##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934
 (mark one)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 for
the quarter ended December 31, 2005
 o
    
    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.
  MASSACHUSETTS
    
    04-2448516(State of Incorporation)
    
    (I.R.S. EmployerIdentification Number)
 
 
 
  
 þ o
 þ o
  o o o
 o þ




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##### 



MRO SOFTWARE, INC.
10-Q INDEX
 PagePART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets (unaudited) as of December 31, 2005 and September 30, 2005.
    
    3Consolidated Statements of Operations (unaudited) for the three months ended December 31, 2005 and 2004.
    
    4Consolidated Statements of Cash Flows (unaudited) for the three months ended December 31, 2005 and 2004.
    
    5Notes to Consolidated Financial Statements (unaudited).
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    25Item 4.
    
    Controls and Procedures
    
    25PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    26Item 1A.
    
    Risk Factors
    
    26Item 2.
    
    Unregistered Sales of Equity Securities & Use of Proceeds
    
    26Item 3.
    
    Defaults upon Senior Executives
    
    26Item 4.
    
    Submission of Matter to a Vote of Security Holders
    
    26Item 5.
    
    Other Information
    
    26Item 6.
    
    Exhibits
    
    26SIGNATURE
    
    27Ex-10.2 Executive Bonus Plan Fiscal Year Ended 9/30/06Ex-10.3 Amended Stock Restriction AgreementEx-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEO & CFO
  Page
    
    
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MRO SOFTWARE, INC.
 
 CONSOLIDATED BALANCE SHEETS
(unaudited)
 December 31,
    
    
    September 30,(in thousands, except per share data)
    
    2005
    
    
    2005ASSETSCurrent assets:Cash and cash equivalents
    
    $
    123,642
    
    
    $
    120,301Marketable securities
    
    
    7,095
    
    
    
    5,130Accounts receivable, trade, less allowance
for doubtful accounts of $1,413 at December 31, 2005
and $1,445 at September 30, 2005, respectively
    
    
    35,582
    
    
    
    40,362Prepaid expenses and other current assets
    
    
    6,457
    
    
    
    4,715Deferred income taxes
    
    
    1,871
    
    
    
    1,963Total current assets
    
    
    174,647
    
    
    
    172,471Marketable securities
    
    
    5,784
    
    
    
    7,743Property and equipment, net
    
    
    7,337
    
    
    
    7,210Goodwill, net
    
    
    46,337
    
    
    
    46,337Intangible assets, net
    
    
    2,689
    
    
    
    3,118Deferred income taxes
    
    
    6,013
    
    
    
    6,412Other assets
    
    
    2,999
    
    
    
    3,079Total assets
    
    $
    245,806
    
    
    $
    246,370LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable and accrued expenses
    
    $
    12,794
    
    
    $
    15,481Accrued compensation
    
    
    7,315
    
    
    
    12,805Income taxes payable
    
    
    4,326
    
    
    
    1,467Deferred revenue
    
    
    30,515
    
    
    
    31,718Deferred lease obligation
    
    
    432
    
    
    
    363Total current liabilities
    
    
    55,382
    
    
    
    61,834Deferred lease obligation
    
    
    2,248
    
    
    
    2,013Deferred revenue
    
    
    475
    
    
    
    577Other long term liabilities
    
    
    3
    
    
    
    240Total liabilities
    
    
    58,108
    
    
    
    64,664Commitments and contingencies (Note H)Stockholders equityPreferred stock, $0.01 par value;1,000 shares authorized,
none issued and outstandingCommon stock, $0.01 par value; 50,000 shares authorized;
25,866 and 25,738 shares issued and outstanding at December
31, 2005 and September 30, 2005, respectively
    
    
    259
    
    
    
    257Additional paid-in capital
    
    
    129,955
    
    
    
    128,180Deferred compensation
    
    
    (2,204
    )
    
    
    (2,420
    )Retained earnings
    
    
    59,314
    
    
    
    55,098Accumulated other comprehensive income
    
    
    374
    
    
    
    591Total stockholders equity
    
    
    187,698
    
    
    
    181,706Total liabilities and stockholders equity
    
    $
    245,806
    
    
    $
    246,370
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MRO SOFTWARE, INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 Three Months EndedDecember 31,(in thousands, except per share data)
    
    2005
    
    
    2004Revenues:Software
    
    $
    12,815
    
    
    
    14,824Support and services
    
    
    36,317
    
    
    
    32,532Total revenues
    
    
    49,132
    
    
    
    47,356Cost of revenues:Software
    
    
    1,383
    
    
    
    1,280Support and services
    
    
    16,174
    
    
    
    15,615Total cost of revenues
    
    
    17,557
    
    
    
    16,895Gross profit
    
    
    31,575
    
    
    
    30,461Operating expenses:Sales and marketing
    
    
    13,601
    
    
    
    15,231Product development
    
    
    7,453
    
    
    
    6,780General and administrative
    
    
    4,628
    
    
    
    4,570Total operating expenses
    
    
    25,682
    
    
    
    26,581Income from operations
    
    
    5,893
    
    
    
    3,880Interest income, net
    
    
    1,225
    
    
    
    471Other (expense)/income, net
    
    
    (191
    )
    
    
    570Income before income taxes
    
    
    6,927
    
    
    
    4,921Provision for income taxes
    
    
    2,711
    
    
    
    1,758Net income
    
    $
    4,216
    
    
    $
    3,163Net income per share, basic
    
    $
    0.16
    
    
    $
    0.13Net income per share, diluted
    
    $
    0.16
    
    
    $
    0.12Shares used to calculate net income per shareBasic
    
    
    25,594
    
    
    
    25,041Diluted
    
    
    26,591
    
    
    
    25,392
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MRO SOFTWARE, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 Three Months endedDecember 31,(in thousands)
    
    2005
    
    
    2004Cash flows from operating activities:Net income
    
    $
    4,216
    
    
    $
    3,163Adjustments to reconcile net income to net
cash provided by operating activities:Depreciation
    
    
    737
    
    
    
    775Amortization of other intangibles
    
    
    429
    
    
    
    611Amortization of premium on marketable securities
    
    
    4
    
    
    
    66Stock-based compensation
    
    
    382
    
    
    
    48Deferred income taxes
    
    
    463
    
    
    
    664Changes in operating assets and liabilities:Accounts receivable
    
    
    4,427
    
    
    
    1,789Prepaid expenses and other assets
    
    
    (1,783
    )
    
    
    142Accounts payable, accrued expenses and other liabilities
    
    
    (2,445
    )
    
    
    (946
    )Accrued compensation
    
    
    (5,421
    )
    
    
    (896
    )Income taxes payable
    
    
    2,883
    
    
    
    281Deferred revenue
    
    
    (1,071
    )
    
    
    (1,806
    )Net cash provided by operating activities
    
    
    2,821
    
    
    
    3,891Cash flows from investing activities:Acquisitions of property and equipment and other
capital expenditures
    
    
    (844
    )
    
    
    (1,105
    )Sale of marketable securities
    
    
    
    
    
    
    3,429Purchase of marketable securities
    
    
    
    
    
    
    (2,420
    )Net cash used in investing activities
    
    
    (844
    )
    
    
    (96
    )Cash flows from financing activities:Proceeds from exercise of employee stock options and
stock purchases
    
    
    1,551
    
    
    
    2,299Tax benefit  stock based compensation
    
    
    53
    
    
    
    Net cash provided by financing activities
    
    
    1,604
    
    
    
    2,299Effect of exchange rate changes on cash
and cash equivalents
    
    
    (240
    )
    
    
    1,124Net increase in cash and cash equivalents
    
    
    3,341
    
    
    
    7,218Cash and cash equivalents, beginning of period
    
    
    120,301
    
    
    
    56,982Cash and cash equivalents, end of period
    
    $
    123,642
    
    
    $
    64,200
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MRO SOFTWARE, INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (UNAUDITED)
 A. Basis of Presentation
    B. Net Income Per Share
   Three months ended(in thousands, except per share data)
    
    12/31/05
    
    
    12/31/04Net income
    
    $
    4,216
    
    
    $
    3,163Weighted average common shares outstanding-basic
    
    
    25,594
    
    
    
    25,041Effect of dilutive securities (primarily stock options)
    
    
    997
    
    
    
    351Weighted average common shares outstanding-diluted
    
    
    26,591
    
    
    
    25,392Net income per share, basic
    
    $
    0.16
    
    
    $
    0.13Net income per share, diluted
    
    $
    0.16
    
    
    $
    0.12
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C. Accounting Policies
     Three months endedDecember 31, 2005Expected life (1)
    
    4 yearsExpected volatility (2)
    
    
    47.36
    %Risk-free interest rate (3)
    
    
    4.02
    %Expected annual dividend yield (4)
    
    
    0.00
    %
 
 (1)
    
    Expected life is based on expected exercise patterns.(2)
    
    Expected volatility is based on historical volatility of the Companys stock.(3)
    
    Risk-free interest rate is based on U.S. Treasury rates corresponding to the grant
date and expected term.(4)
    
    Based on managements expectations with respect to payment of dividends during the
option term.
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Three months endedDecember 31, 2004Assumptions:Expected life (1)
    
    4 yearsExpected volatility (2)
    
    
    75.00
    %Risk-free interest rate (3)
    
    
    3.24
    %Expected annual dividend yield (4)
    
    
    0.00
    %
 
 (1)
    
    Expected life is based on expected exercise patterns.(2)
    
    Expected volatility is based on historical volatility of the Companys stock.(3)
    
    Risk-free interest rate is based on U.S. Treasury rates corresponding to the grant
date and expected term.(4)
    
    Based on managements expectations with respect to payment of dividends during the
option term.
 Three months endedDecember 31, 2004Effect of FAS 123Net income as reported
    
    $
    3,163Add: Stock-based employee compensation
included in net income
    
    
    48Deduct: Stock-based employee compensation
expense determined under the fair value based
method for all awards, net of related tax effects
    
    
    (1,299
    )Pro forma net income
    
    $
    1,912Net income per share:Basic  as reported
    
    $
    0.13Basic  pro forma
    
    $
    0.08Diluted  as reported
    
    $
    0.12Diluted  pro forma
    
    $
    0.08
 Stock based plans  description
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D.
Comprehensive Income:
  Three months ended(in thousands)
    
    12/31/05
    
    
    12/31/04Net income
    
    $
    4,216
    
    
    $
    3,163Other comprehensive income,Net of tax:Unrealized gain/(loss) on securities arising
during period
    
    
    11
    
    
    
    (9
    )Foreign currency translation adjustment
    
    
    (228
    )
    
    
    1,198Comprehensive income
    
    $
    3,999
    
    
    $
    4,352
 E. Segment Information, Geographic Data and Major Customers:
   Three months ended(in thousands)
    
    12/31/05
    
    
    12/31/04Revenues:United States
    
    $
    26,530
    
    
    $
    26,495Other
Americas
    
    
    2,510
    
    
    
    2,805Intercompany
    
    
    4,807
    
    
    
    3,478Subtotal
    
    $
    33,847
    
    
    $
    32,778Europe/Middle East and Africa
    
    
    15,110
    
    
    
    14,437Asia/Pacific
    
    
    4,982
    
    
    
    3,619Intercompany
    
    
    (4,807
    )
    
    
    (3,478
    )Total revenues
    
    $
    49,132
    
    
    $
    47,356
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F. Goodwill and Other Intangible Assets
  (in thousands)
    
    12/31/05
    
    
    09/30/05Goodwill, net
    
    $
    46,337
    
    
    $
    46,337Acquired technology
    
    
    16,654
    
    
    
    16,654Accumulated amortization
    
    
    (14,102
    )
    
    
    (13,748
    )Sub-total acquired technology
    
    
    2,552
    
    
    
    2,906Other intangibles
    
    
    1,911
    
    
    
    1,911Accumulated amortization
    
    
    (1,774
    )
    
    
    (1,699
    )Sub-total other intangibles
    
    
    137
    
    
    
    212Total intangible assets, net
    
    $
    49,026
    
    
    $
    49,455Other intangibles consist of customer contracts and customer lists.
   (in thousands)2006 (remaining 9 months)
    
    $
    1,1352007
    
    
    6592008
    
    
    6592009
    
    
    236Total
    
    $
    2,689
 G. Recent Accounting Pronouncements
   Page
    
    
    10




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H. Guarantor Arrangements
   Page
    
    
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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
  OVERVIEW
   Critical Accounting Policies and Estimates
  Page
    
    
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REVENUES
  Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    MonthsEnded
    
    
    Change
    
    
    Ended(in thousands)
    
    12/31/05
    
    
    %
    
    
    12/31/04Software licenses
    
    $
    12,815
    
    
    
    (14
    %)
    
    $
    14,824Percentage of total revenues
    
    
    26
    %
    
    
    
    
    
    
    31
    %Support revenues
    
    $
    20,270
    
    
    
    9
    %
    
    $
    18,590Percentage of total revenues
    
    
    41
    %
    
    
    
    
    
    
    39
    %Services revenues
    
    $
    16,047
    
    
    
    15
    %
    
    $
    13,942Percentage of total revenues
    
    
    33
    %
    
    
    
    
    
    
    30
    %Total revenues
    
    $
    49,132
    
    
    
    4
    %
    
    $
    47,356
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COST OF REVENUES
 Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    MonthsEnded
    
    
    Change
    
    
    Ended(in thousands)
    
    12/31/05
    
    
    %
    
    
    12/31/04Cost of
software licenses
    
    $
    1,383
    
    
    
    8
    %
    
    $
    1,280Percentage
of software licenses revenues
    
    
    11
    %
    
    
    
    
    
    
    9
    %Cost of support revenues
    
    $
    3,152
    
    
    
    9
    %
    
    $
    2,881Percentage of support revenues
    
    
    16
    %
    
    
    
    
    
    
    15
    %Cost of services revenues
    
    $
    13,022
    
    
    
    2
    %
    
    $
    12,734Percentage of services revenues
    
    
    81
    %
    
    
    
    
    
    
    91
    %Total cost of revenues
    
    $
    17,557
    
    
    
    4
    %
    
    $
    16,895Percentage of total revenues
    
    
    36
    %
    
    
    
    
    
    
    36
    %
    Page
    
    
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OPERATING EXPENSES
 Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    MonthsEnded
    
    
    Change
    
    
    Ended(in thousands)
    
    12/31/05
    
    
    %
    
    
    12/31/04Sales and marketing
    
    $
    13,601
    
    
    
    (11
    %)
    
    $
    15,231Percentage of total revenues
    
    
    28
    %
    
    
    
    
    
    
    32
    %Product development
    
    $
    7,453
    
    
    
    10
    %
    
    $
    6,780Percentage of total revenues
    
    
    15
    %
    
    
    
    
    
    
    14
    %General and administrative
    
    $
    4,628
    
    
    
    1
    %
    
    $
    4,570Percentage of total revenues
    
    
    9
    %
    
    
    
    
    
    
    10
    %
    NON-OPERATING EXPENSES
 Three
    
    
    
    
    
    
    ThreeMonths
    
    
    
    
    
    
    MonthsEnded
    
    
    Change
    
    
    Ended(in thousands)
    
    12/31/05
    
    
    %
    
    
    12/31/04Interest income, net
    
    $
    1,225
    
    
    
    160
    %
    
    $
    471Other (expense)/ income, net
    
    $
    (191
    )
    
    
    (134
    )%
    
    $
    570
   Page
    
    
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INCOME TAXES
  LIQUIDITY AND CAPITAL RESOURCES
        RECENT ACCOUNTING PRONOUNCEMENTS
   Page
    
    
    17




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RISK FACTORS
  We depend substantially on our Maximo EAM product.
  The markets for our products are mature and saturated and may present limited opportunity for
growth, and are crowded with larger competitors that may have significant advantages.
  Page
    
    
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
    
    The emergence and growth of the EAM, ITAM and service desk markets have attracted a
large number of strong competitors, and most of the largest software companies that sell
into complementary markets have developed competing EAM, ITAM or service desk products.
    
    In the EAM market, large ERP vendors have developed products that compete with Maximo
EAM and that are tightly integrated with the rest of their ERP product suites. In the
ITAM and service desk markets, larger companies than ours have developed competing
products that are delivered as part of a broader product offering. While our products may
have technical or functional advantages over those of our competition, these companies are
all larger than ours, they may have the ability to quickly eliminate our competitive
advantages, and they are able to market their products as part of a larger solution and
take advantage of customers desire to consolidate their information technology (IT)
systems onto fewer platforms.
   Our efforts to reach into new markets with new products may not be successful.
  
    
    We may not be able to develop and market our new products on time, with acceptable
quality or with functions and features that meet the requirements of customers in these
markets.
    
    The MXES products may not contain all of the functionality deemed necessary by
prospective buyers in these markets, and certain of our competitors in these new markets
also offer complementary and sometimes fully integrated products that we do not offer. It
may take longer than we anticipate for us to establish our presence in new markets,
develop a robust and dependable flow of sales opportunities and establish predictable
closure rates and revenue streams.
    
    It is possible that our sales, service or support personnel may not be adequately
trained and/or staffed to sell, implement or support the new products. Newly developed
products require a higher level of development, distribution and support expenditures in
the early stages of their product life cycles.
 Page
    
    
    19




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##### Table of Contents




    
    In the event that our development efforts do not progress as intended, or if our new
product releases or technologies are not successful in the markets they are intended to
address, we may increase our rate of expenditure in this area over and above the level of
investment experienced in the past or previously projected, which could have a material
adverse affect on our results of operation or financial condition.
    
    We may not derive revenues from MXES in proportion to our development investment and
sales efforts, and those efforts may serve as a significant distraction from our efforts
to maintain revenues at current levels in our traditional EAM market.
    
    Our positioning of the combination of our traditional EAM products and our ITAM and
service desk products in a single offering as a logical suite of products may not be
accepted in the marketplace. As a result of this and other factors, we may not be able to
benefit from the trend among customers to consolidate their IT systems, and we may not be
successful in our attempts to cross-sell our new products into our existing accounts, or
our traditional EAM products to customers primarily interested in our new products.
  Our sales efforts depend in part on strategic relationships and reseller arrangements with other
companies.
   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.
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Our quarterly operating results are subject to fluctuations and to seasonal variation.
  We face intense competition in the markets we serve.
 .
   Our international operations subject us to special risks.
  Page
    
    
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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 may have exposure to additional tax liabilities.
  Changes in regulations or critical accounting policies could materially and adversely affect us.
   We may perform more fixed price services contracts.
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We may be unable to effectively protect our intellectual property.
  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 exposed to fluctuations in the market values of our portfolio investments and in interest
rates.
  Recently issued regulations related to equity compensation could adversely affect our ability to
attract and retain key personnel.
  Page
    
    
    23




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We face costs and risks associated with compliance with Section 404 of the Sarbanes-Oxley Act.
  Other Risks
  Page
    
    
    24




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures
  Changes in internal control over financial reporting
  Page
    
    
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Part II. OTHER INFORMATION
 
 Item 1. Legal Proceedings
 None
 
 Item 1A. Risk Factors
  
 Item 2 Unregistered Sales of Equity Securities & Use of Proceeds
 None
 
 Item 3 Defaults upon Senior Securities
 None
 
 Item 4. Submission of Matters to a Vote of Security Holders
 None
 
 Item 5. Other Information
    
 Item 6. Exhibits
  Page
    
    
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MRO SOFTWARE, INC.Dated: February 09, 2006
    
    By:  /s/ Peter J. RicePeter J. RiceExecutive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer) Page
    
    
    27




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EXHIBIT LIST
 Exhibit
    
    
    
    Filed with this
    
    Incorporated by ReferenceNo.
    
    Description
    
    Form 10-Q
    
    Form
    
    Filing Date
    
    Exhibit No.3.1
    
    Amended and Restated Articles of Organization
    
    
    
    S-1
    
    April 21, 1994
    
    
    3.33.2
    
    Amendment to Articles of Organization
    
    
    
    10-Q
    
    February 14, 2000
    
    
    3.43.3
    
    Amendment to Articles of Organization
    
    
    
    8-K
    
    March 9, 2001
    
    
    3.43.4
    
    Certificate of Vote of Directors Establishing Series A
Junior Participating Preferred Stock
    
    
    
    8-K
    
    February 3, 1998
    
    
    4
    (b)3.5
    
    By-laws
    
    
    
    10-Q
    
    February 14, 2001
    
    
    3.53.6
    
    Amendment to By-laws
    
    
    
    10-Q
    
    May 15, 2001
    
    
    3.34.1
    
    Specimen stock certificate for common stock
    
    
    
    S-1
    
    April 21, 1994
    
    
    4.14.2
    
    Form of rights certificate
    
    
    
    8-K
    
    February 3, 1998
    
    
    4
    (c)10.1*
    
    Form of Option Amendment for executive officers
    
    
    
    8-K
    
    October 6, 2005
    
    
    10.110.2*
    
    Executive Bonus Plan Fiscal Year Ended September 30, 2006
    
    X10.3*
    
    Amended Stock Restriction Agreement
    
    X31.1
    
    Certification of the chief executive officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
    
    X31.2
    
    Certification of the chief financial officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
    
    X32.1
    
    Certification of the chief executive officer and the
chief financial officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
    
    X
 
 *
    
    Management contract or compensatory plan.
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