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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
(mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from _______________ to __________________
Commission File Number 0-23852
MRO SOFTWARE, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2448516
(State or other jurisdiction of (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)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
----------------------------
(Title of Class)
----------------
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [X] No
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, 2003
was $116,151,579.
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 24,720,247 shares of common stock, $.01 par value per share,
as of December 19, 2003.
DOCUMENT INCORPORATED BY REFERENCE
Certain portions of the Company's Definitive Proxy Statement for its 2004 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
Annual Report on Form 10-K.
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EXPLANATORY NOTE
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 for various reasons, include those discussed under
the heading "Factors Affecting Future Performance" below. These forward-looking
statements speak only as of the date of this Annual Report, and the Company
disclaims 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 MainControl(R), are registered trademarks of MROI. MRO
Software(TM), Make It All Count(TM) MAXIMO Enterprise(TM), MAXIMO Extended
Enterprise(TM), MAXIMO Buyer(TM), MAXIMO Scheduler(TM), MAXIMO Workflow(TM),
MAXIMO Enterprise Adapter(TM), MAXIMO Illustrated Parts Catalog, Supplier
E-Commerce Adapter(TM), MRO.COM(TM), and MRO Operations Center(SM) are
trademarks and service marks of MROI. IBM(R), WebSphere, AIX and DB2 are
trademarks of IBM Corporation, or its subsidiaries. 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] 2003 MRO Software, Inc. All rights reserved.
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PART I
ITEM 1. BUSINESS
MRO Software is a leading global provider of strategic asset management
solutions, software and related services. Strategic asset management is the
management and optimization of the business processes required to keep our
customers' critical assets productive. Critical assets are those that have a
significant impact on operations and performance, including assets used in
production, facilities, fleet and Information Technology (IT) operations. The
Company's strategic asset management software products and services allow our
customers to manage the complete lifecycle of their strategic assets, including:
planning, procurement, deployment, tracking, maintenance and retirement. Using
MRO Software's products and services, our customers improve production
reliability, labor efficiency, material optimization, software license
compliance, lease management, warranty and service management and provisioning
across their critical asset base.
MAXIMO, the Company's flagship product targeting the Enterprise Asset Management
("EAM") market, was first released in 1991. MAXIMO enables customers to manage
the Maintenance, Repair and Operations ("MRO") of their significant assets.
Businesses, government agencies and other organizations use MAXIMO across their
enterprises to assist in the management of their high-value capital assets such
as plants, facilities and production equipment to cut MRO inventories and supply
chain costs, control maintenance expenses, reduce downtime, and more effectively
deploy assets, personnel and other resources. MAXIMO delivers robust
functionality, drawing upon the Company's established track record as a provider
of large-scale applications critical to the operations of major industrial
companies.
In fiscal 2001, the Company released MAXIMO 5. MAXIMO 5 is based on pure
Internet component-based technology that lowers the total cost of ownership for
enterprise application systems and allows customers to support their global
enterprise or single sites via a Web browser. This architecture significantly
streamlines operations by reducing the time and cost associated with deployment,
support and training.
Also, in fiscal 2001, the Company changed its name to MRO Software, Inc. and its
NASDAQ trading symbol to "MROI".
In fiscal 2002, the Company acquired MainControl, Inc. and began to market and
sell the MainControl product, which enables customers to manage their
information technology (IT) assets, such as hardware and software used in their
desktop, telecommunications, networking and computing infrastructure. Targeting
the IT asset management (ITAM) market, the MainControl Product (re-branded as
MAXIMO MainControl) enables our customers to manage their IT assets through
procurement, contracts, compliance, inventory, finance, service management,
business continuity and retirement, while enabling information to be correlated
and shared across discrete functional areas of an organization.
Our solutions for EAM (MAXIMO) and ITAM (MAXIMO MainControl) markets, combine to
address the market we define as Strategic Asset Management (SAM).
In fiscal 2003, the Company has focused on enhancing and adding functionality to
its MAXIMO and MAXIMO MainControl products in its endeavor to be the premier
vendor for strategic asset management solutions. We have also focused on
developing Industry Solutions that meet the unique needs of different vertical
industries, consisting of pre-configured, industry-specific, focused
applications delivered on the MAXIMO 5 technology platform.
The Company reports all its revenue in one reportable business segment, the
strategic asset management segment.
BUSINESS STRATEGY
Our objective is to be the leading provider of strategic asset management
solutions. We have focused on building our business strategies around key
strengths that we believe will drive future success and allow the Company to
continue to be a stable, profitable and growth oriented software company. Key
elements of our strategy include the following:
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INDUSTRY SOLUTIONS. We believe that our extensive expertise in asset
management solutions for production, facilities, fleet, and IT, --
enhanced by our vertical domain knowledge in many industries will
distinguish us from our competitors
EXPAND SOLUTIONS OFFERED TO OUR CUSTOMER BASE. We believe that our
large and diverse customer base provides a stable foundation on which
to grow the business. We intend to strengthen our relationship with our
existing customers, while actively pursuing new customers both
domestically and internationally. The Company also recognizes the
opportunity to provide ITAM solutions to its existing EAM customer base
and has begun to execute on this strategy.
MAINTAIN RESEARCH AND DEVELOPMENT INVESTMENT. We believe that our
products have a significant architectural advantage that offers both a
unique solution to our users and also establishes key differentiation
from competitors in our market. We believe that we must continue to
invest in research and development initiatives in order to further
leverage this architectural advantage into the future.
MANAGE COSTS AND PRESERVE CASH RESERVES. We believe that the strength
of our cash position, absence of long-term debt and recent history of
positive earnings distinguishes us from our competitors. We will
continue to manage costs and preserve cash.
PURSUE STRATEGIC RELATIONSHIPS AND ACQUISITIONS. We will continue to
pursue strategic relationships and alliances that help us to access a
broader set of customers. We may pursue acquisitions of companies that
have technologies or products that are complementary to our products.
PRODUCTS
MAXIMO
MAXIMO is the market-leading solution in the Enterprise Asset Management (EAM)
market. MAXIMO helps companies in asset-intensive industries increase their
return on assets while decreasing their operational costs, including the costs
of transacting with their suppliers. The MAXIMO suite of software products is
used to plan and manage ongoing Maintenance Repair and Operations (MRO) and to
track related labor, parts and costs. Using MAXIMO, customers can prioritize
tasks, assign work based on the availability of necessary parts and labor, and
analyze equipment failures in order to implement appropriate preventive
maintenance measures. MAXIMO is available in English, Brazilian Portuguese,
Dutch, French, German, Italian, Japanese, Korean, Swedish, Latin American
Spanish, and Simplified Chinese. MAXIMO is also localized into additional
non-English languages via our local agents.
MAXIMO FEATURES
MAXIMO is composed of a series of comprehensive capabilities that communicate
with a relational database management system. MAXIMO operates on a variety of
commonly used server hardware platforms and network operating systems and also
uses leading commercial SQL databases, including Oracle and Microsoft SQL
Server. Core application features and functions in MAXIMO include:
ASSET MANAGEMENT. Asset management means identifying, tracking,
locating, maintaining and analyzing physical assets, especially those
that impact the customer's revenue stream. MAXIMO 5 captures critical
asset-related data and makes it easily accessible for analysis,
planning and more informed decision-making.
WORK MANAGEMENT. MAXIMO 5 work management capabilities track all
aspects related to work performed on assets, from initial work request
through work order generation, job completion and recording of actual
results. The ability to track, manage and analyze work requests, labor,
planning and scheduling can help organizations improve productivity.
Work management compares budgets or estimates against actual and
historical work orders.
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MATERIALS MANAGEMENT. MAXIMO 5 materials management capabilities help
generate significant savings by accurately tracking materials and their
usage, allowing reductions in inventory and elimination of unnecessary
spending. MAXIMO 5 provides the capability to consolidate vendor lists,
automate procurement processes, track repairable spares and reduce
inventory levels, which creates greater efficiency and ensures that the
customer has the right parts at the right time.
PURCHASING. MAXIMO 5 purchasing capabilities enable organizations to
plan and consolidate, demand, and streamline purchasing processes and
comply with existing purchasing contracts. MAXIMO purchasing creates
requests for proposals, blanket purchase orders and purchase
agreements, purchase requisitions and purchase orders, records receipt
of parts, analyzes vendor performance and integrates with accounting
applications, including invoice matching and multiple currency
functionality.
ANALYTICS. The ability to analyze data captured in MAXIMO 5 provides
companies with critical knowledge to improve and optimize their
maintenance initiatives across all functional areas. MAXIMO 5 Key
Performance Indicators (KPIs) and Reports make it possible to identify
areas or activities that need improvement. In addition to KPIs, MAXIMO
5 provides a comprehensive set of pre-defined functional and exception
reports that provide detailed information on all customer maintenance
operations.
MAXIMO OPTIONS
A variety of options can be added on to expand the capabilities of MAXIMO,
including the following: MAXIMO Mobile Suite, MAXIMO Project Manager, MAXIMO
Desktop Requisition, MAXIMO Illustrated Parts Catalog, MAXIMO Enterprise
Adapters, MAXIMO e-Commerce Adapters and MAXIMO Workflow.
MAXIMO INDUSTRY SOLUTIONS
The Company seeks to expand its market share in target vertical markets by
offering pre-configured, industry-specific, focused applications for MAXIMO 5.
We are focused on the following industries: public sector, utilities, oil and
gas, nuclear, aviation, transportation, pharmaceuticals, power generation, and
power transmission and distribution.
Each is supported with scalable solutions running on industry-standard
databases, application servers and hardware platforms, complemented by offerings
from key alliance partners with the appropriate domain expertise.
MAXIMO MAINCONTROL
MAXIMO MainControl is a leading solution for the IT Asset Management (ITAM)
market and provides management of IT assets across their entire lifecycle from
planning and procurement to retirement and disposal.
MAXIMO MAINCONTROL FEATURES
MAXIMO MainControl addresses the numerous IT asset management issues facing an
organization, such as:
ASSET DISCOVERY & TRACKING: enables the user with autodiscovery tools
and software usage tracking tools to provide knowledge of where assets
are at all times. MAXIMO MainControl enables users to track history of
asset location, owners, users and configuration changes while tracking
all moves, adds and changes.
CONTRACT MANAGEMENT: enables the user to track and manage contracts and
obligations, from purchase contracts to subscription, lease,
maintenance, software licensing and service contracts.
FINANCIAL MANAGEMENT: supports budget planning with a spreadsheet
import/export facility and allows budget tracking by account, cost
center and cost type to assist with technology procurement.
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PROCUREMENT: provides comprehensive, online management of IT asset
procurement and is able to fully integrate with a wide variety of
procurement systems. Maximo MainControl enables users to select vendors
and equipment from online catalogs, check contract terms, generate
purchase requisitions, approve requests, generate orders and allocate
planned expenses to budget accounts. Users can fulfill orders from
stock or place new orders.
SERVICE MANAGEMENT: manages all requests regarding IT assets and
services, provides a complete history of all activities involved in
problem resolution, planning and change management activities. This
capability also empowers the help desk technician, improves service
levels and increases employee productivity.
COMPLIANCE: ensures software license compliance, tracks and manages all
software installations in the organization. Provides the ability to
establish a software management process to track license terms and to
assist with internal software audits.
BUSINESS CONTINUITY: supports the requirements to integrate and
automate the response and recovery process for technology assets in the
event of a business disruption.
ONLINE COMMERCE SERVICES (OCS)
MRO Software provides solutions to support asset-centric procurement by offering
distributors and manufacturers of industrial and office products the
capabilities to successfully implement or augment their e-Commerce initiatives.
These services give industrial suppliers a fast and simple way to conduct
business over the Internet with users of MAXIMO Buyer or of other procurement
applications. By using these hosted services, companies can immediately
participate in Internet-based commerce and ensure their ability to provide
service to existing customers and new prospects. OCS supports multiple
languages, currencies and tax codes, with 24/7/365 availability.
OCS FEATURES
OCS provides suppliers with a variety of hosted applications including the
ability to accept, process and respond to electronic purchase orders transmitted
from MAXIMO and other popular e-Procurement applications; to manage supplier and
buyer profiles and relationships; and to process e-Commerce transactions. 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 publishing of electronic catalog content. Our customers have
the ability to provide a Web storefront with comparison tools, shopping cart,
e-Commerce 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 5 components are built on 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 5 is the first asset management solution to be developed
and commercially deployed on a standards-based pure-Internet architecture.
MAXIMO, with its industry-leading, best-of-breed functionality, was designed
with global organizations in mind.
J2EE provides application portability, scalability, interoperability 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, Internet applications need a
mechanism for identifying a particular client and the state of any conversation
it is having with that client.
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By providing session management capabilities, the MAXIMO Web servers and
applications servers can easily manage session states for Internet-based
connections.
MAXIMO's use of open standards supports a broad range of 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 asset-centric procurement solutions use an Internet oriented, scaleable
architecture to support a full Web browser-based environment. OCS allows
communications between buyers and suppliers in a real-time manner, based on XML
standards. OCS applications are hosted by the Company at an outsourced hosting
facility.
STANDARDS BASED INTEROPERABILITY
Enterprises today require systems that will collaborate within their enterprise
and with their partners and customers. They require business systems that will
address their business needs efficiently and adapt to changes as their business
needs or environment changes. Our interoperability products simplify and
expedite the implementation of our core product suites. 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, Oracle and
PeopleSoft. Our MAXIMO 5 interoperability framework supports the more common
collaboration patterns found between an asset management system like MAXIMO and
other enterprise business systems. This allows enterprises to focus on their
operational procedures, and provides them with 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.
The Company employs a technical hot-line support staff of 114 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 four satellite support offices in
China, Korea, Mexico and McLean Virginia. Support services are provided on a
seven-day week, 24-hour day basis using our support centers in UK, Australia,
United States (Bedford, MA) and Canada. 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 the standard support provided to all of our clients.
Subscribers to the Company's annual support contracts are entitled to receive
(i) customer service and technical support by telephone, fax, on-line
via the Internet and electronic media (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.
PROFESSIONAL AND EDUCATIONAL SERVICES
The Company offers services designed to assist customers in meeting the
challenges of successfully implementing the Company's business solutions. The
Company employs a consulting and training staff of 268 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
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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 needs.
The Company conducts comprehensive training programs covering Company
applications and concepts for its end-users. Training is offered at the
Company's headquarters in Massachusetts and at regional centers located 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. For those customers that look for
alternative forms of training, we also offer computer-based training that
consist of a series of self-paced lessons and Web-based training.
CUSTOMERS
The Company's customers are found in a broad range of vertical industries
including: aviation, facility/property management, discrete and process
manufacturing, public sector, oil and gas, transportation, aviation, utilities,
financial services consumer/retail 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 marketing and
direct sales organization of 116 persons operating out of its Massachusetts
headquarters and sales offices located in California, Colorado, Florida,
Georgia, Illinois, Maryland, Michigan, New Jersey, New York, Texas and Virginia.
In addition, the Company markets its products outside the United States through
a sales force of 102 persons from sales offices in Australia, Belgium, Brazil,
Canada, China, France, Germany, Hong Kong, India, Italy, Japan, Mexico, the
Netherlands, Singapore, Sweden, Thailand and the United Kingdom and through
distributors in parts of Africa, Asia, Europe, the Middle East, and Latin
America. Approximately 41%, 38%, and 34% of the Company's total revenues in
fiscal 2003, 2002, and 2001, respectively, were derived from sales outside the
United States. The United Kingdom represented 15%, 13%, and 11% of the sales
outside the United States in fiscal 2003, 2002, and 2001, respectively.
Approximately 9%, 8%, and 8% of the Company's total long-lived assets in fiscal
2003, 2002, and 2001, respectively, are located outside the United States.
The Company markets its products through advertising campaigns in national trade
periodicals, direct 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 the 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 strategic asset management products, from the initial sales
presentation to the issuance of a purchase order, typically ranges from nine 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, implementation time, domain expertise
and ease of use.
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.
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STRATEGIC ALLIANCES
MRO Software's alliance program is designed to bring value to asset-intensive
companies on a global basis through collaboration with world-class product and
service partners. Our alliance program enhances the Company's market reach while
at the same time ensuring that exacting standards of quality are met in
partnering engagements. Management of our relationships with alliance partners
is an important component of the Company's business strategy. The goal of this
strategy is to enhance our future revenue streams by broadening our market reach
through the addition of partner resources.
The Company works closely with major consulting and systems integrators and has
formed alliances with such firms as Booz Allen Hamilton, Deloitte Consulting,
Hewlett Packard, IBM Global Services and SAIC. In addition, the Company has
partnerships with specific solution providers that offer a complementary
solution to MAXIMO, such as Bentley Nevada, Computational Systems, Inc., Fisher
Rosemount, Isograph, Meridium, Inc., OSI Software Inc., Optram, Inc., SKF, Inc.,
and Tech Assist.
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), Hewlett Packard and Rockwell Automation, who resell our
products using their own sales forces. We market the Syclo Inc. products as part
of the MAXIMO Mobile solution.
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 select technology partners based on their technological expertise,
and we seek partners with leading edge technology conducive to the advancements
that we have planned for our own products and services. Some of our technology
partners are BEA Software, Hewlett Packard, IBM, Oracle, Microsoft and Sun
Microsystems. These licenses are generally non-exclusive, worldwide licenses
that terminate on varying dates.
COMPETITION
The Company's suite of strategic asset management 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 Management
providers such as SAP, Peoplesoft and Oracle. Our competitors also include niche
providers such as Datastream and Indus International that focus on segments of
the EAM market, and Computer Associates and Peregrine Systems that focus on the
IT asset management market.
PRODUCT DEVELOPMENT
The Company has made substantial investments in research and software product
development. The Company's total product development expenses in fiscal years
2003, 2002 and 2001 were $26.5 million, $26.9 million and $27.6 million,
respectively. The Company's research and development staff consists of 203
employees and a number of outside consultants. 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 Bedford, Massachusetts; London, Ontario; Grand
Rapids, Michigan, and McLean, Virginia.
In fiscal 2003, the Company has focused its development efforts on enhancing and
adding functionality to its MAXIMO 5 and MAXIMO MainControl products. We have
also focused on developing Industry Solutions that meet the unique needs of
different
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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 5 and MAXIMO MainControl products, as well
as, to continue to research and investigate new technologies that would
complement the Company's product strategies in the future.
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" and "click
wrap" licenses and negotiated 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 its corporate headquarters. The Company also now 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.
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EMPLOYEES
As of September 30, 2003, the Company had 890 full-time employees including
sales, marketing and related services, product research and development,
customer support, training and consulting services, and finance, 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 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. In October 2002, the Company and the sub
landlord agreed to extend the lease term until December 31, 2009. The average
annual base rent is $1.1 million. Additionally, the Company estimates that its
annual operating expenses under the recently renegotiated lease will be
approximately $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 sales offices in
California, Colorado, Florida, Georgia, Idaho, Illinois, Kansas, North Carolina,
Maryland, Michigan, Missouri, New Jersey, New York, Tennessee, Texas and
Virginia. The Company also leases offices for its international operations in,
Australia, Brazil, Canada, China, France, Germany, Hong Kong, India, Italy,
Mexico, the Netherlands, Singapore, Sweden, Thailand and the United Kingdom.
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
ITEM 5. OTHER INFORMATION
CERTIFICATION UNDER SARBANES-OXLEY ACT
Our chief executive officer and chief financial officer have furnished to the
SEC the certification with respect to this Report that is required by Section
906 of the Sarbanes-Oxley Act of 2002.
NONE.
Page 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded in the over-the-counter market and prices
are quoted on the National Association of Securities Dealers Automated Quotation
National Market System ("NASDAQ National Market") under the symbol MROI. As of
December 19, 2003, there were approximately 120 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 consolidated
reporting system for each quarterly period within the two year period ended
September 30, 2003.
FISCAL 2003 HIGH LOW
First Quarter $13.20 $5.85
Second Quarter $13.87 $6.83
Third Quarter $ 9.90 $5.88
Fourth Quarter $15.11 $8.41
FISCAL 2002 HIGH LOW
First Quarter $25.84 $ 8.43
Second Quarter $29.85 $11.16
Third Quarter $15.07 $10.39
Fourth Quarter $12.30 $ 6.65
On October 15, 1999, the Company's Board of Directors approved a 2-for-1 stock
split in the form of a dividend of its common stock to be paid to all
shareholders of record on December 15, 1999. The payment distribution date for
the stock dividend was December 22, 1999. The Company's authorized common stock,
$0.01 par value per share, was also increased from 15,350,000 to 50,000,000
shares. All share and per share data has been restated to reflect this stock
split in the form of a dividend as though it had occurred at the beginning of
the earliest period presented.
Since the Company's initial public offering in 1994, the Company has not
declared or paid cash dividends on its Common Stock. The Company currently
intends to retain any future earnings to finance growth and therefore does not
anticipate paying cash dividends in the foreseeable future.
Certain provisions of the Company's Articles of Organization, as amended, and
Bylaws could delay the removal of incumbent directors and could make a merger,
tender offer or proxy contest involving the Company more difficult, even if such
events would be beneficial to the interests of the stockholders. In addition,
the Company has 1,000,000 shares of authorized Preferred Stock. The Company may
issue shares of such Preferred Stock in the future without further stockholder
approval and upon such terms and conditions, and having such rights, privileges
and preferences, as the Board of Directors may determine. The rights of the
holders of common stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, a majority or the outstanding voting
stock of the Company. In addition, the staggered terms of the Company's Board of
Directors could have the effect of delaying or deferring a change in control of
the Company.
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
Page 12
exercisable, 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 each 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, respectively. 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.
Stockholders are urged to review the Rights Agreement for a complete
understanding of the Rights Plan. The Rights Plan, while providing the Board of
Directors with flexibility in connection with possible acquisitions and
deterring unfair or coercive takeover tactics, could have the effect of making
it more difficult for a third party to acquire, or of discouraging a third party
from acquiring, beneficial ownership of 15% or more of the outstanding shares of
the Company's Common Stock.
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.
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------
(in thousands, except
per share data)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Revenues $176,877 $171,881 $185,450 $168,661 $145,665
Income/(loss) from operations 5,742 (15,319) (20,755) (571) 24,333
Net income/(loss) 4,870 (10,551) (15,468) 2,102 17,880
Net income/(loss) per share, basic 0.20 (0.46) (0.70) 0.10 0.87
Net income/(loss) per share, diluted 0.20 (0.46) (0.70) 0.09 0.85
Shares used to calculate net income/
(loss) per share
Basic 24,429 23,171 22,148 21,682 20,459
Diluted 24,653 23,171 22,148 22,786 21,094
------------------------------------------------------------
Total assets 205,261 192,153 171,453 180,945 159,033
Long-term obligations 1,216 405 150 171 282
On October 15, 1999, the Company's Board of Directors approved a 2-for-1 stock
split in the form of a dividend of its common stock to be paid to all
shareholders of record on December 15, 1999. The payment distribution date for
the stock dividend was December 22, 1999. All historical share and per data has
been restated to reflect this stock split as though it had occurred at the
beginning of the earliest period presented.
Page 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, 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 for various
reasons, include those discussed under the heading "Factors Affecting Future
Performance" below. These forward-looking statements speak only as of the date
of this Annual Report, and the Company disclaims any obligation to update such
forward looking statements as a result of any change in circumstances or
otherwise.
OVERVIEW
MRO Software is a leading global provider of strategic asset management
solutions, software and related services. Strategic asset management is the
management and optimization of the business processes required to keep our
customers' critical assets productive. Critical assets are those that have a
significant impact on operations and performance, including assets used in
production, facilities, fleet and Information Technology (IT) operations. The
Company's strategic asset management software products and services allow our
customers to manage the complete lifecycle of their strategic assets, including:
planning, procurement, deployment, tracking, maintenance and retirement. Our
strategic asset management software products and services include MAXIMO for the
Enterprise Asset Management (EAM) market and MAXIMO MainControl for the IT Asset
Management (ITAM) market. We also offer Online Commerce Services (OCS) that
enables the asset-centric procurement capabilities of our EAM software products
through the MRO Operations Center. Asset-centric procurement is a combination of
products and services designed to support the requirements of industrial
asset-related procurement. Using MRO Software's products and services, our
customers improve production reliability, labor efficiency, material
optimization, software license compliance, lease management, warranty and
service management and provisioning across their critical asset base.
At the beginning of fiscal 2003, the Strategic MRO offerings were renamed
strategic asset management and consist of the MAXIMO and MAXIMO MainControl
products. Enterprise Catalog Management services were offered up until January
17, 2003 (see services operations sale in the following paragraph). The Company
continues to report in one operating segment and does not allocate expenses to
these product groups. The Company's management assesses operating results on an
aggregate basis to make decisions about the allocation of resources.
On January 17, 2003, the Company sold the industrial data normalization services
operations and recorded a gain of $407 thousand (recorded as other income).
Under the terms of the sale, the Company retained comprehensive, non-exclusive
rights to the software and technology used in the business, which has been
embedded in the Company's MAXIMO and Online Commerce Services offerings. Also,
due to the sale of this business, the Company will no longer sell Enterprise
Catalog Management services. The services operations were purchased by
International Materials Solutions, Inc. The fair value of the assets sold net of
the liabilities assumed was $593 thousand.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial conditions and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
that
Page 14
management make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. These estimates and assumptions are
affected by management's application of accounting policies.
Critical accounting policies, in which different judgments and estimates by our
management could materially affect our reported condition and results of
operations, include revenue recognition, estimating the allowance for doubtful
accounts, deferred tax assets, and the valuation of long-lived assets.
REVENUE RECOGNITION
SOFTWARE PRODUCTS
The Company 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 product 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. Our resellers do not
have any right of return beyond the standard 90-day performance warranty that
runs concurrent with post-contract product support (PCS).
SERVICES REVENUES
Services revenues are comprised of consulting and training fees related to
installation of the Company's software solutions, maintenance/support ("PCS")
contracts for software products, content management and subscription based fees
related to the Company's Online Commerce Services ("OCS") business. Consulting,
training and content management 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.
Many of our software arrangements include consulting implementation services
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. For those fixed price
arrangements where we cannot reliably estimate the hours required to complete
the implementation services and 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 VSOE of fair value of each
Page 15
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
Management's 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. 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, 2003 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.
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 No. 109. 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 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. We consider future taxable
income and ongoing tax planning strategies when assessing the need for a
valuation allowance. Negative evidence that would suggest the need for a
valuation allowance
Page 16
for the Company consists of our recent cumulative operating losses, which were
attributable to unprofitable internet commerce businesses that we were engaged
in. We have since ceased operation of these unprofitable businesses and we
believe that we have substantial positive evidence that would negate the need
for a valuation allowance. The positive evidence consists of the current year
cumulative pre-tax profits and projected future pre-tax profits, as well as, a
consistent earnings history for the Company prior to these operating loss years.
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, 2003 is $11.5 million.
The Company has established a valuation allowance with respect to the net
operating losses acquired from Applied Image Technology, Inc. ($1.3 million),
various state net operating loss carryforwards ($266 thousand), and certain
Canadian net operating loss carryforwards ($40 thousand). The valuation
allowance was based upon expected earnings within individual tax jurisdictions
and statutory limitations imposed by tax jurisdictions, which will more likely
than not reduce our ability to realize the net operating loss carryforwards. The
reduction in the net valuation allowance in fiscal 2003 from fiscal 2002 is
primarily attributable to the utilization of net operating loss carryforwards.
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 17
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,
------------------------
2003 2002 2001
---- ---- ----
Revenues:
Software 28% 29% 33%
Support and services 72 71 67
--- --- ---
Total revenues: 100 100 100
Total cost of revenues 38 40 41
--- --- ---
Gross profit 62 60 59
--- --- ---
Operating expenses:
Sales and marketing 33 34 38
Product development 15 16 15
General and administration 10 11 11
Amortization of goodwill
and other intangibles 1 8 6
--- --- ---
Total operating expenses: 59 69 70
--- --- ---
Income/(loss) from operations 3 (9) (11)
Other income 1 1 1
--- --- ---
Income/(loss) before income taxes 4 (8) (10)
Provision/(benefit) for income taxes 1 (2) (2)
--- --- ---
Net income/(loss) 3% (6)% (8)%
--- --- ---
Page 18
REVENUES
The Company's 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) 9/30/03 % 9/30/02 % 9/30/01
- ------------------------------------------------------------------------------------------------
Software licenses $ 49,904 2% $ 49,035 (20)% $ 61,337
Percentage of total revenues 28% 29% 33%
Support and services $126,973 3% $122,846 (1)% $124,113
Percentage of total of revenues 72% 71% 67%
Total revenues $176,877 3% $171,881 (7)% $185,450
FISCAL 2003 COMPARED TO FISCAL 2002: Software license revenues increased 2% to
$49.9 million in fiscal 2003 from $49.0 million in fiscal 2002. The increase in
fiscal 2003 as compared to fiscal 2002 is mainly attributable to an increase in
IT asset management software licenses (MAXIMO MainControl) revenues, which
increased to $3.6 million from $2.7 million for fiscal 2003 and 2002,
respectively. The Company purchased the MAXIMO MainControl product in June 2002
and therefore only recognized four months of revenue from this product in fiscal
2002. MAXIMO software licenses increased slightly to $46.2 million in fiscal
2003 from $45.6 million in fiscal 2002. The Company attributes the relatively
flat software revenue to the saturation of our traditional EAM market, and
continued difficult IT spending environment and adverse economic conditions in
the general economy. The Company is also experiencing longer sales cycles.
Support revenues increased 18% to $65.2 million in fiscal 2003 from $55.4
million in fiscal 2002. Support revenues have increased as a result of a
cumulative increase in the number of MAXIMO customers, a strong renewal rate
(90%) for support contracts, and the addition of customers assumed as a result
of our acquisition of the MAXIMO MainControl business. MAXIMO support revenues
increased 13% to $61.6 million in fiscal 2003 from $54.3 million in fiscal 2002.
MAXIMO MainControl support revenues, primarily attributable to contracts assumed
in connection with the June 2002 acquisition of MainControl, Inc., were $3.6
million and $807 thousand for fiscal 2003 and 2002, respectively.
Service revenues decreased 8% to $61.8 million in fiscal 2003 from $67.4 million
in fiscal 2002. The overall decline in service revenues in fiscal 2003 as
compared to fiscal 2002 is comprised of a decline in MAXIMO service revenues of
$4.3 million, a decline in Enterprise Catalog Management service revenues of
$3.9 million, and a decline in OCS revenues of $300 thousand, partially offset
by an increase in IT asset management revenues of $2.7 million. The decrease in
MAXIMO service revenues is primarily due to a cumulative decline in the number
of MAXIMO software licenses sold and increased competition from independent
consulting firms who implement MAXIMO or other enterprise-wide solutions. The
decrease in Enterprise Catalog Management services revenues is primarily
attributable to the sale of the industrial data normalization services
operations in January 2003. The decline in OCS revenues is attributable to a
decrease in the number of customers renewing annual service contracts. The
increase in MAXIMO MainControl service revenues reflects the comparison of
revenues for all of fiscal 2003 with only four months of revenue from this
product in fiscal 2002.
FISCAL 2002 COMPARED TO FISCAL 2001: Software license revenues decreased 20% to
$49.0 million in fiscal 2002 from $61.3 million in fiscal 2001. The decrease in
fiscal 2002 was mainly attributable to a decrease in MAXIMO software license
revenues. MAXIMO software license revenues decreased 25% to $45.6 million in
fiscal 2002 from $60.7 million in 2001. The Company attributed this decrease to
a continued slowdown in its customers' IT spending, slower than expected
adoption of MAXIMO 5, and overall adverse economic conditions. The Company
recognized $2.7 million of software license revenues related to MAXIMO
MainControl, acquired in June 2002.
Page 19
Support revenues increased 17% to $55.4 million in fiscal 2002 from $47.3
million in fiscal 2001. Support revenues increased as a result of an increase in
the number of MAXIMO customers and a strong renewal rate for support contracts.
MAXIMO support revenues increased 17% to $54.3 million in fiscal 2002 from $46.4
million in fiscal 2001. The Company recognized $807 thousand of support revenues
related to its MAXIMO MainControl product. Enterprise Catalog Management support
revenues decreased 23% to $173 thousand in fiscal 2002 from $225 thousand in
fiscal 2001. The decline in Enterprise Catalog Management support revenues was
due to a relatively weak renewal rate and a small number of customers.
Service revenues decreased 12% to $67.5 million in fiscal 2002 from $76.8
million in fiscal 2001. MAXIMO service revenues decreased 3% to $58.5 million
from $60.4 million in fiscal 2002 and 2001, respectively. The decrease from
fiscal 2001 to fiscal 2002 was primarily due to a decline in MAXIMO software
licenses sold, which reduced the demand for services related to customer
implementations. The Company recognized $793 thousand of service revenues
related to its MAXIMO MainControl product. Enterprise Catalog Management service
revenues decreased 67% to $4.9 million in fiscal 2002 from $14.5 million in
fiscal 2001. Enterprise Catalog Management services revenues consists of content
normalization services, and the decrease in these revenues was due to a
continued decrease in demand for these services, and a stagnant e-Commerce
market. Also, in fiscal 2001, $7.2 million of Enterprise Catalog services
revenue was attributable to a single large contract for content
normalization/cataloging services that did not recur in fiscal 2002.
OCS support and service revenues increased 36% to $3.4 million in fiscal 2002
from $2.5 million in fiscal 2001. The increase was primarily attributable to a
single large subscription contract for $1.5 million, which was recognized
ratably over the 18-month term of the contract.
Page 20
COST OF REVENUES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/03 % 9/30/02 % 9/30/01
- ------------------------------------------------------------------------------------------------
Cost of software licenses $ 8,314 19% $ 7,012 50% $ 4,685
Percentage of software licenses 17% 14% 8%
Cost of support and services $58,618 (5)% $61,862 (12)% $70,423
Percentage of support and services 46% 50% 57%
Total cost of revenues $66,932 (3)% $68,874 (8)% $75,108
Percentage of total revenues 38% 40% 41%
FISCAL 2003 COMPARED TO FISCAL 2002: 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 increase in cost of software license revenues in
fiscal 2003 as compared to fiscal 2002 is primarily attributable to software
purchased for resale related to our MAXIMO Mobile Suite product and amortization
of acquired technology. Cost of software purchased for resale increased $982
thousand in fiscal 2003 as compared to fiscal 2002 due to an increase in demand.
Amortization of acquired technology was $3.4 million in fiscal 2003 and $3.0
million in fiscal 2002 and is attributable to technology acquired from
MainControl, Inc. in June 2002.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities, costs for utilization of third
party consultants, and costs to support the MRO Operations Center. Cost of
support revenues increased 13% to $9.6 million in fiscal 2003 from $8.5 million
in fiscal 2002. The increase in cost of support revenues was primarily
attributable to an increase in personnel. Cost of support revenues, as a
percentage of total support revenues was 15% in both fiscal 2003 and 2002.
Cost of service revenues decreased 8% to $49.0 million in fiscal 2003 from $53.4
million in fiscal 2002. The decrease in the cost of service revenues in fiscal
2003 as compared to fiscal 2002 was attributable to a $2.1 million reduction in
personnel and related benefits and facilities costs and a $2.2 million decrease
for the cost of third party consultants due to the sale of the industrial data
normalization services operations in January 2003. Cost of service revenues, as
a percentage of total service revenues was 79% in both fiscal 2003 and 2002.
FISCAL 2002 COMPARED TO FISCAL 2001: 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 increase in the cost of software license revenues in
fiscal 2002 as compared to fiscal 2001 was due to a $1.7 million increase in
royalties and software purchased for resale related to our MAXIMO Mobile Suite,
and a $750 thousand increase in amortization of acquired technology related to
technology acquired from MainControl, Inc. in June 2002.
Cost of support and services consists primarily of personnel costs for employees
and the related costs of benefits and facilities, costs for utilization of third
party consultants, and costs to support the MRO Operations Center. Cost of
support revenues was $8.5 million and $8.7 million in fiscal 2002 and 2001,
respectively. Cost of support revenues as a percentage of total support revenues
was 15% and 18% in fiscal 2002 and 2001, respectively. The decrease in cost of
support revenues was attributable to a decrease in number of internal resources
allocated to support the MRO Operations Center, which was implemented in
recognition of the slower than anticipated adoption of these services.
Cost of service revenues was $53.4 million and $61.7 million in fiscal 2002 and
2001, respectively. The decrease in cost of service revenues was primarily
attributable to a $9.0 million decrease for the costs of third party consultants
implementing the Company's products, a decrease of $1.5 million in travel costs
and
Page 21
an overall decrease in spending. Offsetting this decrease was a charge of $2
million for employee termination and other costs related to a reduction in
workforce for our OCS and Enterprise Catalog Management businesses. Our services
backlog in fiscal 2002 decreased compared to prior periods, and as a result we
utilized more in-house consultants to perform services instead of third parties.
Cost of service revenues as a percentage of total service revenues was 79% and
80% in fiscal 2002 and 2001, respectively.
OPERATING EXPENSES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/03 % 9/30/02 % 9/30/01
- ------------------------------------------------------------------------------------------------
Sales and marketing $59,117 1% $58,806 (18)% $71,651
Percentage of total revenues 33% 34% 39%
Product development $26,476 (2)% $26,897 (2)% $27,559
Percentage of total revenues 15% 16% 15%
General and administrative $17,702 (10)% $19,698 1% $19,573
Percentage of total revenues 10% 11% 11%
Amortization of goodwill and
other intangibles $ 908 (93)% $12,925 5% $12,314
Percentage of total revenues 1% 8% 7%
FISCAL 2003 COMPARED TO 2002: Sales and marketing expenses increased slightly to
$59.1 million in fiscal 2003 from $58.8 million in fiscal 2002. The increase in
fiscal 2003 as compared to fiscal 2002 is primarily attributable to a $1.2
million increase in personnel and related benefits, including severance costs
related to reorganization of the sales and marketing departments, and a $900
thousand increase in sales commissions paid on revenues from software licenses
sold. Partially offsetting this increase is a $1.8 million decrease in
advertising, travel expenses, and general sales expenses.
Product development expenses decreased 2% to $26.5 million in fiscal 2003 from
$26.9 million in fiscal 2002. The decrease in fiscal 2003 as compared to fiscal
2002 is attributable to a decrease in the costs to translate our products into
foreign languages, as most of the cost to translate MAXIMO 5 was absorbed in
fiscal 2002. The Company expects to continue to make enhancements to MAXIMO 5,
integrate MAXIMO MainControl into its overall product architecture and develop
industry-specific functionality, in a manner commensurate with future
expectations of revenues and income from sales of the resulting product
enhancements and functionality.
General and administrative expenses decreased 10% to $17.7 million in fiscal
2003 from $19.7 million in fiscal 2002. The decrease was primarily due to a $1.4
million decrease in bad debt provisions, a $1.2 million decrease in general and
administrative salaries and related benefits due to a decrease in the number of
general and administrative personnel, and a general decrease in spending.
Partially offsetting this decrease was a $525 thousand increase in insurance
premiums year over year.
The decrease in amortization of goodwill and other intangibles expense was due
to the adoption of SFAS No. 142 by the Company on October 1, 2002. In accordance
with SFAS No. 142, goodwill is no longer amortized. Intangibles and other
identifiable assets will continue to be amortized. Goodwill amortization was
$11.8 million in fiscal 2002.
FISCAL 2002 COMPARED TO 2001: Sales and marketing expenses decreased 18% to
$58.8 million in fiscal 2002 from $71.7 million in fiscal 2001. The decrease in
sales and marketing expenses in fiscal 2002 as compared to 2001 was primarily
attributable to a $3.0 million decrease in travel costs, a $5.0 million decrease
in sales commissions due to the decrease in MAXIMO software license revenues, a
$1 million decrease in advertising expenses, and an overall decrease in
spending. Also, in fiscal 2001, the Company issued a warrant valued at $3.3
million to i2 Technologies, Inc and recorded this as a one-time sales and
marketing expense.
Page 22
Product development expenses decreased 2% to $26.9 million in fiscal 2002 from
$27.6 million in fiscal 2001. The decrease in product development expenses was
attributable to a decrease in the cost of purchased software and an overall
decrease in spending. The Company will continue to make enhancements to MAXIMO
5, as well as its other product offerings.
General and administrative expenses increased slightly in fiscal 2002 as
compared to fiscal 2001. While certain expenses such as insurance premiums and
accounting and tax fees increased $600 thousand year over year, these increases
were offset by an overall decrease in spending. Also, in fiscal 2001, the
Company made a one-time payment in the amount of $650 thousand to W.W. Grainger,
Inc. for the repurchase of a stock option agreement.
The increase in amortization of goodwill and other intangibles expense was due
to the acquisition of businesses.
NON-OPERATING EXPENSES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/03 % 9/30/02 % 9/30/01
- ------------------------------------------------------------------------------------------------
Interest income $ 811 (17)% $ 974 (39)% $ 1,594
Other income/(expense), net $ 1,161 1,135% $ (94) (79)% $ (450)
FISCAL 2003 AS COMPARED TO 2002: Interest income is attributable to interest
earned on marketable securities and cash and cash equivalents. Due to
unfavorable interest yields, the Company earned less interest on its investments
in fiscal 2003. The change in other income was due to foreign currency exchange
rate gains and a gain of $407 thousand on the sale of the industrial data
normalization services operations in January 2003.
FISCAL 2002 COMPARED TO 2001: Interest income is attributable to interest earned
on marketable securities and cash and cash equivalents. Due to unfavorable
interest yields, the Company did not reinvest its portfolio with short-term
treasuries and municipal bonds. The Company instead decided to reinvest its cash
in short-term securities such as money market funds until rates increase. The
change in other income/(expense) was primarily due to losses caused by currency
rate fluctuations.
INCOME TAXES
The Company's effective tax rate was 37% for fiscal 2003. The difference between
the effective tax rate and the federal statutory tax rate of 35% in 2003 is due
to the non-deductible nature of certain intangible amortization expenses, the
impact of foreign rate differentials, and state income taxes offset by net
operating loss utilization and research and development credits. In fiscal 2002
the effective tax rate was a benefit of 27%. The difference between the
effective tax rate and the federal statutory rate of 35% was due to the
non-deductible nature of certain intangible and goodwill amortization expenses
and the impact of foreign rate differentials.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2003, the Company had cash and cash equivalents of $73.7
million and marketable securities of $20.9 million, and working capital of $52.5
million.
Cash provided by operations was $26.1 million for the twelve months ended
September 30, 2003 primarily attributable to income generated from operations,
the collection of accounts receivables, and income tax refunds, offset by the
payment of liabilities.
Cash used in investing activities was $23.2 million for the twelve months ended
September 30, 2003 and was primarily used in the purchase and sale of marketable
securities.
Page 23
Cash provided by financing activities was $2.0 million for the twelve months
ended September 30, 2003 and represents proceeds from the Company's Employee
Stock Option and Purchase Plans.
As of September 30, 2003, the Company's principal commitments consist primarily
of office space and equipment operating leases for its U.S. and European
headquarters. The Company's corporate headquarters are under lease through
December 31, 2009. The Company leases its other facilities and certain equipment
under non-cancelable operating lease agreements that expire at various dates
through June 30, 2019.
The Company 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 under these leases was $6.2
million, $6.5 million, and $6.6 million for fiscal 2003, 2002 and 2001,
respectively.
The operating leases provide for minimum aggregate future rentals as of
September 30, 2003 as follows:
(in thousands)
2004................................................................ $ 3,934
2005................................................................ 3,269
2006................................................................ 2,921
2007................................................................ 2,823
2008 and thereafter................................................. 21,103
-------
$34,050
=======
The following table summarizes our contractual obligations as of September 30,
2003. The contractual obligations are primarily related to office leases,
equipment leases and contracts for our MRO Operations Center.
Payments due by Period
(in thousands) Less than 1-3 3-5 More than
Contractual Obligations Total 1 year years years 5 years
- --------------------------------------------------------------------------------------------------
Operating leases
Leased premises $34,050 $ 3,934 $6,190 $5,337 $ 18,589
Equipment/Automobiles $ 3,763 $ 2,567 $1,193 $ 3 ---
Purchase obligations $5,410 $ 3,577 $1,833 --- ---
Total $43,223 $10,078 $9,216 $5,340 $ 18,589
The Company may use a portion of its cash to acquire additional businesses,
products or technologies complementary to its business. The Company also plans
to make investments over the next year in its products and technology.
The Company expects that its cash flow from operations together with its current
cash and marketable securities will be sufficient to meet its working capital
and capital expenditure requirements through at least September 30, 2004. The
Company's liquidity and working capital requirements, including the current
portions of any long-term commitments, are satisfied through its cash flow from
operations, leaving its cash reserves available for acquisitions, other
investments and unanticipated expenditures. The Company has no long-term debt
obligations. The factors which might impact the Company's cash flows include
those which might impact the Company's business and operations generally, as
described below under the heading "Factors Affecting Future Performance".
Page 24
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). This interpretation of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," addresses consolidation by
business enterprises of variable interest entities (VIEs) that either: (1) do
not have sufficient equity investment at risk to permit the entity to finance
its activities without additional subordinated financial support, or (2) the
equity investors lack an essential characteristic of a controlling financial
interest. The FASB intends to issue a revised FIN 46 ("FIN 46-R"). For all
Special Purpose Entities ("SPEs") created prior to February 1, 2003, companies
must apply either the provisions of FIN 46 or early adopt the provisions of FIN
46-R at the end of the first interim or annual reporting period ending after
December 15, 2003. If companies apply FIN 46 for such period, the provisions of
FIN 46-R must be applied as of the end of the first interim or annual reporting
period ending after March 15, 2004. For all non-SPEs created prior to February
1, 2003, companies will be required to adopt FIN 46-R at the end of the first
interim or annual reporting period ending after March 15, 2004. For all
entities (regardless of whether the entity is an interim or annual reporting
period ending after March 15, 2004. For all entities (regardless of whether the
entity is an SPE) that were created subsequent to January 31, 2003, companies
were already required to apply the provisions of FIN 46, and will continue
doing so unless companies elect to early adopt the provisions of FIN 46-R as of
the first interim or annual reporting period ending after December 15, 2003. If
the FIN 46-R is not early adopted, companies are required to apply FIN 46-R to
those post-January 31, 2003 entities as of the end of the first interim or
annual reporting period ending after March 15, 2004. As of September 30, 2003,
the Company believes it did not have any VIEs and therefore FIN 46 had no
material impact on our financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity" (SFAS
150). This statement establishes new standards for classification, measurement
and disclosure of certain types of financial instruments having characteristics
of both liabilities and equity, including instruments that are mandatorily
redeemable and that embody obligations requiring or permitting settlement by
transferring assets or by issuing an entity's own shares. SFAS 150 is effective
for financial instruments entered into or modified after May 31, 2003 and for
contracts in existence at the start of the first interim period beginning after
June 15, 2003. The FASB has deferred indefinitely the effective date for
sections of SFAS 150 applicable to certain mandatorily redeemable financial
instruments. As of September 30, 2003, the Company had no financial instruments
that could be classified with characteristics of both liabilities and equity and
therefore SFAS 150 had no material impact on our financial statements.
FACTORS AFFECTING FUTURE PERFORMANCE
The nature of forward-looking information is that such information involves
significant assumptions, risks and uncertainties. Certain public documents of
the Company and statements made by our authorized officers, directors,
employees, agents and representatives, acting on behalf of the Company, may
include forward-looking information, which will be influenced by the factors
described below, and by other assumptions, risks and uncertainties.
Forward-looking information is based on assumptions, estimates, forecasts and
projections regarding the Company's future results as well as the future
effectiveness of the Company's strategic plans and 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 prove
to be inaccurate. Accordingly, actual results and the Company's implementation
of its plans and operations may differ materially from forward-looking
statements made by or on behalf of the Company. The following discussion
identifies certain important factors that could affect the Company's actual
results and actions and could cause such results and actions to differ
materially from forward-looking statements.
OUR BUSINESS IS SENSITIVE TO GENERAL ECONOMIC CONDITIONS, AND OVERALL DOWNTURNS
IN THE ECONOMY AND IN INDUSTRIAL SPENDING, AND OUR FORECASTING SYSTEMS HAVE
NEVER BEEN TESTED UNDER CONDITIONS OF EXTENDED ECONOMIC DOWNTURN.
Over the past several quarters, the US and worldwide economies have experienced
difficult conditions, with a negative effect on our revenues and operations. As
industrial companies experience downturns, they often delay or cease spending on
capital assets and IT infrastructure (including software and related services).
As a result, our revenues have in the past fallen, and may again in the future
fall, below expectations. The slump in the economy in general, and the market
for IT software and services in particular, have continued for an extended
period of time. While our forecasting systems and metrics have generally been
reliable in informing our projections and guidance for future performance, the
current economic downturn
Page 25
has persisted for a length of time that is unprecedented in the Company's recent
history, our forecasting systems may not be valid under such conditions, and
they might not be valid during a period of economic recovery. As a result, our
expectations and guidance for future performance may not be accurate. If the US
and worldwide economies do not recover and if growth in IT spending does not
materialize, our revenues may be decreased, and there could be a material and
adverse result on our operating results and financial condition.
THE TRADITIONAL MARKET FOR OUR MAXIMO PRODUCT IS MATURE AND SATURATED AND
PRESENTS LIMITED OPPORTUNITY FOR GROWTH.
MAXIMO has been the industry-leading plant floor capital asset maintenance
product for a number of years, and we have acquired a large number of customers
in this market. However, most large industrial organizations have made
significant investments in systems that support the maintenance of their capital
assets, and opportunities for new MAXIMO sales in the enterprise asset
management market are more limited than they have been in the past. In addition,
the emergence and growth of this market have attracted a large number of
competitors, and most of the largest software companies that sell into
complementary markets have developed competing asset maintenance products. It is
likely that this market will continue to mature, there will be fewer sales
opportunities for the Company, and competitive forces will put downward pressure
on our average sales prices and rates of success. While we continue to
strengthen our MAXIMO offering, these efforts may not be sufficient to overcome
the effects of maturity and saturation in our traditional market, and our
revenues, margins, results of operation and financial condition may be
materially and adversely impacted.
OUR EFFORTS TO REACH INTO NEW MARKETS WITH MAXIMO AND WITH NEW PRODUCTS MAY NOT
BE SUCCESSFUL.
Given the maturity and saturation of our traditional enterprise asset management
market, in order to maintain revenues at their current levels and to grow our
business, we are attempting to broaden our product offerings and find additional
sources of revenues, in two ways. First, we are tailoring and extending MAXIMO
to meet the needs of specific industries in which the Company has a presence,
such as the nuclear, transportation, power transmission and distribution, and
other industries. We refer to these industry-specific MAXIMO offerings as
"Industry Solutions". Second, we are attempting, through the MainControl
acquisition and additional internal development, to deliver products that
address markets that are new to the Company, such as the IT asset management and
consolidated service desk markets. There can be no assurance that we will be
able to develop and market our Industry Solutions or new products on time, with
acceptable quality and with such functions and features that meet the
requirements of customers in these markets. If our Industry Solutions and newly
acquired or 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
operation and financial condition may be materially and adversely impacted.
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
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. We cannot give any assurance that we will be
successful in developing and marketing new products or product enhancements, or
that we will not experience significant delays in our development efforts. In
addition, we cannot give any assurance that our new products and product
enhancements will
Page 26
achieve market acceptance. Finally, when we develop new products, or
enhancements to our 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, released and proven in the
market. Such delays could have a material and adverse impact on ongoing sales of
existing products, and on the Company's business and our results of operations.
WE DEPEND SUBSTANTIALLY ON OUR MAXIMO PRODUCT, AND ANY DEVELOPMENTS THAT CAUSE
REDUCED MARKET ACCEPTANCE OF MAXIMO WOULD HARM OUR BUSINESS.
Most of our revenues are derived from the licensing of our MAXIMO family of
products and sales of related services and support. Our financial performance
depends largely on continued market acceptance of MAXIMO, and on the acceptance
and market penetration of MAXIMO 5, our new Internet-centric version of MAXIMO.
We believe that continued market acceptance of MAXIMO, and our revenue stability
and growth, will largely depend on our ability to continue to enhance and
broaden the capabilities of MAXIMO 5, both by broadening the core MAXIMO
functionality and by developing specialized functionality targeted at key
customer industries. New Internet technologies, standards, applications,
functions and features are developing rapidly and are continuously being
introduced, competing for acceptance in the market, and changing, and we must
accurately anticipate technology and market trends and make the right choices in
order to keep MAXIMO 5 at the forefront in its market from a technological
perspective. Any factor adversely affecting sales of MAXIMO, such as delays in
further development, significant software flaws, incompatibility with
significant hardware platforms, operating systems or databases, increased
competition, poor technology decisions or negative evaluations of the product,
would have a material adverse effect on the Company's business and our results
of operations. In addition, in the event that our development efforts are not
progressing as intended, or if our new product releases or technologies are not
successful in the markets they are intended to address, we may increase our rate
of expenditure in this area over and above the level of investment experienced
in the past or previously projected, which could have a material adverse effect
on our results of operation or financial condition.
THE MARKET ADDRESSED BY OUR MAXIMO MAINCONTROL PRODUCT IS IN TURMOIL, AND A
SIGNIFICANT NEW COMPETITOR MAY EMERGE.
Our MAXIMO MainControl product is targeted at the IT asset maintenance (ITAM)
market. In the past, Peregrine Systems, Inc. had the biggest single share of
this market. Peregrine filed for bankruptcy protection in September 2002. As a
result of Peregrine's bankruptcy, this market has become fragmented, and some
market analysts and prospective MAXIMO MainControl customers have questioned the
validity of the product category, and adopted a "wait and see" attitude towards
purchasing products in this market. Peregrine's Plan of Reorganization was
recently confirmed, and as a result Peregrine may successfully emerge from
bankruptcy. It remains to be seen whether Peregrine's reorganization has enabled
Peregrine to streamline its operations and restructure its pre-bankruptcy
liabilities in a manner that will render it as a stronger competitor in the ITAM
market, and there can be no assurance that this market will coalesce and gain
momentum, or that the Company will achieve its desired market share.
OUR SALES EFFORTS DEPEND IN PART ON STRATEGIC RELATIONSHIPS WITH OTHER
COMPANIES.
We have entered into strategic relationships with various larger companies, such
as IBM Corporation, Deloitte Consulting L.P., Rockwell Automation, A.T. Kearney,
Inc., Booz Allen Hamilton, SAIC, and others. In order to generate revenue
through these relationships, we must integrate our products and solutions with
those of the other companies. Each party to those strategic relationships must
coordinate with and support each other's sales and marketing efforts, and each
party must make significant sales and marketing investments. Our ability to
generate revenues through these relationships depends in large part upon the
efforts of these other companies, which are outside of our control. The efforts
of these companies may in turn be influenced by factors internal to these
companies, or by developments in their respective industries or markets, that we
fail to anticipate.
We have in the past successfully engaged in cooperative software sales efforts
with PeopleSoft, Inc., a vendor of an enterprise resource planning ("ERP")
system that does not compete with our products, and with which MAXIMO is
successfully integrated. PeopleSoft recently acquired J.D. Edwards & Co., which
markets a
Page 27
product that competes with MAXIMO. As a result, it is highly likely that
PeopleSoft will cease to act in cooperation with the Company, as it markets its
new J.D. Edwards product and our software sales may decline as a result.
In addition, we have agreed to develop a version of MAXIMO, which will operate
with IBM's Websphere, AIX and DB2 products, and to market the IBM versions of
our products in preference to other versions. MAXIMO sales will therefore be
affected by the success and acceptance of the IBM Websphere, AIX and DB2
products relative to those of IBM's competitors. We may experience difficulties
in gaining market acceptance of the IBM version of our products, and
difficulties in integrating and coordinating our products and sales efforts with
those of IBM. Finally, our alliance with IBM may be viewed negatively by
customers or prospects that have not adopted the IBM technology platform, and
competitive alliances may emerge among other companies that are more attractive
to our customers and prospective customers.
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, which may
negatively impact the price of our stock. 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 CHALLENGES WITH THE MAINCONTROL ACQUISITION, AND WE MAY NOT BE
SUCCESSFUL IN ADDRESSING A NEW AND BROADER MARKET.
We recently acquired MainControl, Inc., which developed a product that enables
companies to manage, track and maintain their information technology (IT)
assets, such as computers, telephones and networks. One of the assumptions
underlying our acquisition of MainControl was that our existing customers might
be interested in purchasing our new IT product. With the acquisition of
MainControl, our positioning with existing and prospective customers has changed
in that we are now offering products which can manage more of a company's
critical physical assets, such as IT assets, in addition to those managed by
MAXIMO, such as plant floor assets, vehicles and facilities. However, in many
cases the people who purchased MAXIMO may not have responsibility for management
of their company's IT assets. If we are unable to obtain access to executive
levels in our customers' and prospective customers' organizations, we will be
unable to sell a solution that covers more than just the plant floor assets, the
vehicle fleet, the facilities or the IT assets. Moreover, it is possible that
our attempts to characterize this combination of target markets as a single or
composite market will not be accepted within the industry, by market analysts or
by our customers, and as a result we might not gain the cross-market sales
opportunities and synergies that we hoped for in the MainControl acquisition.
Finally, we have announced our intention to integrate the MAXIMO MainControl
product into our MAXIMO 5 platform, utilizing the same leading edge
Internet-centric architecture and technologies as contained in MAXIMO 5, in
order to provide a common platform from which a customer's critical assets may
be managed. It is also possible that prospective customers may prefer to wait
until this integrated solution is available before purchasing MAXIMO
MainControl, and it is possible that during the interim period while the
integrated version is under development such customers may decide to purchase a
competing product; in either case revenues from MAXIMO MainControl would be
deferred, or lost entirely, and there could be a material and adverse impact on
our business and results of operations.
Page 28
ACQUISITIONS MAY FAIL TO MEET OUR EXPECTATIONS.
We may from time to time purchase other companies or their products or
technologies. While we exercise due diligence in determining the nature of the
assets and liabilities of such acquired companies and whether their products or
technologies are suitable and of commercial quality, there can be no assurances
that we will not acquire unanticipated or undisclosed liabilities or that
operations from and after the date of acquisition can be predicted from prior
performance or will meet our expectations. There can also be no assurances that
acquired products or technologies will be of commercial quality or meet
our expectations, that we will be able to employ and retain the personnel
necessary for us to achieve continuity in the acquired business and effectively
exploit the new products or technologies, that we will be able to successfully
integrate the new products or technologies with or into our existing products
and product architecture, that we will be able to effectively distribute the new
products or technologies through our existing sales force and channels, that we
will be able to retain existing customers and revenue streams that may have been
associated with the new products or technologies prior to their acquisition by
us, or that such existing customers may not demand that we remedy problems that
were not known or disclosed to us at the time of the acquisition. As a result of
the foregoing, we may not realize the benefits intended from such acquisitions
or recover our investments, which would have a material adverse impact on our
business and our results of operations.
WE FACE INTENSE COMPETITION IN THE MARKETS WE SERVE.
The markets for strategic asset maintenance software such as MAXIMO and MAXIMO
MainControl 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
enterprise resource planning ("ERP") vendors. Independent software vendors
include DataStream Systems, Inc. and Indus International, Inc. MAXIMO also
competes with integrated ERP systems, which include integrated maintenance
modules offered by several large vendors, such as SAP, Oracle, JD Edwards
(recently acquired by PeopleSoft) and others. MAXIMO MainControl competes with
companies in IT asset management market, such as Peregrine Systems and Computer
Associates. Currently, MAXIMO competes with products of a number of large
vendors, some of which have traditionally provided maintenance software
operating in a client/server environment and our now developing or offering
systems that are web-architected. MAXIMO also encounters competition from
vendors of low cost maintenance management systems designed initially for use by
a single user or limited number of users as vendors of these products upgrade
their functionality and performance to enter the enterprise market.
Certain of our competitors have greater financial, marketing, service and
support and technological resources than we do. To the extent that such
competitors increase their focus on the asset maintenance or planning and cost
systems markets, or on the industrial supply chain market, we could be at a
competitive disadvantage.
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 United States. 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, United States
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, business intelligence, content and graphics
capabilities developed by these
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companies. We have also agreed to bundle IBM's Websphere application server, its
AIX operating system and DB2 database programs with MAXIMO. If we cannot renew
these licenses (at all or on commercially reasonable terms), or if any of such
vendors were to become unable to support and enhance their products, we could be
required to devote additional resources to the enhancement and support of these
products or to acquire or develop software providing equivalent capabilities,
which could cause delays in the development and introduction of products
incorporating such capabilities.
WE MAY HAVE EXPOSURE TO ADDITIONAL INCOME TAX LIABILITIES.
We are subject to income taxes in both the United States 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. Periodically, we are
subject to income tax audits. While we believe that we have complied with all
applicable tax laws, there can be no assurance that a governing tax authority
will not have a different interpretation of the law and assess us with
additional taxes. Should we be assessed with additional taxes, there could be a
material and adverse effect on our results of operations or financial condition.
CHANGES IN REGULATIONS OR CRITICAL ACCOUNTING POLICIES COULD MATERIALLY AND
ADVERSELY AFFECT US.
New laws, regulations or standards related to 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 FORCED TO PERFORM MORE FIXED PRICE SERVICES CONTRACTS.
A trend is emerging among customers in our market towards demanding consulting
and implementation services on a fixed price basis, whereby the Company agrees
to deliver the contract requirements for a fixed fee, regardless of the number
of person-hours actually provided, as opposed to our traditional services
arrangements where we deliver services on a time and materials basis. In
addition, when our Industry Solutions are first delivered, they may not include
all of the functionality required by the initial customers, and we may complete
the development effort under a services contract with the customer. In cases
where services are provided either for the future delivery of functionality or
on a fixed price basis and our standard software is licensed at the same time,
and if the services are essential to the overall solution desired by the
customer or if the Company cannot determine the fair value of the services being
delivered, then the Company may not be able to recognize the software license
revenue from such transactions at the time the agreements are signed, but rather
may be required to recognize such license revenue under the contract or other
method of accounting, or to recognize a greater portion or (or all) of the
revenue from these transactions as services revenue. This would likely result in
a postponement of recognition of, or a reduction in, software license revenues,
and have an adverse impact on the results of our operations.
WE MAY BE UNABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY.
Our success is dependent upon our proprietary technology. We currently have two
United States 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 on-line. 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 p