================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission File Number 0-23852
MRO SOFTWARE, INC.
------------------
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2448516
------------- ----------
(State or other jurisdiction (I.R.S employer
incorporation or organization) identification number)
100 CROSBY DRIVE, BEDFORD MASSACHUSETTS 01730
---------------------------------------------
(Address of principal executive offices, including zip code)
(781) 280-2000
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 22,223,056 shares of common stock, $.01 par value per share,
as of July 31, 2001.
================================================================================
MRO SOFTWARE, INC.
10-Q INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) as of
June 30, 2001 and September 30, 2000. 3
Consolidated Statements of Operations (unaudited) for
the three and nine months ended June 30, 2001 and 2000. 4
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended June 30, 2001 and 2000. 5
Notes to Consolidated Financial Statements (unaudited). 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28
SIGNATURE 30
2
MRO SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited)
ASSETS JUNE 30, SEPTEMBER 30,
2001 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA) --------- ---------
Current assets:
Cash and cash equivalents $ 34,377 $ 31,584
Marketable securities 7,031 4,241
Accounts receivable, trade, less allowance
for doubtful accounts of $4,001 at June 30, 2001
and $2,825 at September 30, 2000, respectively 42,384 47,699
Prepaid expenses and other current assets 7,698 7,148
Deferred income taxes 8,479 6,097
--------- ---------
Total current assets 99,969 96,769
--------- ---------
Marketable securities 999 1,059
Property and equipment, net 14,081 14,571
Intangible assets, net 52,325 63,286
Other assets 2,002 2,168
Deferred income taxes 5,588 3,203
--------- ---------
Total assets $ 174,964 $ 181,056
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 15,661 $ 16,013
Accrued compensation 8,359 8,551
Income taxes payable 2,568 660
Deferred revenue 23,320 19,080
Deferred income taxes -- 94
Line of credit -- 2,278
--------- ---------
Total current liabilities 49,908 46,676
--------- ---------
Other long term liabilities 180 188
Stockholders' equity
Preferred stock, $.01 par value;1,000 authorized,
none issued and outstanding
Common stock, $.01 par value;50,000 authorized;
22,220 and 22,069 issued at June 30, 2001
and September 30, 2000, respectively 222 220
Additional paid-in capital 87,688 83,185
Deferred compensation (175) (233)
Retained earnings 38,864 52,312
Accumulated other comprehensive loss (1,723) (1,292)
--------- ---------
Total stockholders' equity 124,876 134,192
--------- ---------
Total liabilities and stockholders' equity $ 174,964 $ 181,056
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
3
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(IN THOUSANDS,EXCEPT PER SHARE DATA)
Revenues:
Software $ 14,124 $ 21,238 $ 42,231 $ 55,619
Support and services 33,192 24,055 92,295 69,281
------------ ------------ ------------ ------------
Total revenues 47,316 45,293 134,526 124,900
------------ ------------ ------------ ------------
Cost of revenues:
Software 519 2,680 1,670 4,184
Support and services 16,834 13,142 50,292 37,842
------------ ------------ ------------ ------------
Total cost of revenues 17,353 15,822 51,962 42,026
------------ ------------ ------------ ------------
Gross margin 29,963 29,471 82,564 82,874
Operating expenses:
Sales and marketing 17,794 17,261 56,095 46,949
Product development 7,617 5,630 19,880 15,647
General and administrative 4,313 4,060 13,543 10,629
Amortization of goodwill and
other intangibles 3,545 3,125 10,770 4,426
------------ ------------ ------------ ------------
Total operating expenses 33,269 30,076 100,288 77,651
------------ ------------ ------------ ------------
(Loss)/income from operations (3,306) (605) (17,724) 5,223
Interest income 274 384 1,132 2,703
Interest expense 27 (10) (53) (111)
Other income (expense), net (115) (232) (222) (609)
------------ ------------ ------------ ------------
(Loss)/income before income taxes (3,120) (463) (16,867) 7,206
(Benefit)/provision for income taxes (936) (177) (3,419) 2,533
------------ ------------ ------------ ------------
Net (loss)/income $ (2,184) $ (286) $ (13,448) $ 4,673
============ ============ ============ ============
Net (loss)/ income per share, basic $ (0.10) $ (0.01) $ (0.61) $ 0.22
------------ ------------ ------------ ------------
Net (loss)/income per share, diluted $ (0.10) $ (0.01) $ (0.61) $ 0.20
------------ ------------ ------------ ------------
Shares used to calculate net
income/(loss) per share
Basic 22,151 21,811 22,114 21,632
Diluted 22,151 21,811 22,114 22,898
The accompanying notes are an integral part of the consolidated financial statements.
4
MRO SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2001 2000
------------ ------------
(IN THOUSANDS)
Cash flows from operating activities:
Net (loss)/income $ (13,448) $ 4,673
Adjustments to reconcile net (loss)/income to net
cash provided by operating activities:
Depreciation and amortization 14,854 5,874
Loss /(gain )on sale and disposal of property
and equipment 62 50
Amortization of discount on marketable securities - 108
Deferred rent (29) (25)
Deferred compensation 58 -
Non-cash marketing expense 3,287 -
Deferred income taxes (4,858) (1,898)
Changes in operating assets and liabilities,
net of effect of acquisitions:
Accounts receivable 5,315 (7,486)
Prepaid expenses (2,479) (3,221)
Other assets 2,094 (1,119)
Accounts payable and accrued expenses (319) 883
Accrued compensation (192) (2,830)
Income taxes payable 1,909 (453)
Deferred revenue 4,226 4,309
------------ ------------
Net cash provided by/(used in) operating activities 10,480 (1,135)
------------ ------------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired - (55,558)
Acquisitions of property and equipment and other
capital expenditures (3,466) (6,798)
Purchase of marketable securities (6,274) (51,929)
Sale of marketable securities 3,550 81,000
------------ ------------
Net cash (used in) investing activities (6,190) (33,285)
------------ ------------
Cash flows from financing activities:
Payment of line of credit (2,278) -
Proceeds from exercise of stock options 1,218 6,035
------------ ------------
Net cash (used in)/ provided by financing activities (1,060) 6,035
------------ ------------
Effect of exchange rate changes on cash (437) (331)
------------ ------------
Net increase/(decrease) in cash and cash equivalents 2,793 (28,716)
Cash and cash equivalents, beginning of period 31,584 59,903
------------ ------------
Cash and cash equivalents, end of period $ 34,377 $ 31,187
============ ============
The accompanying notes are an integral part of the consolidated financial statements.
5
MRO SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of MRO Software, Inc. ("MRO") and its majority-owned subsidiaries
(collectively, the "Company"), as of June 30, 2001 and have been prepared by the
Company in accordance with generally accepted accounting principles for interim
reporting and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. All intercompany accounts and transactions have been eliminated. In the
opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair presentation of the Company's financial
position, results of operations and cash flows at the dates and for the periods
indicated. The results of operations for the periods presented herein are not
necessarily indicative of the results of operations to be expected for the
entire fiscal year, which ends on September 30, 2001, or for any other future
period.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended September
30, 2000 included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on December 29, 2000.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
B. INCOME PER SHARE
Basic income (loss) per share is computed by dividing income or loss available
to common shareholders by the weighted average number of common shares
outstanding. Diluted income per share is computed by dividing income or loss
available to common shareholders by the weighted average common shares
outstanding plus dilutive potential common shares. For purposes of this
calculation, stock options are considered dilutive potential common shares in
periods in which they have a dilutive effect. All potential dilutive common
shares are excluded from the computation of net loss per share because they are
anti-dilutive.
6
Basic and diluted earnings per share are calculated as follows:
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) 06/30/01 06/30/00
-------- --------
Net loss $ (2,184) $ (286)
Denominator:
Weighted average common shares
outstanding-basic 22,151 21,811
Effect of dilutive securities
(stock options) (1) -- --
-------- --------
Weighted average common shares
outstanding 22,151 21,811
======== ========
Net (loss) per share-basic $ (0.10) $ (0.01)
Net (loss) per share-diluted $ (0.10) $ (0.01)
(1) Common stock equivalents of 510,000 and 901,000 for the three months ended
June 30, 2001 and 2000, respectively are not included because they are
anti-dilutive.
NINE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA) 06/30/01 06/30/00
-------- --------
Net (loss)/income $(13,448) $ 4,673
Denominator:
Weighted average common shares
outstanding-basic 22,114 21,632
Effect of dilutive securities
(stock options) (1) -- 1,266
-------- --------
Weighted average common shares
outstanding-diluted 22,114 22,898
======== ========
Net (loss)/income per share-basic $ (0.61) $ 0.22
Net (loss)/income per share-diluted $ (0.61) $ 0.20
(1) In the nine months ended June 30, 2001, common stock equivalents of 358,000
are not included because they are anti-dilutive.
7
C. COMPREHENSIVE INCOME
The following table reflects the components of comprehensive income:
THREE MONTHS ENDED
JUNE 30,
(IN THOUSANDS) 2001 2000
-------- --------
Net loss $ (2,184) $ (286)
Other comprehensive income,
Net of tax:
Unrealized (loss)/gain on
Securities arising during
Period (2) 1,516
Foreign currency translation
Adjustment (595) 44
-------- --------
Comprehensive (loss)/income $ (2,781) $ 1,274
======== ========
NINE MONTHS ENDED
JUNE 30,
(IN THOUSANDS) 2001 2000
-------- --------
Net (loss)/income $(13,448) $4,673
Other comprehensive income,
Net of tax:
Unrealized gain on
Securities arising during
Period 6 1,522
Foreign currency translation
Adjustment (437) (319)
-------- --------
Comprehensive (loss)/income $(13,879) $ 5,876
======== ========
D. SEGMENT INFORMATION, GEOGRAPHIC DATA AND MAJOR CUSTOMERS:
In December 2000, the Company announced the repositioning of its Internet-Based
supplier enablement software products. The Company now operates in two
reportable industry segments: (1) the development, marketing and support of the
"Demand-Side" software products and services, consisting of MAXIMO(R)
Enterprise(TM) and MAXIMO(R) Extended Enterprise(TM) (which includes MAXIMO
Buyer, our e-procurement application that was integrated with MAXIMO during
fiscal 2000), and (2) the development, marketing and support of our
"Supply-Side" software products and services, consisting of mroDistributor(TM),
mroManufacturer(TM) and mroConnect(TM), and our Internet-based content
management tools and cataloging services developed and marketed by the Company's
INTERMAT, Inc. subsidiary. Asset information by reportable segment is not
reported, since the Company does not produce such information internally. The
Company also manages these segments across geographic reportable segments:
United States, Other Americas (Canada and Latin America), Europe/Middle East and
Africa, and Asia Pacific. All segments are managed by the same board of
directors and executive officers.
8
For periods ending on or before September 30, 2000, the Company reported
revenues related to two industry segments: the development, marketing and
support of asset maintenance management software (MAXIMO) and the development,
marketing and support of Internet e-commerce software products and the related
network services (MRO.COM). All segment-reported financial information contained
in this report has been restated to reflect the Company's repositioning,
effective in the first quarter of fiscal 2001.
A summary of the Company's operations by product line was as follows:
THREE MONTHS ENDED
JUNE 30,
2001 2000
(IN THOUSANDS) -------- --------
Revenues:
Demand-Side software and services $ 42,588 $ 36,325
Supply-Side software and services 4,728 8,968
-------- --------
$ 47,316 $ 45,293
======== ========
(Loss)/income from operations:
Demand-Side software and services $ 5,534 $ 6,258
Supply-Side software and services (8,840) (6,863)
-------- --------
$ (3,306) $ (605)
======== ========
NINE MONTHS ENDED
JUNE 30,
2001 2000
(IN THOUSANDS) -------- --------
Revenues:
Demand-Side software and services $120,802 $105,656
Supply-Side software and services 13,724 19,244
-------- --------
$134,526 $124,900
(Loss)/income from operations:
Demand-Side software and services $ 18,024 $ 15,187
Supply-Side software and services (35,748) (9,964)
-------- --------
$(17,724) $ 5,223
======== ========
9
A summary of the Company's revenues by geographical area was as follows:
THREE MONTHS ENDED
JUNE 30,
2001 2000
(IN THOUSANDS) -------- --------
Revenues:
United States $ 31,830 $ 28,134
Other Americas 2,700 3,989
Intercompany revenues 1,550 691
-------- --------
Subtotal $ 36,080 $ 32,814
-------- --------
Europe/Middle East and Africa 10,331 9,362
Asia/Pacific 2,455 3,808
Consolidating eliminations (1,550) (691)
-------- --------
Total revenues $ 47,316 $ 45,293
======== ========
NINE MONTHS ENDED
JUNE 30,
2001 2000
(IN THOUSANDS) -------- --------
Revenues:
United States $ 85,551 $ 76,321
Other Americas 7,558 9,350
Intercompany revenues 4,845 2,792
-------- --------
Subtotal $ 97,954 $ 88,463
======== ========
Europe/Middle East and Africa 33,504 31,038
Asia/Pacific 7,913 8,191
Consolidating eliminations (4,845) (2,792)
-------- --------
Total revenues $134,526 $124,900
======== ========
The Company has subsidiaries in foreign countries, which sell the Company's
products and services in their respective geographic areas. Intercompany
revenues primarily represent shipments of software to international subsidiaries
and are eliminated from consolidated revenues.
E. COMMON STOCK:
In Apri1 1999, the Company granted a two-year option to W.W. Grainger, Inc.
("Grainger) to purchase 5% of the Company's wholly owned subsidiary, MRO.com,
Inc. In June 2001, the Company paid $650,000 to Grainger to re-purchase the
option grant.
In December 2000, the Company issued a warrant to i2 Technologies, Inc. ("i2")
under which i2 has the right to purchase up to 500,000 shares of the Company's
common stock at an exercise price of $10.25 per share. i2 had not exercised this
warrant as of August 13, 2001. The Company valued the
10
warrant at $3.3 million using the Black-Scholes valuation model, with the
following assumptions: (1) risk-free interest rate of 4.8%; (2) life of 2.5
years; and (3) volatility of 105%. The warrant is immediately exercisable and
has been recorded as a one-time non-cash sales and marketing expense. The
warrant was issued in connection with a strategic agreement for the two
companies to resell each other's offerings and integrate their technologies to
create a solution for the strategic asset maintenance, repair and operations
market.
F. ACCOUNTING STANDARDS:
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations"
and Statement of Financial Accounting Standards No. 142 ("SFASB No. 142"),
"Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business
combinations be accounted for under the purchase method only and that certain
acquired intangible assets in a business combination be recognized as assets
apart from goodwill. SFAS No. 142 requires that ratable amortization of goodwill
be replaced with periodic test of the goodwill's impairment and that intangible
assets other than goodwill be amortized over their useful lives. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 will
be effective for fiscal years beginning after December 15, 2001, and will thus
be adopted by the Company, as required, in fiscal year 2003. The Company has the
option to early adopt SFAS No. 142 in the first quarter of fiscal year ended
September 30, 2002. The impact of SFAS No. 141 and SFAS No. 142 on the Company's
financial statements has not yet been determined.
On December 3, 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements." SAB 101, as amended, summarizes some of the staff's
interpretations of the application of generally accepted accounting principles
to revenue recognition. All registrants are expected to apply the accounting and
disclosure requirements that are described in SAB 101 by the fourth quarter of
their fiscal year beginning after December 15, 1999. The Company does not
anticipate that the application of SAB 101 will have a material adverse effect
on its financial statements for the current fiscal year.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly report on Form 10-Q 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, but are not limited to, 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. Actual results may
differ materially from those suggested by the forward-looking statements for
various reasons, including those discussed under "Factors Affecting Future
Performance." These forward-looking statements speak only as of the date of this
Quarterly Report, and the Company disclaims any obligation to update such
forward looking statements as a result of any change in circumstances or
otherwise.
OVERVIEW
MRO Software, Inc. provides solutions for enterprise asset maintenance
optimization, industrial supply chain planning and supplier enablement. On
December 11, 2000, the Company's Board of Directors voted to change the
Company's name to MRO Software, Inc. This change became legally effective
immediately following the Special Meeting in Lieu of the Annual Meeting of
Stockholders of the Company held on March 6, 2001. The Company also changed its
NASDAQ trading symbol from "PSDI" to "MROI", effective March 8, 2001.
In December 2000, the Company announced the repositioning of its Internet-based
supplier enablement software products. The Company now operates in two
reportable industry segments: (1) the development, marketing and support of our
"Demand-Side" software products and services, consisting of MAXIMO(R)
Enterprise(TM) and MAXIMO(R) Extended Enterprise(TM)(which includes MAXIMO
Buyer, our e-procurement application that was integrated with MAXIMO during
fiscal year 2000) and (2) the development, marketing and support of our
"Supply-Side" software products and services, and the Internet-based content
management tools and cataloging services developed and marketed by the Company's
INTERMAT, Inc. subsidiary. The Supply-Side products consist of the
mroDistributor(TM), mroManufacturer(TM) and mroConnect(TM) products. These
products are offered under an application service provider subscription model.
The Company also offers application hosting services delivered through our
mroHosting Center, and our MRO.COM website acts as an administrative and support
hub for these solutions.
12
For periods ending on or before September 30, 2000, the Company reported
revenues related to two industry segments: the development, marketing and
support of asset maintenance management software (MAXIMO) and the development,
marketing and support of Internet e-commerce software products and the related
network services (MRO.COM). All segment-reported financial information contained
in this report has been restated to reflect the Company's repositioning,
effective in the first quarter of fiscal 2001.
RESULTS OF OPERATIONS
REVENUES
The Company's revenues are derived primarily from two sources: (i) software
licenses, and (ii) fees for support and services, including support contracts,
training and consulting services, application service provider subscription
fees, commerce fees charged for electronic commerce transactions, and data
content services offered through the Company's INTERMAT, Inc. subsidiary.
Three Three Nine Nine
Months Months Months Months
Ended Change Ended Ended Change Ended
(in thousands) 6/30/01 % 6/30/00 6/30/01 % 6/30/00
- --------------------------------- --------- --------- --------- --------- --------- ---------
Software licenses $14,124 (33%) $21,238 $42,231 (24%) $55,619
Percentage of total revenues 30% 47% 31% 45%
Support and services $33,192 38% $24,055 $92,295 33% $69,281
Percentage of total of revenues 70% 53% 69% 55%
Total revenues $47,316 4% $45,293 $134,526 8% $124,900
Total revenues for the quarter increased $2.0 million over the comparable
quarter and $9.6 million year over year. The increases are attributable to an
increase in Demand-Side support and service revenues. Demand-Side revenues
represent 90% of total revenues for the quarter. Total revenues for the
Demand-Side business segment increased 17% to $42.6 million from $36.3 million
over the comparable quarter and 14% to $120.8 million from $105.7 million year
over year. The Company's North American market made the strongest contribution
for the quarter ended June 30, 2001 at 70% of total revenues. Total revenues for
the Supply-Side business segment, which include revenues from the Company's
suite of hosted solutions, decreased 47% to $4.7 million from $9.0 million over
the comparable quarter and 29% to $13.7 million from $19.2 million year over
year. The decreases are attributable to transitioning to an Application Service
Provider ("ASP") subscription revenue model for the Supply-Side of the business,
which was implemented for the first time in the quarter ended December
13
31, 2000. Also, the Company concluded a significant one-time license agreement
for its supplier content management tools for approximately $4.4 million in
fiscal 2000 that was not repeated in fiscal 2001.
Software license revenue decreased 33% or $7.1 million over the comparable
quarter and 24% or $13.4 million year over year. The decreases are mainly
attributable to decreases in Supply-Side software sales due to the transition to
an ASP subscription revenue model, and to a lesser extent cautious spending for
enterprise asset management software. Software license revenue for the
Supply-Side business segment decreased 96% to $229,000 from $5.9 million over
the comparable quarter and decreased 97% to $396,000 from $14.8 million year
over year. The Company attributes this decline to transitioning to an ASP
subscription revenue model for the Supply-Side of the business. ASP revenues are
recognized ratably over the contract period and are recognized as service
revenues regardless of whether the customer pays up front or monthly. In the
previous year, the Company sold perpetual licenses to customers and generally
recognized revenue upon shipment of the software license. The Company also
recorded a significant one-time license agreement for MRO supplier content
management tools for approximately $4.4 million that was not repeated in fiscal
2001. Demand-Side software revenues decreased 10% to $13.9 million from $15.3
million over the comparable quarter and increased 2% to $41.9 million from $40.9
million year over year. The quarter over quarter decreases are mainly
attributable to a cautious spending pattern in the enterprise asset management
market and current economic conditions. The increase in Demand-Side revenues
year over year is attributable to some very large software licenses in excess of
$1 million sold in North America and Europe. In the quarter ended March 31,
2001, the Company concluded the sale of four software licenses in excess of $1
million in North America and two software licenses in excess of $1 million in
Europe. In the current quarter ended June 30, 2001, the Company concluded the
sale of two large software licenses in excess of $1 million in North America.
Support and services revenue increased 38% or $9.1 million over the comparable
quarter and 33% or $23.0 million year over year. Support revenues were $12.2
million and $9.5 million over the comparable quarter and $34.9 million and $26.3
million year over year. Demand-Side support revenues represented 98% of total
support revenues for the comparable quarters and 98% and 99% year over year.
Support revenues have increased as a result of sequential increases in software
revenue and a high retention of the existing customer base. The current renewal
rate is over 90% for all Demand-Side customers. Service revenues were $21.0
million and $14.5 million over the comparable quarter and $57.4 million and
$43.0 million year over year. Services revenues are comprised of consulting and
training services offered to customers, data content services, and ASP fees. ASP
fees are not yet a significant amount of revenues. However, the Company's
management expects that the number of customers using the product will continue
to increase over the next year. The Company continues to make
14
significant investments to the Supply-Side infrastructure. Demand-Side service
revenues represented 80% of total services revenues for the comparable quarters
and 78% and 90% year over year. The increase in Demand-Side service revenues is
primarily attributable to a few large on-going implementations derived from some
of the significant software sales made during the fiscal year and an increase in
the utilization of consultants used to perform implementations of the Company's
products. Supply-Side service revenues increased 51% over the comparable quarter
and 204% year over year. The increases are attributable to a single large
contract for data content services. The Company does not expect to recognize any
additional, significant revenue from this large contract in the near future.
COST OF REVENUES
Three Three Nine Nine
Months Months Months Months
Ended Change Ended Ended Change Ended
(in thousands) 6/30/01 % 6/30/00 6/30/01 % 6/30/00
- --------------------------------- --------- --------- --------- --------- --------- ---------
Software licenses $519 (81%) $2,680 $1,670 (60%) $4,184
Percentage of software licenses 4% 13% 4% 8%
Support and services $16,834 28% $13,142 $50,292 33% $37,842
Percentage of support and services 51% 55% 54% 55%
Total cost of revenues $17,353 10% $15,822 $51,962 24% $42,026
Percentage of total revenues 37% 35% 39% 34%
Cost of software license revenues consists of software purchased for resale,
royalties paid to vendors of third-party software, the cost of software product
packaging and media, and certain employee costs related to software duplication,
packaging and shipping. The decrease in the cost of software license revenues
quarter over quarter and year over year was due primarily to a decrease in
royalties paid for third-party products, as less of these third-party products
are being resold, as well as a significant one-time cost for software purchased
for resale in fiscal 2000 that was not repeated in fiscal 2001. Also,
contributing to the decreases are the amount of documentation and production
material expenses in the Demand-Side business segment. Documentation costs are
down period over period because the Company no longer mass-produces
documentation materials. The Company now offers documentation to its customers
via a web-site link. In addition, the Company is purchasing less production
materials, such as CD-Roms, and ships fewer CD-Roms with the newer versions of
its software products.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities and costs for utilization of
third-party
15
consultants. Cost of support revenues was $2.0 million and $2.1 million over the
comparable quarter and $6.6 million and $5.8 million year over year. Cost of
support revenues as a percentage of total support revenues was 16% and 22% over
the comparable quarter and 19% and 22% year over year. The decreases in cost of
support revenues as a percentage of support revenues are attributable to an
increase in support revenues without a commensurate increase in support
personnel or other support costs. Cost of services revenues was $14.9 million
and $11.1 million over the comparable quarter and $43.7 million and $32.1
million year over year. The increase in cost of services is primarily
attributable to the utilization of third-party consultants to perform services
related to a large Supply-Side contract related to content services recorded in
the first quarter of 2001 as well as the cost of additional personnel hired to
support the growth and demand for support and services. The Company has made and
will continue to make significant investments in its Supply-Side segment and may
not derive revenue and benefit from these investments in the near future. Cost
of services revenues as a percentage of total services revenues was 71% and 76%
over the comparable quarter and 76% and 75% year over year. The decrease in cost
of services as a percentage of total services revenues quarter over quarter is
due to a higher utilization of in-house staff and lower third-party costs in the
current period.
OPERATING EXPENSES
Three Three Nine Nine
Months Months Months Months
Ended Change Ended Ended Change Ended
(in thousands) 6/30/01 % 6/30/00 6/30/01 % 6/30/00
- ------------------------------------------------- -------------- -------------- -------------- -------------- --------------
Sales and marketing $17,794 3% $17,261 $56,095 19% $46,949
Percentage of total revenues 38% 38% 42% 38%
Product development $7,617 35% $5,630 $19,880 27% $15,647
Percentage of total revenues 16% 12% 15% 13%
General and administrative $4,313 6% $4,060 $13,543 27% $10,629
Percentage of total revenues 9% 9% 10% 9%
Goodwill amortization $3,545 13% $3,125 $10,770 143% $4,426
Percentage of total revenues 7% 7% 8% 4%
The increases in sales and marketing expenses over the comparable quarter were
mainly due to sales commissions. The increase in sales and marketing expenses
over the prior year is primarily attributable to a one-time charge recorded in
the first quarter of fiscal 2001 of $3.3 million for a warrant issued to i2
Technologies, Inc. ("i2") and sales commissions. In December 2000, the Company
issued a warrant to i2 under which i2 has the right to purchase up to 500,000
shares of the
16
Company's common stock at an exercise price of $10.25 per share. i2 had not
exercised this warrant as of August 13, 2001. The Company valued the warrant
using the Black-Scholes valuation model. The warrant was issued in connection
with a strategic agreement between the two companies to resell each other's
offerings and integrate their technologies to create a solution for the
strategic asset maintenance, repair and operations market. During the three
months ended December 31, 2000, the Company also wrote off a $1 million
receivable owed by a company that had ceased operations.
The increase in product development expenses quarter over quarter and year over
year is primarily due to the hiring of additional employees to further develop
e-commerce products and make enhancements to the Company's MAXIMO products, as
well as, translation of the Company's products to foreign languages. The Company
intends to continue to make investments in electronic commerce products for MRO
supply chain management and e-procurement. The Company will also make further
enhancements to its MAXIMO (Demand-Side) products.
The increases in general and administrative expenses were primarily due to
salaries and related benefits, as well as other expenses to support the increase
in revenues and global expansion of the Company. Also, in the quarter ended June
30, 2001, the Company paid $650,000 to W.W. Grainger, Inc. as payment for the
re-purchase of a stock option agreement.
The increase in goodwill amortization expense is attributable to the
acquisitions of businesses completed during fiscal year 2000. There were no
acquisitions made during the nine months ended June 30, 2001.
NON-OPERATING EXPENSES
Three Three Nine Nine
Months Months Months Months
Ended Change Ended Ended Change Ended
(in thousands) 6/30/01 % 6/30/00 6/30/01 % 6/30/00
- --------------------------------- --------- --------- --------- --------- --------- ---------
Interest income $274 (29%) $384 $1,132 (58%) $2,703
Interest (expense) $27 170% $(10) $(53) (52%) $(111)
Other income (expense) $(115) (50%) $(232) $(222) (64%) $ (609)
Interest income is attributable to interest earned on marketable securities and
cash equivalents from cash flow generated from operations. The Company
liquidated a portion of its marketable securities in March 2000 in order to
complete the purchase of INTERMAT, Inc. and has thus earned less interest income
from investments. The Company may decide to make further investments in
marketable securities in the future.
17
Other income (expense) was primarily attributable to currency translation
losses.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for the current quarter and year to date was a
benefit of 30% and 20%. The Company was not able to benefit all of its losses
due to the non-deductible nature of certain intangible and goodwill costs. Also,
the $3.3 million expense incurred in connection with the warrant issued to i2
and recorded in the quarter ended December 31, 2000 is not deductible for tax
purposes.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2001, the Company had cash and cash equivalents and marketable
securities of approximately $42.4 million and working capital of $50.1 million.
Cash provided by operations for the nine months ended June 30, 2001 was $10.5
million, primarily attributable to an increase in collection of accounts
receivable.
Cash used in investing activities was $6.2 million, primarily for acquisitions
of capital assets including financial software and purchases of marketable
securities.
Cash used in financing activities was $1.1 million. The Company paid off a $2.3
million line of credit during the first quarter ended December 31, 2000 related
to the acquisition of Applied Image Technologies, Inc. ("AIT") in the last
quarter of fiscal year 2000.
As of June 30, 2001, the Company's principal commitments consist primarily of
office leases for its U.S. and European headquarters. Under the terms of the
U.S. lease agreement, upon termination of the lease, the Company has the right
to extend the lease for an additional six year term for an agreed upon fixed
cost. The Company leases its facilities and certain equipment under
non-cancelable operating lease agreements that expire at various dates through
June 2006.
The Company may use a portion of its cash to acquire additional businesses,
products and technologies complementary to its business. The Company also plans
to make investments over the next year in its Supply-Side and Demand-Side
products.
The Company believes that its current cash balances and marketable securities
combined with cash flow from operations will be sufficient to meet its working
capital and capital expenditure requirements through at least June 30, 2002.
FACTORS AFFECTING FUTURE PERFORMANCE
The nature of forward-looking information is that such information involves
significant assumptions, risks and uncertainties. Certain public documents of
the Company and
18
statements made by authorized officers, directors, employees, agents and
representatives of the Company, acting on its behalf, may include
forward-looking information which will be influenced by the factors described
below, and by other assumptions, risks and uncertainties. Forward-looking
information is based on assumptions, estimates, forecasts and projections
regarding the Company's future results as well as the future effectiveness of
the Company's strategic plans and future operational decisions. Forward-looking
statements made by or on behalf of the Company are subject to the risk that the
forecasts, projections, and expectations of management, or assumptions
underlying such forecasts, projections and expectations, may become inaccurate.
Accordingly, actual results and the Company's implementation of its plans and
operations may differ materially from forward-looking statements made by or on
behalf of the Company. The following discussion identifies certain important
factors that could affect the Company's actual results and actions and could
cause such results and actions to differ materially from any forward-looking
statements made by or on behalf of the Company that related to such results and
actions.
Other factors, which are not identified herein, could also have such an effect,
including without limitation those factors discussed in the Section entitled
"Factors Affecting Future Performance" in our most recent Annual Report on Form
10-K as filed with the Securities and Exchange Commission ("SEC").
RAPID TECHNOLOGICAL AND MARKET CHANGES
The computer software industry is characterized by rapid technological advances,
changes in customer requirements and frequent product introductions and
enhancements. The Company's success depends upon its ability to continue to
enhance its current products and to develop and introduce new products that keep
pace with technological developments, respond to evolving customer requirements
and industry standards, and achieve market acceptance. In particular, the
Company believes that it must continue to respond quickly to users' needs for
new functionality and to advances in hardware and operating systems, and that it
must continue to create products that conform to industry standards regarding
the communication and interoperability among software products of different
vendors. Any failure by the Company to anticipate or respond adequately to
technological developments and changes in customer requirements, or any
significant delays in product development or introduction, could result in a
loss of competitiveness and revenues. There can be no assurance that the Company
will be successful in developing and marketing new products or product
enhancements, or that the Company will not experience significant delays in
developing such new products or product enhancements. Certain portions of the
Company's new products and product enhancements are being developed by third
party contractors, who are outside of the Company's direct control, and who may
fail to deliver software on time with the specified functionality. Such delays
could have a material adverse effect on the Company's results of operations. In
addition, there can be no assurance that new products and product enhancements
developed by the Company will achieve market acceptance. Finally, when the
Company develops new products or enhances its existing products, it is possible
that potential customers will defer or delay their decisions to purchase
existing products while the newer products and enhancements are being developed,
19
released and proven in the market. Such delays could have a material, adverse
impact on ongoing sales of existing products, and on the Company's results of
operations.
DEPENDENCE ON MAXIMO
A significant portion of the Company's revenues are derived from the licensing
of its MAXIMO family of products and to related services and support. The
Company's financial performance depends largely on continued market acceptance
of MAXIMO, and the acceptance of its Demand-Side e-commerce procurement
application MAXIMO Buyer. The Company believes that continued market acceptance
of MAXIMO and revenue growth will largely depend on its ability to enhance and
broaden the capabilities of MAXIMO by among other things, incorporating Internet
technologies into the MAXIMO products. Any factor adversely affecting sales of
MAXIMO, such as delays in development, significant software flaws,
incompatibility with significant hardware platforms, operating systems or
databases, increased competition, negative evaluations of MAXIMO or potential
customers' delay in purchasing in anticipation of new product releases, would
have a material adverse effect on the Company's business and financial results.
SUPPLY-SIDE MARKET CHANGES
In the first quarter of fiscal 2001, the Company repositioned its Internet-based
supplier enablement products as mroDistributor, mroManufacturer and mroConnect,
offering the suppliers of MRO goods and services the ability to drive and
control their Internet-based e-commerce initiatives.
There can be no assurance that the Company's Supply-Side products will be sold
successfully, or that the Company's Supply-Side products will achieve market
acceptance. There is also no assurance that the Company and its customers will
create a large enough community of sellers, connected to a large enough
community of buyers, for the Company to achieve leverage and market synergy
between its Demand-Side and Supply-Side products.
The market for business-to-business initiatives and supporting products has
recently experienced significant turmoil and downturn, and there is no clear
indication of whether or when this market may re-emerge, or the direction that
it may take. As a result, the Company cannot predict whether or when products
that enable business-to-business marketplaces or exchanges will gain acceptance
and be adopted on a repeated or predictable basis. Sales of the Company's
Supply-Side solutions will continue to fluctuate until the markets for
business-to-business solutions in general, and for strategic MRO e-commerce
initiatives in particular, stabilize, move and grow in an understandable and
predictable direction.
The Company's future success in the electronic commerce market may depend on its
ability to accurately determine the functionality and features required by its
customers, as well as the ability to enhance its Supply-Side products and
deliver them in a timely manner. The Company may incur substantial costs to
enhance and modify its Supply-Side products and services in order to meet the
demands of this growing and changing market. The Company's Supply-Side product
segment is not yet profitable and may not be profitable for sometime.
20
SUPPLY-SIDE SUBSCRIPTION REVENUE MODEL
The Company's Supply-Side revenues are largely received from subscription
agreements under which customers pay a relatively low monthly or annual fee for
the right to access and use the Supply-Side products. The Supply-Side products
are hosted by the Company and accessed by its customers via the Internet, and as
a result Supply-Side customers do not need to create or maintain extensive
internal information systems infrastructure to support the solution, and their
initial investments are typically lower than for the Demand-Side. As a result of
all of the foregoing, the customers' cost to discontinue their Supply-Side
subscriptions, or switching to other solutions, are lower.
The use of applications on a hosted basis presents difficulties to customers
that they do not face with software that they have licensed internally. For
instance, individual customers might not be able to modify the software to meet
their idiosyncratic needs, since the desired modification might impact all
customers who subscribe to the Company's Supply-Side solutions. Conversely, the
Company may implement changes to the software that it believes will meet general
market requirements, but which are not desired by certain customers.
In the event that any of the foregoing difficulties are experienced by a
material number of Supply-Side customers, it would be easy for those customers
to discontinue their subscriptions, which could cause a material, adverse impact
on the Company's Supply-Side revenue, and on the Company's overall results of
operations.
DEPENDENCE ON SALES CHANNELS AND BUSINESS ALLIANCES
In order for the Company to maintain and grow its Demand-Side and Supply-Side
revenues, the Company is both dependent upon its existing distribution channels,
and it must develop new channels. The Company cannot control the actions of its
distributors, resellers, agents and other channel partners, and if these
companies suffer business downturns or fail to meet their objectives, the
Company's revenues and results of operations will suffer as a result.
With respect to its Supply-Side business in particular, the Company will seek to
develop new channels, often consisting of e-commerce marketplaces or exchanges
that use the Company's Supply-Side products and generate further sales of
mroDistributor, mroManufacturer and mroConnect. The ability of these
marketplaces or exchanges to generate such sales for the Company will depend to
a large degree on the validity of their underlying business models, the vibrancy
of their various markets and various other factors specific to their businesses,
including the general market acceptance and growth of e-commerce marketplaces
and exchanges.
The Company has entered into strategic partnerships with various larger
companies, such as i2 Technologies, Inc., Ariba, Inc., Rockwell Automation, and
others. The Company's ability to generate incremental revenue through these
partnerships will depend upon the Company's ability to integrate its products
and solutions with those of the other companies, and its ability to coordinate
and support each company's sales and marketing efforts. In particular, the
21
Company has agreed to integrate certain of its products with certain products
offered by i2 Technologies, Inc., and the Company may experience difficulties in
gaining market acceptance of the MRO Software and i2 integrated products,
difficulties in integrating and coordinating MRO Software's products and sales
efforts with the products and sales efforts of i2. Finally, competitive
alliances may emerge among other companies.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; SEASONALITY
The Company has experienced, and may in the future experience, significant
period-to-period fluctuations in revenues and operating results, which may
negatively impact the price of our stock. The Company believes that these
quarterly fluctuations are partly attributable to the Company's sales commission
policies, which compensate members of the Company's direct sales force for
meeting or exceeding annual quotas. In addition, the Company's 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. The Company typically
realizes a significant portion of its revenue from sales of software licenses in
the last two weeks of a quarter, frequently even in the last days of a quarter.
Failure to close a small number of large software license contracts may have a
significant impact on revenues for any quarter and could, therefore, result in
significant fluctuations in quarterly revenues and operating results.
Accordingly, 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.
COMPETITION
The market for enterprise asset maintenance software such as MAXIMO is
fragmented by geography, by hardware platform and by industry orientation, and
is characterized by a large number of competitors including both independent
software vendors and certain enterprise resource planning ("ERP") vendors.
Independent software vendors include Datastream, Manugistics and Indus. MAXIMO
also competes with integrated ERP systems which include integrated maintenance
modules provided by several large vendors, such as SAP, Oracle and JD Edwards
and others. Currently, MAXIMO competes with products of a number of large
vendors, some of which have traditionally provided maintenance software running
on mainframes and minicomputers and are now offering systems for use in the
client/server environment. 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 to enter the client/server market. Some of the companies mentioned
above have also developed e-procurement applications that are competitive with
MAXIMO Buyer, and e-commerce platforms and supply chain integration solutions
that are competitive with the Company's Supply-Side solutions.
The Company's Supply-Side business 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. We may not remain competitive, and
22
increased competition could seriously harm our business. Our competitors offer a
variety of e-business products that compete with ours including supply chain and
other core Supply-Side business. We may compete with vendors who have
established electronic marketplaces and indirect procurement capabilities, such
as Ariba and Commerce One. Other competitive factors include internal
development efforts by corporate information technology departments and
companies offering customized products.
Certain of the Company's competitors have greater financial, marketing, service
and support and technological resources than the Company. To the extent that
such competitors increase their focus on the asset maintenance or planning and
cost systems markets, or on the industrial supply chain market, the Company
could be at a competitive disadvantage.
DEPENDENCE ON THIRD PARTIES
The Company has entered into nonexclusive license agreements with other
third-party software vendors, pursuant to which the Company incorporates into
its products software providing certain application development, user interface,
business intelligence, content and graphics capabilities developed by these
companies. If the Company were unable to renew these licenses (or unable to
renew them on commercially reasonable terms), or if any of such vendors were to
become unable to support and enhance its products, the Company 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. The Supply-Side operation is dependent on Digital Island, a
third-party data center, which could be destroyed or damaged. The Company must
stay on good terms with this vendor, and be able to renew its agreement with
this vendor on commercially reasonably terms. If this data center were to become
inoperable or unavailable on commercially reasonable terms, the Company would
incur significant expense, and potentially lose its ability to provide these
services altogether during the period of downtime and transition, resulting in
customer dissatisfaction and market rejection of its Supply-Side offerings. The
Company's Supply-Side operations are dependent upon the Company's ability to
protect computer equipment and the information stored in these third- party data
centers against damage that may be caused by natural disasters, fire, power
loss, telecommunication or Internet failures, unauthorized intrusions, computer
viruses and other similar damaging events. The Company cannot assure that any of
these damaging events would not result in a prolonged outage of the Company's
network services or that the Company would not experience a reduction of
revenues or unexpected expenses which could have a material adverse effect on
our business and financial results.
HOSTING
The Company does not have extensive experience in hosting applications. If we do
not accurately predict the volume of traffic adequately, or if we encounter
technical difficulties with our software, we may experience slower response
times or other problems. Any delays in response time or performance problems
could cause our customers to perceive this service as not functioning properly
and they may discontinue use of our products and services.
23
The Company's success and profitability in its Supply-Side business is dependent
on the Company's ability to increase the scalability and performance of its
Supply-Side solutions, meaning that the Company must be able to host and operate
a large number of mroDistributor, mroManufacturer and mroConnect product
instances on a single computer using multiple processors. This is because the
Company incurs fixed costs associated with the hosting environment, regardless
of how many, or how few, Supply-Side products are hosted at the same time. If
the Company is unable to host a certain number of Supply-Side solutions per
computer, then the Supply-Side business may not become profitable for a long
time. Moreover, if the Company is not able to operate a large number of
Supply-Side product instances on the same computer without denigrating product
performance, the Supply-Side solutions may not gain customer acceptance and
market penetration.
PRODUCT DEVELOPMENT: INTERNET
The Company has decided to incorporate into the MAXIMO product Java-based and
other technologies emerging in conjunction with the Internet. Internet
technologies and applications generally are developing and gaining acceptance
rapidly in the market. MRO supply chain management using electronic commerce is
a nascent market with many standards and technologies remaining to be developed.
Accordingly, developing technologies pose risks to the Company. The Company
believes that electronic commerce products and technologies complement the
Company's enterprise asset management products. There can be no assurance that
the Company will successfully anticipate trends in this market, that the Company
will be successful in Internet technology development or acquisition efforts or
that the Company's Internet applications, if developed, will achieve market
acceptance.
PRODUCT DEVELOPMENT: ACQUISITIONS
The Company may from time to time purchase software products or technologies
from other companies. While the Company exercises due diligence in determining
whether acquired products or technologies are suitable and of commercial
quality, there can be no assurances that the new products or technologies will
meet the Company's expectations, that the Company will be able to employ and
retain the personnel necessary for the Company to effectively exploit the new
products or technologies, that the Company will be able to successfully
integrate the new products or technologies with or into the Company's existing
products and product architecture, that the Company will be able to effectively
distribute the new products or technologies through its existing sales force and
channels, that the Company will be able to retain existing customers and revenue
streams that may be associated with the new products or technologies, or that
such existing customers may not demand that the Company remedy problems that
were not known or disclosed at the time of the acquisition. As a result of the
foregoing, the Company may not realize the benefits intended from such
acquisitions or recover its investments, which would have a material adverse
impact on the Company's business and its results of operations.
LIMITED INTELLECTUAL PROPERTY PROTECTION
The Company's success is dependent upon its proprietary technology. The Company
currently has one patent and protects its technology primarily through
24
copyrights, trademarks, trade secrets and employee and third-party nondisclosure
agreements. The Company's 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 on-line. Although, in larger
sales, the Company's shrink-wrap and click wrap licenses may be accompanied by
specifically negotiated agreements signed by the licensee, in many cases its
shrink-wrap and click wrap licenses are not negotiated with or signed by
individual licensees. 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. There can be no assurance that the steps taken
by the Company to protect its proprietary rights will be adequate to prevent
misappropriation of its technology or development by others of similar
technology. Although the Company believes that its products and technology do
not infringe on any valid claim of any patent or any other proprietary rights of
others, there can be no assurance that third parties will not assert
infringement claims in the future. Litigation may be necessary to enforce the
Company's intellectual property rights, to protect the Company's 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 and could potentially
have a material adverse result on our operating results and financial condition.
DEPENDENCE ON KEY PERSONNEL
The Company is highly dependent on certain key executive officers, technical and
sales employees, and the loss of one or more of who could have an adverse impact
on the future operations of the Company. The Company does not have employment
contracts with, and does not maintain key person life insurance policies on, any
personnel. The Company continues to hire a significant number of additional
sales, services and technical personnel. Competition for hiring of such
personnel in the software industry is intense, and the Company from time to time
experiences difficulty in locating candidates with the appropriate
qualifications within the desired geographic locations, or with certain industry
specific domain expertise. It is widely believed that the technology industry is
at or beyond a condition of full employment. There can be no assurance that the
Company will be able to retain its existing personnel or attract additional
qualified employees.
POSSIBLE CONTINUED VOLATILITY OF STOCK PRICE
There have recently been significant fluctuations in the market price of the
common stock, par value $.01 per share, of the Company (the "Common Stock"). In
addition, the stock market in general has recently experienced substantial price
and volume fluctuations, which have particularly affected the market prices of
many software and e-commerce companies and which have often been unrelated to
the operating performance of such companies. These broad market fluctuations
also may adversely affect the market price of the common stock.
25
EFFECT OF ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations"
and Statement of Financial Accounting Standards No. 142 ("SFASB No. 142"),
"Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business
combinations be accounted for under the purchase method only and that certain
acquired intangible assets in a business combination be recognized as assets
apart from goodwill. SFAS No. 142 requires that ratable amortization of goodwill
be replaced with periodic test of the goodwill's impairment and that intangible
assets other than goodwill be amortized over their useful lives. SFAS No. 141 is
effective for all business combinations initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method for which the
date of acquisition is after June 30, 2001. The provisions of SFAS No. 142 will
be effective for fiscal years beginning after December 15, 2001, and will thus
be adopted by the Company, as required, in fiscal year 2003. The Company has the
option to early adopt SFAS No. 142 in the first quarter of fiscal year ended
September 30, 2002. The impact of SFAS No. 141 and SFAS No. 142 on the Company's
financial statements has not yet been determined.
On December 3, 1999, the staff of the SEC issued Staff Accounting Bulletin No.
101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101, as
amended, summarizes some of the staff's interpretations of the application of
generally accepted accounting principles to revenue recognition. All registrants
are expected to apply the accounting and disclosure requirements that are
described in SAB 101 by the fourth quarter of their fiscal year beginning after
December 15, 1999. The Company does not anticipate that the application of SAB
101 will have a material adverse effect on its financial statements for the
current fiscal year.
OTHER RISK FACTORS
The foregoing is not a complete description of all Risk Factors relevant to the
Company's future performance, and the foregoing should be read and understood
together with and in the context of the discussion entitled "Factors Affecting
Future Performance" in our most recent Annual Report on Form 10-K as filed with
the SEC, and similar discussions contained in the other documents that the
Company has filed with the SEC.
NO REVISIONS OR UPDATES TO FORWARD-LOOKING STATEMENTS
The Company undertakes no obligation to release publicly any revision or update
to any forward-looking statements to reflect events or circumstances after the
date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company's primary exposures to market risk are the effect of fluctuations in
interest rates earned on its cash equivalents and marketable securities and
exposures to foreign currency exchange rate fluctuations.
At June 30, 2001, the Company held $42.4 million in cash equivalents and
marketable securities consisting of taxable and tax exempt municipal securities.
Cash equivalents are classified as available for sale and valued at amortized
cost, which approximates fair market value. A hypothetical 10 percent increase
in interest rates would not have a material impact on the fair market value of
these instruments due to their short maturity.
The Company develops its products in the United States and markets them in North
America, Europe, Middle East and Africa, Australia, Asia Pacific and Latin
America. As a result, our financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. Currently, the Company has no hedging contracts.
27
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Organization of the Company
(included as Exhibit 3.3 to the Company's Registration Statement on
Form S-1, File No. 0-23852, and incorporated herein by reference)
3.2 Restated By-Laws of the Company, as amended (included as Exhibit 3.2
to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996, File No. 0-23852 and incorporated herein by
reference)
3.3 Amendment to By-Laws adopted on February 1, 2001 (including as
Exhibit 3.3 to the Company's Current Report on Form 10-Q for the
quarter ended March 31, 2001, File No. 0-23852 and incorporated
herein by reference)
3.4 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of Project Software & Development, Inc. (which is
attached as Exhibit A to the Rights Agreement included as Exhibit
4(b) to the Company's Current Report on Form 8-K dated February 2,
1998, File No. 0-23852, and incorporated herein by reference)
3.5 Amendment to Articles of Organization adopted on December 15, 1999
(included as Exhibit 3.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1999, File No. 0-23852, and
incorporated herein by reference)
3.6 Amendment to Articles of Organization, dated March 6, 2001 (included
as Exhibit 3.4 to the Company's Current Report on Form 8-K dated
March 9, 2001, File No. 0-23852, and incorporated herein by
reference).
4. Instruments defining the Rights of Security Holders, Including
Indentures
4.1 Specimen certificate for the Common Stock of the Company (included as
Exhibit 4.1 to the Company's Registration Statement on Form S-1,
Registration No. 33-76420, and incorporated herein by reference)
4.2 Article 4B of the Amended and Restated Articles of Organization of
the Company (included as Exhibit 4.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-76420, and incorporated
herein by reference)
4.3 Rights Agreement dated as of January 27, 1998, between Project
Software & Development, Inc. and BankBoston, N.A. as Rights Agent
(included as Exhibit 4 (a) to the Company's Current Report on Form
8-K dated February 2, 1998, File No. 0-23852, and incorporated herein
by reference)
28
4.4 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of Project Software & Development, Inc. (included as
Exhibit 4 (b) to the Company's Current Report on Form 8-K dated
February 2, 1998, File No. 0-23852, and incorporated herein by
reference)
4.5 Form of Rights Certificate (included as Exhibit 4 (c) to the
Company's Current Report on Form 8-K dated February 2, 1998, File No.
0-23852, and incorporated herein by reference)
(b) Reports on Form 8-K
There were no current reports filed on Form 8-K for the three months ended
June 30, 2001.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MRO SOFTWARE, INC.
------------------
Date: August 14, 2001 By: /s/ Peter J. Rice
--------------- -----------------
Peter J. Rice
Executive Vice President -
Finance and Administration,
Chief Financial Officer and
Treasurer
(Principal Financial Officer)
30
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION PAGE
- --- ----------- ----
3.1 Amended and Restated Articles of Organization of the Company
(included as Exhibit 3.3 to the Company's Registration Statement on
Form S-1, Registration No. 33-76420, and incorporated herein by
reference)
3.2 Restated By-Laws of the Company, as amended (included as Exhibit 3.2
to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1996 File No. 0-23852 and incorporated herein by
reference)
3.3 Amendment to By-Laws adopted on February 1, 2001 (including as
Exhibit 3.3 to the Company's Current Report on Form 10-Q for the
quarter ended March 31, 2001, File No. 0-23852 and incorporated
herein by reference)
3.4 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of Project Software & Development, Inc. (which is
attached as Exhibit A to the Rights Agreement included as Exhibit
4(b) to the Company's Current Report on Form 8-K dated February 2,
1998, File No. 0-23852, and incorporated herein by reference)
3.5 Amendment to Articles of Organization adopted on December 15, 1999
(included as Exhibit 3.4 to the Company's Quarterly Report on Form
10-Q for the quarter ended December 31, 1999, File No. 0-23852, and
incorporated herein by reference)
3.6 Amendment to Articles of Organization, dated March 6, 2001 (included
as Exhibit 3.4 to the Company's Current Report on Form 8-K dated
March 9, 2001, File No. 0-23852, and incorporated herein by
reference).
4.1 Specimen certificate for the Common Stock of the Company (included as
Exhibit 4.1 to the Company's Registration Statement on Form S-1,
Registration No. 33-76420, and incorporated herein by reference)
4.2 Article 4B of the Amended and Restated Articles of Organization of
the Company (included as Exhibit 4.1 to the Company's Registration
Statement on Form S-1, Registration No. 33-76420, and incorporated
herein by reference)
4.3 Rights Agreement dated as of January 27, 1998, between Project
Software & Development, Inc. and BankBoston, N.A. as Rights Agent
(included as Exhibit 4 (a) to the Company's Current Report on Form
8-K dated February 2, 1998, File No.0-23852, and incorporated herein
by reference)
4.4 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock of Project Software & Development, Inc. (included as
Exhibit 4 (b) to the Company's Current Report on Form 8-K dated
February 2, 1998, File No. 0-23852, and incorporated herein by
reference)
4.5 Form of Rights Certificate (included as Exhibit 4 (c) to the
Company's Current Report on Form 8-K dated February 2, 1998, File No.
0-23852, and incorporated herein by reference)
31