UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2005
[ ] 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 of Incorporation) (I.R.S. Employer
IDENTIFICATION NUMBER)
100 CROSBY DRIVE, BEDFORD, MASSACHUSETTS 01730
(Address of principal executive offices) (Zip code)
(781) 280-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 per share
-----------------------------
(Title of Class)
----------------
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 of Section 15(d) of the Act.
Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to the Form 10-K. 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 [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act.
Yes [ ] No [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the last sale price on March 31, 2005
was $262,690,929.
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 25,857,361 shares of common stock, $.01 par value per share,
as of December 12, 2005.
DOCUMENT INCORPORATED BY REFERENCE
The information called for by Part III is incorporated herein by reference to
the definitive Proxy Statement for the Annual Meeting of Stockholders of the
Company, which will be filed with the Securities and Exchange Commission not
later than 120 days after September 30, 2005.
MRO SOFTWARE, INC.
FISCAL 2005 FORM 10-K
INDEX
ITEM PAGE
- ---- ----
PART I
Item 1: Business 1
Item 1A: Risk Factors 7
Item 1B: Unresolved Staff Comments 13
Item 2: Properties 13
Item 3: Legal Proceedings 14
Item 4: Submission of Matters to a Vote of Security Holders 14
PART II
Item 5: Market for Registrant's Common Equity, Related Stockholder Matters and Issuer's Purchases of Equity
Securities 14
Item 6: Selected Consolidated Financial Data 15
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations 16
Item 7A: Quantitative and Qualitative Disclosures About Market Risk 28
Item 8: Financial Statements and Supplementary Data 29
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 57
Item 9A: Controls and Procedures 57
Item 9B: Other Information 57
PART III
Item 10: Directors and Executive Officers of the Registrant 58
Item 11: Executive Compensation 60
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 60
Item 13: Certain Relationships and Related Transactions 60
Item 14: Principal Accountant Fees and Services 61
PART IV
Item 15: Exhibits and Financial Statement Schedules 61
Signatures 62
Exhibit Index
This Annual Report on Form 10-K, as well as documents incorporated herein by
reference, may contain forward-looking statements (within the meaning of section
27A of the Securities Act of 1933, as amended, and section 21E of the Securities
Exchange Act of 1934, as amended). The following and similar expressions
identify forward-looking statements: "expects", "anticipates", and "estimates".
Forward-looking statements include, without limitation, statements related to:
the Company's plans, objectives, expectations and intentions; the timing of,
availability and functionality of products under development or recently
introduced; and market and general economic conditions. Important factors that
could cause actual results to differ materially from those suggested by the
forward-looking statements include those discussed under the heading "Risk
Factors" below. These forward-looking statements speak only as of the date of
this Annual Report, and we disclaim any obligation to update such
forward-looking statements as a result of any change in circumstances or
otherwise.
MRO Software, Inc., incorporated in May 1968 under the laws of the Commonwealth
of Massachusetts, is hereinafter sometimes referred to as the "Company", "MROI",
"our", "us", or "we".
Maximo(R) and Make It All Count(R) are registered trademarks of MROI. MRO
Software(TM), Maximo Enterprise Suite(TM), MXES(TM), Maximo Enterprise(TM),
Maximo Enterprise/SP(TM), Maximo Enterprise IT(TM), Maximo Discovery(TM), Maximo
Enterprise IT/SP(TM), Maximo SLA Manager(TM), Maximo Navigator(TM), Maximo
Project Manager(TM), Maximo Calibration(TM), Maximo Enterprise Adapter(TM),
Maximo Fusion(TM), Maximo OCSSM, Maximo Mobile Suite(TM), Maximo Mobile
Auditor(TM), Maximo Mobile Inventory Manager(TM), Maximo Mobile Work
Manager(TM), Maximo Mobile Calibration(TM), and MRO.COM(TM) are trademarks and
service marks of MROI. IBM(R), WebSphere, AIX and DB2 are trademarks and
registered trademarks of IBM Corporation. Microsoft(R) is a registered trademark
of Microsoft Corporation, Oracle(R) is a registered trademark of Oracle
Corporation, and Java(R) is a registered trademark of Sun Microsystems
Corporation. Other company and product names may be trademarks of the respective
companies.
(C) 2005 MRO Software, Inc. All rights reserved.
PART I
ITEM 1. BUSINESS
GENERAL
MRO Software is the leading provider of asset and service management solutions.
The Company's integrated suite of applications optimizes performance, improves
productivity and service levels, and enables asset-related sourcing and
procurement across the entire spectrum of our customers' strategic assets.
The Company's asset management solutions allow customers to manage the complete
lifecycle of strategic assets including: planning, procurement, deployment,
tracking, maintenance and retirement. Using MRO Software's solutions, customers
improve production reliability, labor efficiency, material optimization,
software license compliance, lease management, warranty and service management
and provisioning across their asset base. Using our products, our customers
manage and optimize the value derived from their assets used for production,
facilities management, IT asset management, including hardware and software, and
their transportation assets.
MRO Software was incorporated in Massachusetts in 1968 as Project Software &
Development, Inc. (PSDI). In fiscal 2001, the Company changed its name to MRO
Software, Inc. and its trading symbol to "MROI". Our headquarters are located in
Bedford, Massachusetts, U.S.A., and our website may be viewed at www.mro.com.
Through a link on the Investor Relations section of our website, we make
available all the following filings as soon as reasonably practicable after they
are electronically filed with or furnished to the Securities and Exchange
Commission ("SEC"): our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and any amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934. All such filings are available free of charge.
During the past two years, the Company has made significant investments in the
development of our next generation of Maximo: Maximo Enterprise Suite (MXES). In
March 2005, the Company released MXES. MXES is a comprehensive suite of products
all built on a single, common, web-architected platform. MXES combines enhanced
Enterprise Asset Management (EAM) functionality with new service management
capabilities that together improve the effectiveness of asset management
strategies. MXES includes all the functionality required to provide IT Service
Management (ITSM) capabilities which includes advanced IT Asset Management
(ITAM), service management, and a full-featured service desk, all based on the
IT Infrastructure Library (ITIL) guidelines. The Company markets its MXES
solution under several product names: Maximo and Maximo Enterprise for EAM
applications, Maximo Discovery for autodiscovery of IT assets, Maximo IT Asset
Management (ITAM) for advanced IT Asset Management (ITAM), and Maximo Service
Desk, a full-featured service desk. Most products within MXES can each be
implemented separately as a stand-alone solution, or they can readily be
deployed together. MXES enables compliance with contracts, service level
agreements, internal corporate standards, and government regulations. Our
solutions enhance asset management and ensure service performance of production,
facility, transportation and IT assets.
In addition to MXES, the Company markets several solutions for specific
industries. These solutions include specific functionality and capabilities for
the following industries: Nuclear Energy, Transmission & Distribution
(Utilities), Oil & Gas, Transportation and Pharmaceuticals. These specialized
solutions combine core Maximo capabilities with domain-specific enhancements and
often include or integrate with technology and capabilities provided by a
technology partner company to meet the unique needs of these particular
industries.
We have over thirty years of experience understanding the complexities and
challenges of asset management. We have focused on building our business
strategies around key strengths, such as our commitment to research and
development, our diverse customer base, and our domain knowledge of complex
asset management business problems. We believe that our extensive expertise in
asset management solutions for production, facilities, transportation, and IT --
combined with our vertical domain knowledge in many industries - - can and will
distinguish us from our competitors.
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In Fiscal 2006, we plan to continue to improve our financial metrics and to
focus on growth opportunities, thereby increasing shareholder value. We believe
that our steadfast focus on this holistic approach to asset and service
management will drive future success and allow the Company to continue to be a
stable, profitable and growth-oriented company.
The Company reports all its revenue in one reportable business segment. We
market our products mainly through a direct sales organization in all
geographies, with greater emphasis on distributors and resellers outside of
North America. MRO Software has sales offices throughout North America, Europe,
Asia/Pacific and Latin America. The Company also markets its products through
indirect sales channels to supplement its direct sales force. Financial
information relating to business segments and international operations can be
found in Note N of the Consolidated Financial Statements, in Item 8 of this
Annual Report on Form 10-K.
PRODUCTS
The Maximo Enterprise Suite is a family of multiple products all built on a
single, common platform. Most products within MXES are each a stand-alone
solution that can be implemented separately from any of the others, or they can
readily be deployed together.
MAXIMO
Maximo is an EAM solution targeted for small to medium-sized companies that
require robust asset management capabilities. Maximo helps companies to optimize
asset performance, reduce costs and improve workforce efficiencies. Maximo
delivers asset management, work management, service management, contracts
management, materials management and procurement management capabilities for
production, facilities and transportation assets.
MAXIMO ENTERPRISE
Maximo Enterprise is a comprehensive EAM solution that helps large and
multi-national companies in asset-intensive industries to maximize the lifetime
value of complex assets critical to the company's business. Using this solution,
customers can increase their return on asset investment while decreasing their
operating costs, including greater work force efficiency, inventory/material
optimization and lower supplier transaction costs. Maximo Enterprise supports
the six critical business processes that allow customers to better align asset
and service management with business objectives: asset management, work
management, service management, contracts management, materials management and
procurement management capabilities. Maximo Enterprise provides these
capabilities for production, facilities and transportation assets.
MAXIMO ITSM
Maximo ITSM (IT Service Management) solutions is an integrated group of
comprehensive solutions that allows users to effectively track and manage IT
assets, resources, changes and service levels using ITIL best practices. This
solution set facilitates more effective IT planning, helps customers reduce the
costs associated with purchasing and maintaining assets, and mitigates the risk
of compliance with software and warranty contracts.
Maximo ITSM, as well as the entire Maximo Enterprise Suite, is built with an
asset repository, also known as a configuration management database (CMDB),
common across the entire product family.
Maximo Discovery provides a comprehensive view of all network hardware and
software including PCs, servers and network devices, and detects the physical
location of the assets. It is a fast, accurate and easy to deploy auto-discovery
tool.
Maximo IT Asset Management (ITAM) provides customers with the information
required to track and manage IT assets efficiently through their entire life
cycle. The solution aggregates the data used to manage the inventory, financial
and contract management of IT assets, allowing reconciliation between authorized
and deployed assets.
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MAXIMO SERVICE DESK
Maximo Service Desk is an enterprise service management solution ready to help
companies create service efficiencies, reduce service outages and streamline
service desk operations. Maximo Service Desk provides users with the ability to
create, manage and monitor Service Level Agreements (SLAs) with features like
notifications, escalations and a Key Performance Indicator (KPI) dashboard.
Maximo Service Desk also supports and enables the major Service Support
functions according to IT Infrastructure Library (ITIL), including advanced
processes such as incident, problem, change, configuration and release
managment.
MAXIMO OPTIONS
A variety of options can be added on to expand the capabilities of MXES,
including the following: Maximo Calibration, Maximo Change Manager, Maximo
Contract & Procurement Manager, Maximo Incident & Problem Manager, Maximo
Integration Products, Maximo Mobile Manager, Maximo Navigator, Maximo Project
Manager and Maximo SLA Manager.
ONLINE COMMERCE SERVICES (OCS)
Maximo OCS is a suite of hosted technologies and applications that enable Maximo
and other purchasing systems (such as those offered by SAP AG, Ariba, Oracle
Corporation and others) to view supplier catalogs, procure electronically,
receive acknowledgements, view real-time price and stock availability, and check
orders online. This service also provides suppliers with the capabilities to
host an on-line searchable electronic catalog, and with the tools for the
management, customization and publication of electronic catalog content. Our
customers have the ability to provide a Web storefront with comparison tools,
shopping cart, transaction processing and payment processing. OCS also provides
suppliers with the capability to provide real-time pricing and availability to
buyers as well as real-time transaction processing by integrating with the
suppliers' "back-end" ERP systems.
PRODUCT ARCHITECTURE
Maximo components are built on Sun Microsystem's Java technology, specifically
the Java 2 Platform, Enterprise Edition ("J2EE"), to take full advantage of
today's enterprise environment. J2EE defines a standard for developing
multi-tier enterprise applications. J2EE simplifies enterprise applications by
basing them on standardized, modular components, by providing a complete set of
services to those components, and by handling many details of application
behavior automatically. Maximo is the first and most comprehensive J2EE asset
management solution to be developed and commercially deployed on a
standards-based, pure-Internet architecture. Maximo, with its depth of
functionality and industry-leading architecture, was designed with global
organizations in mind.
J2EE provides application portability, scalability, inter-operability and
security models for Internet applications. For example, it has an extensive
library of routines for Internet protocols like HTTP and FTP. This makes
creating and managing network connections much easier, enabling applications to
open and access objects across the Internet via URLs with the same ease as
accessing a local file system. Also, because HTTP is a request-response protocol
and individual requests are treated independently, an Internet application needs
a mechanism for identifying a particular client and the state of any
"conversation" it is having with that client. The Maximo Web servers and
applications servers provide session management capabilities, and can easily
manage session states for Internet-based connections.
Maximo's use of open standards supports a broad range of commercial server
platforms, network operating systems and communications protocols. These open
standards provide customers with the flexibility to match their computing
resources to their needs, and facilitates tight integration to critical business
systems. These standards also provide the ability to collaborate with virtually
any procurement network, marketplace or on a one-on-one basis with suppliers.
Our OCS solutions use an Internet-oriented, scalable architecture to support a
full Web browser-based environment. OCS allows real-time communications between
buyers
Page 3
and suppliers based on XML standards. OCS applications are hosted by the Company
at an outsourced hosting facility.
STANDARDS BASED INTEROPERABILITY
Enterprises today are focused on operational and procedural efficiencies that
will make them more competitive and responsive across the board. They require
business systems that will address their business needs efficiently and adapt to
changes as their business needs or environment changes. They require systems
that will collaborate within their enterprise and with their partners and
customers.
These products are based upon our extensive experience in providing integration
with a number of major marketplaces and ERP systems such as those offered by SAP
AG and Oracle Corporation. Our Maximo interoperability framework supports
collaboration between Maximo and those enterprise business systems for which
this requirement most frequently arises. This allows enterprises to focus on
their operational procedures and provides them with the flexibility to choose
which business system to use to manage specific business processes.
SERVICES
CUSTOMER SUPPORT
A high level of customer service and technical support is critical to customer
satisfaction in our industry. Many of the Company's customers implement our
products in complex, large-scale IT environments on which the success of their
organizations depend. The Company believes that its approach to support has been
and will continue to be a significant factor in the market acceptance of its
products.
As of September 30, 2005, the Company employed a customer support staff of 101
employees operating out of the Company's corporate headquarters in Massachusetts
and four international technical response centers located in the United Kingdom,
Australia, Canada, and Brazil as well as in seven satellite support offices in
China, Korea, Mexico, Japan, France, Italy and McLean, Virginia. Support
services are provided on a seven-day week, 24-hour day basis using our support
centers in United Kingdom, Australia, United States (Bedford, MA) and Canada.
Subscribers to the Company's annual support services are entitled to receive (i)
customer service and technical support by telephone, fax, online via the
Internet and electronic mail, (ii) a newsletter and periodic technical
bulletins, (iii) an invitation to attend the Company's annual user group
meeting, and (iv) periodic software updates and software upgrades. Support
contracts are a stable source of recurring revenue.
The Company also provides premium support via resources dedicated to meeting the
needs of our larger enterprise-wide clients. Premium Support is a fee-based
service provided in addition to all of the standard support provided to all of
our clients.
PROFESSIONAL AND EDUCATIONAL SERVICES
The Company offers services designed to assist customers in completing the
process of successfully implementing the Company's business solutions and
getting the most value from Maximo. As of September 30, 2005, the Company
employed a consulting and training staff of 270 employees. The Company's
international distributors also provide services within their geographic
territories.
The Company provides consulting services to assist customers in planning and
carrying out the implementation of the Company's solutions. In some cases,
customers install and implement Maximo systems and perform any necessary
modifications themselves with only limited assistance from the Company. In other
cases, particularly where an integrated solution is required, the Company
provides comprehensive implementation planning, project management, network
communications and system integration services. The Company also contracts with
third-party consultants as needed in order to augment its services offerings.
The Company conducts comprehensive training programs covering Company
applications and concepts for its end-users and partners. Training is offered at
the Company's
Page 4
headquarters in Massachusetts and at regional centers in California, Georgia,
Virginia, Australia, France, Germany, Italy, Sweden, the United Kingdom and the
Netherlands. The Company also offers on-site training classes at customer sites
upon request, and Web-based training consisting of a series of self-paced
lessons and virtual classroom training.
CUSTOMERS
The Company's customers operate in a broad range of vertical industries
including: facility/property management, discrete and process manufacturing,
public sector, oil and gas, transportation, aviation, utilities, financial
services, consumer/retail, pharmaceutical, telecommunications, education, health
care and professional services. The Company's products have been installed and
are supported in all major markets worldwide. Local language support is provided
in many of these markets.
SALES AND MARKETING
The Company markets its products in the United States through a combination of
an internal marketing organization, a direct sales organization, and value-added
resellers and distributors. As of September 30, 2005, we employed a marketing
and direct sales organization of 119 employees operating out of our
Massachusetts headquarters and sales offices in Georgia and Virginia. In
addition, the Company markets its products outside the United States through an
internal marketing organization, and a direct sales force of 105 employees
operating from sales offices in Australia, Brazil, Canada, China, France,
Germany, Hong Kong, Italy, Japan, Korea, Mexico, the Netherlands, Singapore,
Sweden, Thailand and the United Kingdom and through distributors and resellers
in parts of Africa, Asia, Europe, the Middle East, Latin America. Approximately
41% of the Company's total revenues were derived from sales outside the United
States for each of the fiscal years ended September 30 2005, 2004 and 2003. The
United Kingdom represented approximately 15% of these international sales for
each of the fiscal years ended September 30 2005, 2004, and 2003. Approximately
11% of the Company's total long-lived assets were located outside the United
States for each of the fiscal years ended September 2005, 2004, and 2003.
The Company markets its products through advertising campaigns in national trade
periodicals, direct and electronic mail, public relations activities, seminars
and its Web site (http://www.mro.com). These efforts are supplemented by
listings in relevant trade directories, exhibitions at trade shows and
conference appearances. Initial leads are qualified by our tele-marketing
operation before being turned over to either the direct sales force or
tele-sales.
In certain situations, the Company uses resellers that are located around the
world to supplement our direct sales force in territories where the Company does
not have subsidiaries or a strong direct sales infrastructure.
The sales cycle for our products, from the initial sales presentation to the
issuance of a purchase order, typically ranges from six to twelve months. The
Company believes that customers generally choose the Company's products and
services based on the features they provide and upon a preference for the
product architecture, reduced implementation time, extensive domain expertise,
deep functionality and ease of use, and the resulting low total cost of
ownership and demonstrable return on investment.
Delivery lead times for the Company's products are short and, consequently,
substantially all of the Company's software revenues in each quarter result from
the orders received in the quarter. Accordingly, the Company only maintains a
backlog for its consulting and training services and believes that its backlog
at any point in time is not a reliable indicator of future sales and earnings.
STRATEGIC ALLIANCES
MRO Software's alliance program is designed to bring value to global companies
through a collaboration with world-class product and service partners. Our
alliance program enhances the Company's market reach and potential revenue
streams while at the same time ensuring that exacting standards of quality are
met in partnering engagements.
Page 5
The Company works closely with major consultancies and systems integrators and
has formed alliances with such firms as IBM Corporation, Science Applications
International Corporation (SAIC), BearingPoint, Inc. and Accenture LLP. The
Company also works closely with consulting and systems integration firms that
offer deep domain expertise in very select core markets that complement ours.
Examples would include CGI-AMS (part of CGI Group, Inc.) and EMA, Inc. In
addition, the Company has partnerships with specific solution providers that
offer a complementary solution to Maximo, such as Environmental Systems Research
Institute, Inc. (ESRI), Intergraph Corporation, Meridium, Inc., Mobile Data
Solutions, Inc., Kronos, Inc. and Primavera Systems, Inc.
The Company has also developed managed services, reseller and OEM relationships.
We have agreements with partners such as ABB Service Worldwide (an affiliate of
Asea Brown Boveri), SAIC, Accenture LLP, and others, who provide outsourced
services offerings based on our products, or resell our products using their own
sales resources. We market Syclo, LLC products as part of the Maximo Mobile
solution, and we market Centennial Software, LLC products as part of Maximo
Discovery.
The Company has licensing arrangements with companies that offer technology that
enhances the performance of our solutions, broadens their applicability and or
optimizes their functionality. The Company re-brands and sells some of its
technology partners' products on an OEM basis, while products from other
technology partners are either embedded in our solutions or offered as separate
add-ons. We continuously monitor the marketplace for partners with leading edge
technology conducive to the advancements that we have planned for our own
products and services, and create new agreements as appropriate. Technology
partners include: BEA Software, IBM Corporation, Oracle Corporation, Microsoft
Corp., Sun Microsystems, Inc., Syclo LLC, Centennial Software, LLC and Actuate
Corporation.
COMPETITION
The Company's suite of solutions has many diverse competitors offering a wide
range of differing products, services and technologies. The Company expects
competition to intensify as current competitors expand their product offerings
and new competitors enter the market. The current competitors include
traditional Enterprise Resource Planning (ERP) providers such as SAP AG and
Oracle Corporation. Our competitors also include niche providers such as
Datastream Systems Inc. and Indus International that focus on segments of the
EAM market. BMC Software, Computer Associates and Peregrine Systems (which has
agreed to be acquired by Hewlett-Packard Company) are competitors that focus on
the ITAM market. With the expansion into the IT Service Desk and IT Help Desk
markets, the Company expects competition in these markets to include BMC
Software, Computer Associates, and Hewlett-Packard Company.
PRODUCT DEVELOPMENT
The Company has made substantial investments in research and software product
development. The Company's total product development expenses in fiscal years
2005, 2004 and 2003 were $29.6 million, $28.5 million and $26.5 million,
respectively. As of September 30, 2005, the Company's research and development
staff consisted of 235 employees. The Company's development organization is
comprised of relatively small teams of senior level developers and engineers,
who focus on different areas of development. The Company maintains development
centers in Massachusetts, Florida, Michigan, Virginia, Canada and Brazil. We
also utilize the services of offshore development resources provided by a
company in India to supplement our development efforts.
In fiscal 2005, the Company focused its development efforts on the MXES product.
We have also focused on developing Maximo Industry Solutions that meet the
unique needs of different vertical industries by offering pre-configured,
industry-specific, focused applications delivered on the Maximo technology
platform. We will continue to develop enhancements to our Maximo products, as
well as, to continue to research and investigate new technologies that would
complement the Company's product strategies in the future.
Page 6
PROPRIETARY RIGHTS AND LICENSES
The Company has registered a number of its trademarks with the United States
Patent and Trademark Office. Registrations with equivalent offices in many
foreign countries in which the Company or its distributors do business have been
obtained or are in process. The Company has obtained two U. S. Patents - (no.
6,325,522 B2) for inventory sharing as it relates to electronic commerce and
(no. 6,519,588 B1) covering a proprietary system and method for representing
structured information. The Company has filed or intends to file patent
applications in other countries within key geographies for both.
The Company regards its software as proprietary and attempts to protect its
rights with a combination of patent, trademark, copyright and employee and
third-party non-disclosure agreements. Despite these precautions, it may be
possible for unauthorized parties to copy or reverse-engineer portions of the
Company's products. While the Company's competitive position could conceivably
be threatened by its inability to protect its proprietary information, the
Company believes that patent, copyright and trademark protection are less
important to the Company's success than other factors such as knowledge, ability
and experience of the Company's personnel, and ongoing product development,
support and innovation.
The Company's software products are usually licensed to customers under a
perpetual, non-transferable, non-exclusive license that stipulates how many
users may access the system. The Company relies on both "shrink wrap" or "click
wrap" license agreements, and physically executed agreements. A shrink wrap
license agreement is a printed license agreement included with packaged software
that sets forth the terms and conditions under which the purchaser can use the
product, and purports to bind the purchaser to such terms and conditions by its
acceptance and purchase of the software. A click wrap license agreement is
displayed to an end-user during the online registration and delivery process,
and purports to bind the end-user to its terms and conditions when the end-user
acknowledges and agrees to those terms and conditions via an interactive
process. Certain provisions of the Company's shrink-wrap and click wrap
licenses, including provisions protecting against unauthorized use, copying,
transfer and disclosure of the licensed program, may be unenforceable under the
laws of certain jurisdictions. In addition, the laws of some foreign countries
do not protect the Company's proprietary rights to the same extent, as do the
laws of the United States.
PRODUCTION
The principal materials and components used in the Company's software products
are CD-ROMs containing software and documentation, and occasionally hard copy
installation guides. The Company occasionally uses third-party vendors to print
user manuals, packaging and related materials. The majority of CD-ROM
duplication is done by the Company's manufacturing and distribution facility
located at our corporate headquarters. The Company also offers documentation to
its customers via its secured, customer support Web site. To date, the Company
has been able to obtain adequate supplies of all components and materials and
has not experienced any material difficulties or delays in manufacture and
assembly of its products or materials due to product defects.
EMPLOYEES
As of September 30, 2005, the Company had 924 full-time employees including
sales, marketing and related functions, product research and development,
customer support, training and consulting services, finance and administration,
information technology, human resources, manufacturing and office services. The
Company's employees are not represented by any collective bargaining
organization, and the Company has never experienced a work stoppage. The Company
believes that its relations with employees are good.
ITEM 1A: RISK FACTORS
The nature of forward-looking information is that such information involves
significant assumptions, risks and uncertainties. Certain of our public
documents and statements made by our authorized officers, directors, employees,
agents and representatives acting on our behalf 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 our future results
as well as the future effectiveness of our strategic plans and our operational
decisions. Forward-looking
Page 7
statements made by or on behalf of us 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 our implementation of our plans and operations
may differ materially from forward-looking statements made by or on behalf of
us. The following discussion identifies certain important factors that could
affect our 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,
our revenues, margins and results of operations and financial condition may be
materially and adversely affected.
THE MARKET FOR OUR PRODUCTS ARE MATURE AND SATURATED AND MAY PRESENT LIMITED
OPPORTUNITY FOR GROWTH, AND ARE CROWDED WITH LARGER COMPETITORS THAT MAY HAVE
SIGNIFICANT ADVANTAGES.
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, our new ITAM and service desk products
represent new entrants into mature markets that are currently served by larger
competitors, and that are not growing.
- The emergence and growth of the EAM, ITAM and service desk markets
have attracted a large number of strong competitors, and most of the
largest software companies that sell into complementary markets have
developed competing EAM, ITAM or service desk products.
- In the EAM market, large ERP vendors have developed products that
compete with Maximo EAM and that are tightly integrated with the
rest of their ERP product suites. In the ITAM and service desk
markets, larger companies than ours have developed competing
products that are delivered as part of a broader product offering.
While our products may have technical or functional advantages over
those of our competition, these companies are all larger than ours,
they may have the ability to quickly eliminate our competitive
advantages, and they are able to market their products as part of a
larger solution and take advantage of customers' desire to
consolidate their information technology (IT) systems onto fewer
platforms.
It is likely that these markets will continue to mature, there will be fewer
sales opportunities for the Company within the EAM market, 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 we have a presence,
such as the nuclear energy, transportation, power generation, transmission and
distribution, and other industries. We refer to these industry-specific Maximo
offerings as "Industry Solutions." To address the ITAM and service desk markets,
we have invested heavily in the development and release of MXES. While we
continue to strengthen our Maximo EAM offering, and while we offer our products
as an integrated suite that manages all of our customers' critical assets in a
manner that none of our competitors are able, these efforts may not be
sufficient to overcome the effects of maturity, saturation and intense
competition in our markets, and our revenues, margins, results of operation and
financial condition may be materially and adversely affected.
Page 8
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 have
recently broadened our product offerings in order to develop additional sources
of revenues, and we continue to do so. With the initial release of Maximo
Enterprise Suite (MXES), in March 2005, we have delivered products that address
the Help Desk and Service Desk markets, and these markets are new to us. We are
planning significant enhancements to this initial release, and will continue to
broaden this offering. Our continuing development of MXES and of our Maximo EAM
Industry Solutions, and our ability to derive revenue and grow, is subject to
the following risks, among others:
- We may not be able to develop and market our new products on time,
with acceptable quality or with functions and features that meet the
requirements of customers in these markets.
- The MXES products may not contain all of the functionality deemed
necessary by prospective buyers in these markets, and certain of our
competitors in these new markets also offer complementary and
sometimes fully integrated products that we do not offer. It may
take longer than we anticipate for us to establish our presence in
new markets, develop a robust and dependable flow of sales
opportunities and establish predictable closure rates and revenue
streams.
- It is possible that our 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 do not progress 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.
- We may not derive revenues from MXES in proportion to our
development investment and sales efforts, and those efforts may
serve as a significant 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 ITAM 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 IT systems, and
we may not be successful in our attempts to "cross-sell" our new
products into our existing accounts, or our traditional EAM products
to customers primarily interested in our new products.
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.
OUR SALES EFFORTS DEPEND IN PART ON STRATEGIC RELATIONSHIPS AND RESELLER
ARRANGEMENTS WITH OTHER COMPANIES.
We have entered into strategic relationships with various larger companies, such
as IBM, SAIC, BearingPoint and Accenture LLP. 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
Page 9
internal to these companies that impact their desire or ability to execute, by
changes in their strategies, or by developments in their respective industries
or markets, that we fail to anticipate.
In addition, we are renewing our focus on generating software license sales
through value-added resellers, systems integrators and other indirect sales
channels. The Company may have difficulty or we may experience delays in
establishing the infrastructure necessary to initiate, maintain and support
these channel relationships, and these relationships may either not materialize
or they may fail to produce additional sales, at all or within the timeframe
that we currently anticipate. To the extent that these channels are focused on
our new product offerings, they are vulnerable to unknown problems with our new
products or gaps in our new offerings. As a company we do not have experience in
supporting channel relationships in this new market, and we may fail to develop
the infrastructure or deliver the resources necessary to successfully support
these new channel relationships. We may not derive revenues from in proportion
to our investment in channel sales, and those efforts may serve as a significant
distraction from our direct sales efforts.
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 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
Page 10
systems, which include maintenance modules offered by several large vendors,
such as SAP and Oracle. In the ITAM market we compete with companies such as
Peregrine Systems (which has agreed to be acquired by Hewlett-Packard Company),
Computer Associates and BMC Software. MXES will compete with all of these
companies, and in the Help Desk and Service Desk markets MXES will compete with
BMC Software (which recently acquired the Remedy help desk product) and
Hewlett-Packard. 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, planning and cost
systems markets, or on the industrial supply chain market, we could be at a
competitive disadvantage.
Current or potential competitors may combine with each other or 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 TAX LIABILITIES.
We are subject to income taxes and non-income taxes (e.g., import/export duties,
and payroll, sales, use, value-added, net worth, property, and goods and
services 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 regularly subject to examinations of our
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 and accruals for taxes.
While we believe that we have properly interpreted 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.
Page 11
CHANGES IN REGULATIONS OR CRITICAL ACCOUNTING POLICIES COULD MATERIALLY AND
ADVERSELY AFFECT US.
New laws, regulations or standards related to us 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.
We 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 we determine that
the 85% dividends received deduction is advantageous. However, if we do not
appropriately comply with the statutory requirements then the 85% foreign
dividends received deduction could be forfeited resulting in a potentially
adverse affect on our 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
we agree 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 we cannot determine the fair value of the services being
delivered, then we 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 our 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.
Page 12
LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY EXECUTIVE OFFICERS OR INABILITY
TO RECRUIT NEEDED SALES, SERVICES AND TECHNICAL PERSONNEL COULD ADVERSELY AFFECT
OUR BUSINESS.
We are highly dependent on certain key executive officers, technical and sales
employees, and the loss of one or more of such employees could have an adverse
impact on our future operations. We do not have employment contracts with any
personnel, and we do not maintain any so-called "key person" life insurance
policies on any personnel. We continue to hire additional sales, services and
technical personnel. Competition for hiring of such personnel in the software
industry is intense, and from time to time we may experience difficulty in
locating candidates with the appropriate qualifications within the desired
geographic locations, or with certain industry specific expertise. There can be
no assurance that we will be able to retain our existing personnel or attract
additional qualified employees.
WE ARE EXPOSED TO FLUCTUATIONS IN THE MARKET VALUES OF OUR PORTFOLIO INVESTMENTS
AND IN INTEREST RATES.
We invest a significant portion of our cash in marketable securities. These
securities are classified as available-for-sale and are recorded at fair value
on the consolidated balance sheet with unrealized gains or losses reported as a
separate component of accumulated other comprehensive income (loss), net of tax.
Economic downturns and other factors subject these securities to volatility in
the market place. Any resulting decline in fair value of these investments could
adversely affect our financial condition.
RECENTLY ISSUED REGULATIONS RELATED TO EQUITY COMPENSATION COULD ADVERSELY
AFFECT OUR ABILITY TO ATTRACT AND RETAIN KEY PERSONNEL.
We have used stock options and other long-term equity incentives as a
fundamental component of our employee compensation packages. We believe that
stock options and other long-term equity incentives directly motivate our
employees to maximize long-term stockholder value and, through the use of
vesting, encourage employees to remain with MRO. The FASB issued changes to U.S.
GAAP that requires us to record a charge to earnings for new and unvested
employee stock option grants beginning on July 1, 2005. This regulation could
have a negative impact on our earnings. In addition, regulations of the Nasdaq
National Market that require shareholder approval for all stock option plans,
and regulations implemented by the New York Stock Exchange that prohibit NYSE
member organizations from giving a proxy to vote on equity-compensation plans
unless the beneficial owner of the shares has given voting instructions, could
make it more difficult for us to grant options to employees in the future. To
the extent that new regulations make it more difficult or expensive to grant
stock options to employees, we may incur increased compensation costs, change
our equity compensation strategy or find it difficult to attract, retain and
motivate employees, each of which could materially and adversely affect our
business.
WE FACE COSTS AND RISKS ASSOCIATED WITH COMPLIANCE WITH SECTION 404 OF THE
SARBANES-OXLEY ACT.
We continue to evaluate our internal control systems in order to allow our
management to report on, and our independent auditors to attest to, our internal
controls over financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act. As a result, we continue to incur substantial expenses and
management's time continues to be diverted which could adversely affect our
financial results and the market price of our common stock.
OTHER RISKS
The foregoing is not a complete description of all risks relevant to our future
performance, and the foregoing should be read and understood together with and
in the context of similar discussions which may be contained in the documents
that we file with the SEC in the future. We undertake no obligation to release
publicly any revision to the foregoing or any update to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.
ITEM 1B: UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters and its manufacturing and
distribution facilities in Bedford, Massachusetts. The leased facility consists
of approximately 115,000 square feet and the lease ends December 31, 2009. The
average annual base
Page 13
rent is $1.0 million. Additionally, the Company estimates that its annual
operating expenses under the recently renegotiated lease will be approximately
$1.1 million, based on information currently available. The actual costs will
depend on such factors as actual electricity usage, real estate taxes and
operating costs. Under the terms of its lease, the Company has the ability to
sublease the space. The Company leases additional offices in California,
Florida, Georgia, Illinois, Kansas, Michigan, New Jersey, New York, Texas, and
Virginia. The Company also leases offices for its international operations in,
Australia, Brazil, Canada, China, France, Germany, Hong Kong, Italy, Japan,
Korea, Mexico, the Netherlands, Singapore, Sweden, Thailand and the United
Kingdom.
We believe our facilities are adequate for our current and near-term needs and
that we will be able to locate additional facilities as needed. See Note J
"Commitments and Contingencies" for more information about our leases.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this Annual Report on Form 10-K, the Company is not a party to
any legal proceedings the outcome of which, in the opinion of management, would
have a material adverse effect on the Company's results of operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER'S PURCHASES OF EQUITY SECURITIES
PRICE RANGE OF COMMON STOCK
The company's common stock is traded on the NASDAQ National Market under the
symbol MROI. As of December 12, 2005, there were approximately 115 holders of
record of the company's common stock. Most of the Company's stock is held in
street names through one or more nominees.
The following table sets forth the high and low per share sale prices of the
Company's common stock, as reported on the NASDAQ National Market for each
quarterly period within the two year period ended September 30, 2005.
FISCAL 2005 HIGH LOW
First Quarter $ 14.39 $ 9.89
Second Quarter $ 14.70 $ 11.53
Third Quarter $ 15.34 $ 12.06
Fourth Quarter $ 17.09 $ 14.10
FISCAL 2004 HIGH LOW
First Quarter $ 14.70 $ 11.78
Second Quarter $ 18.15 $ 10.93
Third Quarter $ 14.83 $ 11.48
Fourth Quarter $ 13.61 $ 8.70
Page 14
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company set forth below has been
derived from the audited consolidated financial statements for the Company for
the periods indicated. This selected consolidated financial data should be read
in conjunction with "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and the notes thereto included elsewhere herein.
FIVE-YEAR SUMMARY
CONSOLIDATED STATEMENT OF OPERATIONS DATA
FISCAL YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS, EXCEPT PER SHARE DATA)
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Revenues $ 199,169 $ 185,689 $ 176,877 $ 171,881 $ 185,450
Income/(loss) from operations 13,204 14,643 5,742 (15,319) (20,755)
Net income/(loss) 13,595 10,340 4,870 (10,551) (15,468)
Net income/(loss) per share, basic 0.54 0.42 0.20 (0.46) (0.70)
Net income/(loss) per share, diluted 0.52 0.41 0.20 (0.46) (0.70)
Shares used to calculate net income/(loss) per share
Basic 25,280 24,795 24,429 23,171 22,148
Diluted 25,901 25,273 24,647 23,171 22,148
FIVE-YEAR SUMMARY
CONSOLIDATED BALANCE SHEET DATA
FISCAL YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS)
2005 2004 2003 2002 2001
---- ---- ---- ---- ----
Cash, cash equivalents and marketable securities $133,174 $108,407 $ 94,573 $ 67,815 $ 48,354
Working capital 110,637 78,161 53,391 58,893 51,471
Total assets 246,370 222,721 205,261 192,153 171,453
Long-term obligations 2,830 3,435 2,049 1,236 1,034
Total stockholders' equity 181,706 161,135 146,512 138,020 123,353
Page 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
MRO Software, Inc. is the leading global provider of asset and service
management solutions. In March 2005, we released our new generation of products,
Maximo Enterprise Suite (MXES). MXES is a comprehensive suite of products all
built on a single, common, web-architected platform. MXES combines enhanced
Enterprise Asset Management (EAM) functionality with new service management
capabilities that together improve the effectiveness of asset management
strategies. MXES includes all the functionality required to provide IT Service
Management (ITSM) capabilities which includes advanced IT Asset Management
(ITAM), service management, and a full-featured service desk, all based on the
IT Infrastructure Library (ITIL) guidelines. The Company markets its MXES
solution under several product names: Maximo and Maximo Enterprise for EAM
applications, Maximo Discovery for autodiscovery of IT assets, Maximo IT Asset
Management (ITAM) for advanced IT Asset Management (ITAM), and Maximo Service
Desk, a full-featured service desk. Most products within MXES can each be
implemented separately as a stand-alone solution, or they can readily be
deployed together. MXES enables compliance with contracts, service level
agreements, internal corporate standards, and government regulations. Our
solutions enhance asset management and ensure service performance of production,
facility, transportation and IT assets.
We report all our revenues in one reportable business segment. Our 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 41% of total revenues for fiscal
year 2005, and, therefore, the fluctuation in exchange rates can have a
significant impact on our results of operations. In fiscal 2005, 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 7% in fiscal 2005, as compared to fiscal 2004, however, in constant
currency terms the increase is estimated to be 5%. The exchange rates had a
similar impact on direct and operating expenses, and, therefore, the overall
impact on net income was immaterial for fiscal 2005.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America. The preparation of these financial statements requires that
management make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and
Page 16
liabilities. 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. We
include and update 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 our estimates in
the interim period.
REVENUE RECOGNITION
SOFTWARE PRODUCTS
The Company primarily licenses its software products under noncancellable
license agreements. Software license fee revenues are generally recognized upon
contract execution and product shipment, provided that collection of the
resulting receivable is deemed probable, the fees are fixed or determinable and
no significant modification or customization of the software is required.
Our customers do not have any right of return except as stipulated under a
standard 90-day warranty that runs concurrent with post contract support (PCS).
The Company does not maintain any reserves with respect to this warranty based
on a history of performance of our software. On the rare occasion that a
customer insists on conditions of acceptance, the Company defers revenue until
the customer's acceptance is obtained and the condition has been satisfied.
Revenue from products sold through indirect channels (resellers) is recognized
upon shipment of the software, as long as evidence of an arrangement exists,
collectibility is probable and the fee is fixed or determinable and the
reseller's obligation to pay us is not contingent upon resale of our product.
Revenue is recorded net of any commissions or discounts payable to these
resellers. Our resellers do not have any right of return beyond the standard
90-day performance warranty that runs concurrent with PCS.
SERVICES
Services revenues are comprised of consulting and training fees related to
installation of the Company's software solutions, PCS contracts for software
products, and subscription-based fees related to the Company's OCS business.
Consulting and training services are generally recognized as the services are
performed. PCS revenues are recognized ratably over the term of the agreement,
generally one year. Customers typically subscribe to OCS on an annual basis and
revenue is recorded as services revenue and recognized on a straight-line basis
over the applicable subscription period.
Often our software is sold together with implementation consulting services that
are sold separately under consulting contracts. We consider whether the services
revenue can be recognized separately from the software revenue by analyzing the
nature of the services (i.e., if the services are essential to the functionality
of the software), the level of risk, availability of services from other
vendors, acceptance criteria, milestone payments and fixed price terms. For
those contracts that contain fixed price arrangements, if we can reliably
estimate the hours required to complete the implementation services and if we
have vendor-specific objective evidence (VSOE) for the fair value of the hourly
rates for consultants, we recognize the software license fee separately from the
services revenues. The services revenues are recognized as they are delivered
and the related costs as they are incurred. If at any time we estimate that the
costs to complete a project will exceed expected revenues, we accrue for
estimated losses using cost estimates that are based on average fully burdened
daily rates applicable to the consulting organization delivering the services.
For those fixed price arrangements where we cannot reliably estimate the hours
required to complete the implementation services and/or we do not have VSOE for
the fair value of the hourly rates for consultants, the software license value
is recognized together with the consulting services over the period the
consulting services are provided.
Page 17
MULTIPLE ELEMENT ARRANGEMENTS
The Company's multiple element arrangements could include the following three
elements: (a) software license, (b) PCS, and (c) consulting, training and other
services ("services"). Revenue is allocated to the elements of the arrangement
based upon the VSOE of fair value of each element. The Company uses the residual
method to recognize its software license revenue, because while we are able to
determine the VSOE of fair value of PCS and services, we are unable to determine
the fair value of software licenses. Under the residual method, the fair value
of undelivered elements (PCS and/or services) is deferred and recognized when
the PCS and/or services are delivered. The difference between the amount of the
total arrangement and the amount attributable to the elements for which fair
value is determinable (PCS and/or services) is recognized as software license
revenue. VSOE is established for PCS and is based on the price of PCS when sold
separately. The PCS renewal rate is a relatively consistent percentage of the
stipulated software license fee, offered to all customers. VSOE for consulting
services is based on fixed hourly rates set according to the skill level of the
consultant required. VSOE for training services is based on an established
per-student fee structure. For those multi-element arrangements where we cannot
establish VSOE for the undelivered elements, the software license value is
recognized together with the consulting services over the period the consulting
services are provided. Contract accounting is applied to any arrangement that
includes significant customization or modification of the software.
We assess whether fees are fixed or determinable at the time of sale and
recognize revenue if all other revenue recognition requirements are met. Our
standard payment terms are net 30 days. Payment terms that extend beyond net 30
days from the contract date but are within twelve months are generally deemed to
be fixed or determinable based on our successful history of collecting on such
arrangements. For those customers who are deemed not to be credit-worthy,
revenue is deferred until payment is received.
ALLOWANCES FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
The Company maintains allowances for doubtful accounts, which reflect the
Company's estimate of the amounts owed by customers that customers will be
unable or otherwise fail to pay. The allowance for doubtful accounts is based on
the Company's management assessment of the collectibility of customer accounts
and factors such as historical experience, credit quality, age of the accounts
receivable balance, and current economic conditions. Company management performs
ongoing credit evaluations of its customers' financial condition and limits the
amount of credit when deemed necessary. The Company believes that the current
estimate of allowances for doubtful accounts recorded as of September 30, 2005
adequately covers any potential credit risks. However, if the financial
condition of our customers deteriorates and their payment defaults exceed our
estimates, then we may need to increase our allowance reserves, which will
result in a charge to income in the period that the adjustment is made.
The Company did not record a provision for estimated sales returns. Based on our
history of sales returns and an analysis of credit memos, we determined that a
provision was not needed. If the historical data we used to calculate the basis
for a provision does not properly reflect future returns, then a provision for
returns will be recorded, and a charge to income will result in the period that
such a determination is made.
INCOME TAXES
DEFERRED INCOME TAXES
The Company accounts for income taxes under the asset and liability approach for
accounting and reporting for income taxes in accordance with Financial
Accounting Standards Board Statement No. 109 "Accounting for Income Taxes." The
Company computes deferred income taxes, net of valuation allowances, for the
estimated future tax effects of temporary differences between the financial
statement and tax basis of assets and liabilities, the expected tax benefit of
operating loss carryforwards and the expected benefit of tax credit
carryforwards. Changes in deferred tax assets and liabilities are recorded in
the provision for income taxes. The Company continually assesses the
realizability
Page 18
of its deferred tax asset. The deferred tax asset may be reduced by a valuation
allowance if, based on the weight of available evidence, it is more likely than
not that some portion or all of the recorded deferred tax assets will not be
realized in future periods. All available evidence, both positive and negative,
is considered in the determination of recording a valuation allowance. The
Company believes future taxable income will be sufficient to realize the
deferred tax benefit of the net deferred tax assets. In the event that it is
determined that our financial projections change and it becomes more likely than
not that we cannot realize the net deferred tax assets, an adjustment to the net
deferred tax assets will be made and will result in a charge to income in the
period such a determination is made. The net deferred tax asset amount as of
September 30, 2005 is $8.4 million.
TAX CONTINGENCIES
Tax contingencies are recorded to address potential exposures involving tax
positions we have taken that could be challenged by taxing authorities. These
potential exposures result from the varying application of statutes, rules,
regulations and interpretations. Our estimate of the value of our tax
contingencies reflects assumptions based on past experiences and judgments about
potential actions by taxing jurisdictions. It is possible that the ultimate
resolution of these matters may be greater or less than the amount that we have
accrued. The Company's policy with regard to IRS examinations is to adjust any
tax reserve balances as a result of any examination at the earlier of the date
of IRS Joint Committee approval if any, or the expiration of the statute of
limitations for the year examined.
VALUATION OF LONG-LIVED ASSETS
Long-lived assets are amortized over their estimated useful lives. The Company
reviews its long-lived assets, with the exception of goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying amount of
these assets may exceed their fair value. The Company estimates whether future
cash flows expected to result from the use of assets exceed the carrying amount
of the assets. In the event that the Company judges that an impairment exists,
all or a portion of the asset will be written-off based on the amount by which
the carrying amount exceeds the fair value of the asset. In order to determine
the fair value, the Company obtains quoted market prices or utilizes valuation
techniques, such as discounted cash flows.
The Company also periodically assesses the useful life of its fixed assets and
may in the future need to adjust the life of an asset or write-it off.
Goodwill is tested annually for impairment or whenever events or changes in
circumstances suggest that the carrying value may not be recoverable. If the
carrying amount of the net tangible and intangible assets in a reporting unit
exceeds the reporting units fair value, a detailed impairment loss analysis
would be performed to calculate the amount of impairment, if any.
Page 19
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of total revenues:
YEAR ENDED SEPTEMBER 30,
------------------------
2005 2004 2003
---- ---- ----
Revenues:
Software 33% 28% 28%
Support and Services 67 72 72
--- --- ---
Total revenues 100 100 100
Total cost of revenues 36 36 38
--- --- ---
Gross profit 64 64 62
--- --- ---
Operating expense:
Sales and marketing 32 30 33
Product development 14 15 15
General and administration 10 10 10
Amortization of other intangibles 1 1 1
--- --- ---
Total operating expenses: 57 56 59
--- --- ---
Income from operations 7 8 3
Other income 1 1 1
--- --- ---
Income before income taxes 8 9 4
Provision for income taxes 1 3 1
--- --- ---
Net income 7% 6% 3%
--- --- ---
Page 20
REVENUES
Our revenues are derived primarily from two sources: (i) software licenses, and
(ii) fees for support and services.
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/05 % 9/30/04 % 9/30/03
- ---------------------------- --------- ------ --------- ------ ---------
Software licenses $ 65,115 24% $ 52,583 5% $ 49,904
Percentage of total revenues 33% 28% 28%
Support revenues $ 76,090 6% $ 71,495 10% $ 65,171
Percentage of total revenues 38% 39% 37%
Services revenues $ 57,964 (6%) $ 61,611 (1%) $ 61,802
Percentage of total revenues 29% 33% 35%
Total revenues $199,169 7% $185,689 5% $176,877
FISCAL 2005 COMPARED TO FISCAL 2004: Software license revenues increased 24% in
fiscal 2005 compared to fiscal 2004 and increased approximately 22% using
constant currency rates. The increase in software license revenues was
attributable to the successful penetration of our Maximo Industry Solutions,
early success with our new MXES product which was released in March 2005, and an
increase in our average selling price. The increase in our average selling price
is attributable to ten large license sales over $1.0 million in fiscal 2005.
Support revenues increased 6% in fiscal 2005 compared to fiscal 2004 and
increased approximately 4% using constant currency rates. Support revenues have
increased as a result of a cumulative increase in the number of Maximo licenses
and a strong renewal rate (90%) for support contracts.
Service revenues decreased 6% in fiscal 2005 compared to fiscal 2004 and
decreased approximately 8% using constant currency rates. The decrease in
service revenues was due primarily to the conclusion of a multi-year Maximo
service 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
including our alliance partners who implement our Maximo products and compete
for our services business.
FISCAL 2004 COMPARED TO FISCAL 2003: Software license revenues increased 5% in
fiscal 2004 compared to fiscal 2003 and increased approximately 1% using
constant currency rates. The Company attributes the relatively flat overall
software revenue in fiscal 2004 to the saturation of our traditional EAM market
and long sales cycles for large multi-site, multi-user contracts. Maximo EAM
software license revenues comprised 95% of total software revenues in fiscal
2004. Maximo EAM software license revenues increased 8% in fiscal 2004 compared
to fiscal 2003, as a result of the release of our Maximo Industry Solutions
which are targeted at specific vertical markets. ITAM software license revenues
declined 30% in fiscal 2004 compared to fiscal 2003. Historically, ITAM software
licenses have fluctuated from quarter to quarter.
Support revenues increased 10% in fiscal 2004 compared to fiscal 2003 and
increased approximately 6% using constant currency rates. Support revenues have
increased as a result of a cumulative increase in the number of Maximo EAM
customers and a strong renewal rate (90%) for support contracts. Maximo EAM
support revenues comprised 95% of total support revenues in fiscal 2004 and
increased 11% in fiscal 2004 compared to fiscal 2003. ITAM support revenues
decreased 3% in fiscal 2004 compared to fiscal 2003 due to termination of
contracts without commensurate replacements from new customers.
Service revenues decreased 1% in fiscal 2004 compared to fiscal 2003 and
decreased 5% using constant currency rates. The decrease in service revenues in
fiscal 2004 as compared to fiscal 2003 was comprised of the following: (1) a
decline of 40% in ITAM service revenues related to the decrease in software
licenses sold and (2) a $1 million decline in service revenues as a result of
the sale of our industrial data normalization services operations in the second
quarter of fiscal 2003. These
Page 21
decreases were partially offset by a 5% increase in Maximo EAM services
revenues. In constant currency terms, Maximo EAM service revenues were flat over
the comparable period. Overall, our services business operates in a highly
competitive industry and there are numerous independent consulting firms who
implement Maximo and compete for our services business.
COST OF REVENUES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/05 % 9/30/04 % 9/30/03
- ---------------------------------------- -------- ------ -------- ------ --------
Cost of software licenses $ 7,131 (1%) $ 7,143 (14)% $ 8,314
Percentage of software licenses Revenues 11% 14% 17%
Cost of support revenues $12,295 12% $10,975 4% $10,525
Percentage of support revenues 16% 15% 16%
Cost of services revenues $53,413 9% $49,169 2% $48,093
Percentage of services revenues 92% 80% 78%
Total cost of revenues $72,839 8% $67,287 1% $66,932
Percentage of total revenues 36% 36% 38%
FISCAL 2005 COMPARED TO FISCAL 2004: 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 1% decrease in the cost of software license revenues
in fiscal 2005 compared to fiscal 2004 was primarily due to a decrease in
amortization of acquired technology due to the completion of amortization of
fully amortized assets. Amortization of acquired technology was $2.1 million and
$2.4 million for fiscal 2005 and 2004, respectively. Partially offsetting this
decrease was an increase of $175 thousand in royalties paid to vendors of
third-party software and an increase of $150 thousand 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 of operating our OCS business. Cost of support
revenues increased 12% in fiscal 2005 compared to fiscal 2004. The increase was
primarily attributable to an increase in renewals of third-party support
contracts related to the Maximo Mobile Suite product, general increases in
salaries and related benefits, acceleration of unvested employee stock options,
and an increase in facilities cost due to a lease provision related to our UK
facility. Partially offsetting these increases was a decrease in general
operating expenses. Cost of support revenues, as a percentage of total support
revenues, was 16% and 15% for fiscal 2005 and 2004, respectively.
Cost of service revenues increased 9% in fiscal 2005 compared to fiscal 2004.
Cost of service revenues, as a percentage of total service revenues was 92% and
80% for fiscal 2005 and 2004, respectively. The increase was attributable to an
increase in service incentives, an increase in the utilization of third-party
consultants implementing our products, salaries and related benefits,
acceleration of unvested employee stock options, travel and entertainment
expenses related to worldwide professional services meetings, and an increase in
facilities cost due to a lease provision related to our UK facility, partially
offset by a decrease in reimbursable expenses.
FISCAL 2004 COMPARED TO FISCAL 2003: Cost of software license revenues consists
of software purchased for resale, royalties paid to vendors of third party
software, the cost of software product packaging and media, certain employee
costs related to software duplication, packaging and shipping, and amortization
of acquired technology. The decrease in the cost of software license revenues in
fiscal 2004 as compared to fiscal 2003 was primarily attributable to a decrease
in the amortization of acquired technology due to the cessation of amortization
of fully amortized assets. Amortization of acquired technology was $2.4 million
and $3.4 million for fiscal 2004 and 2003, respectively.
Page 22
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 of operating our OCS business. Cost of support
revenues increased 4% in fiscal 2004 compared to fiscal 2003. The increase in
fiscal 2004 was primarily attributable to general increases in salaries and
related benefits and operating expenses needed to support all of our product
lines. Cost of support revenues, as a percentage of total support revenues was
15% and 16% for fiscal 2004 and 2003, respectively.
Cost of service revenues increased 2% in fiscal 2004 compared to fiscal 2003.
Cost of service revenues, as a percentage of total service revenues was 80% and
78% for fiscal 2004 and fiscal 2003, respectively. The increase in fiscal 2004
as compared to fiscal 2003 was attributable to an increase in the utilization of
third-party consultants to implement our products, an increase in salaries and
related benefits and an increase in service incentives due to additional
headcount. These increases were partially offset by a decrease in travel and
entertainment expenses.
OPERATING EXPENSES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/05 % 9/30/04 % 9/30/03
- --------------------------------- -------- ------ -------- ------ --------
Sales and marketing $63,078 11% $56,762 (4)% $59,117
Percentage of total revenues 32% 30% 33%
Product development $29,614 4% $28,492 8 % $26,476
Percentage of total revenues 14% 15% 15%
General and administrative $20,087 13% $17,839 1 % $17,702
Percentage of total revenues 10% 10% 10%
Amortization of other intangibles $ 347 (48%) $ 666 (27)% $ 908
Percentage of total revenues 1% 1% 1%
FISCAL 2005 COMPARED TO 2004: Sales and marketing expenses increased 11% in
fiscal 2005 as compared to fiscal 2004. The increase was primarily attributable
to an increase in sales commissions due to an increase in software license sales
and accelerated commission rates, a general increase in salaries and related
benefits, acceleration of unvested employee stock options, travel and
entertainment expenses, and advertising expenses to market new products (MXES).
Product development expenses increased 4% in fiscal 2005 as compared to fiscal
2004. The increases were due to an increase in salaries and related benefits due
to an increase in head count, an increase in expenditures for translation of our
products in various languages, and acceleration of unvested employee stock
options.
General and administrative expenses increased 13% in fiscal 2005 as compared to
fiscal 2004. General and administrative costs have mainly increased due to the
costs for the assessment of internal controls in order to comply with the
Sarbanes Oxley Act of 2002. This includes external consultants and increased
audit and legal fees. General and administrative expenses, as a percentage of
total revenues, was 10% for both the fiscal year ended 2005 and 2004,
respectively.
The decrease in amortization of other intangibles expense in fiscal 2005 as
compared to fiscal 2004, respectively, was due to cessation of amortization for
fully amortized assets.
FISCAL 2004 COMPARED TO 2003: Sales and marketing expenses decreased 4% in
fiscal 2004 compared to fiscal 2003. The decrease was primarily attributable to
a decrease in salaries and related benefits due to a reduced number of sales and
marketing personnel and a decrease in advertising expenses. The decrease was
partially offset by an increase in sales commissions due to increases in
software license sales and a
Page 23
more favorable sales commission policy for fiscal 2004 and an increase in travel
and entertainment expenses.
Product development expenses increased 8% in fiscal 2004 compared to fiscal
2003. The increase was primarily attributable to increases in product
development salaries and related benefits and increases in the costs to
translate our products into foreign languages. The Company has focused the
majority of its development on a new generation of products, MXES.
General and administrative expenses increased 1% in fiscal 2004 compared to
fiscal 2003. The increase was primarily attributable to an increase in salaries
and related benefits, property and business taxes, and insurance premiums. These
increases were offset by a decrease in U.S. bad debt reserves.
The decrease in amortization of other intangibles expense in fiscal 2004 as
compared to fiscal 2003 was due to several assets becoming fully amortized
during the first three quarters of fiscal 2004.
NON-OPERATING EXPENSES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/05 % 9/30/04 % 9/30/03
- ---------------------------- ------- ------ ------- ------ -------
Interest income $2,956 135 % $1,258 55% $ 811
Other (expense)/ income, net $ (355) (602)% $ 6 (99%) $1,161
FISCAL 2005 AS COMPARED TO 2004: Interest income is attributable to interest
earned on marketable securities and cash and cash equivalents. We invest a large
portion of our cash in marketable securities such as United States treasury and
treasury-backed instruments and highly rated conservative corporate bonds. We
were able to earn more income in fiscal 2005 as compared to fiscal 2004 because
we invested more cash into higher yielding securities, mostly higher yielding
U.S. bonds. The change in other expense was primarily due to non-operating costs
associated with MRO World held in July 2005. Partially offsetting this was a
swing in foreign currency transaction gains and losses. We reported net currency
transaction losses of $93 thousand in fiscal 2005 and $506 thousand in fiscal
2004. We did not enter into any foreign exchange contracts during fiscal 2005 or
2004. Transaction gains and losses are primarily attributable to settlement of
foreign intercompany account balances. Also, in fiscal 2004, the Company
recorded an additional $452 thousand in other income related to the sale of its
industrial data normalization services operations that was not repeated in
fiscal 2005.
FISCAL 2004 AS COMPARED TO 2003: Interest income is attributable to interest
earned on marketable securities and cash and cash equivalents. The Company
invests a large portion of its cash in marketable securities such as United
States treasury and treasury-backed instruments, municipal bonds and highly
rated conservative corporate bonds. We were able to earn more income in fiscal
2004 as compared to fiscal 2003 because we invested more cash into higher
yielding securities because the overall U.S. bond market improved over the
previous comparable period. The change in other income was primarily due to a
swing in foreign currency transaction gains and losses. The Company reported net
currency transaction losses of $506 thousand in fiscal 2004 compared to net
currency transaction gains of $532 thousand in fiscal 2003. Also, in fiscal
2004, the Company recorded an additional $452 thousand in other income related
to the sale of its industrial data normalization services operations.
INCOME TAXES
Our effective tax rate was 14% for fiscal 2005. The tax provision was calculated
on income generated in domestic and foreign tax jurisdictions and on changes in
our net deferred tax assets and liabilities. In accordance with its policy on
tax examinations, the Company released a $3.4 million tax reserve during the
fourth quarter of fiscal 2005 upon notification of approval from the IRS Joint
Committee for a tax audit. Absent the impact of this tax reserve adjustment, the
Page 24
effective tax rate for fiscal 2005 would have been 35.5%. Also, in fiscal 2005,
the Company reversed valuation allowances previously maintained with respect to
net operating losses acquired from the acquisition of Applied Image Technology,
Inc. and various state net operating loss carryforwards. A portion ($431
thousand) of the reversal of the valuation allowance related to the net
operating losses acquired from Applied Image Technology, Inc. resulted in a
reduction in the Company's goodwill balance. The reversal of the valuation
allowance was based on the assessment that it is more likely than not that the
loss carryforwards will be utilized by the Company due to favorable projections
of future income.
Our effective tax rate was 35% for fiscal 2004 and 37% for fiscal 2003. The
decrease in the effective tax rate in fiscal 2004 as compared to fiscal 2003 was
primarily due to the reduction in non-deductible amortization and the
utilization of state net operating losses and research and development credits.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2005, the Company had cash and cash equivalents of $120.3
million and marketable securities of $12.9 million. The Company's working
capital was $110.6 million.
Cash provided by operations was $22.6 million for the twelve months ended
September 30, 2005 primarily attributable to income generated from operations.
Cash provided by investing activities was $35.8 million for the twelve months
ended September 30, 2005, and was primarily provided by sales and maturities of
marketable securities, offset by the purchase of marketable securities and
capital expenditures.
Cash provided by financing activities was $5.5 million for the twelve months
ended September 30, 2005 and represents proceeds from our employee stock option
and stock purchase plans.
As of September 30, 2005, the Company's principal commitments consist primarily
of office space and equipment operating leases for its U.S. and European
headquarters. Our corporate headquarters are under a lease through December 31,
2009. We have entered into sub-lease agreements for our UK facility through May
2010. We lease our other facilities and certain equipment under non-cancelable
operating lease agreements that expire at various dates through June 30, 2019.
The Company leases its office facilities under operating lease agreements that
expire at various dates through June 30, 2019. The Company pays all insurance,
utilities, and pro rated portions of any increase in certain operating expenses
and real estate taxes. The aggregated rent expense under these leases was $6.5
million (net of sublease income), $6.9 million, and $6.2 million for fiscal
2005, 2004 and 2003, respectively.
Page 25
The following table summarizes our contractual obligations as of September 30,
2005. The contractual obligations are primarily related to office leases,
equipment leases and contracts for hosting our financial applications.
PAYMENTS DUE BY PERIOD
CONTRACTUAL LESS THAN 1-3 3-5 MORE THAN 5
OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS
- --------------------- ------- --------- ------- ------- -----------
(in thousands)
Operating leases:
Lease premises $31,353 $ 4,745 $ 6,092 $ 4,869 $15,647
Equipment/Automobiles 1,853 1,067 748 38 --
Purchase obligations 5,737 2,999 2,738 -- --
------- ------- ------- ------- -------
Total $38,943 $ 8,811 $ 9,578 $ 4,907 $15,647
------- ------- ------- ------- -------
We may use a portion of our cash to acquire additional businesses, products or
technologies complementary to our business. We also plan to make investments
over the next year in our products and technology.
We expect that our cash flow from operations, together with our current cash and
marketable securities, will be sufficient to meet our working capital and
capital expenditure requirements through at least September 30, 2006. Our
liquidity and working capital requirements, including the current portions of
any long-term commitments, are satisfied through cash flow from operations,
leaving our cash reserves available for acquisitions, other investments and
unanticipated expenditures. We have no long-term debt obligations. The factors
that might impact our cash flows include those that might impact our business
and operations generally, as described below under the heading "Risk Factors."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2005, the EITF reached a consensus on Issue No. 05-06, "Determining the
Amortization Period for Leasehold Improvements" (EITF 05-06). EITF 05-06
provides guidance for determining the amortization period used for leasehold
improvements acquired in a business combination or purchased after the inception
of a lease, collectively referred to as subsequently acquired leasehold
improvements). EITF 05-06 provides that the amortization period used for the
subsequently acquired leasehold improvements to be the lesser of (a) the
subsequently acquired leasehold improvements' useful lives, or (b) a period that
reflects renewals that are reasonably assured upon the acquisition or the
purchase. EITF 05-06 is effective on a prospective basis for subsequently
acquired leasehold improvements purchased or acquired in periods beginning after
the date of the FASB's ratification, which was on June 29, 2005. The Company
does not anticipate that EITF 05-06 will have a material impact on its
consolidated results of operations.
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS 154,
Accounting Changes and Error Corrections ("FAS 154"). FAS 154 replaces APB No.
20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements, and establishes retrospective application as the required
method for reporting a change in accounting principle. FAS 154 provides guidance
for determining whether retrospective application of a change in accounting
principle is impracticable and for reporting a change when retrospective
application is impracticable. The reporting of a correction of an error by
restating previously issued financial statements is also addressed. FAS 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The Company does not anticipate that the
adoption of FAS 154 will have a material impact on its consolidated results of
operations.
Page 26
In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations (FIN 47). FIN 47 provides guidance
relating to the identification and recognition of legal obligations to perform
an asset retirement activity. FIN 47 requires recognition of a liability for the
fair value of a conditional asset retirement obligation when incurred if the
liability's fair value can be reasonably estimated. We are required to adopt the
provisions of FIN 47 by September 30, 2006. We do not expect FIN 47 to have a
material impact on our results of operations, financial position or cash flows.
In December 2004, the FASB issued a revised Statement of Financial Accounting
Standard (SFAS) No. 123, Share-Based Payment (FAS 123(R)). FAS 123(R) requires
public entities to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the
award and recognize the cost over the period during which an employee is
required to provide service in exchange for the award. In addition, in March
2005, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 107, Share-Based Payment (SAB 107). SAB 107 provides supplemental
implementation guidance on FAS 123(R), including guidance on valuation methods,
(including assumptions such as expected volatility and expected term),
classification of compensation expense, inventory capitalization of share-based
compensation cost, income tax effects, disclosures in Management's Discussion
and Analysis, and several other issues. FAS 123(R) is effective for the first
interim reporting period of the first fiscal year beginning after June 12, 2005.
The new standard will require the Company to expense stock options beginning in
the first quarter of fiscal 2006. The Company accelerated all outstanding
unvested options as of September 30, 2005. We will not have any significant
stock option related compensation charges until additional options are granted.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets
(FAS 153) which eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception from fair value measurement for exchanges of nonmonetary
assets that do not have commercial substance. We are required to adopt FAS 153
for nonmonetary asset exchanges occurring in the first quarter of fiscal year
2006 and its adoption is not expected to have a significant impact on our
results of operations, financial condition or cash flows.
The American Jobs Creation Act
In October 2004, the American Jobs Creation Act of 2004 ("AJCA") was passed. The
AJCA provides a deduction for income from qualified domestic production
activities which will be phased in from 2005 through 2010. The AJCA also
provides for a two-year phase-out of the existing extra-territorial income
exclusion for foreign sales. The Company continues to evaluate the guidance
provided under the qualified domestic production activity and anticipates that
it will qualify for the incentive.
The AJCA also created a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85% dividends received
deduction for certain dividends from controlled foreign corporations. The
deduction is subject to a number of limitations. The Company is currently
evaluating the AJCA and are not yet in a position to decide whether, or to what
extent, it may repatriate foreign earnings to the U.S. and will make a final
determination by the end of fiscal 2006. The amount of income tax we would incur
should we repatriate some level of earnings cannot be reasonably estimated at
this time.
In December 2004, the FASB issued two Staff Positions, "FSP FAS 109-1" and "FSP
FAS 109-2", in response to the AJCA. Under FSP FAS 109-1, the FASB decided that
the deduction for qualified domestic production activities should be accounted
for as a special deduction under FAS 109. Under FSP FAS 109-2, the FASB
addressed the appropriate point at which a company should reflect in its
financial statements the effects of the one-time tax benefit upon the
repatriation of foreign earnings. The adoptions of FSP FAS 109-1 and FSP FAS
109-2 did not have a material impact on our financial position or results of
operations.
Page 27
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary exposure to market risk is the effect of fluctuations in interest
rates earned on our cash equivalents and marketable securities and exposures to
foreign currency exchange rate fluctuations.
At September 30, 2005, we held $133.2 million in cash equivalents and marketable
securities consisting of taxable and tax exempt municipal securities. Interest
rate movements affect the interest income we earn. We place our 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.
We develop our products in the United States and market them in North America,
Europe, Middle East and Africa, Australia, Asia Pacific and Latin America. As a
result, our financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
As of September 30, 2005, we did not engage in foreign currency hedging
activities.
Page 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present certain unaudited quarterly financial information
for our last eight quarters. The unaudited interim consolidated financial
information contained herein has been prepared on the same basis as the audited
consolidated financial statements.
The Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as an
indication of future performance.
(in thousands except per share amounts)
YEAR
DEC. 31, MAR. 31, JUNE 30, SEP. 30, ENDED
2005 QUARTER ENDED 2004 2005 2005 2005 2005
------------------ -------- -------- -------- -------- --------
Total Revenue $ 47,356 $ 43,179 $ 53,230 $ 55,404 $199,169
Gross Profit 30,461 25,660 34,181 36,028 126,330
Income from operations 3,880 801 5,651 2,872 13,204
Income before income taxes 4,921 949 6,351 3,584 15,805
Provision/(benefit) for income taxes 1,758 330 2,289 (2,167)A 2,210
Net income 3,163 619 4,062 5,751 13,595
Net income per share, basic $ 0.13 $ 0.02 $ 0.16 $ 0.23 $ 0.54
Net income per share, diluted $ 0.12 $ 0.02 $ 0.16 $ 0.22 $ 0.52
Footnote A: The Company released a $3.4 million tax reserve upon notification of
approval from the IRS Joint Committee for a tax audit.
YEAR
DEC. 31, MAR. 31, JUNE 30, SEP. 30, ENDED
2004 QUARTER ENDED 2003 2004 2004 2004 2004
------------------ -------- -------- -------- -------- --------
Total Revenue $ 44,902 $ 44,622 $ 46,300 $ 49,865 $185,689
Gross Profit 28,317 27,320 29,758 33,007 118,402
Income from operations 2,931 1,795 4,371 5,546 14,643
Income before income taxes 2,695 2,152 4,719 6,341 15,907
Provision for income taxes 943 753 1,631 2,240 5,567
Net income 1,752 1,399 3,088 4,101 10,340
Net income per share, basic $ 0.07 $ 0.06 $ 0.12 $ 0.16 $ 0.42
Net income per share, diluted $ 0.07 $ 0.05 $ 0.12 $ 0.16 $ 0.41
The financial statements and schedules filed as part of this Report are listed
in the following Index to Financial Statement and Schedules.
1. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
The following financial statements are filed as part of this Report:
PAGE
----
Report of Independent Registered Public Accounting Firm 31
Consolidated Balance Sheets September 30, 2005 and 2004 33
Consolidated Statements of Operations Years Ended September 30, 2005, 2004 and 2003 34
Consolidated Statements of Cash Flows Years Ended September 30, 2005, 2004 and 2003 35
Consolidated Statements of Stockholders' Equity Years Ended September 30, 2005, 2004 and 2003 36
Notes to Consolidated Financial Statements 37
Page 29
2. INDEX TO FINANCIAL STATEMENT SCHEDULES
The following financial statement schedule is filed as part of this report
and should be read in conjunction with the Consolidated Financial
Statements:
SCHEDULE PAGE
- -------- ----
II Valuation and Qualifying Accounts 56
All other schedules not listed above have been omitted because they are
not applicable or are not required, or the information required to be set
forth therein is included in the consolidated Financial Statements or
Notes thereto.
Page 30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF MRO SOFTWARE, INC.:
We have completed an integrated audit of MRO Software, Inc.'s 2005 consolidated
financial statements and of its internal control over financial reporting as of
September 30, 2005 and audits of its 2004 and 2003 consolidated financial
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our audits, are
presented below.
CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
- ------------------------------------------------------------------
In our opinion, the consolidated financial statements listed in the accompanying
index presents fairly, in all material respects, the financial position of MRO
Software, Inc. and its subsidiaries at September 30, 2005 and 2004, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 2005 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements 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.
INTERNAL CONTROL OVER FINANCIAL REPORTING
- -----------------------------------------
Also, in our opinion, management's assessment, included in Management's Annual
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that the Company maintained effective internal control over financial reporting
as of September 30, 2005 based on criteria established in Internal Control
- -Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), is fairly stated, in all material respects, based on
those criteria. Furthermore, in our opinion, the Company maintained, in all
material respects, effective internal control over financial reporting as of
September 30, 2005, based on criteria established in Internal Control -
Integrated Framework issued by the COSO. The Company's management is responsible
for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
Page 31
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - (CONTINUED)
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Boston, Massachusetts
December 14, 2005
Page 32
MRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
(in thousands) ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 120,301 $ 56,982
Marketable securities 5,130 36,152
Accounts receivable, trade, less allowance
for doubtful accounts of $1,445 at September 30, 2005
and $2,324 at September 30, 2004, respectively 40,362 36,636
Prepaid expenses and other current assets 4,715 5,072
Deferred income taxes 1,963 1,470
--------- ---------
Total current assets 172,471 136,312
--------- ---------
Marketable securities 7,743 15,273
Property and equipment, net 7,210 7,227
Goodwill 46,337 46,768
Intangible assets, net 3,118 5,541
Deferred income taxes 6,412 7,611
Other assets 3,079 3,989
--------- ---------
Total assets $ 246,370 $ 222,721
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 15,481 $ 12,871
Accrued compensation 12,805 10,142
Income taxes payable 1,467 5,473
Deferred revenue 31,718 29,373
Deferred lease obligation 363 292
--------- ---------
Total current liabilities 61,834 58,151
--------- ---------
Deferred lease obligation 2,013 2,210
Deferred revenue 577 900
Other long term liabilities 240 325
Commitments and contingencies (Note J)
Stockholders' equity
Preferred stock, $.01 par value; 1,000 authorized,
none issued and outstanding
Common stock, $.01 par value; 50,000 authorized;
25,738 and 24,983 issued and outstanding at
September 30, 2005 and 2004, respectively 257 250
Additional paid-in capital 128,180 118,903
Deferred compensation (2,420) (370)
Retained earnings 55,098 41,503
Accumulated other comprehensive income 591 849
--------- ---------
Total stockholders' equity 181,706 161,135
--------- ---------
Total liabilities and stockholders' equity $ 246,370 $ 222,721
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
Page 33
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
----------------------------------
2005 2004 2003
(in thousands, except per share data) ---------- --------- ---------
Revenues:
Software $ 65,115 $ 52,583 $ 49,904
Support and services 134,054 133,106 126,973
--------- --------- ---------
Total revenues 199,169 185,689 176,877
--------- --------- ---------
Cost of revenues:
Software 7,131 7,143 8,314
Support and services 65,708 60,144 58,618
--------- --------- ---------
Total cost of revenues 72,839 67,287 66,932
--------- --------- ---------
Gross profit 126,330 118,402 109,945
Operating expenses:
Sales and marketing 63,078 56,762 59,117
Product development 29,614 28,492 26,476
General and administrative 20,087 17,839 17,702
Amortization of other intangibles 347 666 908
--------- --------- ---------
Total operating expenses 113,126 103,759 104,203
--------- --------- ---------
Income from operations 13,204 14,643 5,742
Interest income 2,956 1,258 811
Other (expense)/income, net (355) 6 1,161
--------- --------- ---------
Income before income taxes 15,805 15,907 7,714
Provision for income taxes 2,210 5,567 2,844
--------- --------- ---------
Net income $ 13,595 $ 10,340 $ 4,870
========= ========= =========
Net income per share, basic $ 0.54 $ 0.42 $ 0.20
--------- --------- ---------
Net income per share, diluted $ 0.52 $ 0.41 $ 0.20
--------- --------- ---------
Shares used to calculate net income/(loss) per share
Basic 25,280 24,795 24,429
Diluted 25,901 25,273 24,647
The accompanying notes are an integral part of the
consolidated financial statements.
Page 34
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
------------------------------------
(in thousands) 2005 2004 2003
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 13,595 $ 10,340 $ 4,870
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 3,029 4,933 4,480
Amortization of other intangibles 2,422 3,070 4,284
Gain on sale of services operation -- (452) (407)
Disposal of equipment 243 -- 28
Amortization of (discount)/ premium on marketable
securities (276) 108 --
Stock-based compensation 1,290 214 171
Tax benefit on exercise of employee stock purchases 345 341 92
Deferred income taxes 1,439 2,137 309
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable (3,831) (6,932) 7,863
Prepaid expenses and other assets 1,268 773 207
Accounts payable, accrued expenses and other
liabilities 2,488 (3,275) (1,910)
Accrued compensation 2,767 1,585 (1,025)
Income taxes payable (4,298) 734 5,958
Deferred revenue 2,078 (411) 1,193
--------- --------- ---------
Net cash provided by operating activities 22,559 13,165 26,113
--------- --------- ---------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired -- (605) --
Proceeds from sale of services operation -- 1,300 --
Acquisitions of property and equipment and other
capital expenditures (3,231) (3,943) (2,661)
Purchases of marketable securities (340,939) (58,956) (40,406)
Sales of marketable securities 379,972 28,307 19,900
--------- --------- ---------
Net cash provided by/(used in) investing activities 35,802 (33,897) (23,167)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from exercise of employee stock options
and stock purchases 5,456 3,188 2,011
--------- --------- ---------
Net cash provided by financing activities 5,456 3,188 2,011
--------- --------- ---------
Effect of exchange rate changes on cash (498) 864 1,390
--------- --------- ---------
Net increase/(decrease) in cash and cash equivalents 63,319 (16,680) 6,347
Cash and cash equivalents, beginning of year 56,982 73,662 67,315
--------- --------- ---------
Cash and cash equivalents, end of year $ 120,301 $ 56,982 $ 73,662
========= ========= =========
Supplemental disclosure on noncash financing activities:
Restricted stock awards $ 452 $ 214 $ 171
Acceleration of stock option grants 838 -- --
The accompanying notes are an integral part of the
consolidated financial statements.
Page 35
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Accumulated
------------- Additional Other Total
Shares Par Paid-in Deferred Retained Comprehensive Stockholders' Comprehensive
(in thousands) Issued Value Capital Compensation Earnings Income/(loss) Equity Income/(loss)
- ------------------------------- ------------- ---------- ------------ -------- ------------- ------------- -------------
Balance at September 30, 2002 24,267 $ 243 $112,700 $ (176) $ 26,293 $(1,040) $138,020
Stock options exercised and
related tax benefit,
employee stock purchases 284 3 2,100 2,103
Deferred compensation,
related to common stock
grants 25 293 (293) --
Stock-based compensation 171 171
Net income 4,870 4,870 $ 4,870
Translation adjustment 1,445 1,445 1,445
Net unrealized loss on
marketable securities, net
of tax (97) (97) (97)
----------
Comprehensive income $ 6,218
----------
- -------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2003 24,576 $ 246 $115,093 $ (298) $ 31,163 $ 308 $146,512
Stock options exercised and
related tax benefit,
employee stock purchases 383 4 3,524 3,528
Deferred compensation,
related to common stock
grants 24 286 (286) --
Stock-based compensation 214 214
Net income 10,340 10,340 $ 10,340
Translation adjustment 624 624 624
Net unrealized loss on
marketable securities, net
of tax (83) (83) (83)
----------
Comprehensive income $ 10,881
----------
- -------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2004 24,983 $ 250 $118,903 $ (370) $ 41,503 $ 849 $161,135
Stock options exercised and
related tax benefit,
employee stock purchases 558 5 5,796 5,801
Deferred compensation,
related to common stock
grants 185 2 2,500 (2,502) --
Stock-based compensation 12 143 452 595
Stock option acceleration 838 838
Net income 13,595 13,595 $ 13,595
Translation adjustment (199) (199) (199)
Net unrealized loss on
marketable securities, net
of tax (59) (59) (59)
----------
Comprehensive income $ 13,337
----------
- -------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 2005 25,738 $ 257 $128,180 $(2,420) $ 55,098 $ 591 $181,706
- -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements.
Page 36
MRO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
NATURE OF BUSINESS
The Company develops, markets, sells and distributes asset and service
management solutions used by businesses, government agencies and other
organizations to manage their high-value capital assets, such as plants,
facilities, transportation, production equipment and IT assets. The Company's
integrated suite of applications optimizes performance, improves productivity
and service levels and enables asset-related sourcing and procurement across the
entire spectrum of our customers' strategic assets.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of MRO Software, Inc.
("MROI") and its majority-owned subsidiaries (collectively, the "Company"). All
intercompany accounts and transactions have been eliminated. Certain prior year
financial statement items have been reclassified to conform to the current year
presentation.
USE OF ESTIMATES
The Company's financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). These
accounting principles require management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. To
the extent there are material differences between these estimates and actual
results, our financial statements would be affected.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with original
maturities of three months or less to be cash equivalents. Our cash equivalents
consist mainly of money market mutual funds, which are stated at cost plus
accrued interest, which approximates fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist primarily of temporary cash investments, marketable
securities and accounts receivable. The majority of our cash is maintained with
several financial institutions in the United States and Europe. Deposits held
with these banks may exceed the amount of insurance provided on such deposits.
The counterparties to the agreements relating to marketable securities and
investment instruments consist of various United States governmental units and
financial institutions of high credit standing. Credit risk on accounts
receivable is minimized as a result of the diverse nature of the Company's
customer base. The Company performs ongoing credit evaluations of its customers'
financial condition and limits the amount of credit when deemed necessary.
COMPREHENSIVE INCOME
The Company's comprehensive income is comprised of net income, foreign currency
translation adjustments and unrealized gains and losses on available-for-sale
investments, net of tax. Comprehensive income is included in the stockholders'
equity section of the balance sheet.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts (stated at cost) of cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate fair value because
of their short-term nature.
FOREIGN CURRENCY
Assets and liabilities are translated at current exchange rates at the balance
sheet dates. The translation adjustments made on translation of the balance
sheet are recorded as a separate component of stockholders' equity. Revenues and
expenses are
Page 37
translated into U.S. dollars at average exchange rates. Foreign currency
transaction gains and losses are included in determining net income. The Company
recorded a foreign currency translation net loss of $93 thousand, a net loss of
$506 thousand, and a net gain of $532 thousand for fiscal 2005, 2004, and 2003,
respectively.
MARKETABLE SECURITIES
The Company's marketable securities are classified as available-for-sale and are
stated at their fair value. All marketable securities are held in the Company's
name and are held in custody with a major financial institution. The fair value
of marketable securities was determined based on quoted market prices.
Unrealized gains and losses on securities classified as available-for-sale are
reported as a separate component of stockholders' equity and are included in
other comprehensive income net of tax.
LONG-LIVED ASSETS
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of depreciation and amortization.
Depreciation is computed over the estimated useful lives of the assets as
follows:
Description Estimated Useful Life
- ----------- ---------------------
Computer equipment & software 3 years
Vehicles 3 years
Furniture and fixtures 5 years
Leasehold improvements are amortized on the straight-line method over the
shorter of their estimated useful life or the remaining term of the lease.
Maintenance and repairs are charged to expense as incurred. Upon retirement or
sale, the cost of the assets disposed of and the related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
included in the determination of net income.
GOODWILL
In accordance with the Statement of Financial Accounting Board ("SFAS") No. 141,
"Business Combinations," the Company accounts for acquisitions under the
purchase method of accounting. SFAS 142 requires that goodwill no longer be
amortized, but instead, be tested annually for impairment or whenever events
occur which may indicate possible impairment. The impairment analysis performed
at September 30, 2005 concluded that no impairment of goodwill occurred.
INTANGIBLE ASSETS OTHER THAN GOODWILL
Long-lived assets are amortized over their estimated useful lives. The Company
periodically reviews the long-lived assets, including intangible assets
resulting from acquisitions, for impairment whenever events or changes in
circumstances indicate that the carrying amount of these assets may exceed their
fair value. The Company estimates whether future cash flows expected to result
from the use of assets exceed the carrying amount of the assets. In the event
that the Company judges that an impairment exists, all or a portion of the asset
will be written off based on the amount by which the carrying amount exceeds the
fair value of the asset. In order to determine the fair value, the Company
obtains quoted market prices or utilizes valuation techniques, such as
discounted cash flows.
RESEARCH AND DEVELOPMENT
Costs related to research, design and development of products are charged to
research and development expenses as incurred. Software development costs are
capitalized beginning when a product's technological feasibility has been
established and ending when a product is available for general release to
customers. Generally, our products are released soon after technological
feasibility has been established. Costs eligible for capitalization under SFAS
No. 86 were not significant to our consolidated financial statements and all
software development costs have been expensed as incurred.
INCOME PER SHARE
Basic income (loss) per share is computed by dividing income or loss available
to common shareholders by the weighted average number of common shares
outstanding. Diluted income per share is computed by dividing income or loss
available to common
Page 38
shareholders by the weighted average of common shares outstanding plus dilutive
potential common shares. For purposes of this calculation, stock options are
considered dilutive potential common shares in periods in which they have a
dilutive effect. All potential dilutive common shares are excluded from the
computation of net loss per share because they are anti-dilutive.
INCOME TAXES
The Company accounts for income taxes under the asset and liability approach for
accounting and reporting for income taxes. The Company computes deferred income
taxes, net of valuation allowances, for the estimated future tax effects of
temporary differences between the financial statement and tax basis of assets
and liabilities. Changes in deferred tax assets and liabilities are recorded in
the provision for income taxes. A valuation allowance is recorded to reduce
deferred tax assets to the amount of future tax benefit that is more likely than
not to be realized. Any increase or decrease in a valuation allowance could have
a material impact on our income tax provision and net income in the period in
which the determination is made. The Company's policy with regard to IRS
examinations is to adjust any tax reserve balances as a result of any
examination at the earlier of the date of IRS Joint Committee approval if any,
or the expiration of the statute of limitations for the year examined.
The Company has not provided for U.S. income tax on earnings of its foreign
subsidiaries as it considers these earnings indefinately reinvested. At
September 30, 2005, the undistributed earnings of foreign subsidiaries were
$14.0 million.
REVENUE RECOGNITION
SOFTWARE PRODUCTS
The Company primarily licenses its software products under noncancellable
license agreements. Software license fee revenues are generally recognized upon
contract execution and product shipment, provided that collection of the
resulting receivable is deemed probable, the fees are fixed or determinable, and
no significant modification or customization of the software is required.
Our customers do not have any right of return except as stipulated under a
standard 90-day warranty that runs concurrent with post contract support (PCS).
The Company does not maintain any reserves with respect to this warranty based
on a history of performance of our software. On the rare occasion that a
customer insists on conditions of acceptance, the Company defers revenue until
the customer's acceptance is obtained and the condition has been satisfied.
Revenue from products sold through indirect channels (resellers) is recognized
upon shipment of the software, as long as evidence of an arrangement exists,
collectibility is probable and the fee is fixed or determinable and the
resellers obligation to pay us is not contingent upon resale of our product.
Revenue is recorded net of any commissions or discounts. Our resellers do not
have any right of return beyond the standard 90-day performance warranty that
runs concurrent with PCS.
SERVICES
Services revenues are comprised of consulting and training fees related to
installation of the Company's software solutions, PCS contracts for software
products, and subscription-based fees related to the Company's Online Commerce
Services (OCS) business. Consulting and training services are generally
recognized as the services are performed. PCS revenues are recognized ratably
over the term of the agreement, generally one year. Customers typically
subscribe to OCS on an annual basis and revenue is recorded as services revenue
and recognized on a straight-line basis over the applicable subscription period.
Often our software is sold together with implementation consulting services that
are sold separately under consulting contracts. We consider whether the services
revenue can be recognized separately from the software revenue by analyzing the
nature of the services (i.e., if the services are essential to the functionality
of the software), the level of risk, availability of services from other
vendors, acceptance criteria, milestone payments and fixed price terms. For
those contracts that contain fixed price arrangements, if we can reliably
estimate the hours
Page 39
required to complete the implementation services and if we have vendor-specific
objective evidence (VSOE) for the fair value of the hourly rates for
consultants, we recognize the software license fee separately from the services
revenues. The services revenues are recognized as they are delivered and the
related costs as they are incurred. If at any time we estimate that the costs to
complete a project will exceed expected revenues, we accrue for estimated losses
using cost estimates that are based on average fully burdened daily rates
applicable to the consulting organization delivering the services. For those
fixed price arrangements where we cannot reliably estimate the hours required to
complete the implementation services and/or we do not have VSOE for the fair
value of the hourly rates for consultants, the software license value is
recognized together with the consulting services over the period the consulting
services are provided.
MULTIPLE ELEMENT ARRANGEMENTS
The Company's multiple element arrangements could include the following three
elements: (a) software license, (b) PCS, and (c) consulting, training and other
services (services). Revenue is allocated to the elements of the arrangement
based upon the vendor-specific objective evidence (VSOE) of fair value of each
element. The Company uses the residual method to recognize its software license
revenue, because while we are able to determine the VSOE of fair value of PCS
and services, we are unable to determine the fair value of software licenses.
Under the residual method, the fair value of undelivered elements (PCS and/or
services) is deferred and recognized when the PCS and/or services are delivered.
The difference between the amount of the total arrangement and the amount
attributable to the elements for which fair value is determinable (PCS and/or
services) is recognized as software license revenue. VSOE is established for PCS
and is based on the price of PCS when sold separately. The PCS renewal rate is a
relatively consistent percentage of the stipulated software license fee, offered
to all customers. VSOE for consulting services is based on fixed hourly rates
set according to the skill level of the consultant required. VSOE for training
services is based on an established per-student fee structure.
We assess whether fees are fixed or determinable at the time of sale and
recognize revenue if all other revenue recognition requirements are met. Our
standard payment terms are net 30 days. Payment terms that extend beyond net 30
days from the contract date but are within twelve months are generally deemed to
be fixed or determinable based on our successful history of collecting on such
arrangements. For those customers who are deemed not to be credit-worthy,
revenue is deferred until payment is received.
Shipping and handling fees associated with our products are recorded as revenue
and the associated costs are recorded as cost of software sales.
ALLOWANCES FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
The Company maintains allowances for doubtful accounts, which reflect the
Company's estimate of the amounts owed by customers that customers will be
unable or otherwise fail to pay. The allowance for doubtful accounts is based on
the Company's management assessment of the collectibility of customer accounts
and factors such as historical experience, credit quality, age of the accounts
receivable balance, and current economic conditions. Company management performs
ongoing credit evaluations of its customers' financial condition and limits the
amount of credit when deemed necessary. The Company did not record a provision
for estimated sales returns. Based on our history of sales returns and an
analysis of credit memos, we determined that a provision was not needed.
DEFERRED REVENUE
Revenue on all software license transactions in which there are significant
outstanding obligations is deferred and recognized once such obligations are
fulfilled. Deferred revenue also includes maintenance contracts and OCS fees
billed in advance.
ADVERTISING EXPENSE
The Company recognizes advertising expense as incurred. Advertising expense was
approximately $3.5 million, $3.3 million, and $4.7 million for fiscal years
2005, 2004, and 2003, respectively.
Page 40
STOCK-BASED COMPENSATION
The Company grants stock options to its employees. Such grants are for a fixed
number of shares with an exercise price equal to the fair value of the shares at
the date of grant. SFAS No. 148 ("SFAS 148") amends SFAS No. 123 ("SFAS 123") to
provide alternative methods of transition to the SFAS 123 fair value method of
accounting for stock-based employee compensation. In addition, SFAS 148 requires
disclosure of the effects of an entity's accounting policy with respect to
stock-based employee compensation on reported net income (loss) and earnings per
share in annual and interim financial statements.
The Company accounts for stock-based employee compensation using the intrinsic
value method under the recognition and measurement principles of APB Opinion No.
25, "Accounting for Stock Issued to Employees" and related interpretations. The
fair value of the Company's stock options was estimated using the Black-Scholes
option-pricing model. This model was developed for use in estimated fair value
of traded options that have no vesting restrictions and are fully transferable.
This model requires the input of highly subjective assumptions including the
expected stock price volatility.
The fair value of the Company's stock options was estimated using the following
weighted-average assumptions:
YEAR ENDED SEPTEMBER 30,
STOCK OPTIONS 2005 2004 2003
------------- ---- ---- ----
Expected life (in years) 3.40 3.31 3.36
Volatility 60% 75% 90%
Risk-free interest rate 3.59% 2.18% 2.36%
Dividend yield 0% 0% 0%
YEAR ENDED SEPTEMBER 30,
EMPLOYEE STOCK PURCHASE PLAN 2005 2004 2003
- ---------------------------- ---- ---- ----
Expected life (in years) 1.00 1.00 1.00
Volatility 55% 55% 77%
Risk-free interest rate 1.94% 1.02% 1.58%
Dividend yield 0% 0% 0%
Under SFAS 123, the weighted-average estimated fair value of options granted
during fiscal 2005, 2004 and 2003 was $6.93, $6.70 and $7.36 per share,
respectively.
PROFORMA INFORMATION
The Company complies with the pro forma disclosure requirements of SFAS 123 as
amended by SFAS 148. The following table illustrates the effect on net income
and earnings per share on a pro forma basis as if the Company had applied the
fair value recognition provisions of SFAS 123 to stock-based employee
compensation:
2005 2004 2003
(in thousands, except per share amounts) --------- ---------- ---------
Net income $ 13,595 $ 10,340 $ 4,870
As reported
Add: Stock-based employee compensation expense
included in net income 1,290 214 171
Deduct: Stock-based employee compensation expense
determined under the fair value based method for
all awards, net of related tax effects $(10,036) $ (7,027) $(10,751)
Pro forma net income/(loss) $ 4,849 $ 3,527 $ (5,710)
Earnings/(loss) per share:
Basic - as reported $ 0.54 $ 0.42 $ 0.20
Basic - pro forma $ 0.19 $ 0.14 $ (0.23)
Diluted - as reported $ 0.52 $ 0.41 $ 0.20
Diluted - pro forma $ 0.19 $ 0.14 $ (0.23)
Compensation cost is reflected in net income for restricted stock awards to
non-employee members of the Board of Directors in fiscal years 2004 and 2005. In
fiscal year 2005, the Company recorded compensation cost in net income for
restricted stock awards to non-employee members of the Board of Directors and
certain executives of
Page 41
the Company. Compensation cost in fiscal year 2005 also included the charge
related to the Company's acceleration of employee stock options.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2005, the EITF reached a consensus on Issue No. 05-06, "Determining the
Amortization Period for Leasehold Improvements" (EITF 05-06). EITF 05-06
provides guidance for determining the amortization period used for leasehold
improvements acquired in a business combination or purchased after the inception
of a lease, collectively referred to as subsequently acquired leasehold
improvements). EITF 05-06 provides that the amortization period used for the
subsequently acquired leasehold improvements to be the lesser of (a) the
subsequently acquired leasehold improvements' useful lives, or (b) a period that
reflects renewals that are reasonably assured upon the acquisition or the
purchase. EITF 05-06 is effective on a prospective basis for subsequently
acquired leasehold improvements purchased or acquired in periods beginning after
the date of the FASB's ratification, which was on June 29, 2005. The Company
does not anticipate that EITF 05-06 will have a material impact on its
consolidated results of operations.
In May 2005, the Financial Accounting Standards Board ("FASB") issued SFAS 154,
Accounting Changes and Error Corrections ("FAS 154"). FAS 154 replaces APB No.
20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim
Financial Statements, and establishes retrospective application as the required
method for reporting a change in accounting principle. FAS 154 provides guidance
for determining whether retrospective application of a change in accounting
principle is impracticable and for reporting a change when retrospective
application is impracticable. The reporting of a correction of an error by
restating previously issued financial statements is also addressed. FAS 154 is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The Company does not anticipate that the
adoption of FAS 154 will have a material impact on its consolidated results of
operations.
In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations (FIN 47). FIN 47 provides guidance
relating to the identification and recognition of legal obligations to perform
an asset retirement activity. FIN 47 requires recognition of a liability for the
fair value of a conditional asset retirement obligation when incurred if the
liability's fair value can be reasonably estimated. We are required to adopt the
provisions of FIN 47 by September 30, 2006. We do not expect FIN 47 to have a
material impact on our results of operations, financial position or cash flows.
In December 2004, the FASB issued a revised Statement of Financial Accounting
Standard (SFAS) No. 123, Share-Based Payment (FAS 123(R)). FAS 123(R) requires
public entities to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the
award and recognize the cost over the period during which an employee is
required to provide service in exchange for the award. In addition, in March
2005, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 107, Share-Based Payment (SAB 107). SAB 107 provides supplemental
implementation guidance on FAS 123(R), including guidance on valuation methods,
(including assumptions such as expected volatility and expected term),
classification of compensation expense, inventory capitalization of share-based
compensation cost, income tax effects, disclosures in Management's Discussion
and Analysis, and several other issues. FAS 123(R) is effective for the first
interim reporting period of the first fiscal year beginning
Page 42
after June 12, 2005. The new standard will require the Company to expense stock
options beginning in the first quarter of fiscal 2006. The Company accelerated
all outstanding unvested options as of September 30, 2005. We will not have any
significant stock option related compensation charges until additional options
are granted.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets
(FAS 153) which eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception from fair value measurement for exchanges of nonmonetary
assets that do not have commercial substance. We are required to adopt FAS 153
for nonmonetary asset exchanges occurring in the first quarter of fiscal year
2006 and its adoption is not expected to have a significant impact on our
results of operations, financial condition or cash flows.
The American Jobs Creation Act
In October 2004, the American Jobs Creation Act of 2004 ("AJCA") was passed. The
AJCA provides a deduction for income from qualified domestic production
activities which will be phased in from 2005 through 2010. The AJCA also
provides for a two-year phase-out of the existing extra-territorial income
exclusion for foreign sales. The Company continues to evaluate the guidance
provided under the qualified domestic production activity and anticipates that
it will qualify for the incentive.
The AJCA also created a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85% dividends received
deduction for certain dividends from controlled foreign corporations. The
deduction is subject to a number of limitations. The Company is currently
evaluating the AJCA and are not yet in a position to decide whether, or to what
extent, it may repatriate foreign earnings to the U.S. and will make a final
determination by the end of fiscal 2006. The amount of income tax we would
incur should we repatriate some level of earnings cannot be reasonably
estimated at this time.
In December 2004, the FASB issued two Staff Positions, "FSP FAS 109-1" and
"FSP FAS 109-2", in response to the AJCA. Under FSP FAS 109-1, the FASB decided
that the deduction for qualified domestic production activities should be
accounted for as a special deduction under FAS 109. Under FSP FAS 109-2, the
FASB addressed the appropriate point at which a company should reflect in its
financial statements the effects of the one-time tax benefit upon the
repatriation of foreign earnings. The adoptions of FSP FAS 109-1 and FSP FAS
109-2 did not have a material impact on our financial position or results of
operations.
B. INCOME TAXES:
The components of income before income taxes and the provision/(benefit) for
income taxes consist of the following:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 2005 2004 2003
---- ---- ----
Income before income taxes:
United States $ 10,684 $ 11,707 $ 4,867
Foreign 5,121 4,200 2,847
-------- -------- --------
$ 15,805 $ 15,907 $ 7,714
======== ======== ========
The (benefit)/provision for income taxes consists of:
Current taxes:
Federal (1,491) 1,748 547
State 217 195 196
Foreign 1,507 1,072 1,298
Foreign withholding taxes 488 357 591
-------- -------- --------
$ 721 $ 3,372 $ 2,632
======== ======== ========
Deferred taxes:
Federal 1,415 1,567 561
State 443 359 20
Foreign (369) 269 (369)
-------- -------- --------
1,489 2,195 212
-------- -------- --------
Total $ 2,210 $ 5,567 $ 2,844
======== ======== ========
Page 43
The reconciliation of the Company's income tax provision to the statutory
federal tax rate is as follows:
YEAR ENDED SEPTEMBER 30,
2005 2004 2003
---- ---- ----
Statutory federal tax rate 35.0% 35.0% 35.0%
Extra-territorial income exclusion (1.1) (1.1) (.70)
State taxes, net of federal tax benefit 2.7 2.6 1.4
R&D credit (2.7) (2.9) (5.4)
Exempt interest (0.6) (0.5) (0.1)
Previously unbenefitted losses -- (1.2) (6.6)
Meals and entertainment 0.8 0.6 1.5
Foreign taxes 0.4 2.5 7.8
Stock based compensation-acceleration of
stock options 1.0 -- --
Goodwill and intangibles amortization -- -- 4.5
Tax reserve adjustment (21.5) -- --
Other -- -- (0.5)
----- ---- ----
Effective tax rate 14.0% 35.0% 36.9%
===== ==== ====
The components of the deferred tax assets and liabilities are as follows:
AS OF SEPTEMBER 30,
2005 2004
(in thousands) ---- ----
Deferred tax assets:
Deferred revenue $ 195 $ 289
Deferred rent 831 620
Allowance for doubtful accounts 174 491
Accrued vacation 377 322
Depreciation 707 510
Package design 52 58
Amortized intangibles 2,743 2,586
Other reserves 360 368
Goodwill 1,499 3,169
Translation loss 540 538
Net operating loss carryforward 512 868
Research and development credit 594 509
Stock based compensation-
acceleration of stock options 150 --
Valuation allowance -- (868)
------ ------
$8,734 $9,460
------ ------
Deferred tax liabilities:
Amortized software $ 323 $ 329
Other 36 50
------ ------
$ 359 $ 379
------ ------
Net deferred taxes $8,375 $9,081
====== ======
At September 30, 2005, the Company had total federal domestic net operating loss
carryforwards of approximately $1.3 million attributable to the acquisition of
Applied Image Technology, Inc. ("AIT"). In accordance with the provisions of
Internal Revenue Code Section 382, the Company's utilization of AIT's net
operating loss carryforward is estimated to be limited to approximately $600
thousand per year. The federal domestic net operating loss carryforwards will
generally expire in 2018 and 2019. At September 30, 2005, the Company had state
apportioned net operating loss carryforwards of approximately $1.4 million
expiring in various years from 2006 through 2022.
The Company continually assesses the realizability of its deferred tax asset.
The deferred tax asset may be reduced by a valuation allowance if, based on the
weight of available evidence, it is more likely than not that some portion or
all of the recorded deferred tax assets will not be realized in future periods.
All available evidence, both positive and negative, is considered in the
determination of recording a valuation allowance. The Company believes future
taxable income will be sufficient to realize the deferred tax benefit of the net
deferred tax assets. In the event that our financial projections change and it
becomes
Page 44
more likely than not that we cannot realize the net deferred tax assets, an
adjustment to the net deferred tax assets will be made and will result in a
charge to income in the period such a determination is made. The net deferred
tax asset amount as of September 30, 2005 is $8.4 million.
In fiscal 2005, the Company reversed valuation allowances previously maintained
with respect to net operating losses acquired from the acquisition of Applied
Image Technology, Inc. and various state net operating loss carryforwards . A
portion ($431 thousand) of the reversal of the valuation allowance related to
the net operating losses acquired from Applied Image Technology, Inc. resulted
in a reduction in the Company's goodwill balance. The reversal of the valuation
allowance was based on the assessment that it is more likely than not that the
loss carryforwards will be utilized by the Company due to favorable projections
of future income.
In accordance with its policy on tax examinations, the Company released a $3.4
million tax reserve during the fourth quarter of fiscal 2005 upon notification
of approval from the IRS Joint Committee for a tax audit.
C. ACQUISITIONS
On July 9, 2004, the Company completed the acquisition of Raptor ASA
Corporation, a provider of software solutions for the aviation industry. The
total purchase price of the acquisition was $1.1 million. The amount of $600
thousand was paid at closing. The amount of $200 thousand was payable within
thirty days after the first anniversary of the closing and $300 thousand was
payable within thirty days after the second anniversary of the closing. Both of
these payments were contingent upon the completion of knowledge transfer
milestones, however, neither payment was contingent on any employment of the
selling principals with the Company. In July 2005, the Company paid the first
contingent payment in the amount of $200 thousand pursuant to the terms of the
agreement. The Company allocated the purchase price as such: $910 thousand to
acquired technology, $560 thousand to goodwill and $370 thousand to deferred tax
liability. The deferred tax liability represents the cumulative tax effect of
the book to tax difference in basis for the acquired technology. The acquired
technology will be amortized over five years.
D. SALE OF ASSETS
On January 17, 2003, the Company sold its industrial data normalization services
operations to International Materials Solutions, Inc. (the "Buyer"). The sale
included software and technology used in such operations, contracts with
customers, suppliers and vendors, and trademarks associated with such
operations. Additionally, the workforce became employed by the Buyer. The
Company retained comprehensive, non-exclusive rights to the software and
technology used in the business, which has also been embedded in the Company's
MAXIMO and OCS offerings. As consideration for the assets, the Buyer assumed all
liabilities arising in connection with the assets and the associated business
operations from and after January 1, 2003 and delivered two promissory notes in
the face amount of $1 million each, together with a stock purchase warrant
representing the right to purchase five (5%) percent of the Buyer's common
stock. One promissory note was a term note payable over a period of three years
commencing July 1, 2003, and the other promissory note was a balloon note
payable in full on June 30, 2006. The gain recorded on the sale of these assets
was $407 thousand and was included in other income in fiscal 2003. For purposes
of calculating the gain on the sale, the $1 million promissory balloon note
receivable was not valued due to uncertainty of collection and no value was
attributed to the stock purchase warrants due to the limited operating history
of the buyer.
On July 29, 2004, the Company and the Buyer entered into a termination agreement
where the Company consented to the sale of the Buyer's business to an unrelated
party and settled the outstanding obligation between the Company and the Buyer.
In exchange for $1.3 million, received September 2004, the Company released the
Buyer from all obligations due pursuant to the original January 17, 2003 sale.
The gain recorded as a result of the termination agreement was $452 thousand and
was included in other income in fiscal 2004. The gain represents the difference
between the $1.3 million received by the Company and the carrying amount of the
term note.
Page 45
E. NET INCOME PER SHARE:
Basic and diluted income per share are calculated as follows:
YEAR ENDED SEPTEMBER 30,
(in thousands, except per share amounts) 2005 2004 2003
---- ---- ----
Net income $13,595 $10,340 $ 4,870
Weighted average common shares outstanding - basic 25,280 24,795 24,429
Effect of dilutive securities (primarily stock options) 621 478 218
------- ------- -------
Weighted average common shares outstanding - diluted 25,901 25,273 24,647
======= ======= =======
Net income per share - basic $ 0.54 $ 0.42 $ 0.20
Net income per share - diluted $ 0.52 $ 0.41 $ 0.20
Options to purchase shares of the Company's common stock of 1,493,000, 1,773,000
and 2,843,000 for fiscal 2005, 2004 and 2003, respectively, were outstanding but
were not included in the computation 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.
F. MARKETABLE SECURITIES:
The Company classifies its marketable securities as "available for sale" and
carries them at aggregate fair value. Unrealized gains and losses are included
as a component of stockholders' equity, net of tax effect. Realized gains and
losses are determined based on the specific identified cost of the securities.
Dividend and interest income, including amortization of the premium and discount
arising at acquisition, are included in other income. The pre-tax unrealized
holding gains and (losses) for the year ended September 30, 2005 were $8
thousand and ($382) thousand, respectively.
The following table summarizes the Company's investments:
GROSS GROSS
AS OF SEPTEMBER 30, 2005 AMORTIZED UNREALIZED UNREALIZED FAIR
(in thousands) COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
U.S. government securities $10,017 -- $(277) $ 9,740
Corporate bonds 3,038 -- (102) 2,936
Certificates of deposit 190 -- (3) 187
Corporate securities 2 8 10
------- -- ----- -------
Total $13,247 $8 $(382) $12,873
------- -- ----- -------
Reported As:
Marketable securities-Current 5,130
Marketable securities 7,743
-------
Total $12,873
=======
GROSS GROSS
AS OF SEPTEMBER 30, 2004 AMORTIZED UNREALIZED UNREALIZED FAIR
(in thousands) COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
U.S. Government securities $12,288 $(219) $12,069
Corporate bonds 4,107 $10 (62) 4,055
Tax exempt municipal securities 33,925 33,925
Certificates of deposit 1,380 (5) 1,375
Corporate securities 1 1
------- --- ----- -------
Total $51,701 $10 $(286) $51,425
------- --- ----- -------
Reported As:
Marketable securities-Current 36,152
Marketable securities 15,273
-------
Total $51,425
=======
Page 46
The following table provides a breakdown of the investments with unrealized
losses at September 30, 2005:
LESS 12 MONTHS
THAN 12 MONTHS OR GREATER TOTAL
GROSS GROSS GROSS
FAIR UNREALIZED FAIR UNREALIZED FAIR UNREALIZED
(in thousands) VALUE LOSSES VALUE LOSSES VALUE LOSSES
------ ---------- ------ ---------- ------- ----------
U.S. government securities $3,930 $(73) $5,810 $(204) $ 9,740 $(277)
Corporate bonds 1,002 (6) 1,934 (96) 2,936 (102)
Certificates of deposit 187 (3) -- -- 187 (3)
------ ---- ------ ----- ------- -----
Total $5,119 $(82) $7,744 $(300) $12,863 $(382)
------ ---- ------ ----- ------- -----
The gross unrealized losses related to the U.S. government securities and the
certificates of deposit are due to changes in interest rates. The gross
unrealized losses related to the corporate bonds are due to changes in market
prices. The Company has the intent and the ability to hold these investments for
a period of time sufficient to allow for anticipated recovery in market value.
Substantially all of the Company's investments are rated investment grade or
better. As a result of these factors, the Company has determined that the gross
unrealized losses on its investment securities at September 30, 2005 are
temporary in nature.
The following table summarizes the maturities of the Company's investments at
September 30, 2005:
AMORTIZED FAIR
(in thousands) COST VALUE
--------- -------
Less than one year $ 5,203 $ 5,130
Due in 1-2 years 8,044 7,743
------- -------
Total $13,247 $12,873
======= =======
G. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost and consist of the following as of
September 30, 2005 and 2004, respectively:
(in thousands) 2005 2004
---- ----
Computer equipment $ 4,990 $ 7,271
Purchased and internal use software 16,920 16,261
Vehicles 16 16
Furniture and fixtures 5,418 6,178
Leasehold improvements 6,943 6,229
------- --------
34,287 35,955
Less accumulated depreciation and amortization (27,077) (28,728)
------- --------
Total $ 7,210 $ 7,227
======= ========
Total depreciation and amortization expense was $3.0 million, $4.9 million, and
$4.5 million for fiscal 2005, 2004 and 2003, respectively. Included in
depreciation and amortization expense is amortization expense for purchased and
internal use software of $1.1 million, $2.9 million, and $2.6 million for fiscal
2005, 2004 and 2003, respectively.
H. GOODWILL AND OTHER INTANGIBLE ASSETS:
In accordance with SFAS No. 141, "Business Combinations," the Company accounts
for acquisitions under the purchase method of accounting. Goodwill is tested
annually for impairment. In testing for potential impairment, all remaining
goodwill has been assigned to one reporting unit and reviewed for impairment at
the entity level. The
Page 47
impairment analysis performed at September 30, 2005 concluded that no impairment
of goodwill occurred.
Changes in the amount of goodwill for the fiscal years ended September 30, 2005
and 2004, respectively, are as follows:
(in thousands)
Balance as of September 30, 2003 $46,210
Goodwill acquired during the period (see Footnote C) 558
-------
Balance as of September 30, 2004 $46,768
=======
Release of Applied Image Technology, Inc. valuation allowance (431)
-------
Balance as of September 30, 2005 $46,337
=======
Intangible assets as of September 30, 2005 and 2004, respectively, consist of
the following:
(in thousands) 09/30/05 09/30/04
-------- --------
Goodwill, net $46,337 $ 46,768
Acquired technology 16,654 16,654
Accumulated amortization (13,748) (11,673)
------- --------
Sub-total acquired technology 2,906 4,981
------- --------
Other intangibles 1,911 2,711
Accumulated amortization (1,699) (2,151)
------- --------
Sub-total other intangibles 212 560
------- --------
Total intangible assets, net $49,455 $ 52,309
======= ========
Other intangibles consist of customer contracts, customer lists and non-compete
agreements.
Amortization expense of intangible assets was $2.4 million, $3.1 million and
$4.3 million for fiscal 2005, 2004 and 2003, respectively.
As of September 30, 2005, remaining amortization expense on existing intangibles
for the next five years is as follows:
(in thousands)
2006 $1,564
2007 659
2008 659
2009 236
2010 -
------
$3,118
------
I. ACCRUED COMPENSATION:
A summary of accrued compensation as of September 30, 2005 and 2004,
respectively, consists of the following:
2005 2004
(in thousands) ---- ----
Accrued compensation and 401(k) contribution $ 3,221 $ 3,195
Accrued sales commissions 6,878 4,582
Accrued vacation pay 2,706 2,365
------- -------
$12,805 $10,142
======= =======
Page 48
J. COMMITMENTS AND CONTINGENCIES:
The Company leases its office facilities under operating lease agreements, which
expire at various dates through June 30, 2019. The Company pays all insurance,
utilities, and pro rated portions of any increase in certain operating expenses
and real estate taxes. The aggregated rent expense (net of sublease income)
under these leases was $6.5 million, $6.9 million, and $6.2 million for fiscal
2005, 2004 and 2003, respectively.
The operating leases provide for minimum aggregate future rentals as of
September 30, 2005 as follows:
(in thousands)
2006 $ 4,746
2007 4,068
2008 3,537
2009 3,435
2010 and thereafter 17,816
-------
Total $33,602
=======
Less: expected sublease income $(2,249)
-------
Net future rentals $31,353
=======
The Company is not a party to any legal proceedings the outcome of which, in the
opinion of management, would have a material adverse effect on the Company's
results of operations or financial condition. The Company has other long-term
non-cancelable commitments with vendors, primarily equipment leases and
contracts for hosting our financial applications, totaling $7.6 million as of
September 30, 2005.
K. EMPLOYEE BENEFITS:
CASH OR DEFERRED PLAN
The MRO Software, Inc. Cash or Deferred Plan (the "Plan") is a defined
contribution plan available to substantially all of MROI's domestic employees.
The Plan was established in 1988 under Section 401(a) of the Internal Revenue
Code. Under the Plan, employees may make voluntary contributions based on a
percentage of their pretax earnings.
Effective January 1, 1993, the Plan was amended to provide for both a guaranteed
and a discretionary contribution made by MROI. Amounts charged to expense for
this Plan in fiscal 2005, 2004, and 2003 were $635 thousand, $563 thousand, and
$359 thousand, respectively. The Company also makes contributions to pension
plans for our international subsidiaries. Our practice is to fund the various
plans in amounts at least sufficient to meet the minimum requirements of local
laws and regulations or make a contribution equal to the contribution made to
U.S. domestic employees. Amounts charged to expense for our international
employees for fiscal 2005, 2004, and 2003 were $1.3 million, $1.2 million, and
$998 thousand, respectively.
1994 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
On March 10, 1994, the Board of Directors of the Company adopted the 1994
Incentive and Nonqualified Stock Option Plan (the "1994 Option Plan") that
provided for the grant of nonqualified and incentive stock options to directors
and employees. On January 25, 1996, the Board of Directors of the Company voted
to increase the number of shares of Common Stock that may be issued from
1,800,000 to 3,600,000.
The exercise price of incentive options must be at least equal to the fair
market value on the date of grant. The exercise price of nonqualified options
must not be less than 85% of the fair market value on the date of grant. Options
generally vest in equal installments over four years.
On March 4, 1999, the Board of Directors of the Company elected to terminate the
1994 Option Plan upon the adoption of the 1999 Equity Incentive Plan (the "1999
Plan"). The stockholders of the Company, on March 24, 1999, approved amendments
to the vesting and transferability of options granted to outside directors under
the 1994 Option Plan.
Page 49
AMENDED AND RESTATED 1999 EQUITY INCENTIVE PLAN
On March 24, 1999, the Company's stockholders and the Board of Directors of the
Company adopted the 1999 Equity Incentive Plan (the "1999 Plan") that provided
for the grant of incentive stock options, non statutory stock options, stock
bonuses, rights to purchase restricted stock, stock appreciation rights and
other awards based upon the Company's common stock. Up to 1,850,000 shares of
Common Stock (subject to adjustment upon certain changes in the capitalization
of the Company) were originally authorized for issuance pursuant to grants
awarded under the 1999 Plan. The 1999 Plan was amended and restated on April 25,
2000 to adjust the amount of options granted to non-employee directors of the
Company.
On November 15, 2000, the Board of Directors of the Company voted to increase
the number of shares of Common Stock that may be issued under the 1999 Plan from
1,850,000 to 4,050,000. This increase was approved by the Company's stockholders
on March 6, 2001.
On January 16, 2002 the Board of Directors voted to change the manner in which
stock awards are granted to non-employee directors. The provision for automatic
grants of initial options and additional options was eliminated, and
Non-employee directors were made eligible to receive stock awards in the same
manner and to the same degree as all other eligible persons, as determined by
the Board of Directors on a discretionary basis. These changes were approved by
the Company's stockholders on March 6, 2002.
On January 23, 2004, the Board of Directors of the Company voted to increase the
number of shares of Common Stock that may be issued under the 1999 Plan from
4,050,000 to 5,250,000. This increase was approved by the Company's stockholders
on March 9, 2004.
The exercise price of incentive options must be at least equal to the fair
market value on the date of grant. The exercise price of nonqualified options
must not be less than 85% of the fair market value on the date of grant. Options
granted prior to March 2001 generally vest over four years in four equal annual
installments. Options granted from and after March 2001 generally vest over four
years, with 25% vesting one year from the date of grant and 75% vesting in equal
monthly installments over the subsequent three years. Awards of options under
the 1999 Plan may be made until March 24, 2009. No incentive options may extend
for more than ten years from the date of grant.
On January 14, 2005, the Board of Directors of the Company voted to increase the
number of shares of common stock that may be issued under the 1999 Plan from
5,250,000 to 6,450,000. This increase was approved by the Company's stockholders
on March 8, 2005.
ACCELERATION OF THE VESTING OF EMPLOYEE STOCK OPTIONS
On September 30, 2005, the Compensation Committee of the Board of Directors
approved accelerating the vesting of all unvested options for all employees,
including executive officers, but excluding non-employee directors. Executive
officers have agreed to not exercise their accelerated options prior to the
original vesting period. Upon termination of employment, however, the executive
officers will be able to exercise their options. The vesting of approximately
1,400,000 shares of stock options were accelerated. The weighted average price
of the options that were accelerated was $12.34. The total pretax charge related
to the option acceleration was $838 thousand.
Page 50
Stock option activity is summarized as follows:
WEIGHTED
NO. OF SHARES AVERAGE PRICE
------------- -------------
Outstanding shares at September 30, 2002 3,576,099 $19.99
2003
Granted 1,073,500 $11.89
Canceled (261,528) $19.74
Exercised (84,794) $8.29
---------
Outstanding at September 30, 2003 4,303,277 $18.22
Options exercisable at September 30, 2003 2,610,088 $20.06
2004
Granted 1,011,562 $11.93
Canceled (65,384) $20.34
Exercised (191,967) $ 7.95
---------
Outstanding at September 30, 2004 5,057,488 $17.32
Options exercisable at September 30, 2004 3,362,666 $20.12
2005
Granted 559,248 $12.99
Canceled (234,199) $22.05
Exercised (353,461) $10.03
---------
Outstanding at September 30, 2005 5,029,076 $17.14
Options exercisable at September 30, 2005 5,020,808 $17.12
The following table summarizes information about stock options outstanding at
September 30, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------- --------------------------
NUMBER WEIGHTED-AVG NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVG EXERCISABLE WEIGHTED-AVG
EXERCISE AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
PRICES 09/30/05 LIFE (YEARS) PRICE 09/30/05 PRICE
- ------------ ----------- ------------ ------------ ----------- ------------
$ 7.53-11.25 1,069,700 4.4 $ 9.01 1,069,700 $ 9.01
$11.30-16.26 2,665,251 7.6 $12.39 2,656,983 $12.38
$17.00-25.47 630,625 5.0 $23.65 630,625 $23.65
$28.40-42.50 509,000 4.2 $37.79 509,000 $37.79
$54.50-59.13 143,000 4.3 $58.87 143,000 $58.87
$85.00-85.00 11,500 4.4 $85.00 11,500 $85.00
--------- ---------
5,029,076 5,020,808
--------- ---------
EMPLOYEE STOCK PURCHASE PLAN
On January 16, 2002, the Board of Directors adopted the 2002 Employee Stock
Purchase Plan (the "2002 ESPP") effective June 1, 2002, authorizing the issuance
of up to 750,000 shares of the Company's Common Stock. Generally, the 2002 ESPP
provides that eligible employees may purchase Common Stock of the Company
through payroll deductions on a periodic basis, with the particular terms of the
offering established by the Compensation Committee from time to time. As
originally administered by the Compensation Committee, the offering periods were
set at six months each, and the purchase price was set at 85% of the fair market
value of the
Page 51
Company's Common Stock based on the lowest price on (a) the semi-annual offering
commencement date, (b) the semi-annual offering termination date, or (c) the
first of each month in a semi-annual offering period. Effective with the
offering that commenced on June 1, 2005, the Compensation Committee changed the
share purchase price to be 85% of the fair market value of the Company's Common
Stock on the termination date of the six month offerings.
During fiscal year ended September 30, 2005, employees purchased 116,044 shares
at a price of $8.19 and 87,915 shares at a price of $10.87 for the offering
periods ended November 30, 2004 and May 31, 2005, respectively. Total shares
purchased in 2004 and 2003 were 190,451 and 199,633, respectively.
L. STOCKHOLDERS' EQUITY:
DEFERRED COMPENSATION
The value of restricted stock granted to employees and non-employee directors
that is subject to vesting, is recorded as deferred stock-based compensation in
an amount equal to the difference between the purchase price and the fair market
value of the stock at the date of grant. Deferred stock-based compensation is
amortized on a straight-line basis over the vesting term of these options and
stock awards.
PREFERRED STOCK
On March 11, 1994, the issuance of up to 1,000,000 shares of preferred stock,
$0.01 par value was authorized by the Stockholders of the Company. The Board of
Directors has the authority to issue the preferred stock in one or more series
and to fix rights, preferences, privileges and restrictions, including
dividends, and the number of shares constituting any series and the designation
of such series.
In January 1998, the Board of Directors of the Company adopted a stockholder
rights plan by declaring a dividend distribution of one preferred stock purchase
right (one "Right") on each share of the Company's Common Stock outstanding on
January 27, 1998 or, in certain circumstances, issued thereafter. Initially, the
Rights are not exercisable, are not represented by separate Right certificates
and do not trade separately from the Company's Common Stock. Ten days after a
tender offer or acquisition of 15% or more of the Company's common stock, each
right may be exercised for $140 ("Exercise Price") to purchase one one
thousandth of one share of the Company's Series A Junior Participating Preferred
Stock. Each one one-thousandth of a share of Series A Junior Participating
Preferred Stock will generally be afforded economic rights similar to one share
of the Company's common stock. In addition after such rights are triggered, each
Right entitles the holder to purchase common stock of the Company with a fair
value of twice the Exercise Price or, in certain circumstances, securities of
the acquiring company for the Exercise price. Each Right expires in January 2008
and, during specified periods, the Company may redeem or exchange each Right for
$.01 or one share of common stock. The Rights Agreement has been filed by the
Company with the Securities and Exchange Commission as an exhibit to a
Registration Statement on Form 8-A dated February 2, 1998.
COMMON STOCK
On June 18, 2001, each non-employee Director received an outright grant of 6,250
shares of restricted stock vesting on a quarterly basis over three years in
twelve equal installments vesting on the 15th day of the second month of each
quarter, subject to acceleration under certain circumstances. The shares were
recorded at fair market value ($12.65 per share) on the date of issuance as
deferred compensation and the value of the vested shares was recorded as general
and administrative expense over the vesting period.
On January 27, 2003, each non-employee director received an outright grant of
6,250 shares of restricted stock vesting on a quarterly basis over three years
in twelve equal installments vesting on the 15th day of the second month of each
quarter, subject to acceleration under certain circumstances. The shares were
recorded at
Page 52
fair market value ($11.73 per share) on the date of issuance as deferred
compensation and the value of the vested shares is being recorded as general and
administrative expense over the vesting period.
On March 15, 2004, each non-employee director and the Chairman of the Board
received an outright grant of 4,800 shares of restricted stock vesting on a
quarterly basis over three years in twelve equal installments on the 15th day of
the second month of each quarter, subject to acceleration under certain
circumstances. The shares were recorded at fair market value ($11.89 per share)
on the date of issuance as deferred compensation and the value of the vested
shares is being recorded as general and administrative expense over the vesting
period.
On May 10, 2005, each non-employee director received an outright grant of 6,250
shares of restricted stock vesting on a quarterly basis over three years in
twelve equal installments on the 15th day of the second month of each quarter,
subject to acceleration under circumstances. The shares were recorded at fair
market value ($13.53 per share) on the date of issuance as deferred
compensation and the value of the vested shares is being recorded as general and
administrative expense over the vesting period.
On May 10, 2005, certain executives of the Company received restricted stock in
varying amounts. The restricted stock vests twenty-five percent on May 10, 2006
and in 36 equal monthly installments thereafter subject to the terms of the 1999
Plan. The shares were recorded at fair market value ($13.53 per share) on the
date of issuance as deferred compensation and the value of the vested shares
is being recorded as general and administrative expense over the vesting period.
M. GUARANTOR ARRANGEMENTS
We warrant that our software products will perform substantially in accordance
with the product specifications as contained in certain associated
documentation, which is provided with the products, for a period of ninety days
from initial delivery of the products to the customer. Our sole obligation under
this warranty is to use reasonable efforts to correct a verified problem that is
brought to our attention during the warranty period, or if we are unable to
provide a correction, we are obligated to accept the return of the product and
refund the license fee paid. We warrant that our professional services will be
provided in accordance with good professional practice, and that any software
developed by our services organization will perform substantially in accordance
with its approved specifications for a period of thirty days from initial
delivery of the services to the customer. Our sole obligation under this
warranty is to use reasonable efforts to correct a verified problem that is
brought to our attention during the warranty period, or if we are unable to
provide a correction, we are obligated to accept the return of the deliverables
and refund the fee paid for the services. If necessary, we would provide for the
estimated cost of product and services warranties based on specific warranty
claims and claim history. However, we have never incurred significant expense
under our product or services warranties, our liability for breach of warranty
is limited to the amount of the license or services fees actually paid, and we
maintain insurance covering such claims in an amount sufficient to cover a
refund of the license or services fees paid by any particular customer during
the last 12 months. As a result, we believe the estimated fair value of these
warranty obligations is minimal. Accordingly, we have no liabilities recorded
for these warranty obligations as of September 30, 2005.
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
Page 53
covers such indemnification obligations, and the amount of coverage that we
maintain is sufficient to cover a refund of the license and services fees
received from any particular customer during the last 12 months. Historically,
the Company has not made any material payments pursuant to any such indemnity
obligations. Accordingly, we have no liabilities recorded for any such indemnity
obligations as of September 30, 2005.
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
grandfathered under the provisions of FIN No. 45 as they were in effect prior to
December 31, 2002. Accordingly, we have no liabilities recorded for the
assumption of any such liabilities as of September 30, 2005.
N. SEGMENT INFORMATION, GEOGRAPHIC DATA AND MAJOR CUSTOMERS:
The Company reports revenues and income under one reportable industry segment.
The Company's management assesses operating results on an aggregate basis to
make decisions about the allocation of resources.
The Company manages its business in the following geographic areas: United
States, Other Americas (Canada and Latin America), Europe/Middle East and
Africa, and Asia Pacific.
A summary of the Company's revenues by geographical area is as follows:
YEAR ENDED SEPTEMBER 30,
(IN THOUSANDS) 2005 2004 2003
- -------------- ---- ---- ----
REVENUES
United States $ 117,146 $ 105,815 $ 104,735
Other Americas 9,929 9,907 10,654
Intercompany revenues 11,059 13,912 11,536
--------- --------- ---------
Subtotal $ 138,134 $ 129,634 $ 126,925
--------- --------- ---------
Europe/Middle East and Africa 56,298 57,863 48,148
Asia/Pacific 15,796 12,104 13,340
Intercompany revenues (11,059) (13,912) (11,536)
--------- --------- ---------
TOTAL REVENUES $ 199,169 $ 185,689 $ 176,877
========= ========= =========
INCOME/(LOSS) FROM OPERATIONS:
United States $ 2,415 $ 385 $ (5,140)
Other Americas (3,855) (3,085) (2,761)
Europe/Middle East and Africa 12,869 17,394 14,846
Asia/Pacific 1,775 (51) (1,203)
--------- --------- ---------
$ 13,204 $ 14,643 $ 5,742
========= ========= =========
AS OF SEPTEMBER 30,
(in thousands) 2005 2004
---- ----
LONG-LIVED ASSETS:
United States $53,297 $57,764
Other Americas 1,611 1,276
Europe/Middle East and Africa 3,647 3,885
Asia/Pacific 1,189 600
------- -------
$59,744 $63,525
======= =======
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
Page 54
international subsidiaries. Intercompany revenues are eliminated from
consolidated revenues.
No customer accounted for more than 10% of revenue in fiscal 2005, 2004 or 2003.
O. SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest and taxes was as follows:
YEAR ENDED SEPTEMBER 30,
(in thousands) 2005 2004 2003
---- ---- ----
Interest, net $ 34 $ 74 $ 39
Income taxes $3,889 $3,988 $1,550
Acquisitions of businesses were as follows:
YEAR ENDED SEPTEMBER 30,
(in thousands) 2005 2004 2003
---- ---- ----
Fair value of assets acquired $ -- $1,469 $ --
Fair value of liabilities assumed $ -- (864) --
------
Net cash paid for acquisitions $ -- $ 605 $ --
======
Page 55
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COL. A COL. B COL. C COL. D COL.E
- --------------------------------- ---------- ---------- ------------ ----------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO WRITE-OFFS BALANCE AT
BEGINNING COSTS AND OTHER AND REVERSAL END OF
OF PERIOD EXPENSES ACCOUNTS OF RESERVES PERIOD
---------- ---------- ---------- ------------ ----------
YEAR ENDED SEP.30, 2005
Allowance for doubtful accounts $2,323,841 $157,885 -- $1,036,870 $1,444,856
YEAR ENDED SEP.30, 2004
Allowance for doubtful accounts $2,741,463 $118,376 -- $ 535,998 $2,323,841
YEAR ENDED SEP.30, 2003
Allowance for doubtful accounts $3,420,799 $118,558 -- $ 797,894 $2,741,463
Page 56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
MANAGEMENT'S EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company's management, with the participation of the Company's chief
executive officer and chief financial officer, evaluated the effectiveness of
the Company's disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) as of September 30, 2005. Based on this
evaluation, the Company's chief executive officer and chief financial officer
concluded that, as of September 30, 2005, the Company's disclosure controls and
procedures were effective in providing reasonable assurance that information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the SEC's rules and forms.
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management, including the Company's chief executive officer and
chief financial officer, is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the Company. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles. The Company's management conducted an assessment of the
effectiveness of the Company's internal control over financial reporting as of
September 30, 2005 based on criteria established in "Internal Control -
Integrated Framework" issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Based on this assessment, the Company's management
concluded that, as of September 30, 2005, the Company's internal control over
financial reporting was effective.
The Company's independent registered public accounting firm,
PricewaterhouseCoopers LLP, has audited the effectiveness of the Company's
internal control over financial reporting and management's assessment of the
effectiveness of the Company's internal control over financial reporting as of
September 30, 2005, as stated in their report that appears under Part II, Item 8
in this Annual Report on Form 10-K.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
In conjunction with its preparation toward compliance with Section 404 of the
Sarbanes-Oxley Act of 2002, during the fourth quarter of 2004, the Company
implemented certain enhancements with respect to its internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)).
The Company enhanced and standardized certain information technology controls,
including documentation thereof, as well as documentation of other financial
controls across its businesses.
ITEM 9B. OTHER INFORMATION
Not applicable.
Page 57
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table shows the Company's executive officers as of December 14,
2005 and their areas of responsibility. Their biographies follow the table.
NAME AGE POSITION
- ---- --- --------
Norman E. Drapeau, Jr. 45 President, Chief Executive Officer and Director Class III
Peter J. Rice 53 Executive Vice President - Finance and Administration, Chief Financial Officer and Treasurer
Richard A. Cahill 50 Executive Vice President - Worldwide Sales
Patricia C. Foye 50 Executive Vice President, Global Marketing & Strategic Alliances
William J. Sawyer 59 Executive Vice President- Operations
John W. Young 53 Executive Vice President - Products and Technology
Craig Newfield 46 Vice President, General Counsel and Secretary
Robert L. Daniels 63 Chairman of the Board - Class I
David N. Campbell 64 Director - Class III
Richard P. Fishman 59 Director - Class III
John A. McMullen 63 Director - Class I
Stephen B. Sayre 54 Director - Class II
Alan L. Stanzler 62 Director - Class II
NORMAN E. DRAPEAU, JR. joined the Company in 1982 as an applications analyst.
Since that time, he has held various positions with the Company, including, from
1984 to 1987, that of Manager of Customer Support and from 1989 through 1991,
that of Director, Product Marketing. In 1991, Mr. Drapeau was appointed Vice
President, Corporate Marketing, in 1992 was appointed Vice President - Americas
and in July 1996 was appointed Executive Vice President - Worldwide Sales and
Marketing, serving in that capacity until January 1998. In January 1998, Mr.
Drapeau was appointed Executive Vice President and Chief Operating Officer and
was also elected a director of the Company. In May 1998, Mr. Drapeau was elected
President and Chief Executive Officer. Mr. Drapeau serves on the Board of
Directors of Authoria, Inc, a provider of strategic human capital management
solutions.
PETER J. RICE joined the Company in 2000 as Executive Vice President of Finance
and Administration, Chief Financial Officer, and Treasurer of the Company. From
1998 to 2000, Mr. Rice was Vice President of Finance and Administration, Chief
Financial Officer, and Treasurer of Interleaf, a developer of e-publishing and
e-content software products. Interleaf was sold to Broadvision, Inc. in 2000.
From 1995 to 1998, Mr. Rice was Vice President, Chief Financial Officer and
Treasurer for Media 100, Inc., a provider of digital media and content design,
and creation and delivery tools. From 1990 to 1995, Mr. Rice was Vice President,
Corporate Controller and Chief Accounting Officer of M/A Com, Inc. Prior there
to; Mr. Rice held senior financial management positions at Apollo Computer and
Atex, Inc.
RICHARD A. CAHILL joined the Company in January 2005 as Executive Vice President
of Worldwide Sales. From August, 1998 until January 2005 Mr. Cahill held a
series of senior management positions at Remedy Corporation and its successors
in interest.
Page 58
Remedy Corporation was sold to Peregrine Systems in June 2001. Following
Peregrine's bankruptcy in December 2001, Remedy's assets were purchased by BMC
Software, Inc. in late 2002. From the fourth calendar quarter of 2003 to the
present Mr. Cahill served as Vice President of Worldwide Sales and Services for
the Remedy business. Prior thereto, from 2002 to 2003 he served as Vice
President and General Manager for Europe, Middle East & Africa; from 2001 to
2002 he served as Vice President of European Operations; from 2000 to 2001 he
served as Vice President of Worldwide Professional Services; and from 1998 to
2000 he served as Director of EMEA Operations.
PATRICIA C. FOYE joined the Company in July 2001 as Executive Vice President,
Global Marketing and Strategic Alliances. From September 2000 to June 2001, Ms.
Foye was Vice President, Worldwide Sales and Marketing for HMS Software, Inc.;
an application software company centered in the aerospace defense markets. From
May 1999 to May 2000, Ms. Foye was President of Allenbrook, Inc., a private firm
focused on the development of policy management system for insurance and
financial markets. From 1998 to 1999, Ms. Foye was Vice President and General
Manager of QAD, Inc., leading the Electronics and Industrial business segment,
the largest vertical business for QAD. From 1994 to 1998, Ms. Foye held senior
management positions at Digital Equipment Corporation, a hardware and software
vendor and Marcam Corporation, an ERP applications vendor.
WILLIAM J. SAWYER joined the Company in 1978 as an applications consultant and
served in various sales and services positions from 1978 to 1984. Mr. Sawyer was
a Vice President of the Company from 1984 to 1990 and Executive Vice President
from 1990 until November 1997. In November 1997, Mr. Sawyer left the Company and
joined Peritus Software Services, Inc., a software application company, as Vice
President, Operations. Mr. Sawyer rejoined the Company in October 1998 as
Executive Vice President, Operations.
JOHN W. YOUNG originally joined the Company in 1985 and served until 1988 as
MAXIMO Product Manager. From 1988 to 1992, Mr. Young was Vice President of Sales
of Comac Systems Corporation, a software application company. In 1992 he
rejoined the Company as Director of MAXIMO Product Design, was appointed Vice
President - Research and Development of the Company in 1995 and was appointed
Executive Vice President - Products and Technology of the Company in 1998. Mr.
Young serves on the Board of Directors of NSI Software, Inc., a vendor of data
protections software.
CRAIG NEWFIELD joined the Company as Vice President, General Counsel and
Secretary in September 2000. From October 1997 through August 2000, Mr. Newfield
was Vice President, General Counsel and Secretary of Interleaf, Inc., a
developer of e-publishing and e-content software products. Interleaf was sold to
Broadvision, Inc. in 2000. From April 1996 through September 1997, Mr. Newfield
was General Counsel and Secretary of OneWave, Inc., since renamed Primix
Solutions, an IT service provider. From February 1993 to April 1996, Mr.
Newfield served as in-house counsel for Marcam Corporation.
ROBERT L. DANIELS founded the Company in 1968 and has been a director since that
time. Commencing in 1968, Mr. Daniels served as Executive Chairman of the Board,
Chief Executive Officer, and President. He relinquished the title of President
in 1995, and resigned as CEO and Chairman in August 1996. From May 1998 to March
2004, Mr. Daniels served as Executive Chairman, and since March 2004 he has
served as Chairman of the Board. He resigned as an employee of the Company in
November 2004.
DAVID N. CAMPBELL was appointed to the Board effective December 15, 2004. Mr.
Campbell is currently Managing Director of Innovation Advisors, Inc., an
investment bank serving middle market technology companies. Mr. Campbell served
as Chairman and Chief Executive Officer of Xpedior from September 1999 through
November 2000. A majority interest in Xpedior was acquired by PSINet, Inc. in
June 2000, and both PSINet and Xpedior filed for bankruptcy protection in April
2001. From January 1999 to September 1999, Mr. Campbell was President of GTE
Technology Organization, the centralized technology unit of GTE Incorporated.
From 1995 to January 1999, Mr. Campbell served as President of BBN Technologies,
the internet technology development and services organization of BBN
Corporation, which was acquired by GTE in 1997. Mr. Campbell is also a director
of Tektronix, Inc., Gibraltar Industries, Inc., Apropos Technology, and
Powersteering Software.
Page 59
RICHARD P. FISHMAN has served as a director since March 1999. Mr. Fishman is
currently Managing General Partner of RSSI Investors, a venture capital firm.
From 2002 to 2005 , Mr. Fishman was Senior Managing Partner of MAF Capital
Partners, a venture capital firm. From 1998 to 2002, Mr. Fishman was Executive
Vice President at MacAndrews & Forbes Group, Inc., where he was responsible for
venture capital investing. From 1995 to 1997, Mr. Fishman served as Managing
Director of GeoPartners Research, Inc., a strategy and management-consulting
firm, where he headed the firm's venture capital activities. Mr. Fishman served
as President and Chief Executive Officer of Thinking Machines Corporation from
1993 to 1994 and was a partner at the law firm of Milbank, Tweed, Hadley & McCoy
from 1987 until 1993.
JOHN A. MCMULLEN has served as a director since April 2000. Mr. McMullen is the
Managing Principal of Cambridge Meridian Group, Inc., a strategy-consulting firm
that serves Fortune 500 and technology-based companies, with which he has been
employed since 1985. Mr. McMullen taught business strategy at Harvard Law School
from the mid 1980's to 1990 and, as one of the original members of CMGI's Board
of Directors, served on that Board from 1988 through 1999. In addition, he
currently serves on the boards of two private technology-oriented companies, and
is advisor to two others. From 1993 to 1997 he was an informal advisor to former
Senator Bill Bradley (NJ). He ran fro the United States Senate from Vermont in
2004.
STEPHEN B. SAYRE has served as a director since September 1998. Mr. Sayre is an
independent marketing consultant. From 2000 until 2005, Mr. Sayre served as Vice
President of Marketing for Watchfire Corporation, a provider of online
regulatory compliance solutions; Endeca Technologies, a provider of search and
analysis software; and Idiom, Inc., an enterprise software provider. From 1994
to 2000, he was the Senior Vice President of Marketing at Lotus Development
Corporation, a subsidiary of IBM Corporation. Prior to 1994, Mr. Sayre served in
other senior executive level positions in the software industry.
ALAN L. STANZLER has served as a director since May 1998. Previously, Mr.
Stanzler served as a director of the Company from 1992 to 1994, and as Clerk of
the Company from 1990 to 1996. Mr. Stanzler is Of Counsel at the law firm of
Stanzler, Funderburk & Castellon, L.L.P. From 1998 to September 2001,
Mr. Stanzler was a partner of the law firm of Maselan Jones & Stanzler, P.C.
The Company has adopted a Code of Ethics that applies to all our directors and
employees including, without limitation, our principal executive officer, our
chairman, our principal financial officer, our principal accounting officer, our
controller, and all of our employees performing financial or accounting
functions. Our Code of Ethics is posted on our website, www.mro.com, and may be
found under the "Investor Relations" section by clicking on "Corporate
Governance" and then clicking on "Code of Conduct". We intend to continue to
satisfy the disclosure requirement under Item 5.01 of Form 8-K regarding an
amendment to, or waiver from, a provision of our Code of Ethics by posting such
information on our website.
Certain additional information required under Item 10 is incorporated
herein by reference to the definitive Proxy Statement for the Annual Meeting of
Stockholders of the Company, which will be filed with the Securities and
Exchange Commission not later than 120 days after September 30, 2005.
ITEM 11
EXECUTIVE COMPENSATION
The information set forth in the Proxy Statement for the 2005 annual meeting of
the stockholders to be filed, pursuant to Regulation 14A, within 120 days after
the end of the Company's fiscal year ended September 30, 2005 is incorporated
herein by reference.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information set forth in the Proxy Statement for the 2005 annual meeting of
the stockholders to be filed, pursuant to Regulation 14A, within 120 days after
the end of the Company's fiscal year ended September 30, 2005 is incorporated
herein by reference.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth in the Proxy Statement for the 2005 annual meeting of
the stockholders to be filed, pursuant to Regulation 14A, within 120 days after
the end
Page 60
of the Company's fiscal year ended September 30, 2005 is incorporated herein by
reference.
ITEM 14
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth in the Proxy Statement for the 2005 annual meeting of
the stockholders to be filed, pursuant to Regulation 14A, within 120 days after
the end of the Company's fiscal year ended September 30, 2005 is incorporated
herein by reference.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as a part of this Report:
1. Consolidated Financial Statements - See Index to Consolidated Financial
Statements in Part II, Item 8. on page 29.
2. Financial Statement Schedules - See Index to Consolidated Financial
Statements in Part II, Item 8. on page 30.
3. We have listed the exhibits filed as part of this annual report on Form 10-K
in the accompanying exhibit index, which follows the signature page to this
annual report on Form 10-K.
Page 61
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Dated: December 14, 2005
MRO SOFTWARE, INC.
By: /s/ Norman E. Drapeau, Jr.
--------------------------
Norman E. Drapeau, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Norman E. Drapeau, Jr. President and Chief December 14, 2005
- ---------------------------- Executive Officer
Norman E. Drapeau, Jr. (Principal Executive
Officer)
/s/ Peter J. Rice Executive Vice President, December 14, 2005
- ---------------------------- Chief Financial Officer
Peter J. Rice and Treasurer
(Principal Financial and
Accounting Officer)
/s/ Robert L. Daniels Chairman of the Board December 14, 2005
- ----------------------------
Robert L. Daniels
/s/ David N. Campbell Director December 14, 2005
- ----------------------------
David N. Campbell
/s/ Richard P. Fishman Director December 14, 2005
- ----------------------------
Richard P. Fishman
/s/ John A. McMullen Director December 14, 2005
- ----------------------------
John A. McMullen
/s/ Stephen B. Sayre Director December 14, 2005
- ----------------------------
Stephen B. Sayre
/s/ Alan L. Stanzler Director December 14, 2005
- ----------------------------
Alan L. Stanzler
Page 62
EXHIBIT LIST
INCORPORATED BY REFERENCE
---------------------------------
FILED WITH EXHIBIT
EXHIBIT NO. DESCRIPTION THIS FORM 10-K FORM FILING DATE NO.
- ----------- --------------------------------------------------------------- -------------- ------- ----------------- -------
3.1 Amended and Restated Articles of Organization S-1 April 21, 1994 3.3
3.2 Amendment to Articles of Organization 10-Q February 14, 2000 3.4
3.3 Amendment to Articles of Organization 8-K March 9, 2001 3.4
3.4 Certificate of Vote of Directors Establishing Series A Junior 8-K February 3, 1998 4(b)
Participating Preferred Stock
3.5 By-laws 10-Q February 14, 2001 3.5
3.6 Amendment to By-laws 10-Q May 15, 2001 3.3
4.1 Specimen stock certificate for common stock S-1 April 21, 1994 4.1
4.2 Form of rights certificate 8-K February 3, 1998 4(c)
9.1 Shareholders Agreement dated August 1, 2001 between Robert L. 10-K December 28, 2001 9.1
Daniels and Susan H. Daniels
1*
10.1* Employment Agreement with Richard A. Cahill 10-Q February 9, 2005 10.2
10.2* Amended and Restated 1999 Equity Incentive Plan DEF 14A January 28, 2005 A
10.3 Form of nonstatutory stock option agreement 10-K December 14, 2004 3.7
10.4 Form of stock option agreement 10-K December 14, 2004 3.8
10.5 Rights Agreement dated January 27, 1998 with BankBoston, N.A. 8-K February 3, 1998 4(a)
10.6* Amended and Restated 1994 Incentive and Nonqualified Stock 10-Q May 14, 1999
Option Plan
10.7* Form of Option Amendment for executive officers 8-K October 6, 2005 10.1
10.8* Employee Stock Purchase Plan 10-K December 30, 1996
21.1 Subsidiaries X
23.1 Consent of PricewaterhouseCoopers LLP X
31.1 Certification of the chief executive officer pursuant to X
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the chief financial officer pursuant to X
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the chief executive officer and the chief X
financial officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
* Management contract or compensatory plan.
Page 63