UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2004
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-23852
MRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2448516
(State or other jurisdiction (I.R.S employer incorporation or organization)
identification number)
100 CROSBY DRIVE, BEDFORD MASSACHUSETTS 01730
(Address of principal executive offices, including zip code)
(781) 280-2000
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes X No
----- -----
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 25,256,852 shares of common stock, $.01 par value per share,
as of February 4, 2005.
Page 1
MRO SOFTWARE, INC.
10-Q INDEX
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) as of December 31, 3
2004 and September 30, 2003.
Consolidated Statements of Operations (unaudited)for the three 4
months ended December 31, 2004 and 2003.
Consolidated Statements of Cash Flows (unaudited) for the 5
three months ended December 31, 2004 and 2003.
Notes to Consolidated Financial Statements (unaudited). 6
ITEM 2. Management's Discussion and Analysis of Financial Condition 11
and Results of Operations
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 22
ITEM 4. Controls and Procedures 22
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 3. Defaults upon Senior Executives 23
Item 4. Submission of Matter to a Vote of Security Holders 23
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURE 26
Page 2
MRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
DECEMBER 31, SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2004
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents $ 64,200 $ 56,982
Marketable securities 37,510 36,152
Accounts receivable, trade, less allowance
for doubtful accounts of $2,371 at December 31, 2004
and $2,324 at September 30, 2004, respectively 35,940 36,636
Prepaid expenses and other current assets 5,404 5,072
Deferred income taxes 1,422 1,470
-------- --------
Total current assets 144,476 136,312
-------- --------
Marketable securities 12,984 15,273
Property and equipment, net 7,520 7,227
Goodwill 46,337 46,768
Intangible assets, net 4,930 5,541
Deferred income taxes 7,761 7,611
Other assets 3,873 3,989
-------- --------
Total assets $227,881 $222,721
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 12,445 $ 12,871
Accrued compensation 9,465 10,142
Income taxes payable 6,033 5,473
Deferred revenue 28,407 29,373
Deferred lease obligation 238 292
-------- --------
Total current liabilities 56,588 58,151
-------- --------
Deferred lease obligation 2,285 2,210
Deferred revenue 728 900
Other long term liabilities 303 325
Stockholders' equity
Preferred stock, $.01 par value;1,000 authorized,
none issued and outstanding
Common stock, $.01 par value;50,000 authorized;
25,246 and 24,983 issued and outstanding at December 31, 2004
and September 30, 2004, respectively 252 250
Additional paid-in capital 121,343 118,903
Deferred compensation (322) (370)
Retained earnings 44,666 41,503
Accumulated other comprehensive income 2,038 849
------- --------
Total stockholders' equity 167,977 161,135
------- --------
Total liabilities and stockholders' equity $227,881 $222,721
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
3
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2004 2003
------- --------
Revenues:
Software $14,824 $12,210
Support and services 32,532 32,692
------- -------
Total revenues 47,356 44,902
------- -------
Cost of revenues:
Software 1,280 1,812
Support and services 15,615 14,773
------- -------
Total cost of revenues 16,895 16,585
------- -------
Gross profit 30,461 28,317
Operating expenses:
Sales and marketing 15,231 13,710
Product development 6,780 7,006
General and administrative 4,478 4,465
Amortization of other intangibles 92 205
------- -------
Total operating expenses 26,581 25,386
------- -------
Income from operations 3,880 2,931
Interest income 471 204
Other income/(expense), net 570 (440)
------- -------
Income before income taxes 4,921 2,695
Provision for income taxes 1,758 943
------- -------
Net income $ 3,163 $ 1,752
======= =======
Net income per share, basic $ 0.13 $ 0.07
------- -------
Net income per share, diluted $ 0.12 $ 0.07
------- -------
Shares used to calculate net income per share
Basic 25,041 24,629
Diluted 25,392 25,200
The accompanying notes are an integral part of the
consolidated financial statements.
4
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE
MONTHS ENDED
DECEMBER 31,
------------------
(in thousands) 2004 2003
------- --------
Cash flows from operating activities:
Net income $ 3,163 $ 1,752
Adjustments to reconcile net income to net
cash provided by/(used in) operating activities:
Depreciation 775 1,193
Amortization of other intangibles 611 957
---
Amortization of premium on marketable securities 66
Stock-based compensation 48 50
Deferred income taxes 664 129
Changes in operating assets and liabilities:
Accounts receivable 1,789 (1,952)
Prepaid expenses and other assets 142 (1,483)
Accounts payable, accrued expenses and other liabilities (1,002) (4,209)
Accrued compensation (896) (681)
Income taxes payable 281 (373)
Deferred revenue (1,806) (1,084)
------- --------
Net cash provided by/(used in) by operating activities 3,891 (5,701)
------- --------
Cash flows from investing activities:
Acquisitions of property and equipment and other
capital expenditures (1,105) (622)
---
Sale of marketable securities 3,429
Purchase of marketable securities (2,420) (20,007)
------- --------
Net cash used in investing activities (96) (20,629)
------- --------
Cash flows from financing activities:
Proceeds from exercise of employee stock options and
stock purchases 2,299 956
------- --------
Net cash provided by financing activities 2,299 956
------- --------
Effect of exchange rate changes on cash 1,124 1,207
------- --------
Net increase/(decrease) in cash and cash equivalents 7,218 (24,167)
Cash and cash equivalents, beginning of period 56,982 73,662
------- --------
Cash and cash equivalents, end of period $64,200 $ 49,495
======= ========
The accompanying notes are an integral part of the
consolidated financial statements.
5
MRO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of MRO Software, Inc. ("MRO") and its majority-owned subsidiaries
(collectively, the "Company"), as of December 31, 2004 and have been prepared by
the Company in accordance with generally accepted accounting principles for
interim reporting and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. All intercompany accounts and transactions have been eliminated.
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair presentation of the Company's financial
position, results of operations and cash flows at the dates and for the periods
indicated. The results of operations for the periods presented herein are not
necessarily indicative of the results of operations to be expected for the
entire fiscal year, which ends on September 30, 2005, or for any other future
period.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended September
30, 2004 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on December 14, 2004.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain prior year financial statement items have been reclassified to conform
to the current year's format.
B. INCOME PER SHARE
Basic income per share is computed by dividing income or loss available to
common shareholders by the weighted average number of common shares outstanding.
Diluted income per share is computed by dividing income or loss available to
common shareholders by the weighted average number of common shares outstanding
plus dilutive potential common shares. For purposes of this calculation, stock
options are considered dilutive potential common shares in periods in which they
have a dilutive effect. All potential dilutive common shares are excluded from
the computation of net loss per share because they are anti-dilutive.
Basic and diluted income per share are calculated as follows:
THREE MONTHS ENDED
-------------------
(in thousands, except per share data) 12/31/04 12/31/03
-------- --------
Net income $ 3,163 $ 1,752
Denominator:
Weighted average common shares outstanding-basic 25,041 24,629
Effect of dilutive securities (1) 351 571
------- -------
Weighted average common shares outstanding-diluted 25,392 25,200
======= =======
Net income per share, basic $ 0.13 $ 0.07
Net income per share, diluted $ 0.12 $ 0.07
Page 6
(1) Options to purchase 1,764,959 shares and 1,555,792 shares of the Company's
Common Stock for the three months ended December 31, 2004 and 2003, respectively
were outstanding but were not included in the computations of diluted net income
per share because the exercise price of the options was greater than the
weighted average market price of the common stock during the period. Common
stock equivalents of 351,000 shares and 571,000 shares were included in the
computation of diluted net income per share for the three months ended December
31, 2004 and 2003, respectively.
C. ACCOUNTING POLICIES
STOCK-BASED COMPENSATION AND PRO FORMA INFORMATION
The Company complies with the pro forma disclosure requirements of the Financial
Accounting Standards Board ("FASB") SFAS No. 123 as amended by SFAS No. 148. The
fair value of the Company's stock options was estimated using the Black-Scholes
option-pricing model. This model was developed for use in estimating fair value
of traded options that have no vesting restrictions and are fully transferable.
This model requires the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimates, in management's opinion, the Black-Scholes model does not
necessarily provide a reliable single measure of the fair value of its stock
options. The following table illustrates the effect on net income and earnings
per share on a pro forma basis as if the Company had applied the fair value
recognition provisions of SFAS No.123 to stock-based employee compensation.
THREE MONTHS ENDED
-------------------
(in thousands, except per share amounts) 12/31/04 12/31/03
-------- --------
Net income
As reported $ 3,163 $ 1,752
Add: Stock-based employee compensation expense
included in net income 48 50
Deduct: Stock-based employee compensation
expense determined under the fair value based
method for all awards, net of related tax effects (1,299) (2,573)
Pro forma net income/(loss) $ 1,912 $ (771)
Earnings/(loss) per share:
Basic - as reported $ 0.13 $ 0.07
Basic-pro forma $ 0.08 $ (0.03)
Diluted-as reported $ 0.12 $ 0.07
Diluted-pro forma $ 0.08 $ (0.03)
With the exception of restricted stock awards to non-employee members of the
board of directors, no stock-based compensation cost is reflected in net income,
as all stock-based awards granted under the Company's plans consist of stock
options that have an exercise price equal to the market value of the underlying
common stock on the date of grant.
Page 7
D. COMPREHENSIVE INCOME:
The following table reflects the components of comprehensive net income:
THREE MONTHS ENDED
-------------------
(in thousands) 12/31/04 12/31/03
-------- --------
Net income $3,163 $1,752
Other comprehensive net income,
Net of tax:
Unrealized gain/(loss) on securities arising during period 143 (82)
Foreign currency translation adjustment 1,046 886
------ ------
Comprehensive income $4,352 $2,556
====== ======
E. SEGMENT INFORMATION, GEOGRAPHIC DATA AND MAJOR CUSTOMERS:
The Company reports revenues and income under one reportable industry segment,
Strategic Asset Management. Our Strategic Asset Management software products and
services include MAXIMO EAM and MAXIMO ITAM. The Company does not allocate
expenses to these product groups and all operating results are assessed on an
aggregate basis to make decisions about the allocation of resources.
The Company manages its business in the following geographic areas: United
States, Other Americas (Canada and Latin America), Europe/Middle East and
Africa, and Asia Pacific.
A summary of the Company's revenues by geographical area is as follows:
THREE MONTHS ENDED
-------------------
(in thousands) 12/31/04 12/31/03
-------- --------
Revenues:
United States $26,495 $27,502
Other Americas 2,805 2,197
Intercompany 3,478 3,859
------- -------
Subtotal $32,778 $33,558
Europe/Middle East and Africa 14,437 12,572
Asia/Pacific 3,619 2,631
Intercompany (3,478) (3,859)
------- -------
Total revenues $47,356 $44,902
======= =======
The Company has subsidiaries in foreign countries, which sell the Company's
products and services in their respective geographic areas. Intercompany
revenues reflect our transfer pricing policies and primarily represent shipments
of software to international subsidiaries. Intercompany revenues are eliminated
from consolidated revenues.
F. GOODWILL AND OTHER INTANGIBLE ASSETS
Changes in the amount of goodwill for the quarter ended December 31, 2004 are as
follows:
Balance as of September 30, 2004 $46,768
Utilization of acquired net operating losses (431)
-------
Balance as of December 31, 2004 $46,337
=======
Page 8
Intangible assets as of December 31, 2004 and September 30, 2004 consist of the
following:
(in thousands) 12/31/04 09/30/04
-------- --------
Goodwill, net $ 46,337 $ 46,768
Acquired technology 16,654 16,654
Accumulated amortization (12,192) (11,673)
-------- --------
Sub-total acquired technology 4,462 4,981
-------- --------
Other intangibles 2,611 2,711
Accumulated amortization (2,143) (2,151)
-------- --------
Sub-total other intangibles 468 560
-------- --------
Total intangible assets, net $ 51,267 $ 52,309
======== ========
Other intangibles consist of customer contracts, customer lists and non-compete
agreements.
Amortization expense of intangible assets was $611 thousand and $957 thousand
for the three months ended December 31, 2004 and 2003, respectively.
As of December 31, 2004, remaining amortization expense on existing intangibles
for the next five years is as follows:
(in thousands)
2005 (remaining 9 mos) $1,811
2006 1,565
2007 659
2008 659
2009 236
------
Total $4,930
------
G. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based
Payments" ("SFAS 123(R)"). SFAS 123(R) replaces FASB Statement No. 123,
"Accounting for Stock-Based Compensation", supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and amends SFAS No. 95, "Statement of
Cash Flows." SFAS 123(R) requires compensation costs related to share-based
payment transactions to be recognized in the financial statements.
We are required to adopt SFAS 123(R) in the fourth quarter of fiscal 2005. SFAS
123(R) applies to all awards granted after June 30, 2005 and to previously
granted awards unvested as of the adoption date. We are currently assessing the
impact of SFAS 123(R) on our financial statements.
H. GUARANTOR ARRANGEMENTS
We warrant that our software products will perform substantially in accordance
with the product specifications as contained in certain associated
documentation, which is provided with the products, for a
Page 9
period of ninety days from initial delivery of the products to the customer. Our
sole obligation under this warranty is to use reasonable efforts to correct a
verified problem that is brought to our attention during the warranty period, or
if we are unable to provide a correction, we are obligated to accept the return
of the product and refund the license fee paid. We warrant that our professional
services will be provided in accordance with good professional practice, and
that any software developed by our services organization will perform
substantially in accordance with its approved specifications for a period of
thirty days from initial delivery of the services to the customer. Our sole
obligation under this warranty is to use reasonable efforts to correct a
verified problem that is brought to our attention during the warranty period, or
if we are unable to provide a correction, we are obligated to accept the return
of the deliverables and refund the fee paid for the services. If necessary, we
would provide for the estimated cost of product and services warranties based on
specific warranty claims and claim history. However, we have never incurred
significant expense under our product or services warranties, our liability for
breach of warranty is limited to the amount of the license or services fees
actually paid, and we maintain insurance covering such claims in an amount
sufficient to cover a refund of the license or services fees paid by any
particular customer during the last 12 months. As a result, we believe the
estimated fair value of these warranty obligations is minimal. Accordingly, we
have no liabilities recorded for these warranty obligations as of December 31,
2004.
Under our standard end-user license agreement, we agree to indemnify our
customers against infringement claims that may be brought by third parties
asserting that our products infringe on certain intellectual property rights. In
our services agreements with customers, we will also, as a matter of standard
practice, agree to indemnify customers (a) against claims that may be brought by
third parties asserting that the results of our services infringe on certain
intellectual property rights, (b) against damages caused by our breach of
certain confidentiality provisions in the contract, and (c) against damages to
personal property, and death, caused by our services personnel while on-site at
customer premises. These indemnification provisions are generally based on our
standard contractual terms. All such provisions, whether based on our standard
contracts or negotiated with a given customer, are entered into in the normal
course of business based on an assessment that the risk of loss is remote. The
terms of the indemnifications as negotiated may vary in duration and nature, and
our obligations to indemnify may be unlimited as to amount. There have been no
demands for indemnity and the contingencies triggering the obligation to
indemnify have not occurred to our knowledge and are not expected to occur. The
Company maintains insurance that covers such indemnification obligations, and
the amount of coverage that we maintain is sufficient to cover a refund of the
license and services fees received from any particular customer during the last
12 months. Historically, the Company has not made any material payments pursuant
to any such indemnity obligations. Accordingly, we have no liabilities recorded
for any such indemnity obligations as of December 31, 2004.
When we acquire a business or a company, we may assume liability for certain
events or occurrences that took place prior to the date of acquisition. The
maximum potential amount of future payments we could be required to make for
such obligations is undeterminable at this time. All of these obligations were
grand fathered under the provisions of FIN No. 45 as they were in effect prior
to December 31, 2002. Accordingly, we have no liabilities recorded for the
assumption of any such liabilities as of December 31, 2004.
I. PROVISION FOR INCOME TAXES
The Company is currently undergoing an income tax audit with the Internal
Revenue Service. We believe that we have provided sufficiently for all audit
exposures. A favorable settlement of this audit or the expiration of the statute
of limitations on the assessment of income taxes for any tax year may result in
a reduction of future tax provisions, which could be significant. Any such
benefit would be recorded upon final resolution of the audit or expiration of
the statute.
Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q, as
well as documents incorporated herein by reference, may contain forward-looking
statements (within the meaning of section 27A of the Securities Act of 1933, as
amended, and section 21E of the Securities Exchange Act of 1934, as amended).
The following and similar expressions identify forward-looking statements:
"expects," "anticipates," and "estimates." Forward-looking statements include,
without limitation, statements related to: the Company's plans, objectives,
expectations and intentions; the timing of, availability and functionality of
products under development or recently introduced; and market and general
economic conditions. Important factors that could cause actual results to differ
materially from those suggested by the forward-looking statements for various
reasons, include those discussed under the heading "Factors Affecting Future
Performance" below. These forward-looking statements speak only as of the date
of this Quarterly Report, and the Company disclaims any obligation to update
such forward looking statements as a result of any change in circumstances or
otherwise.
OVERVIEW
MRO Software is a leading global provider of Strategic Asset Management
solutions, software and related services. Strategic Asset Management is the
management and optimization of the business processes required to keep our
customers' critical assets productive. Critical assets are those that have a
significant impact on operations and performance, including assets used in
production, facilities, transportation and information technology (IT)
operations. The Company's Strategic Asset Management software products and
services allow our customers to manage the complete life cycle of their critical
assets, including: planning, procurement, deployment, tracking, maintenance and
retirement. Our Strategic Asset Management software products and services
include MAXIMO for the Enterprise Asset Management (EAM) market and MAXIMO
MainControl for the IT Asset Management (ITAM) market. Using MRO Software's
products and services, our customers improve production reliability, labor
efficiency, material optimization, software license compliance, lease
management, warranty and service management and provisioning across their
critical asset base. In March 2005, the Company will be releasing its new
generation of products, Maximo Enterprise Suite (MXES). MXES will incorporate
the Company's current EAM and ITAM capabilities, delivered on a common platform
along with new functionality that will include IT Help Desk and Service Desk
capabilities as well as a greatly enhanced application set for the EAM market.
The Company reports all its revenues in one reportable business segment, the
Strategic Asset Management segment. The Company's management assesses operating
results on an aggregate basis to make decisions about the allocation of
resources. Our actual results are reported in United States dollars.
International revenues accounted for 44% and 39% of total revenues for the three
months ended December 31, 2004 and 2003, respectively, and, therefore, the
fluctuation in exchange rates can have a significant impact on our results of
operations. In the three months ended December 31, 2004, the fluctuation in the
Euro dollar and the British pound, in particular, had a favorable impact on our
revenue results. We assess the impact of foreign currency exchange rates on our
business, primarily revenues, by recalculating the current period's financial
results using the comparable period's exchange rates to devise a constant
currency rate in order to compare period over period results. We believe that
this non-GAAP financial measure provides useful information to management and
investors since it reflects performance of our international territories without
the effect of exchange rates. Total actual revenues increased 5% in the three
months ended December 31, 2004 compared to the three months ended December 31,
2003, however, in constant currency terms the increase is estimated to be 2%.
The exchange rates had a similar impact on direct and operating expenses, and,
therefore, the overall impact on net income was immaterial for the three months
ended December 31, 2004.
Page 11
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America (U.S.). The preparation of these financial statements
requires that management make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. These estimates and
assumptions are affected by management's application of accounting policies.
Critical accounting policies, in which different judgments and estimates by our
management could materially affect our reported condition and results of
operations, include revenue recognition, estimating the allowance for doubtful
accounts, deferred tax assets, and the valuation of long-lived assets. These
critical accounting policies and estimates should be read in conjunction with
the critical accounting policies and estimates included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission on
December 14, 2004. The Company includes and updates critical accounting policies
and estimates in interim periods if a new critical accounting policy is adopted
or amended or if there are material changes in related judgments or conditions
underlying the Company's estimates in the interim period.
RESULTS OF OPERATIONS
REVENUES
Three Three
Months Months
Ended Change Ended
(in thousands) 12/31/04 % 12/31/03
-------- ------ --------
Software licenses revenues $14,824 21% $12,210
Percentage of total revenues 31% 27%
Support revenues $18,590 8% $17,243
Percentage of total revenues 39% 38%
Services revenues $13,942 (10)% $15,449
Percentage of total revenues 29% 34%
Total revenues $47,356 5% $44,902
The Company's revenues are derived primarily from two sources: (i) software
licenses, and (ii) fees for support and services.
Software license revenues increased 21% for the three months ended December 31,
2004 compared to the three months ended December 31, 2003 and increased
approximately 17% using constant currency rates. MAXIMO EAM software license
revenues comprised 98% of total software revenues for the three months ended
December 31, 2004. MAXIMO EAM software license revenues increased 26% for the
three months ended December 31, 2004 compared to the three months ended December
31, 2003. The increase was attributable to enhancements to the product, namely
MAXIMO Industry Solutions that target specific vertical markets. MAXIMO ITAM
software license revenues declined 64% for the three months ended December 31,
2004 compared to the three months ended December 31, 2003. Historically, MAXIMO
ITAM software licenses have fluctuated from quarter to quarter; and we expect
that this trend will continue over the next few quarters as a result of the
Company's plans to replace this product in conjunction with the release of its
new generation of products, MAXIMO, Maximo Enterprise Suite (MXES) in March
2005. The Company expects little or no revenue impact from this new release
until the second half of fiscal year 2005.
Page 12
Support revenues increased 8% to $18.6 million for the three months ended
December 31, 2004 from $17.2 million for the three months ended December 31,
2003 and increased approximately 5% using constant currency rates. Support
revenues have increased as a result of a cumulative increase in the number of
MAXIMO EAM customers and a strong renewal rate (90%) for support contracts.
MAXIMO EAM support revenues comprised 96% of total support revenues for the
three months ended December 31, 2004 and increased 11% for the three months
ended December 31, 2004 compared to the three months ended December 31, 2003.
MAXIMO ITAM support revenues decreased 37% for the three months ended December
31, 2004 compared to the three months ended December 31, 2003 due to termination
of contracts without commensurate replacements from new customers.
Service revenues decreased 10% to $13.9 million for the three months ended
December 31, 2004 from $15.5 million for the three months ended December 31,
2003 and decreased 14% using constant currency rates. The decrease in service
revenues for the three months ended December 31, 2004 compared to the three
months ended December 31, 2003 was comprised of the following: (1) a decline of
26% in MAXIMO ITAM service revenues related to the decrease in software licenses
sold and (2) a decline of 10% in MAXIMO EAM service revenues due to the
conclusion of a multi-year engagement that had been generating $1 to $2 million
of revenue per quarter for the previous two years. Overall, our services
business operates in a highly competitive industry and there are numerous
independent consulting firms who implement our MAXIMO products and compete for
our services business.
COST OF REVENUES
Three Three
Months Months
Ended Change Ended
(in thousands) 12/31/04 % 12/31/03
-------- ------ --------
Cost of software licenses revenues $ 1,280 (29)% $ 1,812
Percentage of software licenses revenues 9% 15%
Cost of support revenues $ 2,881 14% $ 2,522
Percentage of support revenues 15% 15%
Cost of services revenues $12,734 4% $12,251
Percentage of services revenues 91% 79%
Total cost of revenues $16,895 2% $16,585
Percentage of total revenues 36% 37%
Cost of software license revenues consists of software purchased for resale,
royalties paid to vendors of third-party software, the cost of software product
packaging and media, certain employee costs related to software duplication,
packaging and shipping and amortization of acquired technology. The decrease in
the cost of software license revenues for the three months ended December 31,
2004 compared to the three months ended December 31, 2003 was primarily
attributable to decrease in the amortization of acquired technology due to the
cessation of amortization of fully amortized assets. Amortization of acquired
technology was $519 thousand and $752 thousand for the three months ended
December 31, 2004 and 2003, respectively. Also contributing to the decrease was
a decline in royalties paid to third-party software vendors and a decrease in
purchases of third-party software related to our MAXIMO Mobile Suite product.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities, costs for utilization of
third-party consultants and costs to support the MRO Operations Center. Cost of
support revenues increased 14% to $2.9 million for the three months ended
December 31, 2004 from $2.5 million for the three months ended December 31,
2003. The increase in the three months ended December 31, 2004 as compared to
the three months ended December 31, 2003 was primarily attributable to general
increases in salaries and related benefits and increases in renewals of
third-party
Page 13
support contracts related to the MAXIMO Mobile Suite product. Cost of support
revenues, as a percentage of total support revenues, was 15% for both the three
months ended December 31, 2004 and 2003, respectively.
Cost of service revenues increased 4% to $12.7 million for the three months
ended December 31, 2004 from $12.3 million for the three months ended December
31, 2003. Cost of service revenues, as a percentage of total service revenues
was 91% and 79% for the three months ended December 31, 2004 and 2003,
respectively. The increase for the three months ended December 31, 2004 compared
to the three months ended December 31, 2003 was attributable to an increase in
salaries and related benefits and travel and entertainment expenses related to a
worldwide professional services meeting. The completion of a large multi-year,
multi-million dollar engagement without commensurate reallocation of personnel
on new assignments also affected the service margin.
OPERATING EXPENSES
Three Three
Months Months
Ended Change Ended
(in thousands) 12/31/04 % 12/31/03
-------- ------ --------
Sales and marketing $15,231 11% $13,710
Percentage of total revenues 32% 31%
Product development $ 6,780 (3)% $ 7,006
Percentage of total revenues 14% 16%
General and administrative $ 4,478 1% $ 4,465
Percentage of total revenues 9% 10%
Amortization of other intangibles $ 92 (55)% $ 205
Percentage of total revenues 1% 1%
Sales and marketing expenses increased 11% for the three months ended December
31, 2004 compared to the three months ended December 31, 2003. The increase was
primarily attributable to an increase in salaries and related benefits, an
increase in advertising expenses, an increase in sales commissions due to an
increase in software license sales and costs to recruit a new Executive Vice
President of Worldwide Sales.
Product development expenses decreased 3% for the three months ended December
31, 2004 compared to the three months ended December 31, 2003. Product
development expense as a percentage of total revenues was 14% and 16% for the
three months ended December 31 2004 and 2003, respectively. The decrease was
primarily attributable to a decrease in the costs to translate our products into
foreign languages. Expenditures for translation of our products are dependent on
the release cycles of our foreign language versions. We have completed the
majority of the translations for MAXIMO Version 5. The decrease was partially
offset by an increase in product development salaries and related benefits and
headcount for a new research and development group in Brazil. The Company has
focused the majority of its development on a new generation of products, MXES.
MXES will incorporate the Company's current EAM and ITAM capabilities, delivered
on a common platform along with new functionality that will include IT Help Desk
and Service Desk capabilities as well as a greatly enhanced application set for
the EAM market to be released in March 2005.
General and administrative expenses increased 1% for the three months ended
December 31, 2004 as compared to the three months ended December 31, 2003.
General and administrative expenses as a percentage of total revenues was 9% and
10% for the three months ended December 31, 2004 and 2003,
Page 14
respectively. The slight increase is attributable to general increases for
salaries and related benefits, offset by general decreases in overall operating
expenses.
The decrease in amortization of other intangibles expense for the three months
ended December 31, 2004 compared to the three months ended December 31, 2003 was
due to cessation of amortization for fully amortized assets.
NON-OPERATING EXPENSES
Three Three
Months Months
Ended Change Ended
(in thousands) 12/31/04 % 12/31/03
-------- ------ --------
Interest income $471 131% $ 204
Other income/(expense), net $570 (230)% $(440)
Interest income is attributable to interest earned on marketable securities and
cash and cash equivalents. The Company invests a large portion of its cash in
marketable securities such as United States treasury and treasury-backed
instruments, municipal bonds and highly rated conservative corporate bonds. We
were able to earn more income in the three months ended December 31, 2004 as
compared to the three months ended December 31, 2003 because we invested more
cash into higher yielding securities and the overall U.S. bond market improved
over the previous comparable period. The change in other income was primarily
due to a swing in foreign currency transaction gains and losses. Due to the
favorable impact of exchange rates, the Company reported net currency
transaction gains of $672 thousand for the three months ended December 31, 2004
compared to net currency transaction losses of $446 thousand for the three
months ended December 31, 2003. The Company has no foreign exchange contracts at
the present time.
INCOME TAXES
The Company's effective tax rate was 36% and 35% for the three months ended
December 31, 2004 and 2003, respectively. The tax provision was calculated on
income generated in domestic and foreign tax jurisdictions and on changes in the
Company's net deferred tax assets and liabilities.
During the first quarter of 2005, the President of the United States signed into
law both the American Jobs Creation Act of 2004 and the Working Families Tax
Relief Act of 2004. This legislation contains numerous corporate tax changes,
including eliminating a tax benefit relating to U.S. product exports, a new
deduction relating to U.S. manufacturing, a lower U.S. tax rate on non-U.S.
dividends and an extension of the research and experimentation credit. The
impact of these new laws may have an impact on the Company's tax rate for 2005
and future years and we are currently evaluating the potential effect of these
new laws on our effective tax rate, but we have not determined what that effect
is at this time.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2004, the Company had cash and cash equivalents of $64.2
million and marketable securities of $50.5 million and working capital of $87.9
million.
Cash provided by operations was $3.9 million for the three months ended December
31, 2004 primarily attributable to income generated from operations.
Cash used in investing activities was $96 thousand for the three months ended
December 31, 2004 and was primarily used in the purchase of marketable
securities and capital expenditures, funded by the maturities of marketable
securities.
Cash provided by financing activities was $2.3 million for the three months
ended December 31, 2004 and represents proceeds from the Company's Employee
Stock Option and Purchase Plans.
Page 15
As of December 31, 2004, the Company's principal commitments consist primarily
of office space and equipment operating leases for its U.S. and European
headquarters. The Company's corporate headquarters are under lease through
December 31, 2009. The Company leases its other facilities and certain equipment
under non-cancelable operating lease agreements that expire at various dates
through June 30, 2019.
The Company may use a portion of its cash to acquire additional businesses,
products or technologies complementary to its business. The Company also plans
to make investments over the next year in its products and technology.
The Company expects that its cash flow from operations, together with its
current cash and marketable securities, will be sufficient to meet its working
capital and capital expenditure requirements through at least December 31, 2006.
The Company's liquidity and working capital requirements, including the current
portions of any long-term commitments, are satisfied through its cash flow from
operations, leaving its cash reserves available for acquisitions, other
investments and unanticipated expenditures. The Company has no long-term debt
obligations. The factors that might impact the Company's cash flows include
those that might impact the Company's business and operations generally, as
described below under the heading "Factors Affecting Future Performance."
FACTORS AFFECTING FUTURE PERFORMANCE
The nature of forward-looking information is that such information involves
significant assumptions, risks and uncertainties. Certain public documents of
the Company, and statements made by our authorized officers, directors,
employees, agents and representatives acting on behalf of the Company, may
include forward-looking information which will be influenced by the factors
described below and by other assumptions, risks and uncertainties.
Forward-looking information is based on assumptions, estimates, forecasts and
projections regarding the Company's future results as well as the future
effectiveness of the Company's strategic plans and its operational decisions.
Forward-looking statements made by or on behalf of the Company are subject to
the risk that the forecasts, projections and expectations of management, or
assumptions underlying such forecasts, projections and expectations, may prove
to be inaccurate. Accordingly, actual results and the Company's implementation
of its plans and operations may differ materially from forward-looking
statements made by or on behalf of the Company. The following discussion
identifies certain important factors that could affect the Company's actual
results and actions and could cause such results and actions to differ
materially from forward-looking statements.
WE DEPEND SUBSTANTIALLY ON OUR MAXIMO EAM PRODUCT.
Most of our revenues are derived from the licensing of our MAXIMO EAM family of
products and sales of related services and support. Our financial performance
depends largely on continued market acceptance of these products. We believe
that continued market acceptance and our revenue stability and growth will
largely depend on our ability to continue to enhance and broaden the
capabilities of these products. If we are unable to continue to enhance and
improve MAXIMO EAM so that it delivers the capabilities required by existing and
potential customers and remains competitive with other products in the market,
or if a trend emerges such that customers decide to consolidate their IT systems
and eliminate their standalone or "best-of-breed" EAM application software
altogether, our revenues, margins and results of operations and financial
condition may be materially and adversely affected.
THE TRADITIONAL MARKET FOR OUR MAXIMO EAM PRODUCT IS MATURE AND SATURATED AND
PRESENTS LIMITED OPPORTUNITY FOR GROWTH.
MAXIMO has been the industry-leading plant floor capital asset maintenance
product for a number of years, and we have acquired a large number of customers
in this market. However, most large industrial organizations have made
significant investments in systems that support the maintenance of their capital
assets, and opportunities for new MAXIMO sales in the EAM market are in a state
of continuous decline. In addition, the emergence and growth of this market have
attracted a large number of competitors, and most of the largest software
companies that sell into complementary markets have developed competing
Page 16
asset maintenance products. It is likely that this market will continue to
mature, there will be fewer sales opportunities for the Company, and competitive
forces will put downward pressure on our average sales prices and rates of
success. To be competitive in the EAM market, we have made significant
investments in MAXIMO EAM to meet the needs of specific industries in which the
Company has a presence, such as the nuclear, transportation, power generation,
transmission and distribution, and other industries. We refer to these
industry-specific MAXIMO offerings as "Industry Solutions." While we continue to
strengthen our MAXIMO EAM offering, these efforts may not be sufficient to
overcome the effects of maturity and saturation in our traditional market, and
our revenues, margins, results of operation and financial condition may be
materially and adversely affected.
OUR EFFORTS TO REACH INTO NEW MARKETS WITH NEW PRODUCTS MAY NOT BE SUCCESSFUL.
Given the maturity and saturation of the traditional EAM market, in order to
maintain revenues at their current levels and to grow our business, we are
attempting to broaden our product offerings and find additional sources of
revenues. We are attempting, through acquisitions and internal development, to
deliver products that address markets that are new to the Company, such as the
ITAM and Help Desk and Service Desk markets. The culmination of these efforts
will be embodied in Maximo Enterprise Suite (MXES), which is scheduled for
release in March 2005. Our development of MXES and of our MAXIMO EAM Industry
Solutions, and our ability to derive revenue and grow the Company, is subject to
the following risks, among others:
- We may not be able to develop and market our new products (including
MXES) on time, with acceptable quality or with functions and features
that meet the requirements of customers in these markets.
- Current potential customers who are considering the purchase of our
MAXIMO EAM or MAXIMO ITAM products may decide to postpone their
purchase in anticipation of the release of MXES.
- The MXES Help Desk and Service Desk products may not contain all of
the functionality deemed necessary by prospective buyers in these
markets.
- It is possible that the Company's sales, service or support personnel
may not be adequately trained and/or staffed to sell, implement or
support the new products. Newly developed products require a higher
level of development, distribution and support expenditures in the
early stages of their product life cycles.
- In the event that our development efforts are not progressing as
intended, or if our new product releases or technologies are not
successful in the markets they are intended to address, we may
increase our rate of expenditure in this area over and above the level
of investment experienced in the past or previously projected, which
could have a material adverse affect on our results of operation or
financial condition.
- The launch of MXES may not result in any new revenues while serving as
a major distraction from our efforts to maintain revenues at current
levels in our traditional EAM market.
- Our positioning of the combination of our traditional EAM products and
our new ITAM, Help Desk and Service Desk products in a single offering
as a logical suite of products may not be accepted in the marketplace.
As a result of this and other factors, we may not be able to benefit
from the trend among customers to consolidate their information
technology (IT) systems, and we may not be successful in our attempts
to sell our new products into our existing accounts, or our
traditional EAM products to customers primarily interested in our new
products.
Page 17
If any of our newly developed products do not gain market acceptance and
generate revenues from new industries or markets, we may not be able to grow our
business or maintain revenues at current levels, and our revenues, margins,
results of operations and financial condition may be materially and adversely
affected.
IF WE ARE UNABLE TO KEEP PACE WITH THE RAPID CHANGES IN TECHNOLOGY AND CUSTOMER
DEMAND THAT CHARACTERIZE OUR INDUSTRY, OUR COMPETITIVE POSITION COULD BE
IMPAIRED.
The computer software industry is characterized by rapid technological advances,
changes in customer requirements and frequent product introductions and
enhancements by us and by our competitors. Our success depends on our abilities
to enhance our current products, to develop and introduce new products that keep
pace with technological developments, to respond to evolving customer
requirements and changing industry standards, to offer functionality and other
innovations that are unique to our products and superior to those of our
competitors, and ultimately to achieve market acceptance. In particular, we
believe that we must continue to innovate and develop new functionality, to
respond quickly to users' needs for new functionality and to advances in
hardware and operating systems, and that we must continue to create products
that conform to industry standards regarding the communication and
interoperability among software, hardware and communications products of many
different vendors. If we fail to anticipate or respond adequately to
technological developments and changes in market definitions or changes in
customer requirements within particular market segments, or if we have any
significant delays in product development or introduction, then we could lose
competitiveness and revenues.
OUR SALES EFFORTS DEPEND IN PART ON STRATEGIC RELATIONSHIPS WITH OTHER
COMPANIES.
We have entered into strategic relationships with various larger companies, such
as HP, IBM, SAIC and others. In order to generate revenue through these
relationships, each party must coordinate with and support the other's sales and
marketing efforts, and each party must make significant sales and marketing
investments. Our ability to generate revenues through these relationships
depends in large part upon the efforts of these other companies, which are
outside of our control. The efforts of these companies may in turn be influenced
by factors internal to these companies, or by developments in their respective
industries or markets, that we fail to anticipate.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND TO SEASONAL
VARIATION.
We have experienced, and may in the future experience, significant
period-to-period fluctuations in revenues and operating results. In addition,
our quarterly revenues and operating results have fluctuated historically due to
the number and timing of product introductions and enhancements, customers
delaying their purchasing decisions in anticipation of new product releases, the
budgeting and purchasing cycles of customers, the timing of product shipments
and the timing of marketing and product development expenditures. We typically
realize a significant portion of our revenue from sales of software licenses in
the last two weeks of each quarter, frequently even in the last few days of a
quarter. Failure to close a small number of large software license contracts may
have a significant impact on revenues for the quarter and could, therefore,
result in significant fluctuations in quarterly revenues and operating results,
and divergence of those results from our expectations. Accordingly, we believe
that period-to-period comparisons of results of operations are not necessarily
meaningful and should not be relied upon as an indication of future performance.
WE FACE INTENSE COMPETITION IN THE MARKETS WE SERVE.
The markets for strategic asset management software such as MAXIMO EAM, MAXIMO
ITAM and Maximo Enterprise Suite (MXES) are fragmented by geography, by market
and industry segments, by hardware platform and by industry orientation, and are
characterized by a large number of competitors including both independent
software vendors and certain ERP vendors. Independent software vendors include
DataStream Systems, Inc. and Indus International, Inc. We also compete with
integrated ERP systems, which include integrated maintenance modules offered by
several large vendors, such as SAP, Oracle, and others. In the ITAM market we
compete with companies such as Peregrine Systems, Computer Associates and BMC
Software. MXES will compete with all of these companies, plus additional
Page 18
companies in the Help Desk and Service Desk markets, such as HP. MAXIMO also
encounters competition from vendors of low cost maintenance management systems
designed initially for use by a single user or limited number of users as
vendors of these products upgrade their functionality and performance to enter
the enterprise market.
Certain of our competitors have greater financial, marketing, service and
support and technological resources than we do. To the extent that such
competitors increase their focus on the asset maintenance or planning and cost
systems markets, or on the industrial supply chain market, we could be at a
competitive disadvantage.
Current or potential competitors may make strategic acquisitions, thereby
increasing their ability to deliver products that better address the needs of
our customers. There is no assurance that we will be able to compete
successfully should this occur and this could have a material adverse effect on
our financial condition and results of operations.
OUR INTERNATIONAL OPERATIONS SUBJECT US TO SPECIAL RISKS.
A significant portion of our total revenues and expenses are derived and
incurred from operations outside the U.S. Our ability to sell our products
internationally is subject to a number of risks. General economic and political
conditions in each country could adversely affect demand for our products and
services. Exposure to currency fluctuations and greater difficulty in collecting
accounts receivable could affect our sales. We could be affected by the need to
comply with a wide variety of foreign import laws, U.S. export laws and
regulatory requirements. Trade protection measures and import and export
licensing requirements subject us to additional regulation and may prevent us
from shipping products to a particular market and increase our operating costs.
OUR SOFTWARE PRODUCTS ARE DEPENDENT ON THIRD-PARTY PROVIDERS OF SOFTWARE AND
SERVICES, AND FAILURE OF THESE PARTIES TO PERFORM AS EXPECTED, OR TERMINATION OF
OUR RELATIONSHIPS WITH THEM, COULD HARM OUR BUSINESS.
We have entered into nonexclusive license agreements with other software
vendors, pursuant to which we incorporate into our products and solutions
software providing certain application development, hardware and network
discovery, user interface, mobile technology, report writing, application
servers, business intelligence, content and graphics capabilities developed by
these companies. If we cannot renew these licenses (at all or on commercially
reasonable terms), or if any of such vendors were to become unable to support
and enhance their products, we could be required to devote additional resources
to the enhancement and support of these products or to acquire or develop
software providing equivalent capabilities, which could cause delays in the
development and introduction of products incorporating such capabilities.
WE MAY HAVE EXPOSURE TO ADDITIONAL INCOME TAX LIABILITIES.
We are subject to income taxes in both the U.S. and various foreign
jurisdictions. The amount of taxes paid is subject to our interpretation of
applicable tax laws in the jurisdictions in which we file. We are subject to
continuous examinations of our income tax returns by the Internal Revenue
Service and other tax authorities. We regularly assess the likelihood of adverse
outcomes resulting from these examinations to determine the adequacy of our
provision for income taxes. While we believe that we have complied with all
applicable tax laws, there can be no assurance that a governing tax authority
will not have a different interpretation of the law and assess us with
additional taxes. Should we be assessed with additional taxes, there could be a
material and adverse effect on our results of operations or financial condition.
CHANGES IN REGULATIONS OR CRITICAL ACCOUNTING POLICIES COULD MATERIALLY AND
ADVERSELY AFFECT US.
New laws, regulations or standards related to the Company or our products, and
new accounting pronouncements, could be implemented or changed in a manner that
could adversely affect our business, results of operations or financial
condition. In particular, the FASB recently enacted SFAS 123 (R) which requires
compensation costs related to share-based payment transactions to be recognized
in the financial statements. We believe that SFAS 123(R)
Page 19
will have a significant adverse effect on our reported financial results and may
impact the way in which we conduct our business.
The Company may be eligible for several tax benefits provided for under the
American Jobs Creation Act of 2004, which was signed into law on October 22,
2004. The potential tax benefits include a temporary 85% foreign dividends
received deduction for certain dividends received from controlled foreign
corporations. There are several statutory requirements, which must be met if the
Company determines that the 85% dividends received deduction is advantageous.
However, if the Company does not appropriately comply with the statutory
requirements then the 85% foreign dividends received deduction could be
forfeited resulting in a potentially adverse affect on the results of
operations.
WE MAY PERFORM MORE FIXED PRICE SERVICES CONTRACTS.
A trend has emerged and is continuing among customers in our market towards
demanding consulting and implementation services on a fixed-price basis, whereby
the Company agrees to deliver the contract requirements for a fixed fee
regardless of the number of person-hours actually provided, as opposed to our
traditional services arrangements where we deliver services on a
time-and-materials basis. In cases where services are provided either for the
future delivery of functionality or on a fixed price basis and our standard
software is licensed at the same time, and if the services are essential to the
overall solution desired by the customer or if the Company cannot determine the
fair value of the services being delivered, then the Company may not be able to
recognize the software license revenue from such transactions at the time the
agreements are signed, but rather may be required to recognize such license
revenue under the contract method of accounting, or to recognize a greater
portion (or all) of the revenue from these transactions as services revenue.
This would likely result in a postponement of recognition of, or even a
reduction in, software license revenues, and have an adverse affect on the
results of our operations.
WE MAY BE UNABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY.
Our success is dependent upon our proprietary technology. We currently have two
U.S. patents (and other corresponding patents or applications pending in various
foreign countries), and we protect our technology primarily through copyrights,
trademarks, trade secrets and employee and third-party nondisclosure agreements.
Our software products are sometimes licensed to customers under "shrink-wrap" or
"click- wrap" licenses included as part of the product packaging or acknowledged
by customers who register online. Although, in larger sales, our shrink-wrap and
click-wrap licenses may be accompanied by specifically negotiated agreements
signed by the licensee, in many cases our shrink-wrap and click-wrap licenses
are not negotiated with or signed by individual licensees. Certain provisions of
our shrink-wrap and click-wrap licenses, including provisions protecting against
unauthorized use, copying, transfer and disclosure of the licensed program, and
limitations or liabilities and exclusions of remedies, may be unenforceable
under the laws of certain jurisdictions. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent as do the
laws of the U.S. Finally, we sell our products through distributors and
resellers, and are therefore dependent on those companies to take appropriate
steps to adequately implement our contractual protections and to enforce and
protect our rights. We cannot give any assurance that the steps that we have
taken to protect our proprietary rights will be adequate to prevent
misappropriation of our technology or development by others of similar
technology. Although we believe that our products and technology do not infringe
on any valid claim of any patent or any other proprietary rights of others, we
cannot give any assurance that third parties will not assert infringement claims
in the future. Litigation may be necessary to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources, could result in the deterioration or outright loss of our patent
rights, copyrights or other intellectual property, and could potentially have a
material adverse affect on our operating results and financial condition.
LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY EXECUTIVE OFFICERS OR INABILITY
TO RECRUIT NEEDED SALES, SERVICES AND TECHNICAL PERSONNEL COULD ADVERSELY AFFECT
OUR BUSINESS.
We are highly dependent on certain key executive officers, technical and sales
employees, and the loss of one or more of such employees could have an adverse
impact on our future operations. We do not have
Page 20
employment contracts with any personnel, and we do not maintain any so-called
"key person" life insurance policies on any personnel. We continue to hire
additional sales, services and technical personnel. Competition for hiring of
such personnel in the software industry is intense, and from time to time we may
experience difficulty in locating candidates with the appropriate qualifications
within the desired geographic locations, or with certain industry specific
expertise. There can be no assurance that we will be able to retain our existing
personnel or attract additional qualified employees.
WE ARE EXPOSED TO FLUCTUATIONS IN THE MARKET VALUES OF OUR PORTFOLIO INVESTMENTS
AND IN INTEREST RATES.
We invest a significant portion of our cash in marketable securities. These
securities are classified as available-for-sale and are recorded at fair value
on the Consolidated Balance Sheet with unrealized gains or losses reported as a
separate component of accumulated other comprehensive income (loss), net of tax.
Economic downturns and other factors subject these securities to volatility in
the market place. As a result, we may recognize the decline in fair value of
these investments.
OTHER RISKS
The foregoing is not a complete description of all risks relevant to our future
performance, and the foregoing should be read and understood together with and
in the context of similar discussions which may be contained in the documents
that we file with the SEC in the future. We undertake no obligation to release
publicly any revision to the foregoing or any update to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.
Page 21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary exposures to market risk are the effect of fluctuations in
interest rates earned on its cash equivalents and marketable securities and
exposures to foreign currency exchange rate fluctuations.
At December 31, 2004, the Company held $114.7 million in cash equivalents and
marketable securities consisting of taxable and tax exempt municipal securities.
Interest rate movements affect the interest income we earn. The Company places
its investments with high quality issuers and limits risk by purchasing only
investment-grade securities. A hypothetical 10 percent increase in interest
rates would not have a material impact on the fair market value of these
instruments due to their short maturity.
The Company develops its products in the United States and markets them in North
America, Europe, Middle East and Africa, Australia, Asia Pacific and Latin
America. As a result, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. As of December 31 2004, the Company did not engage in foreign
currency hedging activities.
ITEM 4. CONTROLS AND PROCEDURES
MRO Software carries out periodic evaluations, under the supervision of the
Company's management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon such
evaluations, the Chief Executive Officer and the Chief Financial Officer
concluded that, as of December 31, 2004, our disclosure controls and procedures
were effective to timely alert them to any material information relating to the
Company (including its consolidated subsidiaries) that would be required to be
included in our periodic filings with the Securities and Exchange Commission.
While there have been no significant changes in the Company's internal controls
or in other factors that could significantly affect internal controls subsequent
to their evaluation, the Company is currently undergoing a comprehensive effort
to comply with Section 404 of the Sarbanes-Oxley Act of 2002. Compliance is
required for our fiscal year ended September 30, 2005. This effort includes
documenting and testing of internal controls. To date, the Company has not
identified any material weaknesses in its internal control as defined by the
Public Company Accounting Oversight Board. The Company will continue with its
efforts of compliance and will modify or improve its controls as needed. The
matters noted herein have been discussed with the Company's Audit Committee.
Page 22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS NONE
ITEM 2. RECENT SALES OF UNREGISTERED SECURITIES, USE OF PROCEEDS FROM REGISTERED
SECURITIES CHANGES IN SECURITIES NONE
ITEM 3. DEFAULTS UPON SENIOR SECURITIES NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS NONE
ITEM 5. OTHER INFORMATION
CERTIFICATION UNDER SARBANES-OXLEY ACT
OUR CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER HAVE FURNISHED TO THE
SEC THE CERTIFICATION WITH RESPECT TO THIS REPORT THAT IS REQUIRED BY SECTION
906 OF THE SARBANES-OXLEY ACT OF 2002.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3. Instruments Defining the Rights of Security-Holders
3.1 Amended and Restated Articles of Organization of the Company
(included as Exhibit 3.3 to the Company's Registration Statement
on Form S-1, Registration No. 33-76420, and incorporated herein
by reference)
3.2 Restated By-Laws of the Company, as amended (included as Exhibit
3.2 to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1996, File No. 0-23852, and incorporated
herein by reference)
3.3 Amendment to By-Laws adopted on February 1, 2001 (included as
Exhibit 3.3 to the Company's Current Report on Form 10-Q for the
quarter ended March 31, 2001, File No. 0-23852 and incorporated
herein by reference)
3.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of MRO Software, Inc. (which is
attached as Exhibit A to the Rights Agreement included as Exhibit
4 (b) to the Company's Current Report on Form 8-K dated February
2, 1998, File No. 0-23852, and incorporated herein by reference)
3.5 Amendment to Articles of Organization adopted on December 15,
1999 (included as Exhibit 3.4 to the Company's Form 10-Q for the
quarter ended December 31, 1999, File No. 0-23852, and
incorporated herein by reference)
3.6 Amendment to Articles of Organization, dated March 6, 2001
(included as Exhibit 3.4 to the Company's Current Report on Form
8-K dated March 9, 2001, File No. 0-23852, and incorporated
herein by reference)
Page 23
3.7 Nonstatutory Stock Option Agreement Form (included as Exhibit 3.7
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2004, File No. 0-23852, and incorporated
herein by reference)
3.8 Stock Option Agreement Form for Employees (included as Exhibit
3.8 to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 2004, File No. 0-23852, and incorporated
herein by reference)
4. Instruments Defining the Rights of Security Holders, Including
Indentures
4.1 Specimen certificate for the Common Stock, $.01 par value, of the
Company (included as Exhibit 4.1 to the Company's Current Report
on Form 10-Q for the quarter ended December 31, 2001, File No.
0-23852 and incorporated herein by references)
4.2 Article 4B of the Amended and Restated Articles of Organization
of the Company (included as Exhibit 4.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-76420,
and incorporated herein by reference)
4.3 Rights Agreement dated as of January 27, 1998, between the
Company and BankBoston, N.A. as Rights Agent (included as Exhibit
4 (a) to the Company's Current Report on Form 8-K dated February
2, 1998, File No. 0-23852, and incorporated herein by reference)
4.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of the Company (included as Exhibit
4 (b) to the Company's Current report on Form 8-K dated February
2, 1998, File No. 0-23852, and incorporated herein by reference)
4.5 Form of Rights Certificate (included as Exhibit 4 (c) to the
Company's Current Report on Form 8-K dated February 2, 1998, File
No. 0-23852, and incorporated herein by reference)
9. Voting Trust Agreements
9.1 Shareholders Agreement between Robert L. Daniels and Susan H.
Daniels dated August 1, 2001 (included as Exhibit 9.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2001 File No. 0-23852, and incorporated herein by
reference)
10. Material Contracts
10.1 MRO Software, Inc., & Subsidiaries Executive Bonus Plan Fiscal
Year Ended September 30, 2005
10.2 Contract of Employment Incorporating Statutory Terms and
Conditions of Employment As Required by Section 1(1) Employment
Rights Act 1996
31. Rule 13a-14(a)/15(d)-14(a) Certifications
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32. Section 1350 Certifications
32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Page 24
(b) Reports on Form 8-K
On January 20, 2005, the Company filed a current report on Form 8-K
disclosing its results of operations for the quarter ended December 31,
2004.
The Company will furnish a copy of any exhibit listed to requesting
stockholders upon payment of the Company's reasonable expense in furnishing
those materials.
Page 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MRO SOFTWARE, INC.
Date: February 9, 2005 By: /s/ Peter J. Rice
------------------------------------
Peter J. Rice
Executive Vice President -
Finance and Administration,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
Page 26
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE
- ------- ----------- ----
3.1 Amended and Restated Articles of Organization of the Company
(included as Exhibit 3.3 to the Company's Registration Statement
on Form S-1, Registration No. 33-76420, and incorporated herein
by reference)
3.2 Restated By-Laws of the Company, as amended (included as Exhibit
3.2 to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 1996 File No. 0-23852 and incorporated
herein by reference)
3.3 Amendment to By-Laws adopted on February 1, 2001 (included as
Exhibit3.3to the Company's Current Report on Form 10-Q for the
quarter ended March 31, 2001, File No. 0-23852 and incorporated
herein by reference)
3.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of MRO Software, Inc. (which is
attached as Exhibit A to the Rights Agreement included as Exhibit
4 (b) to the Company's Current Report on Form 8-K dated February
2, 1998, File No. 0-23852, and incorporated herein by reference)
3.5 Amendment to Articles of Organization adopted on December 15,
1999 (included as Exhibit 3.4 to the Company's Form 10-Q for the
quarter ended December 31, 1999, File No. 0-23852, and
incorporated herein by reference)
3.6 Amendment to Articles of Organization dated March 6, 2001
(included as Exhibit 3.4 to the Company's Current Report on Form
8-K dated March 9, 2001, File No. 0-23852, and incorporated
herein by reference)
3.7 Nonstatutory Stock Option Agreement Form (included as Exhibit 3.7
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2004, File No. 0-23852, and incorporated
herein by reference)
3.8 Stock Option Agreement Form for Employees (included as Exhibit
3.8 to the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 2004, File No. 0-23852, and incorporated
herein by reference)
4.1 Specimen certificate for the Common Stock, $.01, of the Company
(included as Exhibit 4.1 to the Company's Current Report on Form
10-Q for the quarter ended December 31, 2001, File No. 0-23852
and incorporated herein by reference)
4.2 Article 4B of the Amended and Restated Articles of Organization
of the Company (included as Exhibit 4.1 to the Company's
Registration Statement on Form S-1, Registration No. 33-76420,
and incorporated herein by reference)
4.3 Rights Agreement dated as of January 27, 1998, between the
Company and BankBoston, N.A. as Rights Agent (included as Exhibit
4 (a) to the Company's Current Report on Form 8-K dated February
2, 1998, File No.0-23852, and incorporated herein by reference)
4.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock of MRO Software, Inc. (included as
Exhibit 4 (b) to the Company's Current Report on Form 8-K dated
February 2, 1998, File No. 0-23852, and incorporated herein by
reference)
4.5 Form of Rights Certificate (included as Exhibit 4 (c) to the
Company's Current Report on Form 8-K dated February 2, 1998, File
No. 0-23852, and incorporated herein by reference)
9.1 Shareholders Agreement between Robert L. Daniels and Susan H.
Daniels dated August 1, 2001 (included as Exhibit 9.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2001 File No. 0-23852, and incorporated herein by
reference)
10.1 MRO Software Inc., and Subsidiaries Executive Bonus Plan Fiscal
Year Ended September 30, 2005
10.2 Contract of Employment Incorporating Statutory Terms and
Conditions of Employment As Required by Section 1(1) Employment
Rights Act 1996
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Page 27