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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2004
(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, 2004
was $202,874,056.
Number of shares outstanding of the Registrant's common stock as of the latest
practicable date: 25,215,604 shares of common stock, $.01 par value per share,
as of December 10, 2004.
DOCUMENT INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Stockholders of the
Company, which will be filed with the Securities and Exchange Commission not
later than 120 days after September 30, 2004.
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MRO SOFTWARE, INC.
FISCAL 2004 FORM 10-K
INDEX
ITEM PAGE
- ---- ----
PART I
Item 1: Business 4
Item 2: Properties 11
Item 3: Legal Proceedings 12
Item 4: Submission of Matters to a Vote of Security Holders 12
PART II
Item 5: Market for Registrant's Common Equity, Related Stockholder 12
Matters and Issuer Purchases of Equity Securities
Item 6: Selected Financial Data 14
Item 7: Management's Discussion and Analysis of Financial 15
Condition and Results of Operations
Item 7A: Quantitative and Qualitative Disclosures About Market 32
Risk
Item 8: Financial Statements and Supplementary Data 33
Item 9: Changes in Disagreements with Accountants on Accounting 60
and Financial Disclosure
Item 9A: Controls and Procedures 60
Item 9B: Other Information 60
PART III
Item 10: Directors, Executive Officers, Promoters and Control Persons 61
of the Registrant
Item 11: Executive Compensation 63
Item 12: Security Ownership of Certain Beneficial Owners and Management 63
Item 13: Certain Relationships and Related Transactions 63
Item 14: Principal Accountant Fees and Services 63
PART IV
Item 15: Exhibits, Financial Statement Schedules and Reports on Form 64
8-K
Signatures 66
Exhibit Index
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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(R) MAXIMO Enterprise(TM), MAXIMO Extended
Enterprise(TM), MAXIMO Enterprise Suite(TM), MAXIMO Buyer(TM), MAXIMO
Scheduler(TM), MAXIMO Workflow(TM), MAXIMO Project Manager, MAXIMO
Discovery(TM), MAXIMO Enterprise Adapter(TM), MAXIMO Mobile Suite(TM), MAXIMO
Illustrated Parts Catalog(TM), 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) 2004 MRO Software, Inc. All rights reserved.
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PART I
ITEM 1. BUSINESS
GENERAL
MRO Software is a leading global provider of strategic asset management
solutions, software and related services. Strategic asset management is the
management and optimization of the business processes required to keep our
customers' critical assets productive. Critical assets are those that have a
significant impact on operations and performance, including assets used in
production, facilities, transportation and information technology (IT)
operations. The Company's strategic asset management software products and
services allow our customers to manage the complete lifecycle of their critical
assets, including: planning, procurement, deployment, tracking, maintenance and
retirement. Our strategic asset management software products and services
include MAXIMO for the Enterprise Asset Management (EAM) market and MAXIMO
MainControl for the IT Asset Management (ITAM) market. Using MRO Software's
products and services, our customers improve production reliability, labor
efficiency, material optimization, software license compliance, lease
management, warranty and service management and provisioning across their
critical asset base.
MRO Software was incorporated in Massachusetts in 1968 as Project Software &
Development, Inc. (PSDI). In fiscal 2001, the Company changed its name to MRO
Software, Inc. and its trading symbol to "MROI". Our headquarters are located in
Bedford, Massachusetts, U.S.A., and our website may be viewed at www.mro.com.
Through a link on the Investor Relations section of our website, we make
available all the following filings as soon as reasonably practicable after they
are electronically filed with or furnished to the Securities and Exchange
Commission ("SEC"): our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K and any amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934. All such filings are available free of charge.
During the past two years, the Company has made significant investments in the
development of our next generation of MAXIMO: Maximo Enterprise Suite (MXES).
The main objective of the MXES product is to accomplish the following: First,
this new suite of products will incorporate the Company's current EAM and ITAM
capabilities onto a common platform - the MAXIMO multi-tier enterprise
environment. Second, MXES will deliver a greatly enhanced application set for
the EAM and ITAM markets. Third, MXES will deliver substantial new IT Help Desk
and Service Desk functionality, and allow the Company to enter new markets that
present significant opportunities for new revenue streams. The Help Desk and
Service Desk markets are new to the Company, and our initial strategy for
penetrating these markets will be to target existing MAXIMO customers. We
believe that our MAXIMO customers are seeking to consolidate software
applications. We will promote MXES as a means for our customers to realize
reduced IT costs and enhanced productivity by consolidating all of their EAM,
ITAM, Help Desk and Service Desk applications onto one platform. We will also
compete in Help Desk and Service Desk opportunities where MAXIMO has not been
installed, and conversely, we believe that the addition of these products will
improve our ability to sell into the traditional EAM and ITAM markets. MXES will
also include specific functionality for the outsourced service provider market
that the Company believes is a growing market segment. The Company expects MXES
to be generally available to customers early in calendar year 2005.
Our objective is to create a sustainable competitive advantage by serving the
market for strategic asset and service management. Our approach is to provide
customers with the ability to consolidate fragmented point solutions with a
single, flexible, functional and modern software product capable of managing a
wide variety of asset-related business processes. We have focused on building
our business strategies around key strengths, such as our commitment to research
and development, our diverse customer base, and our domain knowledge of complex
asset management business problems. We believe that our extensive expertise in
asset management solutions for production, facilities, transportation, and IT --
combined with our vertical domain knowledge in many industries - can and will
distinguish us from our competitors. We
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believe that our steadfast focus on this holistic approach to asset and service
management will drive future success and allow the Company to continue to be a
stable, profitable and growth-oriented company.
During fiscal 2004, the Company completed the acquisition of Raptor ASA
Corporation, a provider of software solutions for the aviation industry. The
Raptor technology will be integrated into MXES. We also expanded our focus on
MAXIMO Industry Solutions. These vertically specialized solutions provide deep
functionality that addresses specific requirements of certain key industries
that we have targeted. We are focused on the following industries: utilities
(including nuclear, fossil-fueled and other generation, transmission and
distribution), oil and gas, aviation, transportation, and pharmaceuticals.
During fiscal 2004, we upgraded the MAXIMO Transportation Industry Solution and
released new industry solutions for the pharmaceutical, oil & gas, and the
nuclear energy industry. These solutions have been brought to market on a timely
basis because they are built on the MAXIMO platform, which enables rapid
development of functional layers that leverage MAXIMO's existing capabilities
without having to make changes to MAXIMO.
The Company reports all its revenue in one reportable business segment. The
Company markets its products through a direct sales organization in all
geographies, and in combination with distributors outside of North America. MRO
Software has sales offices throughout North America, Europe, Asia/Pacific and
Latin America. Financial information relating to business segments and
international operations can be found in Note N of the Consolidated Financial
Statements, in Item 8 of this Annual Report on Form 10-K.
PRODUCTS
MAXIMO (MAXIMO EAM)
MAXIMO is the market-leading solution in the EAM market. MAXIMO helps companies
in asset-intensive industries increase their return on assets (ROA) 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 databases, including Oracle and Microsoft SQL Server.
Core application features and functions in MAXIMO include:
ASSET MANAGEMENT. MAXIMO Asset management means identifying, tracking, locating,
maintaining and analyzing physical assets, especially those that impact the
customer's operations and performance, including their revenue stream. MAXIMO
captures critical asset-related data and makes it easily accessible and useful
in driving our customers' business processes, and for analysis, planning and
real-time decision-making.
WORK MANAGEMENT. MAXIMO work management capabilities execute all processes
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
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organizations improve productivity. Work management compares budgets or
estimates against actual and historical work orders.
MATERIALS MANAGEMENT. MAXIMO materials management capabilities enable our
customers to consolidate vendor lists, automate procurement processes, track
repairable spares and reduce inventory levels. As a result, customers can
generate significant savings by accurately tracking materials and their usage,
reduce their inventory and eliminate unnecessary spending. MAXIMO creates
greater efficiency and ensures that the customer has the right parts at the
right time.
PROCUREMENT. MAXIMO procurement capabilities enable organizations to plan and
consolidate purchasing activity, streamline purchasing processes and comply with
existing purchase contracts. MAXIMO purchasing creates requests for proposals,
blanket purchase orders and purchase agreements, purchase requisitions and
purchase orders, records receipt of goods, analyzes vendor performance and
integrates with accounting applications, including invoice matching and multiple
currency functionality.
ANALYSIS. The ability to analyze data captured in MAXIMO provides companies with
critical knowledge to improve and optimize their maintenance initiatives across
all functional areas. MAXIMO Key Performance Indicators (KPIs) and reports make
it possible to identify areas or activities that need improvement. In addition
to KPIs, MAXIMO provides a comprehensive set of pre-defined functional and
exception reports that provide detailed information on all customer maintenance
operations.
MAXIMO INDUSTRY SOLUTIONS. The Company seeks to expand its market share in
targeted vertical markets by offering pre-configured, industry-specific, focused
applications for MAXIMO. We are focused on the following industries: utilities
(including nuclear, fossil-fueled and other generation, transmission and
distribution), oil and gas, aviation, transportation, and pharmaceuticals. Each
industry is supported with scalable solutions that embody our deep domain
expertise and that run on industry-standard databases, application servers and
hardware platforms, complemented by offerings from key alliance partners in
certain sub-specialty areas.
MAXIMO OPTIONS
In addition to the robust capabilities provided by MAXIMO there are many options
available for those that require extended functionality. 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, MAXIMO Workflow, and Online Commerce Services (OCS).
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.
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 publication 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.
MAXIMO MAINCONTROL (MAXIMO ITAM)
MAXIMO MainControl is a leading solution for the ITAM market and provides
management of IT assets across their entire lifecycle from planning and
procurement to retirement and disposal.
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MAXIMO MAINCONTROL FEATURES
MAXIMO MainControl addresses the numerous IT asset management issues facing an
organization, such as:
MAXIMO ASSET TRACKER: provides autodiscovery and software usage tracking tools,
that enables the user to know where its IT assets (hardware, software and
peripherals) are at all times, and to see the asset location history, owners,
users and configuration 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 and management.
PROCUREMENT: provides comprehensive, online management of IT asset procurement
and the ability 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.
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 improves service
levels and increases employee productivity.
COMPLIANCE: tracks and manages all software installations in the organization,
and allows the user to ensure software license compliance. Customers are able to
establish a software management process to track license terms, and to conduct
internal software audits and other compliance-related activities.
BUSINESS CONTINUITY: supports the requirements to integrate and automate the
response and recovery process for technology assets in the event of a business
disruption.
PRODUCT ARCHITECTURE
MAXIMO components are built on Sun Microsystem's Java technology, specifically
the Java 2 Platform, Enterprise Edition ("J2EE"), to take full advantage of
today's enterprise environment. J2EE defines a standard for developing
multi-tier enterprise applications. J2EE simplifies enterprise applications by
basing them on standardized, modular components, by providing a complete set of
services to those components, and by handling many details of application
behavior automatically. MAXIMO is the first 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, an Internet application needs
a mechanism for identifying a particular client and the state of any
"conversation" it is having with that client. The MAXIMO Web servers and
applications servers provide session management capabilities, and can easily
manage session states for Internet-based connections.
MAXIMO's use of open standards supports a broad range of 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
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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 (OCS) use an Internet oriented,
scaleable architecture to support a full Web browser-based environment. OCS
allows real-time communications between buyers and suppliers 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 AG, Oracle Corporation
and PeopleSoft, Inc. Our MAXIMO interoperability framework supports
collaboration between MAXIMO and those enterprise business systems for which
this requirement most frequently arises. This allows enterprises to focus on
their operational procedures, and provides them with the flexibility to choose
which business system to use to manage specific business processes.
SERVICES
CUSTOMER SUPPORT
A high level of customer service and technical support is critical to customer
satisfaction in our industry. Many of the Company's customers implement our
products in complex, large-scale IT environments on which the success of their
organizations depend. The Company believes that its approach to support has been
and will continue to be a significant factor in the market acceptance of its
products.
As of September 30, 2004, the Company employed a technical hot-line support
staff of 102 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 six satellite
support offices in China, Korea, Mexico, Japan, Sweden and McLean, Virginia.
Support services are provided on a seven-day week, 24-hour day basis using our
support centers in United Kingdom, Australia, United States (Bedford, MA) and
Canada. The Company also provides premium support via resources dedicated to
meeting the needs of our larger enterprise-wide clients. Premium Support is a
fee-based service provided in addition to all of the standard support provided
to all of our clients.
Subscribers to the Company's annual support services are entitled to receive (i)
customer service and technical support by telephone, fax, online via the
Internet and electronic mail (ii) a newsletter and periodic technical bulletins,
(iii) an invitation to attend the Company's annual user group meeting and (iv)
periodic software updates and software upgrades. Support contracts are a stable
source of recurring revenue.
PROFESSIONAL AND EDUCATIONAL SERVICES
The Company offers services designed to assist customers in completing the
process of successfully implementing the Company's business solutions and
getting the most value from MAXIMO. As of September 30, 2004, the Company
employed a consulting and training staff of 255 employees. The Company's
international distributors also provide services within their geographic
territories.
The Company provides consulting services to assist customers in planning and
carrying out the implementation of the Company's solutions. In some cases,
customers install and implement MAXIMO systems and perform any necessary
modifications themselves with only limited assistance from the Company. In other
cases, particularly where an integrated solution is required, the Company
provides comprehensive implementation planning, project management, network
communications and system integration services. The Company also contracts with
third-party consultants as needed in order to augment its services needs.
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The Company conducts comprehensive training programs covering Company
applications and concepts for its end-users and partners. Training is offered at
the Company's headquarters in Massachusetts and at regional centers in
California, Georgia, Virginia, Australia, France, Germany, Italy, Sweden, the
United Kingdom and the Netherlands. The Company also offers on-site training
classes at customer sites upon request. We also offer Web-based training that
consist of a series of self-paced lessons and virtual classroom training.
CUSTOMERS
The Company's customers operate in a broad range of vertical industries
including: facility/property management, discrete and process manufacturing,
public sector, oil and gas, transportation, aviation, utilities, financial
services consumer/retail, pharmaceutical 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. As of September 30, 2004, we employed a marketing and
direct sales organization of 119 employees operating out of its Massachusetts
headquarters and sales offices 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 100 employees, operating from sales offices in Australia, Brazil,
Canada, China, France, Germany, Hong Kong, Italy, Japan, Korea, Mexico, the
Netherlands, Singapore, Sweden, Thailand and the United Kingdom and through
distributors in parts of Africa, Asia, Europe, the Middle East, and Latin
America. Approximately 40% of the Company's total revenues were derived from
sales outside the United States for fiscal years ended 2004, 2003 and 2002,
respectively. The United Kingdom represented approximately 15% of these
international sales for fiscal years ended 2004, 2003, and 2002, respectively.
Approximately 9% of the Company's total long-lived assets were located outside
the United States for fiscal years ended 2004, 2003, and 2002, respectively.
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 our tele-marketing operation before being turned
over to either the direct sales force or tele-sales.
In certain situations, the Company uses resellers that are located around the
world to supplement our direct sales force in territories where the Company does
not have subsidiaries or a strong direct sales infrastructure.
The sales cycle for 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, reduced implementation time, extensive
domain expertise and ease of use, and the resulting low total cost of ownership
and demonstrable return on investment.
Delivery lead times for the Company's products are short and, consequently,
substantially all of the Company's software revenues in each quarter result from
the orders received in the quarter. Accordingly, the Company only maintains a
backlog for its consulting and training services and believes that its backlog
at any point in time is not a reliable indicator of future sales and earnings.
STRATEGIC ALLIANCES
MRO Software's alliance program is designed to bring value to 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 and
potential revenue streams while at the same time ensuring that exacting
standards of quality are met in partnering engagements.
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The Company works closely with major consultancies and systems integrators and
has formed alliances with such firms as HP, IBM and SAIC. The Company also works
closely with consulting and systems integration firms that offer deep domain
expertise in very select core markets that complement ours. Examples would
include CGI-AMS (part of CGI Group, Inc.) and EMA, Inc. In addition, the Company
has partnerships with specific solution providers that offer a complementary
solution to MAXIMO, such as Barchan Associates, LLC, Bentley Nevada, LLC,
Computational Systems, Inc., Cyco Software, Environmental Systems Research
Institute, Inc. (ESRI), Fisher-Rosemount Systems, Inc, Intergraph Corporation,
Meridium, Inc., Mobile Data Solutions, Inc., Optram, Inc., OSIsoft, Inc.,
Primavera Systems, Inc. and Spescom Software, Inc.
The Company has also developed managed services, reseller and OEM relationships.
We have agreements with partners such as ABB Service Worldwide (an affiliate of
Asea Brown Boveri), Accenture, and HP, who resell our products using their own
sales resources. We market the Syclo, LLC. 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 continuously monitor the marketplace for partners with leading edge
technology conducive to the advancements that we have planned for our own
products and services, and create new agreements as appropriate. Technology
partners include: BEA Software, HP, IBM, Oracle Corporation, Microsoft Corp.,
Sun Microsystems, Inc., Syclo LLC and Actuate Corporation.
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 (ERM)
providers such as SAP, PeopleSoft and Oracle. Our competitors also include niche
providers such as Datastream Systems Inc. and Indus International that focus on
segments of the EAM market. BMC Software, Computer Associates and Peregrine
Systems are competitors that focus on the ITAM market. With the expansion into
the IT Service Desk and IT Help Desk markets, the Company expects competition in
these markets to include BMC Software, Computer Associates, Peregrine and HP.
PRODUCT DEVELOPMENT
The Company has made substantial investments in research and software product
development. The Company's total product development expenses in fiscal years
2004, 2003 and 2002 were $28.5 million, $26.5 million and $26.9 million,
respectively. As of September 30, 2004, the Company's research and development
staff consisted of 210 employees. The Company's development organization is
comprised of relatively small teams of senior level developers and engineers,
who focus on different areas of development. The Company maintains development
centers in Massachusetts, Florida, Michigan, Virginia, Canada and Brazil. We
also utilize the services of offshore technology partners in India to supplement
our development efforts.
In fiscal 2004, the Company focused its development efforts on enhancing and
adding functionality to its MAXIMO EAM and MAXIMO ITAM products, in particular
the MXES product. We have also focused on developing MAXIMO Industry Solutions
that meet the unique needs of different vertical industries by offering
pre-configured, industry-specific, focused applications delivered on the MAXIMO
technology platform. We will continue to develop enhancements to our MAXIMO
products, as well as, to continue to research and investigate new technologies
that would complement the Company's product strategies in the future.
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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.
EMPLOYEES
As of September 30, 2004, the Company had 878 full-time employees including
sales, marketing and related services, product research and development,
customer support, training and consulting services, finance and administration,
information technology, human resources, manufacturing and office services. The
Company's employees are not represented by any collective bargaining
organization, and the Company has never experienced a work stoppage. The Company
believes that its relations with employees are good.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters and its manufacturing and
distribution facilities in Bedford, Massachusetts. The leased facility consists
of approximately 115,000 square feet and the lease ends December 31, 2009. The
average annual base
Page 11
rent is $1.0 million. Additionally, the Company estimates that its annual
operating expenses under the recently renegotiated lease will be approximately
$1.1 million, based on information currently available. The actual costs will
depend on such factors as actual electricity usage, real estate taxes and
operating costs. Under the terms of its lease, the Company has the ability to
sublease the space. The Company leases additional sales offices in California,
Colorado, Florida, Georgia, Kansas, North Carolina, Michigan, New Jersey, New
York, Texas, Virginia and Washington. The Company also leases offices for its
international operations in, Australia, Brazil, Canada, China, France, Germany,
Hong Kong, Italy, Japan, Korea, Mexico, the Netherlands, Singapore, Sweden,
Thailand and the United Kingdom.
We believe our facilities are adequate for our current and near-term needs, and
that we will be able to locate additional facilities as needed. See Note J.
Commitments and contingencies for more information about our leases.
ITEM 3. LEGAL PROCEEDINGS
As of the date of this Annual Report on Form 10-K, the Company is not a party to
any legal proceedings the outcome of which, in the opinion of management, would
have a material adverse effect on the Company's results of operations or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER'S PURCHASES OF EQUITY SECURITIES
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 10, 2004, there were approximately 96 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, 2004.
FISCAL 2004 HIGH LOW
First Quarter $14.70 $11.78
Second Quarter $18.15 $10.93
Third Quarter $14.83 $11.48
Fourth Quarter $13.61 $8.70
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
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
Page 12
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 of 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 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.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLAN
Information regarding securities authorized for issuance under equity
compensation plans is incorporated by reference to the definitive Proxy
Statement for the 2004 Annual Meeting of Stockholders of the Company, which will
be filed with the Securities and Exchange Commission not later than 120 days
after September 30, 2004.
Page 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of the Company set forth below has been
derived from the audited consolidated financial statements for the Company for
the periods indicated. This selected consolidated financial data should be read
in conjunction with "Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations" and the Company's consolidated
financial statements and the notes thereto included elsewhere herein.
FIVE-YEAR SUMMARY
FISCAL YEAR ENDED SEPTEMBER 30,
CONSOLIDATED STATEMENT OF OPERATIONS DATA
(in thousands, except per share data)
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Revenues $185,689 $176,877 $171,881 $185,450 $168,661
Income/(loss) from operations 14,643 5,742 (15,319) (20,755) (571)
Net income/(loss) 10,340 4,870 (10,551) (15,468) 2,102
Net income/(loss) per share, basic 0.41 0.20 (0.46) (0.70) 0.10
Net income/(loss) per share, diluted 0.40 0.20 (0.46) (0.70) 0.09
Shares used to calculate net income/
(loss) per share
Basic 24,811 24,429 23,171 22,148 21,682
Diluted 25,290 24,653 23,171 22,148 22,786
FIVE-YEAR SUMMARY
FISCAL YEAR ENDED SEPTEMBER 30,
CONSOLIDATED BALANCE SHEET DATA
(in thousands)
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
Cash, cash equivalents and
marketable securities $108,407 $94,573 $67,815 $48,354 $36,884
Working capital 78,161 53,391 58,893 51,471 50,509
Total assets 222,721 205,261 192,153 171,453 180,945
Long-term obligations 3,435 2,049 1,236 1,034 587
Total stockholders' equity 161,135 146,512 138,020 123,353 134,192
Page 14
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, transportation 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 critical
assets, including: planning, procurement, deployment, tracking, maintenance and
retirement. Our strategic asset management software products and services
include MAXIMO for the Enterprise Asset Management (EAM) market and MAXIMO
MainControl for the IT Asset Management (ITAM) market. Using MRO Software's
products and services, our customers improve production reliability, labor
efficiency, material optimization, software license compliance, lease
management, warranty and service management and provisioning across their
critical asset base.
The Company reports all its revenues in one reportable business segment, the
strategic asset management segment. The Company's management assesses operating
results on an aggregate basis to make decisions about the allocation of
resources. Our actual results are reported in United States dollars.
International revenues accounted for 43% of total revenues for fiscal year 2004
and therefore the fluctuation in exchange rates can have a significant impact on
our results of operations. In fiscal 2004, the fluctuation in the Euro dollar
and the British pound, in particular, had a favorable impact on our revenue
results. We assess the impact of foreign currency exchange rates on our business
by recalculating the current period's financial results using the comparable
period's exchange rates to devise a constant currency rate in order to compare
period over period results. Total actual revenues increased 5% in fiscal 2004
compared to fiscal 2003, however, in constant currency terms the increase is
estimated to be 1%. The exchange rates had a similar impact on direct and
operating expenses and therefore, the overall impact on net income was
immaterial for fiscal year 2004.
In July 2004, the Company completed the acquisition of Raptor ASA Corporation, a
provider of software solutions for the aviation industry. The Raptor Technology
will be integrated into the Company's next generation of products, Maximo
Enterprise Suite (MXES). The total purchase price of the acquisition was $1.1
million. The amount of $600 thousand was paid at closing. The amount of $200
thousand is payable within thirty days after the first anniversary of the
closing and $300 thousand is payable within thirty days after the second
anniversary of the closing. Both of these future payments are contingent upon
the completion of knowledge transfer milestones, however, neither payment is
contingent on any employment of the selling principals with the Company. The
Company allocated the purchase price as such: $910 thousand to acquired
technology, $560 thousand to goodwill and $370 thousand to deferred tax
liability. The deferred tax liability
Page 15
represents the cumulative tax effect of the book to tax difference in basis for
the acquired technology. The acquired technology will be amortized over five
years.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires that
management make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses. These estimates and assumptions are
affected by management's application of accounting policies.
Critical accounting policies, in which different judgments and estimates by our
management could materially affect our reported condition and results of
operations, include revenue recognition, estimating the allowance for doubtful
accounts, income taxes, and the valuation of long-lived assets.
REVENUE RECOGNITION
SOFTWARE PRODUCTS
The Company primarily licenses its software products under noncancellable
license agreements. Software license fee revenues are generally recognized upon
contract execution and product shipment, provided that collection of the
resulting receivable is deemed probable, the fees are fixed or determinable, and
no significant modification or customization of the software is required.
Our customers do not have any right of return except as stipulated under a
standard 90-day warranty that runs concurrent with post contract support (PCS).
The Company does not maintain any reserves with respect to this warranty based
on a history of performance of our software. On the rare occasion that a
customer insists on conditions of acceptance, the Company defers revenue until
the customer's acceptance is obtained and the condition has been satisfied.
Revenue from products sold through indirect channels ("resellers") is recognized
upon shipment of the software, as long as evidence of an arrangement exists,
collectibility is probable and the fee is fixed or determinable and the
reseller's obligation to pay us is not contingent upon resale of our product.
Revenue is recorded net of any commissions or discounts payable to these
resellers. Our resellers do not have any right of return beyond the standard
90-day performance warranty that runs concurrent with PCS.
SERVICES 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, and subscription based fees related to the
Company's OCS business. Consulting and training services are generally
recognized as the services are performed. PCS revenues are recognized ratably
over the term of the agreement, generally one year. Customers typically
subscribe to OCS on an annual basis and revenue is recorded as services revenue
and recognized on a straight-line basis over the applicable subscription period.
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
Page 16
the fair value of the hourly rates for consultants, we recognize the software
license fee separately from the services revenues. The services revenues are
recognized as they are delivered and the related costs as they are incurred. If
at any point in time the costs exceed revenues, we immediately accrue for
estimated losses using cost estimates that are based on average fully burdened
daily rates applicable to the consulting organization delivering the services.
For those fixed price arrangements where we cannot reliably estimate the hours
required to complete the implementation services and 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 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, 2004 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.
Page 17
INCOME TAXES
Deferred Income Taxes
The Company accounts for income taxes under the asset and liability approach for
accounting and reporting for income taxes in accordance with Financial
Accounting Standards Board 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. 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, 2004 is $9.1
million.
The Company has established a valuation allowance with respect to various net
operating losses assumed from acquisitions. 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 2004 from fiscal 2003 is
primarily attributable to the utilization of previously unbenefited losses.
Tax Contingencies
Tax contingencies are recorded to address potential exposures involving tax
positions we have taken that could be challenged by taxing authorities. These
potential exposures result from the varying application of statutes, rules,
regulations and interpretations. Our estimate of the value of our tax
contingencies contains assumptions based on past experiences and judgments about
potential actions by taxing jurisdictions. It is possible that the ultimate
resolution of these matters may be greater or less than the amount that we have
accrued.
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 18
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,
------------------------
2004 2003 2002
---- ---- ----
Revenues:
Software 28% 28% 29%
Support and services 72 72 71
---- ---- ----
Total revenues: 100 100 100
Total cost of revenues 36 38 40
---- ---- ----
Gross profit 64 62 60
---- ---- ----
Operating expenses:
Sales and marketing 30 33 34
Product development 15 15 16
General and administration 10 10 11
Amortization of other
intangibles and goodwill * 1 1 8
---- ---- ----
Total operating expenses: 56 59 69
---- ---- ----
Income/(loss) from operations 8 3 (9)
Other income 1 1 1
---- ---- ----
Income/(loss) before income taxes 9 4 (8)
Provision/(benefit) for income taxes 3 1 (2)
---- ---- ----
Net income/(loss) 6% 3% (6)%
---- ---- ----
* In accordance with FAS No. 142, the company ceased amortization of goodwill at
the beginning of its fiscal year October 1, 2002.
Page 19
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) 9/30/04 % 9/30/03 % 9/30/02
- -------------- ------- ------ ------- ------ -------
Software licenses $ 52,583 5% $ 49,904 2% $ 49,035
Percentage of total revenues 28% 28% 29%
Support and services $133,106 5% $126,973 3% $122,846
Percentage of total of revenues 72% 72% 71%
Total revenues $185,689 5% $176,877 3% $171,881
FISCAL 2004 COMPARED TO FISCAL 2003: Software license revenues increased 5% in
fiscal 2004 compared to fiscal 2003 and increased approximately 1% using
constant currency rates. The Company attributes the relatively flat overall
software revenue to the saturation of our traditional EAM market and long sales
cycles for large multi-site, multi-user contracts. MAXIMO EAM software license
revenues comprised 95% of total software revenues in fiscal 2004. MAXIMO EAM
software license revenues increased 8% in fiscal 2004 compared to fiscal 2003
enhanced by the release of MAXIMO Industry Solutions targeted at specific
vertical markets. ITAM software license revenues declined 30% in fiscal 2004
compared to fiscal 2003. Historically, ITAM software licenses have fluctuated
from quarter to quarter; and we expect that this trend will continue over the
next few quarters as a result of the Company's plans to replace this product in
conjunction with the commercial release of the next version of MAXIMO, Maximo
Enterprise Suite (MXES). The Company expects to have this new version available
early in calendar year 2005 but expects little or no revenue impact until the
second half of fiscal year 2005.
Support revenues increased 10% to $71.5 million in fiscal 2004 from $65.2
million in fiscal 2003 and increased approximately 6% using constant currency
rates. Support revenues have increased as a result of a cumulative increase in
the number of MAXIMO EAM customers and a strong renewal rate (90%) for support
contracts. MAXIMO EAM support revenues comprised 95% of total support revenues
in fiscal 2004 and increased 11% in fiscal 2004 compared to fiscal 2003. ITAM
support revenues decreased 3% in fiscal 2004 compared to fiscal 2003 due to
termination of contracts without commensurate replacements from new customers.
Service revenues decreased 1% to $61.6 million in fiscal 2004 from $61.8 million
in fiscal 2003 and decreased 5% using constant currency rates. The decrease in
service revenues in fiscal 2004 as compared to fiscal 2003 was comprised of the
following: (1) a decline of 40% in ITAM service revenues related to the decrease
in software licenses sold and (2) a $ 1 million decline in service revenues as a
result of the sale of our industrial data normalization services operations in
the second quarter of fiscal 2003. These decreases were partially offset by a 5%
increase in MAXIMO EAM services revenues. In constant currency terms, MAXIMO EAM
service revenues were flat over the comparable period. Overall, our services
business operates in a highly competitive industry and there are numerous
independent consulting firms who implement MAXIMO.
FISCAL 2003 COMPARED TO FISCAL 2002: Software license revenues increased 2% in
fiscal 2003 compared to fiscal 2002. The impact of exchange rates was immaterial
for these comparative periods. The increase in fiscal 2003 as compared to fiscal
2002 was mainly attributable to an increase of 33% in ITAM software licenses
revenues. The Company purchased the MAXIMO Main Control (ITAM) product in June
2002 and therefore only recognized four months of revenue from this product in
fiscal 2002 versus twelve months of revenue in fiscal 2003. MAXIMO EAM software
licenses were flat in fiscal 2003 compared to fiscal 2002 and we attribute this
to the saturation of our traditional EAM market, a difficult IT spending
environment and adverse economic conditions in the general economy. The Company
was also experiencing longer sales cycles.
Page 20
Support revenues increased 18% to $65.2 million in fiscal 2003 from $55.4
million in fiscal 2002. The impact of exchange rates was immaterial for these
comparative periods. Support revenues increased as a result of a cumulative
increase in the number of MAXIMO EAM 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 EAM support revenues
comprised 94% of total support revenues in fiscal 2003 and increased 13% in
fiscal 2003 compared to fiscal 2002. ITAM 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 impact of exchange rates was immaterial for these
comparative periods. The overall decline in service revenues in fiscal 2003 as
compared to fiscal 2002 was comprised of the following: (1) a 7% decline in
MAXIMO EAM service revenues due to a cumulative decline in the number of MAXIMO
EAM software licenses sold and increased competition from independent consulting
firms who implement MAXIMO, (2) an 80% decline in industrial data normalization
service revenues due to the sale of this business in January 2003, and (3) a 12%
decline in OCS revenues due to a decrease in the number of customers renewing
annual service contracts. The decrease was partially offset by a 354% increase
in ITAM revenues. The increase in ITAM service revenues reflects the comparison
of revenues for twelve months in fiscal 2003 with only four months of revenue
from this product in fiscal 2002.
COST OF REVENUES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/04 % 9/30/03 % 9/30/02
- -------------- ------- ------ ------- ------ -------
Cost of software licenses $ 7,143 (14)% $ 8,314 19% $ 7,012
Percentage of software licenses 14% 17% 14%
Cost of support and services $60,144 3% $58,618 (5)% $61,862
Percentage of support and services 45% 46% 50%
Total cost of revenues $67,287 1% $66,932 (3)% $68,874
Percentage of total revenues 36% 38% 40%
FISCAL 2004 COMPARED TO FISCAL 2003: Cost of software license revenues consists
of software purchased for resale, royalties paid to vendors of third party
software, the cost of software product packaging and media, certain employee
costs related to software duplication, packaging and shipping, and amortization
of acquired technology. The decrease in the cost of software license revenues in
fiscal 2004 as compared to fiscal 2003 was primarily attributable to a decrease
in the amortization of acquired technology due to the cessation of amortization
of fully amortized assets. Amortization of acquired technology was $2.4 million
and $3.4 million for fiscal 2004 and 2003, respectively.
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 5% to $11.0 million in fiscal 2004 from $10.5 million
in fiscal 2003. The increase in fiscal 2004 was primarily attributable to
general increases in salaries and related benefits and operating expenses needed
to support all of our product lines. Cost of support revenues, as a percentage
of total support revenues was 15% and 16% for fiscal 2004 and 2003,
respectively. The decrease as a percentage of total support revenues was
attributable to an increase in support revenues without a commensurate increase
in operating expenses and personnel.
Cost of service revenues increased 2% to $49.2 million in fiscal 2004 from $48.1
million in fiscal 2003. Cost of service revenues, as a percentage of total
service revenues was 80% and 78% for fiscal 2004 and fiscal 2003, respectively.
The increase in fiscal 2004 as compared to fiscal 2003 were attributable to an
increase of $1.0 million for the utilization of third party consultants to
implement our products, an increase of $650 thousand in salaries and related
benefits and an
Page 21
increase of $400 thousand in service incentives due to additional headcount.
These increases were partially offset by a decrease of $780 thousand in travel
and entertainment expenses.
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 was 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
for the MAXIMO Mobile Suite product. Amortization of acquired technology was
$3.4 million in fiscal 2003 and $3.0 million in fiscal 2002 and the increase was
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 24% to $10.5 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 headcount. Cost of support revenues, as a
percentage of total support revenues was 16% and 15% for fiscal 2003 and 2002,
respectively.
Cost of service revenues decreased 10% to $48.1 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 primarily 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 78% and 79% for
fiscal 2003 and 2002, respectively.
OPERATING EXPENSES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/04 % 9/30/03 % 9/30/02
- -------------- ------- ------ ------- ------ -------
Sales and marketing $56,762 (4)% $59,117 1% $58,806
Percentage of total revenues 31% 33% 34%
Product development $28,492 8% $26,476 (2)% $26,897
Percentage of total revenues 15% 15% 16%
General and administrative $17,839 1% $17,702 (10)% $19,698
Percentage of total revenues 10% 10% 11%
Amortization of other intangibles
and goodwill $ 666 (27)% $ 908 (93)% $12,925
Percentage of total revenues 1% 1% 8%
FISCAL 2004 COMPARED TO 2003: Sales and marketing expenses decreased 4% to $56.7
million in fiscal 2004 from $59.1 in fiscal 2003. The decrease in fiscal 2004 as
compared to fiscal 2003 was primarily attributable to a $2.9 million decrease in
salaries and related benefits due to a reduced number of sales and marketing
personnel and a $1.4 million decrease in advertising expenses. These decreases
were partially offset by a $1.4 million increase in sales commissions due to
increases in software license sales and a more favorable sales commission policy
for fiscal 2004 and a $340 thousand increase in travel and entertainment
expenses.
Product development expenses increased 8% to $28.5 million in fiscal 2004 from
$26.5 million in fiscal 2003. The increase was primarily attributable to
increases in product development salaries and related benefits and increases in
the costs to translate our products into foreign languages. The Company has
focused the majority of its development on a new generation of products, MXES.
Page 22
MXES will incorporate the Company's current EAM and ITAM capabilities,
delivered on a common platform along with new functionality that will include IT
Help and Service Desk capabilities as well as a greatly enhanced
application set for the EAM market.
General and administrative expenses increased 1% to $17.8 million in fiscal 2004
from $17.7 million in fiscal 2003. The increase was primarily attributable to an
increase in salaries and related benefits, property and business taxes, and
insurance premiums. These increases were offset by a decrease in U.S. bad debt
reserves of $375 thousand.
The decrease in amortization of other intangibles expense in fiscal 2004 as
compared to fiscal 2003 was due to several assets becoming fully amortized
during the first three quarters of fiscal 2004.
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 was 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 was 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 was attributable to a decrease in the costs to translate our products into
foreign languages, as most of the cost to translate the MAXIMO EAM product was
absorbed in fiscal 2002.
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.
NON-OPERATING EXPENSES
Fiscal Fiscal Fiscal
Year Year Year
Ended Change Ended Change Ended
(in thousands) 9/30/04 % 9/30/03 % 9/30/02
- -------------- ------- ------ ------- ------ -------
Interest income $1,258 55% $ 811 (17)% $974
Other income/(expense), net $ 6 (99)% $1,161 1,135% $(94)
FISCAL 2004 AS COMPARED TO 2003: Interest income is attributable to interest
earned on marketable securities and cash and cash equivalents. The Company
invests a large portion of its cash in marketable securities such as United
States treasury and treasury-backed instruments, municipal bonds and highly
rated conservative corporate bonds. We were able to earn more income in fiscal
2004 as compared to fiscal 2003 because we invested more cash into higher
yielding securities and the overall U.S. bond market improved over the previous
comparable period. The change in other income was primarily due to a swing in
foreign currency transaction gains and losses. The Company reported net currency
transaction losses of $506 thousand in fiscal 2004 compared to net currency
transaction gains of $532 thousand in fiscal 2003. Also, in fiscal 2004, the
Company recorded an additional $452 thousand in other income related to the sale
of its industrial data normalization services operations.
Page 23
FISCAL 2003 AS COMPARED TO 2002: Due to unfavorable interest yields in the bond
market in 2003, the Company earned less interest on its investments in fiscal
2003. The change in other income was due to foreign currency exchange rate gains
of $532 thousand and a gain of $407 thousand on the sale of the industrial data
normalization services operations in January 2003 to International Materials
Solutions, Inc.
INCOME TAXES
The Company's effective tax rate was 35% for fiscal 2004. The decrease in the
effective tax rate in fiscal 2004 as compared to the fiscal 2003 tax rate was
primarily due to the reduction in non-deductible amortization and the
utilization of state net operating losses and research and development credits.
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 was due
to the non-deductible nature of certain intangible amortization expenses, the
impact of foreign rate differentials, and state income taxes offset by state net
operating loss utilization and research and development credits.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, the Company had cash and cash equivalents of $57.0
million and marketable securities of $51.4 million, and working capital of $78.2
million.
Cash provided by operations was $13.2 million for the twelve months ended
September 30, 2004 primarily attributable to income generated from operations
and income tax refunds.
Cash used in investing activities was $33.9 million for the twelve months ended
September 30, 2004 and was primarily used in the purchase and sale of marketable
securities. We also received payment of $1.3 million as settlement of an
outstanding obligation from International Materials Solutions, Inc. relative to
their purchase of our industrial data normalization services operations in
January 2003.
Cash provided by financing activities was $3.2 million for the twelve months
ended September 30, 2004 and represents proceeds from the Company's Employee
Stock Option and Purchase Plans.
As of September 30, 2004, the Company's principal commitments consist primarily
of office space and equipment operating leases for its U.S. and European
headquarters. The Company's corporate headquarters are under lease through
December 31, 2009. The Company leases its other facilities and certain equipment
under non-cancelable operating lease agreements that expire at various dates
through June 30, 2019.
The Company 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 $6.9
million, $6.2 million, and $6.5 million for fiscal 2004, 2003 and 2002,
respectively.
The following table summarizes our contractual obligations as of September 30,
2004. The contractual obligations are primarily related to office leases,
equipment leases and contracts for hosting our financial applications.
Page 24
PAYMENTS DUE BY PERIOD
LESS THAN 1-3 3-5 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
- ----------------------- ----- --------- ----- ----- ---------
(IN THOUSANDS)
Operating leases
Leased premises $34,650 $ 4,130 $6,812 $6,153 $17,555
Equipment/Automobiles $ 1,717 $ 1,275 $ 426 $ 15 1
Purchase obligations $ 3,296 $ 1,457 $1,839 -- --
------- ------- ------ ------ -------
Total $39,663 $ 6,862 $9,077 $6,168 $17,556
======= ======= ====== ====== =======
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, 2005. 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".
RECENT ACCOUNTING PRONOUNCEMENTS
In October 2004, the American Jobs Creation Act of 2004 ("AJCA") was signed into
law. The AJCA contains a series of provisions several of which are pertinent to
the Company.
The AJCA creates a temporary incentive for U.S. multinational corporations to
repatriate accumulated income abroad by providing an 85% dividends received
deduction for certain dividends from controlled foreign corporations. It has
been the Company's practice to permanently reinvest all foreign earnings into
its foreign operations and the Company currently still plans to continue to
reinvest its foreign earnings permanently into its foreign operations. Should
the Company determine that it plans to repatriate any of its foreign earnings,
the Company will be required to establish a deferred tax liability on such
earnings.
The AJCA eliminates the extraterritorial income exclusion for transactions
occurring after December 31, 2004. However, the AJCA provides transitional
relief, allowing an exclusion of 80% (of the exclusion previously allowable) for
transactions occurring in calendar 2005 and 60% for transactions occurring in
calendar 2006.
The AJCA also provides U.S. corporations with an income tax deduction equal to a
stipulated percentage of qualified income from domestic production activities
("qualified activities"). The deduction, which cannot exceed 50% of annual wages
paid, is phased in as follows: 3% of qualified activities of the Company's
fiscal years 2006 and 2007, 6% in fiscal years 2008 through 2010, and 9% in
fiscal year 2011 and thereafter. The Company believes that it qualifies for the
deduction. In November 2004, the Financial Accounting Standards Board issued a
staff position (FAS 109-a) indicating that the domestic manufacturing deduction
should be accounted for as a special deduction. As such, the tax benefit of the
deduction will be accounted for in the periods in which the qualifying
activities occur, i.e., the years in which the deductions are taken on the
Company's tax returns. This benefit will be included in the Company's annual
effective tax rate, but will not result in a re-measurement of deferred income
taxes.
The AJCA may have an impact on the Company's tax rate for 2005 and future years.
The outcome at this time is not yet known.
Page 25
FACTORS AFFECTING FUTURE PERFORMANCE
The nature of forward-looking information is that such information involves
significant assumptions, risks and uncertainties. Certain public documents of
the Company and statements made by our authorized officers, directors,
employees, agents and representatives, acting on behalf of the Company, may
include forward-looking information, which will be influenced by the factors
described below, and by other assumptions, risks and uncertainties.
Forward-looking information is based on assumptions, estimates, forecasts and
projections regarding the Company's future results as well as the future
effectiveness of the Company's strategic plans and its operational decisions.
Forward-looking statements made by or on behalf of the Company are subject to
the risk that the forecasts, projections, and expectations of management, or
assumptions underlying such forecasts, projections and expectations, may prove
to be inaccurate. Accordingly, actual results and the Company's implementation
of its plans and operations may differ materially from forward-looking
statements made by or on behalf of the Company. The following discussion
identifies certain important factors that could affect the Company's actual
results and actions and could cause such results and actions to differ
materially from forward-looking statements.
WE DEPEND SUBSTANTIALLY ON OUR MAXIMO EAM PRODUCT
Most of our revenues are derived from the licensing of our MAXIMO EAM family of
products and sales of related services and support. Our financial performance
depends largely on continued market acceptance of these products. We believe
that continued market acceptance and our revenue stability and growth will
largely depend on our ability to continue to enhance and broaden the
capabilities of these products. If we are unable to continue to enhance and
improve MAXIMO EAM so that it delivers the capabilities required by existing and
potential customers and remains competitive with other products in the market,
or if a trend emerges such that customers decide to consolidate their IT systems
and eliminate their standalone of "best-of-breed" EAM application software
altogether, our revenues, margins and results of operations and financial
condition may be materially and adversely affected.
THE TRADITIONAL MARKET FOR OUR MAXIMO EAM PRODUCT IS MATURE AND SATURATED AND
PRESENTS LIMITED OPPORTUNITY FOR GROWTH.
MAXIMO has been the industry-leading plant floor capital asset maintenance
product for a number of years, and we have acquired a large number of customers
in this market. However, most large industrial organizations have made
significant investments in systems that support the maintenance of their capital
assets, and opportunities for new MAXIMO sales in the EAM market are in a state
of continuous decline. In addition, the emergence and growth of this market have
attracted a large number of competitors, and most of the largest software
companies that sell into complementary markets have developed competing asset
maintenance products. It is likely that this market will continue to mature,
there will be fewer sales opportunities for the Company, and competitive forces
will put downward pressure on our average sales prices and rates of success. To
be competitive in the EAM market, we have made significant investments in MAXIMO
EAM to meet the needs of specific industries in which the Company has a
presence, such as the nuclear, transportation, power generation, transmission
and distribution, and other industries. We refer to these industry-specific
MAXIMO offerings as "Industry Solutions". While we continue to strengthen our
MAXIMO EAM offering, these efforts may not be sufficient to overcome the effects
of maturity and saturation in our traditional market, and our revenues, margins,
results of operation and financial condition may be materially and adversely
affected.
OUR EFFORTS TO REACH INTO NEW MARKETS WITH NEW PRODUCTS MAY NOT BE SUCCESSFUL.
Given the maturity and saturation of the traditional EAM market, in order to
maintain revenues at their current levels and to grow our business, we are
attempting to broaden our product offerings and find additional sources of
revenues. We are attempting, through acquisitions and internal development, to
deliver products that address markets that are new to the Company, such as the
ITAM and Help and Service Desk markets. The culmination of these efforts will be
embodied in Maximo Enterprise Suite (MXES), which is scheduled for release in
early calendar
Page 26
2005. Our development of MXES and of our MAXIMO EAM Industry Solutions, and our
ability to derive revenue and grow the Company, is subject to the following
risks, among others:
- - We may not be able to develop and market our new products (including MXES)
on time, with acceptable quality or with functions and features that meet
the requirements of customers in these markets.
- - Current potential customers who are considering the purchase of our MAXIMO
EAM or MAXIMO ITAM products may decide to postpone their purchase in
anticipation of the release of MXES.
- - The MXES Help and Service Desk products may not contain all of the
functionality deemed necessary by prospective buyers in these markets.
- - It is possible that the Company's sales, service or support personnel may
not be adequately trained and/or staffed to sell, implement or support the
new products. Newly developed products require a higher level of
development, distribution and support expenditures in the early stages of
their product lifecycles.
- - In the event that our development efforts are not progressing as intended,
or if our new product releases or technologies are not successful in the
markets they are intended to address, we may increase our rate of
expenditure in this area over and above the level of investment
experienced in the past or previously projected, which could have a
material adverse affect on our results of operation or financial
condition.
- - The launch of MXES may not result in any new revenues while serving as a
major distraction from our efforts to maintain revenues at current levels
in our traditional EAM market.
- - We are positioning the combination of our traditional EAM functionality
with the new ITAM and Help and Service Desk in a single offering as a
logical suite of software products, which may enable our customers to
consolidate their information technology (IT) systems. Our customers may
not value this combination of products in a single architecture, or they
may believe that other overlapping and proven suites are more desirable,
or that the intrinsic value of having a broad suite of developed products
does not outweigh the functional advantages offered by existing and
experienced "best-of-breed" vendors in any one of the markets viewed
separately, especially the ITAM and Help and Service Desk markets where
our offering is new and unproven.
If any of our newly developed products do not gain market acceptance and
generate revenues from new industries or markets, we may not be able to grow our
business or maintain revenues at current levels, and our revenues, margins,
results of operations and financial condition may be materially and adversely
affected.
IF WE ARE UNABLE TO KEEP PACE WITH THE RAPID CHANGES IN TECHNOLOGY AND CUSTOMER
DEMAND THAT CHARACTERIZE OUR INDUSTRY, OUR COMPETITIVE POSITION COULD BE
IMPAIRED.
The computer software industry is characterized by rapid technological advances,
changes in customer requirements and frequent product introductions and
enhancements by us and by our competitors. Our success depends on our abilities
to enhance our current products, to develop and introduce new products that keep
pace with technological developments, to respond to evolving customer
requirements and changing industry standards, to offer functionality and other
innovations that are unique to our products and superior to those of our
competitors, and ultimately to achieve market acceptance. In particular, we
believe that we must continue to innovate and develop new functionality, to
respond quickly to users' needs for new functionality and to advances in
hardware and operating systems, and that we must continue to create products
that conform to industry standards regarding the communication and
interoperability among software, hardware and communications products of many
different vendors. If we fail to anticipate or respond adequately to
technological developments and changes in market definitions or changes in
customer requirements within particular market segments, or if we have any
Page 27
significant delays in product development or introduction, then we could lose
competitiveness and revenues.
OUR SALES EFFORTS DEPEND IN PART ON STRATEGIC RELATIONSHIPS WITH OTHER
COMPANIES.
We have entered into strategic relationships with various larger companies, such
as HP, IBM, SAIC and others. In order to generate revenue through these
relationships, each party must coordinate with and support the other's sales and
marketing efforts, and each party must make significant sales and marketing
investments. Our ability to generate revenues through these relationships
depends in large part upon the efforts of these other companies, which are
outside of our control. The efforts of these companies may in turn be influenced
by factors internal to these companies, or by developments in their respective
industries or markets, that we fail to anticipate.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO FLUCTUATIONS AND TO SEASONAL
VARIATION.
We have experienced, and may in the future experience, significant
period-to-period fluctuations in revenues and operating results. In addition,
our quarterly revenues and operating results have fluctuated historically due to
the number and timing of product introductions and enhancements, customers
delaying their purchasing decisions in anticipation of new product releases, the
budgeting and purchasing cycles of customers, the timing of product shipments
and the timing of marketing and product development expenditures. We typically
realize a significant portion of our revenue from sales of software licenses in
the last two weeks of each quarter, frequently even in the last few days of a
quarter. Failure to close a small number of large software license contracts may
have a significant impact on revenues for the quarter and could, therefore,
result in significant fluctuations in quarterly revenues and operating results,
and divergence of those results from our expectations. Accordingly, we believe
that period-to-period comparisons of results of operations are not necessarily
meaningful and should not be relied upon as an indication of future performance.
WE FACE INTENSE COMPETITION IN THE MARKETS WE SERVE.
The markets for strategic asset management software such as MAXIMO EAM, MAXIMO
ITAM and Maximo Enterprise Suite (MXES) are fragmented by geography, by market
and industry segments, by hardware platform and by industry orientation, and are
characterized by a large number of competitors including both independent
software vendors and certain ERP vendors. Independent software vendors include
DataStream Systems, Inc. and Indus International, Inc. We also compete with
integrated ERP systems, which include integrated maintenance modules offered by
several large vendors, such as SAP, Oracle, and others. In the ITAM market we
compete with companies such as Peregrine Systems, Computer Associates and BMC
Software. MXES will compete with all of these companies, plus additional
companies in the Help and Service Desk markets, such as HP. MAXIMO also
encounters competition from vendors of low cost maintenance management systems
designed initially for use by a single user or limited number of users as
vendors of these products upgrade their functionality and performance to enter
the enterprise market.
Certain of our competitors have greater financial, marketing, service and
support and technological resources than we do. To the extent that such
competitors increase their focus on the asset maintenance or planning and cost
systems markets, or on the industrial supply chain market, we could be at a
competitive disadvantage.
Current or potential competitors may make strategic acquisitions thereby
increasing their ability to deliver products that better address the needs of
our customers. There is no assurance that we will be able to compete
successfully should this occur and this could have a material adverse effect on
our financial condition and results of operations.
OUR INTERNATIONAL OPERATIONS SUBJECT US TO SPECIAL RISKS.
A significant portion of our total revenues and expenses are derived and
incurred from operations outside the U.S. Our ability to sell our products
internationally is subject to a number of risks. General economic and political
conditions in each
Page 28
country could adversely affect demand for our products and services. Exposure to
currency fluctuations and greater difficulty in collecting accounts receivable
could affect our sales. We could be affected by the need to comply with a wide
variety of foreign import laws, U.S. export laws and regulatory requirements.
Trade protection measures and import and export licensing requirements subject
us to additional regulation and may prevent us from shipping products to a
particular market and increase our operating costs.
OUR SOFTWARE PRODUCTS ARE DEPENDENT ON THIRD PARTY PROVIDERS OF SOFTWARE AND
SERVICES, AND FAILURE OF THESE PARTIES TO PERFORM AS EXPECTED, OR TERMINATION OF
OUR RELATIONSHIPS WITH THEM, COULD HARM OUR BUSINESS.
We have entered into nonexclusive license agreements with other software
vendors, pursuant to which we incorporate into our products and solutions
software providing certain application development, hardware and network
discovery, user interface, mobile technology, report writing, application
servers, business intelligence, content and graphics capabilities developed by
these companies. If we cannot renew these licenses (at all or on commercially
reasonable terms), or if any of such vendors were to become unable to support
and enhance their products, we could be required to devote additional resources
to the enhancement and support of these products or to acquire or develop
software providing equivalent capabilities, which could cause delays in the
development and introduction of products incorporating such capabilities.
WE MAY HAVE EXPOSURE TO ADDITIONAL INCOME TAX LIABILITIES.
We are subject to income taxes in both the U.S. and various foreign
jurisdictions. The amount of taxes paid is subject to our interpretation of
applicable tax laws in the jurisdictions in which we file. We are subject to
continuous examinations of our income tax returns by the Internal Revenue
Service and other tax authorities. We regularly assess the likelihood of adverse
outcomes resulting from these examinations to determine the adequacy of our
provision for income taxes. While we believe that we have complied with all
applicable tax laws, there can be no assurance that a governing tax authority
will not have a different interpretation of the law and assess us with
additional taxes. Should we be assessed with additional taxes, there could be a
material and adverse effect on our results of operations or financial condition.
CHANGES IN REGULATIONS OR CRITICAL ACCOUNTING POLICIES COULD MATERIALLY AND
ADVERSELY AFFECT US.
New laws, regulations or standards related to the Company or our products, and
new accounting pronouncements, could be implemented or changed in a manner that
could adversely affect our business, results of operations or financial
condition.
The Company may be eligible for several tax benefits provided for under the
American Jobs Creation Act of 2004, which was signed into law on October 22,
2004. The potential tax benefits include a temporary 85% foreign dividends
received deduction for certain dividends received from controlled foreign
corporations. There are several statutory requirements, which must be met if the
Company determines that the 85% dividends received deduction is advantageous.
However, if the Company does not appropriately comply with the statutory
requirements then the 85% foreign dividends received deduction could be
forfeited resulting in a potentially adverse affect on the results of
operations.
WE MAY PERFORM MORE FIXED PRICE SERVICES CONTRACTS.
A trend has emerged and is continuing among customers in our market towards
demanding consulting and implementation services on a fixed-price basis, whereby
the Company agrees to deliver the contract requirements for a fixed fee,
regardless of the number of person-hours actually provided, as opposed to our
traditional services arrangements where we deliver services on a
time-and-materials basis. In cases where services are provided either for the
future delivery of functionality or on a fixed price basis and our standard
software is licensed at the same time, and if the services are essential to the
overall solution desired by the customer or if the Company cannot determine the
fair value of the services being delivered, then the Company may not be able to
recognize the software license revenue from such
Page 29
transactions at the time the agreements are signed, but rather may be required
to recognize such license revenue under the contract method of accounting, or to
recognize a greater portion (or all) of the revenue from these transactions as
services revenue. This would likely result in a postponement of recognition of,
or even a reduction in, software license revenues, and have an adverse affect on
the results of our operations.
WE MAY BE UNABLE TO EFFECTIVELY PROTECT OUR INTELLECTUAL PROPERTY.
Our success is dependent upon our proprietary technology. We currently have two
U.S. patents (and other corresponding patents or applications pending in various
foreign countries), and we protect our technology primarily through copyrights,
trademarks, trade secrets and employee and third-party nondisclosure agreements.
Our software products are sometimes licensed to customers under "shrink-wrap" or
"click- wrap" licenses included as part of the product packaging or acknowledged
by customers who register online. Although, in larger sales, our shrink-wrap and
click-wrap licenses may be accompanied by specifically negotiated agreements
signed by the licensee, in many cases our shrink-wrap and click-wrap licenses
are not negotiated with or signed by individual licensees. Certain provisions of
our shrink-wrap and click-wrap licenses, including provisions protecting against
unauthorized use, copying, transfer and disclosure of the licensed program, and
limitations or liabilities and exclusions of remedies, may be unenforceable
under the laws of certain jurisdictions. In addition, the laws of some foreign
countries do not protect our proprietary rights to the same extent, as do the
laws of the U.S. Finally, we sell our products through distributors and
resellers, and are therefore dependent on those companies to take appropriate
steps to adequately implement our contractual protections and to enforce and
protect our rights. We cannot give any assurance that the steps that we have
taken to protect our proprietary rights will be adequate to prevent
misappropriation of our technology or development by others of similar
technology. Although we believe that our products and technology do not infringe
on any valid claim of any patent or any other proprietary rights of others, we
cannot give any assurance that third parties will not assert infringement claims
in the future. Litigation may be necessary to enforce our intellectual property
rights, to protect our trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in substantial costs and diversion of
resources, could result in the deterioration or outright loss of our patent
rights, copyrights or other intellectual property, and could potentially have a
material adverse affect on our operating results and financial condition.
LOSS OF THE SERVICES OF ONE OR MORE OF OUR KEY EXECUTIVE OFFICERS OR INABILITY
TO RECRUIT NEEDED SALES, SERVICES AND TECHNICAL PERSONNEL COULD ADVERSELY AFFECT
OUR BUSINESS.
We are highly dependent on certain key executive officers, technical and sales
employees, and the loss of one or more of such employees could have an adverse
impact on our future operations. We do not have employment contracts with any
personnel, and we do not maintain any so-called "key person" life insurance
policies on any personnel. We continue to hire additional sales, services and
technical personnel. Competition for hiring of such personnel in the software
industry is intense, and from time to time we may experience difficulty in
locating candidates with the appropriate qualifications within the desired
geographic locations, or with certain industry specific expertise. There can be
no assurance that we will be able to retain our existing personnel or attract
additional qualified employees.
WE ARE EXPOSED TO FLUCTUATIONS IN THE MARKET VALUES OF OUR PORTFOLIO INVESTMENTS
AND IN INTEREST RATES.
We invest a significant portion of our cash in marketable securities. These
securities are classified as available-for-sale and are recorded at fair value
on the Consolidated Balance Sheet with unrealized gains or losses reported as a
separate component of accumulated other comprehensive income (loss), net of tax.
Economic downturns and other factors subject these securities to volatility in
the market place. As a result, we may recognize the decline in fair value of
these investments.
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OUR STOCK PRICE HAS BEEN VOLATILE, AND YOU COULD INCUR LOSSES AS A RESULT OF
FUTURE FLUCTUATIONS IN OUR STOCK PRICE.
There have been significant fluctuations in the market price of our common
stock, recently and over longer time periods. In addition, the stock market in
general has recently experienced substantial price and volume fluctuations,
which have particularly affected the market prices of many software and
technology companies and which have often been unrelated to the operating
performance of such companies. These broad market fluctuations also may
adversely affect the market price of our common stock. In addition, general
macroeconomic and market conditions unrelated to our performance may also affect
demand for our products and services, our results of operations, and our stock
price.
OTHER RISKS
The foregoing is not a complete description of all risks relevant to our future
performance, and the foregoing should be read and understood together with and
in the context of similar discussions which may be contained in the documents
that we file with the SEC in the future. We undertake no obligation to release
publicly any revision to the foregoing or any update to any forward-looking
statements to reflect events or circumstances after the date of such statements
or to reflect the occurrence of anticipated or unanticipated events.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary exposures to market risk are the effect of fluctuations in
interest rates earned on its cash equivalents and marketable securities and
exposures to foreign currency exchange rate fluctuations.
At September 30, 2004, the Company held $108.4 million in cash equivalents and
marketable securities consisting of taxable and tax exempt municipal securities.
Interest rate movements affect the interest income we earn. The Company places
its investments with high quality issuers and limits risk by purchasing only
investment-grade securities. A hypothetical 10 percent increase in interest
rates would not have a material im