price paid per share plus accrued dividends or fair value
plus accrued dividends. At any time afterJuly 1, 2003, up to 50% of the
Series A preferred stock is redeemable upon such vote; up to 100% is
redeemable at any time after January 1, 2004. On February 19, 2002,
redemption during the period January 1, 2002 to June 30, 2003 was waived by
holders of more than 33% of the outstanding Series A preferred stock.
During fiscal year ended 2000, the Company recorded accretion on preferred
stock of approximately $13,194,000 and negative accretion of $4,861,000
during fiscal year 2001.
-20-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Upon the affirmative vote of holders of 67% of the outstanding
Series B, Series C and Series D preferred stock, each outstanding share of
Series B, Series C and Series D preferred stock is mandatorily redeemable
by the Company, respectively, at the original issue price paid per share
plus accrued dividends. At any time after July 1, 2003, in the case of the
Series B preferred stock, October 1, 2004, in the case of Series C
preferred stock and December 1, 2005, in the case of Series D preferred
stock, up to 50% of the Series B, Series C and Series D preferred stock is
redeemable upon such vote. Up to 100% of the shares are redeemable at any
time after July 1, 2005, in the case of Series B preferred stock, October
1, 2006, in the case of Series C preferred stock and December 1, 2007, in
the case of Series D preferred stock.
Each outstanding share of Series A, Series B, Series C and Series
D preferred stock (collectively, "convertible preferred stock") is
convertible into common stock at the option of the holder. All outstanding
shares of convertible preferred stock automatically convert into common
stock upon the earlier of (i) the Company's sale of its common stock in a
qualified public offering, subject to certain minimum amounts; or (ii) the
majority vote of the holders of convertible preferred stock voting together
as a single class. Upon conversion, each share of convertible preferred
stock shall convert into one share of common stock, subject to certain
adjustments.
In the event the Company issues additional shares of common stock
or securities convertible into common stock, subject to certain exclusions,
for consideration less than the original issue price paid for the
outstanding convertible preferred stock, then the convertible preferred
stock conversion price shall be reduced in accordance with anti-dilution
provisions. Further, in the event prior to December 1, 2000, (i) the
Company sells common stock which becomes publicly traded, or (ii) the
Company is acquired by another entity, or (iii) substantially all assets of
the Company are sold and the price per share received by holders of the
common stock is at least $9 per share, the Series C preferred stock
conversion ratio changes such that each share of Series C preferred stock
converts into 0.8285691 shares of common stock.
Each holder of convertible preferred stock is entitled to vote on
all matters on an "as if converted" basis. Dividends, if declared by the
board of directors, are in preference to any dividends declared on common
stock at the rate of 8% of the original issue price paid per share per
annum and are not cumulative. No dividends have been declared.
Before taking certain actions, the Company must obtain the
majority approval of the holders of certain outstanding convertible
preferred shares. Depending upon the action, the convertible preferred
stockholders may vote separately for each series or together as a single
class. Furthermore, such approval for certain actions is not required if
there is approval by at least 75% of the members of the board of directors.
These actions include making loans or advances to employees and
guaranteeing the indebtedness of any other party, other than in the
ordinary course of business, the sale of all or substantially all of the
Company's property or business, mergers with any other corporation,
acquisitions of other businesses, issuance of senior equity securities and
the declaration and payment of dividends on common stock.
9. STOCKHOLDERS' EQUITY
Common Stock
The Company has 30,000,000 shares of common stock, $0.001 par
value, authorized at September 30, 2001. The voting, dividend and
liquidation rights of common stockholders are subject to and qualified by
the rights of preferred stockholders. Common stockholders are entitled to
one vote on all matters brought before the stockholders for each share of
common stock held and are entitled to receive dividends when, as and if,
declared by the Company and subject to preferential dividend rights of
preferred stockholders. Upon liquidation, dissolution or winding up of the
Company, common stockholders will be entitled to receive all
-21-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
assets of the Company available for distribution to stockholders, subject
to preferential rights of preferred stockholders.
Stock Options
In March 1996, the Company established the 1996 Stock Option Plan
(the Plan) which allows for up to 6,000,000 shares of the Company's
authorized but unissued common stock to be issued under the Plan. The Plan
is administered by the Company's board of directors and options may be
granted to employees, non-employee members of the board of directors and
independent consultants and contractors who provide services to the
Company. Options granted under the Plan may be either incentive stock
options or non-qualified stock options and the terms of any such options
are determined by the board of directors. However, no option shall have a
contractual life in excess of ten years from the date of grant.
Stock options granted under the Plan generally have a ten-year
contractual life and are exercisable on the date of grant. Unvested shares
issued upon exercise of the options are subject to a repurchase right in
favor of the Company. Generally, unexercised options and the Company's
repurchase right of shares purchased upon exercise of unvested options
expires at the rate of 25 percent on the one year anniversary of the grant
and ratably thereafter over the following three-year period as the options
or shares becomes fully vested. At September 30, 2001, 15,375 shares
exercised under the Plan are subject to the Company's repurchase right at a
weighted-average per share price of $2.43.
In September 1997, the Plan was amended to include accelerated
vesting provisions in the event of a change in control of the Company. In
accordance with APB 25 and concurrent with this amendment, a new
measurement date was established and non-cash stock-based compensation for
previous grants under the Plan was determined based on the difference
between the estimated current market value and the exercise price and
recognized over the remaining vesting period of the grants.
During fiscal year 1999, stock options were granted under the Plan
at an exercise price below the estimated market price of the Company's
common stock at the date of grant. In accordance with APB 25, non-cash
stock-based compensation was determined and is being recognized over the
vesting period of the grant or, in the event the stock options were
exercised, as the Company's repurchase right of unvested shares issued upon
exercise lapses.
Non-cash stock-based compensation expense during fiscal years 2000
and 2001 was approximately $425,000 and $231,000, respectively. Total
unamortized, deferred stock-based compensation expense at September 30,
2001 was approximately $235,000.
Options Outstanding and Exercisable
The following table summarizes stock option activity:
WEIGHTED-
AVERAGE
NUMBER OF EXERCISE
OPTIONS PRICE
--------- ---------
Balance at September 30, 1999.................... 2,077,190 2.28
Granted........................................ 1,222,926 5.43
Exercised...................................... (76,753) 0.60
Canceled....................................... (461,333) 2.44
---------
Balance at September 30, 2000.................... 2,762,030 3.69
-22-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Granted........................................ 1,331,052 .90
Exercised...................................... (32,562) .82
Canceled....................................... (1,402,327) 3.76
----------
Balance at September 30, 2001.................... 2,658,193 2.29
==========
Available for grant at September 30, 2001........ 1,718,046
==========
The following table summarizes information about stock options
outstanding and exercisable at September 30, 2001:
OPTIONS OUTSTANDING AND EXERCISABLE
----------------------------------------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED-
RANGE OF CONTRACTUAL AVERAGE
EXERCISE NUMBER AVERAGE LIFE EXERCISE
PRICES OUTSTANDING IN YEARS PRICE
-------- ----------- ------------ ---------
$0.10 50,000 5.4 $0.10
0.62 379,543 6.6 0.62
0.90 1,197,830 9.5 0.90
1.40 0 0.0 1.40
3.80 543,595 6.7 3.80
5.06 348,495 8.6 5.06
5.30 46,000 7.8 5.30
7.59 92,730 8.6 7.59
----------
2,658,193 8.3
==========
The fair value of each employee option grant is estimated on the
date of grant using the Black-Scholes option pricing model. The
weighted-average assumptions included in the Company's fair value
calculations are as follows:
YEAR ENDED SEPTEMBER 30,
2000 2001
------ ------
Expected life (in years)...................... 4 4
Risk-free interest rate....................... 6.36% 4.73%
Volatility.................................... -- --
Dividend yield................................ -- --
Had the Company determined compensation costs for stock option
awards in accordance with SFAS No. 123, the Company's pro forma net loss
would have been approximately $19,615,000 and $15,570,000 for the fiscal
years ended September 30, 2000 and 2001 respectively. Net loss per share
would have been $4.12 and $1.34 for the fiscal years ended September 30,
2000 and 2001 respectively. Compensation cost calculated under the fair
value approach is recognized over the vesting period of the respective
stock options.
Warrants Outstanding and Exercisable
During the year and subsequent to year end, the Company issued
warrants to purchase the Company's stock, in connection with debt financing
arrangements (see Note 7).
-23-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. EMPLOYEE SAVINGS PLAN
The Company has a 401(k) Savings Plan (the Savings Plan) in which
all employees are eligible to participate. The Company may, at its
discretion, match up to 100% of participant contributions. No contributions
to the Savings Plan were made by the Company during fiscal 1998 and 1999.
Effective January 1, 2000, the Company began matching 50% of participant
contributions, up to the first 6% of participant compensation, as approved
by the board of directors. During fiscal years 2000 and 2001, the Company
contributed $215,000 and $268,000 to the Savings Plan, respectively.
11. INCOME TAXES
The (benefit from) provision for income taxes consist of the
following:
YEAR ENDED SEPTEMBER 30,
(in thousands) 2000 2001
----------- -----------
Deferred tax (benefit) provision:
U.S. federal................................ $ 5,394 $ 3,704
Foreign..................................... 1,734 1,308
State and local............................. 952 654
Increase in valuation allowance............... (8,080) (5,666)
-------- -------
Total............................ $ -- $ --
======== =======
The Company provides deferred taxes for temporary differences
between the bases of assets and liabilities for financial reporting
purposes and the bases of assets and liabilities for tax return purposes.
The deferred tax asset/(liability) at September 30, 2000 and 2001, is
attributable to the following:
SEPTEMBER 30,
----------------------------
(in thousands) 2000 2001
------------ ------------
Deferred tax assets:
Allowance for doubtful
accounts........................................................ $ 68 $ 49
Amortization of start-up costs................................... 35 --
Reserves......................................................... 43 --
Accrued expenses................................................. 125 399
Deferred revenues................................................ 65 65
Contribution carryforward........................................ -- 1
R&E credit....................................................... 453 548
Federal and state net operating-loss carryforwards ("NOLs")...... 13,235 16,747
Foreign NOLs..................................................... 4,036 5,345
Software amortization............................................ 182 85
Stock warrants................................................... -- 149
Restructuring.................................................... -- 363
-------- --------
Total deferred tax assets................................ 18,242 23,751
-------- --------
Deferred tax liabilities:
Depreciation and amortization.................................... (63) 94
------- --------
Total deferred tax liability............................. (63) 94
-------- --------
Total deferred tax asset before valuation allowance...... 18,179 23,845
Valuation allowance................................................ (18,179) (23,845)
-------- --------
Net deferred tax asset .................................. $ -- $ --
======== ========
-24-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2001 management has concluded that a full
valuation allowance is required on the deferred tax assets based on its
amendment that the valuation of deferred tax assets does not meet the "more
likely then not" criteria under SFAS 109.
As of September 30, 2001, the company had net operating loss
carryforwards for both U.S. federal and state income tax reporting purposes
of approximately $44.0 million. These carryforwards expire between 2011 and
2021. The company's ability to utilize the net operating loss carryforwards
in future years may be limited in some circumstances, including significant
changes in ownership interests, due to certain provisions of the Internal
Revenue Code of 1986. As of September 30, 2001 MCL has net operating loss
carryforwards in Israel of approximately $5.5 million, which do not have an
expiration period. As of September 30, 2001 MCUK had net operating loss
carryforwards of approximately $6.0 million, which do not have an
expiration period. As of September 30, 2001, the Company also had net
operating loss carryforwards of $3.0 million in Germany. These losses are
related to the MCDE subsidiary and the joint venture and do not have an
expiration period. As of September 30, 2001 the company also had net
operating loss carryforwards of approximately $700,000 in France, which do
not have an expiration period.
In 1997, the Company made an election under the United States tax
laws to domesticate its Israeli subsidiary, MCL. As a result of this
election, on January 1, 1997, MCL is treated as transferring all of its
assets to a domestic corporation. Therefore, for tax purposes MCL is
treated as a taxable subsidiary in both Israel and Delaware from January 1,
1997 forward.
The provision for income taxes differed from that which would be
computed by applying the U.S. federal income tax rate to income before
income taxes as follows:
YEAR ENDED SEPTEMBER 30,
2000 2001
------ ------
Computation of U.S. federal income taxes at 34%....... 34.0% 34.0%
Additional tax loss from joint venture................ 4.5 (0.1)
State and local taxes, net of federal income
tax benefit.......................................... 4.3 3.9
Increase in valuation................................ (42.1) (37.2)
Other................................................. (0.7) (0.6)
----- -----
Provision for income taxes............................ --% --%
===== =====
12. SEGMENT INFORMATION
The Company classifies its operations into one industry segment,
software development and related services. The Company's revenues by
country or geographic region of customer location were as follows:
YEAR ENDED SEPTEMBER 30,
(in thousands) 2000 2001
-------- -------
United States................................ $12,520 $11,761
United Kingdom............................... 2,822 1,325
Germany...................................... 1,840 23
Switzerland.................................. 226 869
France....................................... 115 26
Rest of world................................ 104 11
------- -------
$17,627 $14,015
======= =======
-25-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's long-lived assets by country or geographic region
consist of the following at:
SEPTEMBER 30,
--------------------
(in thousands) 2000 2001
------- -------
United States................................ $ 1,908 $ 1,538
Germany...................................... 264 0
United Kingdom............................... 111 160
Israel....................................... 1 1
------- -------
$ 2,284 $ 1,699
======= =======
13. RELATED-PARTY TRANSACTIONS
Interchip
During fiscal year 2000, the Company was a party to an
international marketing agreement with a software distributor, Interchip
Distributed Systems GmbH (Interchip), which is owned by the Company's Chief
Executive Officer and another member of the Company's board of directors.
Under the marketing agreement, Interchip had an exclusive right, which was
amended to a non-exclusive right effective in April 1999, to market certain
of the Company's products in Germany, Austria and Switzerland. In return,
the Company was entitled to royalties generally calculated as 50% of the
sales price of license and maintenance revenues to end-users. (See Note 2
regarding the Company's revenue and cost of revenue accounting policies in
instances where the Company provides substantial sales and customer support
to its distributors.) During fiscal year 2000, the Company recognized
revenue of approximately $280,000 and distributor expense of approximately
$72,000 under this agreement. In addition, during fiscal year 2000, the
Company subcontracted Interchip to perform certain professional services
for fees of $76,000. At September 30, 2000, the Company had accounts
receivable due from Interchip of $169,000 and accounts payable due to
Interchip of $56,000.
During October 2000, the Company and Interchip terminated their
international marketing agreement and the Company purchased Interchip's
rights to customer contracts previously entered into by Interchip under the
agreement along with Interchip's customer prospect list for consideration
of $585,000. The Company's investment in the purchased contracts rights and
prospect list is being amortized over an estimated useful life of
approximately two years. Amortization expense for fiscal year 2001 was
$300,000.
USU
The Company from time to time engaged in transactions with a
software developer, USU, which is a stockholder in the Company and the
Company's joint venture partner (see Note 5). During fiscal year 2000, the
Company incurred fees of approximately $153,000 for professional services
and development work provided by USU. In connection with the sale and
distribution of certain of USU's products, during fiscal years 2000 and
2001, the Company incurred royalty expense of approximately $0 and $30,000,
respectively. At September 30, 2001, the Company had net accounts payable
to USU of $28,000.
-26-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of related-party transactions:
YEAR ENDED SEPTEMBER 30,
(in thousands) 2000 2001
------- ------
Related-party revenue:
Maintenance:
Interchip................................. $ 280 $ --
------- -----
Joint-venture development fees:
ValueSolution............................ 1,787 --
------- -----
Total related-party revenue........ $ 2,067 $ --
======= =====
Related-party cost of revenue:
License:
USU....................................... $ -- $ 8
ValueSolution............................. 1,236 62
------- -----
1,236 70
------- -----
Maintenance:
Interchip................................. 72 --
USU....................................... -- 22
ValueSolution............................. 241 35
------- -----
313 57
------- -----
Professional services:
Interchip................................. 76 --
USU....................................... 22 --
------- -----
98 --
------- -----
Total related-party cost of revenue... $ 1,647 $ 127
======= =====
Related-party research and development
expense:
USU........................................ $ 131 $ --
------- -----
Total related party research and
development expense................. $ 131 $ --
======= =====
-27-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30,
-------------------
(In thousands) 2000 2001
------- ------
Related-party assets:
Accounts receivable:
Interchip...................................... $ 169 $ --
------ ------
Other assets:
ValueSolution................................. 62 2
------ ------
Total related-party
assets................................. $ 231 $ 2
====== ======
Related-party liabilities:
Accounts payable and accrued liabilities:
Interchip..................................... $ 56 $ --
USU........................................... -- 28
ValueSolution................................. -- 62
------ ------
56 90
------ ------
Deferred revenue:
Interchip..................................... 52 --
ValueSolution................................. 27 --
------ ------
79 --
------ ------
Total related-party liabilities........ $ 135 $ 90
====== ======
14. COMMITMENTS AND CONTINGENT LIABILITIES
Research and Development Contracts with the Chief Scientist
MCL previously entered into research and development contracts
with the Chief Scientist of the Israeli Ministry of Industry and Trade (the
Chief Scientist). Under the agreements, MCL received grants from the Chief
Scientist for use in certain approved research and development projects. In
return, the Chief Scientist is entitled to receive royalties on sales of
the product for which the research is being undertaken. Such royalties are
limited to as much as 300% of total grants received at the rate of up to 5%
to 6% of qualifying sales. MCL had received approximately $365,000 from the
Chief Scientist through September 30, 1996. There were no grants from the
Chief Scientist subsequent to September 30, 1996. Through September 30,
2001, the Company had accrued related royalty expense of approximately
$448,000, of which $368,000 has been paid to the Chief Scientist as of
September 30, 2001.
In March 1999, the Company made an application to the Chief
Scientist to transfer from MCL to MainControl the manufacturing rights of
products developed under contract with the Chief Scientist. Upon approval
of this election, maximum royalties to the Chief Scientist could total
approximately $1,095,000.
-28-
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Operating Lease Commitments
The Company has certain minimum obligations, which principally
pertain to non-cancelable operating leases for office space, as well as
obligations for the purchase of application hosting services and other
subscription services. At September 30, 2001, future minimum payments are
as follows:
YEAR ENDED SEPTEMBER 30,
--------------------------
(in thousands)
2002............. $1,684
2003............. 1,373
2004............. 1,247
2005............. 155
------
$4,459
======
Rent expense was $1,177,000 and $1,002,000 for fiscal years 2000
and 2001, respectively. The Company's lease for its U.S. headquarters
expires during fiscal year 2004 and is renewable thereafter for a period of
five additional years. During December 2001, the Company sublet a portion
of its headquarters' facility through the end of the lease term to various
subtenants for an aggregate future rental expense offset of $1,326,000 (see
Note 6). During fiscal year 2001, the Company accrued restructuring charges
of $1,144,229 related to vacant space prior to securing subtenants,
expected losses on subleases, brokerage commissions and other costs.
During the lease term, the Company is required to maintain a
$296,000 security deposit with the landlord in the form of either a cash
deposit or irrevocable letter of credit (see Note 7).
Legal
The Company encounters allegations and litigation in the course of
business. The Company believes that any negative consequences of such
allegations are remote and are not expected to affect the operations or
financial position of the Company.
-29-
MAINCONTROL, INC
CONSOLIDATED BALANCE SHEET (UNAUDITED)
ASSETS
(IN THOUSANDS,EXCEPT SHARE DATA) MARCH 31, 2002
--------------
Current assets:
Cash and cash equivalents $ 4,165
Accounts receivable, less allowance for
doubtful accounts of $75 1,539
Other assets 328
--------
Total current assets 6,032
--------
Property and equipment, net 888
Other non-current assets 255
--------
Total assets $ 7,175
========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 139
Accrued payroll 258
Accrued expenses 1,118
Accrued restructuring charges 413
Accrued royalties 155
Deferred revenue 1,726
Current portion of long-term debt 946
Other current liabilities 18
--------
Total current liabilities 4,773
--------
Accrued restructuring charges 355
Other non-current liabilities 837
Subordinated convertible debt 11,988
--------
Total liabilities 17,953
--------
Commitments and contingencies
Mandatorily redeemable preferred stock:
Convertible preferred stock, $0.001 par value;
20,000,000 shares authorized;16,182,717 shares
issued and outstanding 56,271
--------
Stockholders' Deficit
Common stock, $.001 par value;30,000,000 authorized;
7,990,264 shares issued and outstanding 8
Additional paid-in capital --
Deferred stock-based compensation (150)
Accumulated deficit (66,773)
Accumulated other comprehensive loss (134)
--------
Total stockholders' deficit (67,049)
--------
Total liabilities, mandatorily redeemable preferred stock
and stockholders' deficit $ 7,175
========
The accompanying notes are an integral part of the
consolidated financial statements.
30
MAINCONTROL, INC
STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED MARCH 31,
(in thousands,except share data) 2001 2002
----------- -----------
License $ 2,395 $ 830
Maintenance 1,267 1,546
Professional Services 2,944 1,926
----------- -----------
Total revenues 6,606 4,302
----------- -----------
Cost of revenues:
License 95 30
Maintenance 221 132
Professional services, exclusive of non-cash
stock-based compensation of $4 and $4 1,343 853
----------- -----------
1,659 1,015
----------- -----------
Gross margin 4,947 3,287
----------- -----------
Operating expenses:
Product development, exclusive of non-cash
stock-based compensation of $27 and $17 3,599 2,223
Sales and marketing, exclusive of non-cash
stock-based compensation of $46 and $22 8,206 3,535
General and administrative, exclusive of
non-cash stock-based compensation of $46 and $42 1,763 1,452
Non-cash stock-based compensation 123 85
Restructuring 1,017 781
----------- -----------
Total operating expenses 14,708 8,076
----------- -----------
Loss from operations (9,761) (4,789)
Interest income 127 32
Interest expense (92) (431)
Non-cash debt issue costs -- (1,257)
----------- -----------
Loss before equity in (loss) of
joint venture (9,726) (6,445)
Equity in loss before equity in income of
joint venture 24 --
----------- -----------
Net loss $ (9,702) $ (6,445)
=========== ===========
Basic and diluted net loss per common share $ (1.22) $ (0.81)
Weighted-average number of common shares used in
computing basic and diluted net loss per
common share 7,983,205 7,989,964
The accompanying notes are an integral part of the consolidated
financial statements.
31
MAINCONTROL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED MARCH 31,
(IN THOUSANDS) 2001 2002
-------- --------
Cash flows from operating activities:
Net loss $(9,702) $(6,445)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 600 427
Impairment of fixed assets -- 24
Provision for bad debts 90 101
Non-cash stock-based compensation 123 85
Non-cash debt issue costs 1,257
Equity in loss(income) of joint venture (24) --
Changes in assets and liabilities:
Accounts receivable 550 640
Other current assets 198 172
Other non-current assets (1) 41
Accounts payable (118) (81)
Accrued payroll (98) (907)
Accrued expenses 159 (361)
Accrued restructuring charges (469) (188)
Accrued royalties 14 (71)
Deferred revenue 63 (700)
Other current liabilities (40) (62)
Other non-current liabilities 92 65
------- -------
Net cash used by operating activities (7,306) (6,003)
------- -------
Cash flows from investing activities:
Purchase of contract rights (585) --
Investment in joint venture 288 --
Acquisitions of property and equipment (328) (60)
------- -------
Net cash used in investing activities (625) (60)
------- -------
Cash flows from financing activities:
Repayment of long-term debt (485) (532)
Net proceeds from sale of common stock and
exercise of stock options 26 1
Proceeds from subordinated convertible debt 4,121 6,941
Purchase of stock subject to repurchase rights (12) (1)
------- -------
Net cash provided by financing activities 3,650 6,409
------- -------
Effect of exchange rate changes on cash (25) (32)
Net decrease in cash and cash equivalents (4,306) 314
Cash and cash equivalents, beginning of year 9,643 3,731
------- -------
Cash and cash equivalents, end of year $ 5,337 $ 4,165
======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
32
MAINCONTROL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2002 AND 2001
(UNAUDITED)
The unaudited consolidated financial statements of MainControl, Inc.
("MainControl") herein have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission (SEC) and, in the opinion of
management, reflect all adjustments (consisting of normal recurring accruals)
necessary to present fairly the results of operations for the interim periods
presented. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations; however, management believes that the disclosures are adequate to
make the information presented not misleading. These financial statements and
the notes thereto should be read in conjunction with MainControl's Financial
Statements for the fiscal years ended September 30, 2001 and 2000 contained
herein.
33
MRO SOFTWARE, INC.
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
On June 14, 2002, MRO Software, Inc ("MRO Software") acquired
MainControl, Inc. ("MainControl"), by means of the merger of a wholly-owned
subsidiary of MRO Software that was formed for the purpose ("Merger Sub") with
and into MainControl, as a result of which MainControl became a wholly-owned
subsidiary of MRO Software (the "Merger"). The Merger was effected pursuant to
an Agreement and Plan of Merger made as of May 28, 2002 among MRO Software,
Merger Sub, MainControl, Mr. Alex Pinchev and Shai Beilis as Shareholders'
Representative.
As consideration for the Merger, MRO Software (i) issued to
MainControl's shareholders a total of 1,098,843 shares of MRO Software Common
Stock, and (ii) paid to Mr. Pinchev and certain other officers of MainControl a
total of $2.8 million in cash, and agreed to pay an additional $700,000 upon and
subject to the achievement of certain future software revenues. The amount of
the consideration was determined by arms' length negotiations between MRO
Software and MainControl. Twenty (20%) percent of the consideration was placed
in escrow as security against claims for breaches of representations or
warranties which may be asserted by MRO Software. The total value of the
consideration was approximately $17 million, based upon the closing price of MRO
Software's Common Stock on May 28, 2002.
The following unaudited pro forma combined condensed balance sheet as
of March 31, 2002 and unaudited pro forma combined condensed statements of
operations for the year ended September 30, 2000 and the six months ended March
31, 2002 (collectively, the "Unaudited Pro Forma Statements") were prepared to
give effect to the Merger accounted for under the purchase method of accounting.
The unaudited pro forma combined condensed balance sheet assumes that the Merger
occurred on March 31, 2002. The unaudited pro forma combined condensed
statements of operations for the year ended September 30, 2001 and for the six
months ended March 31, 2002 assume that the Merger occurred on October 1, 2000.
The Unaudited Pro Forma Statements are based on the historical consolidated
financial statements of MRO Software and MainControl under the assumptions and
adjustments set forth in the accompanying notes to the Unaudited Pro Forma
Statements. The combined financial information for the fiscal year ended
September 20, 2001 has been obtained from the consolidated financial statements
of MRO Software and MainControl. The combined financial information for the six
months ended March 31, 2002 has been obtained from the unaudited consolidated
financial statements of MRO Software and MainControl and includes, in the
opinion of MRO Software's and MainControl's managements, all adjustments
necessary to present fairly the data for such period. The Unaudited Pro Forma
Statements may not be indicative of the results that actually would have
occurred if the Merger had been in effect on the dates indicated or which may be
obtained in the future.
The pro forma adjustments are based upon available information and upon
certain assumptions as described in the notes to the Unaudited Pro Forma
Statements that MRO Software's management believes are reasonable in the
circumstances. The purchase price has been allocated to the acquired assets and
liabilities based on a preliminary independent appraisal of their respective
values. Although MRO Software believes, based on available information, that the
fair values and allocation of the purchase price included in the Unaudited Pro
Forma Statements are reasonable estimates, final purchase accounting adjustments
will be made on the basis of evaluations and estimates which are in progress,
but have not yet been finalized. As a result, final allocation of costs related
to the Merger may differ from that presented herein. The Unaudited Pro Forma
Statements and accompanying notes should be read in conjunction with the
consolidated financial statements and accompanying notes thereto of MRO Software
included in its Annual Report on Form 10-K for the year ended September 30, 2001
and Quarterly Report on Form 10-Q for the quarter ended March 31, 2002.
34
PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF MARCH 31, 2002
(UNAUDITED)
PRO FORMA PRO FORMA
MRO MAINCONTROL ADJUSTMENTS COMBINED
-------- ------------ ----------- ---------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 61,115 $ 4,165 $ (2,808) (a) $ 62,472
Marketable securities 757 -- -- 757
Accounts receivable, net 32,003 1,539 -- 33,542
Prepaid expenses and other current assets 8,166 328 -- 8,494
Deferred income taxes 3,368 -- -- 3,368
-------- --------- -------- ---------
Total current assets 105,409 6,032 (2,808) 108,633
Marketable securities 500 -- -- 500
Property and equipment, net 10,577 888 -- 11,465
Intangible assets, net 44,878 - 16,034 (b) 60,912
Other assets 2,042 255 -- 2,297
Deferred income taxes 7,821 -- -- 7,821
-------- --------- -------- ---------
Total assets 171,227 $ 7,175 $ 13,226 $ 191,628
======== ========= ======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 17,249 $ 570 $ 710 (a) $ 18,529
Accrued compensation 6,843 1,118 -- 7,961
Accrued restructuring -- 413 -- 413
Deferred revenue 24,314 1,726 -- 26,040
Short term debt 946 -- 946
-------- --------- -------- ---------
Total current liabilities 48,406 4,773 710 53,889
Other long term liabilities 87 1,192 1,279
Subordinated convertible debt 11,988 (11,988) (d) --
Mandatorily redeemable preferred stock -- 56,271 (56,271) (e) --
Stockholders' equity (deficit): --
Common stock 231 8 3 (e) 242
Additional paid-in capital 94,180 13,715 (e) 107,895
Deferred compensation (231) (150) 150 (e) (231)
Retained earnings (deficit) 30,089 (66,773) 66,773 (e) 30,089
Accumulated other comprehensive loss (1,535) (134) 134 (e) (1,535)
-------- --------- -------- ---------
Total stockholders' equity (deficit) 122,734 (67,049) 80,775 136,460
-------- --------- --------- ---------
Total liabilities and stockholders'
equity (deficit) $171,227 $ 7,175 $ 13,226 $ 191,628
======== ========= ======== =========
-- -- -- --
See accompanying notes to the pro forma combined condensed financial
information.
35
PRO FORMA COMBINED CONDENSED STATEMENT
OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 2001
(UNAUDITED)
PRO FORMA PRO FORMA
MRO MAINCONTROL ADJUSTMENTS COMBINED
---------- ----------- ----------- -----------
(in thousands,except per share data)
Revenues:
Software $ 61,337 $ 5,341 $ 66,678
Support and services 124,113 8,674 132,787
--------- --------- -------- ----------
Total revenues 185,450 14,015 -- 199,465
Cost of revenues:
Software 2,438 327 2,765
Support and services 70,423 2,929 73,352
--------- --------- -------- ----------
Total cost of revenues 72,861 3,256 -- 76,117
Gross profit 112,589 10,759 -- 123,348
Operating expenses:
Sales and marketing 73,202 14,374 87,576
Product development 27,559 5,823 33,382
General and administrative 18,022 3,461 21,483
Restructuring charges 1,776 1,776
Intangible amortization 14,561 -- 1,090 (c) 15,651
--------- --------- -------- ----------
Total operating expenses 133,344 25,434 1,090 159,868
--------- --------- -------- ----------
Loss from operations (20,755) (14,675) (1,090) (36,520)
Interest income 1,594 177 -- 1,771
Interest expense -- (354) -- (354)
Other expense, net (450) (409) -- (859)
--------- --------- -------- ----------
Loss before income taxes (19,611) (15,261) (1,090) (35,962)
Equity in (loss) income of joint venture 44 44
Benefit for income taxes (4,143) -- (4,143)
--------- --------- -------- ---------
Loss from continuing operations $ (15,468) $ (15,217) $ (1,090) $ (31,775)
========= ========= ======== =========
Loss from continuing operations per
common share
Basic and diluted $ (0.70) $ (1.43)
Weighted average number of common shares
Basic and diluted 22,148 22,148 (f)
See accompanying notes to the pro forma combined condensed
financial information.
36
PRO FORMA COMBINED CONDENSED STATEMENT
OF OPERATIONS FOR THE SIX MONTHS ENDED MARCH 31, 2002
(UNAUDITED)
PRO FORMA PRO FORMA
MRO MAINCONTROL ADJUSTMENTS COMBINED
-------- ----------- ----------- ----------
(in thousands,except per share data)
Revenues:
Software $ 21,602 $ 830 $ 22,432
Support and services 62,762 3,472 66,234
-------- -------- ------ ---------
Total revenues 84,364 4,302 -- 88,666
Cost of revenues:
Software 3,360 30 3,390
Support and services 32,631 989 33,620
-------- -------- ------ ---------
Total cost of revenues 35,991 1,019 -- 37,010
Gross profit 48,373 3,283 -- 51,656
Operating expenses:
Sales and marketing 29,711 3,557 33,268
Product development 13,161 2,240 15,401
General and administrative 9,347 1,494 10,841
Restructuring charges 781 781
Intangible amortization 6,105 -- 545 (c) 6,650
-------- -------- ------ ---------
Total operating expenses 58,324 8,072 545 66,941
-------- -------- ------ ---------
Loss from operations (9,951) (4,789) (545) (15,285)
Interest income 533 32 -- 565
Interest expense -- (431) (431)
Other expense, net (74) (1,257) (1,331)
-------- -------- ------ ---------
Loss before income taxes (9,492) (6,445) (545) (16,482)
Benefit for income taxes (2,737) -- (2,737)
-------- -------- ------ ---------
Loss from continuing operations $ (6,755) $ (6,445) $ (545) $ (13,745)
======== ======== ====== =========
Loss from continuing operations per
common share:
Basic and diluted $ (0.30) $ (0.61)
Weighted average number of common shares:
Basic and diluted 22,543 22,543 (f)
See accompanying notes to the pro forma combined condensed
financial information.
37
MRO SOFTWARE, INC. AND MAINCONTROL, INC.
NOTES AND ASSUMPTIONS TO PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
1. The pro forma information presented is theoretical in nature and not
necessary indicative of the future consolidated results of operations of the
combined companies or the consolidated results of operations which would
have resulted had the Merger taken place during the periods presented. The
Unaudited Pro Forma Statements reflect the effects of the Merger. The
unaudited pro forma combined condensed balance sheet assumes that the Merger
and related events occurred as of March 31, 2002. The unaudited pro forma
combined condensed statements of operations for the year ended September 30,
2001 and for the six months ended March 31, 2002 assume that Merger
and related events occurred as of October 1, 2000.
2. PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENT ADJUSTMENTS
(a) The purchase price for the Merger was determined as follows:
MRO Software common stock issued to MainControl stockholders $13,726,000
Cash received by MainControl stockholders 2,808,000
Direct acquisition costs 710,000
-----------
Total estimated purchase price $17,244,000
===========
(b) The actual allocation of the purchase price will be based on the estimated
fair values of net assets of MainControl at the consummation of the Merger. For
purposes of the pro forma combined financial statements, such allocation has
been estimated as follows:
Assets of MainControl at March 31, 2002 $ 1,210,000
Acquired Technology 3,400,000
Customer Contracts 1,300,000
BackLog 150,000
Goodwill 11,184,000
-----------
Total estimated purchase price $17,244,000
===========
(c) Amortization of the acquired technology, customer contracts and backlog will
be over the estimated useful lives of five years, five years and one year,
respectively. In accordance with SFAS No. 142, goodwill will not be amortized.
Amounts recorded for intangible assets have not been tax affected because these
assets are deemed non-deductible for tax purposes.
(d) Conversion of subordinated convertible debt.
(e) Elimination of MainControl equity amounts.
(f) The shares used in computing the unaudited pro forma combined net loss per
share for the year ended September 30, 2001 and for the six months ended March
31, 2002 are based upon the historical weighted average common shares
outstanding adjusted to reflect the issuance, as of October 1, 2000 and 2001,
respectively, of approximately 1.1 million shares of MRO Software common stock.
38