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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 28, 2002
COMMISSION FILE NUMBER: 000-30027
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MOLDFLOW CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-3406763
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
430 BOSTON POST ROAD, WAYLAND, MA 01778
(Address of principal executive offices, including zip code)
(508) 358-5848
(Registrant's telephone number, including area code)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
There were 9,972,649 shares of our common stock, par value $0.01,
outstanding on November 7, 2002.
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MOLDFLOW CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 28, 2002
TABLE OF CONTENTS
PAGE
NUMBER
--------
Part I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
Condensed Consolidated Balance Sheet as of September 28,
2002 and June 30, 2002.................................... 2
Condensed Consolidated Statement of Income for the three
months ended September 28, 2002 and September 29, 2001.... 3
Condensed Consolidated Statement of Cash Flows for the three
months ended September 28, 2002 and September 29, 2001.... 4
Notes to Condensed Consolidated Financial Statements........ 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 22
Item 4. Controls and Procedures..................................... 22
Part II. OTHER INFORMATION
Item 1. Legal Proceedings........................................... 23
Item 2. Changes in Securities and Use of Proceeds................... 23
Item 6. Exhibits and Reports on Form 8-K............................ 23
Signatures........................................................... 24
Certifications....................................................... 25
1
PART I. FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
MOLDFLOW CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)
SEPTEMBER 28, JUNE 30,
2002 2002
------------- --------
ASSETS
Current assets:
Cash and cash equivalents................................. $47,359 $47,634
Marketable securities..................................... 1,792 3,233
Accounts receivable, net.................................. 5,426 5,927
Other current assets...................................... 3,155 4,098
------- -------
Total current assets...................................... 57,732 60,892
Fixed assets, net........................................... 4,209 4,324
Goodwill.................................................... 8,790 8,790
Intangible assets, net...................................... 1,152 1,311
Other assets................................................ 865 696
------- -------
Total assets.............................................. $72,748 $76,013
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 909 $ 1,164
Accrued expenses.......................................... 6,660 7,664
Deferred revenue.......................................... 6,971 7,931
------- -------
Total current liabilities................................. 14,540 16,759
Other long-term liabilities................................. 625 614
------- -------
Total liabilities......................................... 15,165 17,373
------- -------
Stockholders' equity:
Common stock.............................................. 102 101
Additional paid-in capital................................ 62,735 62,769
Treasury stock, at cost................................... (1,026) (327)
Deferred stock compensation............................... (4) (8)
Notes receivable from stockholders........................ (29) (29)
Accumulated deficit....................................... (3,957) (3,972)
Accumulated other comprehensive income (loss)............. (238) 106
------- -------
Total stockholders' equity................................ 57,583 58,640
------- -------
Total liabilities and stockholders' equity................ $72,748 $76,013
======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
2
MOLDFLOW CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
------------- -------------
Revenue:
Product................................................... $ 3,696 $ 4,007
Services.................................................. 4,605 4,165
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Total revenue............................................. 8,301 8,172
------- -------
Costs and expenses:
Cost of product revenue................................... 661 570
Cost of services revenue.................................. 280 319
Research and development.................................. 1,455 1,365
Selling and marketing..................................... 4,165 4,484
General and administrative................................ 1,650 1,597
Amortization of other intangible assets................... 159 164
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Total operating costs and expenses........................ 8,370 8,499
------- -------
Loss from operations...................................... (69) (327)
Interest income, net........................................ 287 502
Other income, net........................................... 22 24
------- -------
Income before income taxes................................ 240 199
Provision for income taxes.................................. 225 66
------- -------
Net income................................................ $ 15 $ 133
======= =======
Net income per common share:
Basic..................................................... $0.00 $0.01
Diluted................................................... $0.00 $0.01
Shares used in computing net income per common share:
Basic..................................................... 10,108 10,088
Diluted................................................... 10,371 10,385
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
MOLDFLOW CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................. $ 15 $ 133
Adjustments to reconcile to net cash provided by operating
activities:
Depreciation and amortization............................. 498 488
Provisions for doubtful accounts.......................... 38 14
Foreign exchange gains.................................... (23) (37)
Other non-cash charges to income.......................... 104 57
Changes in assets and liabilities:
Accounts receivable..................................... 386 1,774
Other current assets.................................... 728 495
Other assets............................................ (175) (3)
Accounts payable........................................ (249) 182
Accrued expenses........................................ (715) (586)
Deferred revenue........................................ (874) (679)
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Net cash provided by (used in) operating activities....... (267) 1,838
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets................................. (290) (278)
Capitalization of software development costs.............. -- (341)
Sales and maturities of marketable securities............. 1,441 8,253
------- -------
Net cash provided by investing activities................. 1,151 7,634
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................. 177 188
Repurchase of common stock................................ (909) (464)
------- -------
Net cash used in financing activities..................... (732) (276)
------- -------
Effect of exchange rate changes on cash and cash
equivalents............................................... (427) (341)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (275) 8,855
Cash and cash equivalents, beginning of period.............. 47,634 32,969
------- -------
Cash and cash equivalents, end of period.................... $47,359 $41,824
======= =======
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
MOLDFLOW CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS
Moldflow Corporation ("Moldflow" or the "Company") was formed to design,
develop, manufacture and market computer software applications for the design,
engineering and manufacture of injection molded plastic parts and, as such,
revenues are derived from the plastic design and manufacturing industry. The
Company sells its products primarily to customers in the United States, Europe,
Asia and Australia.
The accompanying unaudited condensed consolidated financial statements
include the accounts of Moldflow Corporation and its wholly owned subsidiaries.
The condensed consolidated financial statements have been prepared by the
Company in accordance with the rules and regulations of the Securities and
Exchange Commission ("SEC") regarding interim financial reporting. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements and should be
read in conjunction with the audited consolidated financial statements and notes
thereto for the year ended June 30, 2002 included in the Company's Annual Report
on Form 10-K. The June 30, 2002 condensed consolidated balance sheet was derived
from the Company's audited consolidated financial statements. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements contain all adjustments, consisting only of those of a normal
recurring nature, necessary for a fair presentation of results for the interim
periods presented. The results of operations for the three-month period ended
September 28, 2002 are not necessarily indicative of the results to be expected
for any future period or the full fiscal year.
The Company's fiscal year end is June 30. During the fiscal year, the
Company follows a schedule in which each interim quarterly period ends on the
Saturday of the thirteenth full week of the reporting period.
2. NET INCOME PER COMMON SHARE
The following table presents the calculation for both basic and diluted net
income per common share:
THREE MONTHS ENDED
-------------------------------
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
-------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Net income.................................................. $ 15 $ 133
======= =======
Weighted average shares used in computing net income per
common share--basic....................................... 10,108 10,088
------- -------
Effect of dilutive securities:
Restricted stock.......................................... 3 21
Stock options............................................. 260 276
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Dilutive potential common shares.......................... 263 297
------- -------
Weighted average shares used in computing net income per
common share--diluted..................................... 10,371 10,385
======= =======
Net income per common share--basic.......................... $0.00 $0.01
Net income per common share--diluted........................ $0.00 $0.01
5
MOLDFLOW CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company has established a hedging program designed to reduce the
exposure to changes in currency exchange rates.
At September 28, 2002, currency options and collars designated as hedging
instruments with notional amounts of $3.2 million, $6.6 million and
$1.8 million to exchange Euros, Japanese yen and Australian dollars for U.S.
dollars, respectively, were outstanding. In August 2002, the Company
discontinued hedge accounting for the excess portion of instruments that were
used to hedge transactions considered no longer probable of occurring. At
September 28, 2002, these instruments had notional amounts of $1.4 million and
$243,000 to exchange Japanese yen and Australian dollars for U.S. dollars,
respectively. At September 28, 2002, the total fair values of all currency
options and collars held by the Company of $163,000 and $299,000 were recorded
as components of other current assets and other current liabilities,
respectively. Net unrealized losses on options and collars that qualified as
hedging instruments of $222,000 were included in accumulated other comprehensive
income. The Company expects these instruments to affect earnings over the next
fifteen months. During the three months ended September 28, 2002, gains of
$11,000 were recorded as components of other income and expense on the effective
portion of options that were settled. For the three months ended September 28,
2002, an unrealized gain of $38,000 was recognized on the ineffective portion of
the options and collars dedesignated as hedging instruments.
At September 29, 2001, currency options and collars designated as hedging
instruments with notional amounts of $13.2 million, $11.6 million and
$3.6 million to exchange Euros, Japanese yen and Australian dollars for U.S.
dollars, respectively, were outstanding. At September 29, 2001, instruments with
fair values of $67,000 and $355,000 were recorded as components of other current
assets and other current liabilities, respectively. Net unrealized losses on
these instruments of $376,000 were included in accumulated other comprehensive
income. During the three months ended September 29, 2001, gains of $46,000 were
recorded as components of other income and expenses.
4. INTANGIBLE ASSETS
Intangible assets acquired in past acquisitions include goodwill, customer
base, developed technologies and non-compete agreements. All of the Company's
acquired intangible assets, except for goodwill, are subject to amortization
over their estimated useful lives. No significant residual value is estimated
for the intangible assets. Intangible asset amortization for the three months
ended September 28, 2002 and September 29, 2001 was $159,000 and $164,000,
respectively.
The components of intangible assets are as follows (in thousands):
SEPTEMBER 28, 2002 JUNE 30, 2002
------------------------------------- ----------------------------------
GROSS NET GROSS NET
CARRYING ACCUMULATED CARRYING CARRYING ACCUMULATED CARRYING
AMOUNT AMORTIZATION AMOUNT AMOUNT AMORTIZATION AMOUNT
-------- ------------ -------- -------- ------------ --------
Intangible assets:
Customer base.................. $ 330 $ (70) $ 260 $ 330 $ (58) $ 272
Developed technology........... 975 (472) 503 975 (420) 555
Non-compete agreements......... 1,100 (711) 389 1,100 (616) 484
------ ------- ------ ------ ------- ------
Total............................ $2,405 $(1,253) $1,152 $2,405 $(1,094) $1,311
====== ======= ====== ====== ======= ======
6
MOLDFLOW CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INTANGIBLE ASSETS (CONTINUED)
The following table summarizes the expected remaining amortization of other
intangible assets as of September 28, 2002:
ESTIMATED
AMORTIZATION
FISCAL YEAR EXPENSE
- ----------- --------------
(IN THOUSANDS)
2003 (remainder)............................................ $ 375
2004........................................................ 333
2005........................................................ 189
2006........................................................ 93
2007........................................................ 93
Thereafter.................................................. 69
------
Total amortization expense.................................. $1,152
======
5. SOFTWARE DEVELOPMENT COSTS
Costs associated with the research and development of the Company's products
are expensed as incurred. Costs associated with the development of computer
software and related products are expensed prior to establishing technological
feasibility, as defined by SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased, or Otherwise Marketed," and capitalized thereafter
until commercial release of the software products. Development costs eligible
for capitalization prior to the first quarter of fiscal 2002 were not
significant. The Company established technological feasibility of Moldflow
Plastics Insight version 3.0 ("MPI 3.0") in the first quarter of fiscal 2002 and
released the product commercially in November 2001. In accordance with SFAS
No. 86, research and development costs of $602,000 were capitalized as a
component of fixed assets during fiscal 2002, $341,000 of which was capitalized
in the three months ended September 29, 2001. These costs are being amortized to
cost of product revenue over a five-year period. Accumulated amortization of
capitalized software development costs was $100,000 at September 28, 2002.
7
MOLDFLOW CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMMON STOCK, TREASURY STOCK AND STOCK PLANS
On September 19, 2001, the Board of Directors authorized the Company to
repurchase up to 500,000 shares of its outstanding common stock. In September
2001, the Company reacquired 50,000 shares for $464,000, an average cost of
$9.28 per share. In September 2002, the Company reacquired an additional 194,165
shares of its outstanding common stock for $909,000, an average cost of $4.72
per share. As of September 28, 2002, 37,375 of these shares were reissued under
the Company's Employee Stock Purchase Plan and 206,790 shares remained in
treasury.
A summary of the Company's stock option activity follows:
THREE MONTHS ENDED
-------------------------------------------------------------
SEPTEMBER 28, 2002 SEPTEMBER 29, 2001
----------------------------- -----------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
---------- ---------------- ---------- ----------------
Outstanding at beginning of period...... 1,618,975 $12.23 1,116,460 $12.07
Granted................................. 1,066,550 4.62 495,950 12.90
Exercised............................... (45,637) 0.55 (10,324) 1.07
Canceled................................ (73,689) 13.14 (10,920) 16.37
---------- ----------
Outstanding at end of period............ 2,566,199 $ 9.25 1,591,166 $12.37
========== ==========
Options exercisable at end of period.... 692,340 372,902
Options available for future grant...... 24,765 1,056,692
7. COMPREHENSIVE LOSS
Comprehensive loss is comprised of net income and other comprehensive income
and losses. Other comprehensive loss includes certain changes in equity that are
excluded from net income, such as cumulative foreign currency translation
adjustments. Other comprehensive loss also includes unrealized gains and losses
on the Company's hedging instruments and on the Company's marketable securities.
The following table presents the calculation of comprehensive loss:
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
------------- -------------
(IN THOUSANDS)
Net income......................................... $ 15 $ 133
------- -------
Other comprehensive loss:
Changes in fair value of marketable securities,
net of related tax effect...................... 206 (92)
Changes in value of financial instruments
designated as hedges, net of related tax
effect......................................... 57 (519)
Foreign currency translation adjustment.......... (607) (194)
------- -------
Other comprehensive loss......................... (344) (805)
------- -------
Comprehensive loss................................. $ (329) $ (672)
======= =======
8
MOLDFLOW CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. RESTRUCTURING PLAN
On April 19, 2002, the Company's Board of Directors approved a corporate
restructuring plan. The plan included the involuntary termination of 37
employees, closing certain leased offices and reducing the size of other leased
offices. All significant activities under the plan were completed as of
September 28, 2002.
As a result of the restructuring plan, the Company recorded pre-tax charges
and related accruals in fiscal 2002 of $1.3 million. The remaining accrual
balances as of September 28, 2002 primarily relate to long-term contractual
obligations from facility commitments that will be paid over seven years. The
following table presents the balance of the accrued restructuring charges (in
thousands):
EMPLOYEE LEASE OTHER
SEVERANCE COSTS TERMINATION COSTS COSTS TOTAL
--------------- ----------------- -------- --------
Balance at June 30, 2002......................... $ 31 $642 $124 $ 797
Cash payments.................................... (23) (39) (90) (152)
Foreign exchange impact and other adjustments.... -- 30 -- 30
---- ---- ---- -----
Balance at September 28, 2002.................... $ 8 $633 $ 34 $ 675
==== ==== ==== =====
9. CREDIT FACILITIES
In fiscal 2002, the Company completed the restructuring of its existing
working capital credit facility, establishing a new, unsecured $5.0 million
facility with a domestic bank. The available borrowing base of the facility is
subject to a calculation which is based upon eligible accounts receivable.
Advances may be in the form of loans, letters of credit, foreign exchange
contracts or other cash management lines. Loans against the facility bear
interest at the bank's prime rate. The facility includes certain restrictive
covenants, all of which the Company was in compliance with as of September 28,
2002. These covenants include certain liquidity and profitability measures and
restrictions that limit the ability of the Company to merge, acquire or sell
certain assets without prior approval from the bank. As of September 28, 2002,
the Company had employed $2.2 million of the available borrowing base through
outstanding foreign exchange contracts and letters of credit. These advances do
not incur interest charges. As of September 28, 2002, there were no loans
advanced against the facility, and the remaining available borrowing base was
$2.8 million.
Certain subsidiaries of the Company have established credit facilities with
two separate financial institutions primarily for the purposes of establishing
foreign exchange contracts. Advances against these facilities bear interest at
the institutions' published rates, plus 2% per annum. These credit facilities
are unsecured. Advances against these facilities are guaranteed by the Company.
There were no advances against these facilities as of September 28, 2002.
Certain subsidiaries of the Company have established other credit facilities
totaling $130,000 with two separate financial institutions for general working
capital requirements and foreign exchange contracts. Advances against these
facilities bear interest at the institutions' published rates, plus 1.5% per
annum. Advances against these facilities are secured by a $130,000 term deposit
and the assets of a subsidiary of the Company. There were no advances against
these facilities as of September 28, 2002.
9
MOLDFLOW CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SEGMENT AND GEOGRAPHIC INFORMATION
The Company is engaged in one reportable industry segment: the development,
marketing and support of software products for the plastic design and
manufacturing industry.
Geographic information regarding the Company's operations follows (in
thousands):
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
------------- -------------
REVENUE FROM UNAFFILIATED CUSTOMERS:
Asia/Australia
Product.......................................... $1,333 $ 1,459
Services......................................... 1,333 1,163
------ -------
Total Asia/Australia............................. 2,666 2,622
------ -------
Americas
Product.......................................... 1,071 960
Services......................................... 1,441 1,629
------ -------
Total Americas................................... 2,512 2,589
------ -------
Europe
Product.......................................... 1,292 1,588
Services......................................... 1,831 1,373
------ -------
Total Europe..................................... 3,123 2,961
------ -------
Consolidated
Product.......................................... 3,696 4,007
Services......................................... 4,605 4,165
------ -------
Total consolidated............................... $8,301 $ 8,172
====== =======
Revenue from unaffiliated customers in Japan was $2.0 million (24% of total
revenue) in both the three months ended September 28, 2002 and September 29,
2001. Substantially all of the revenue in the Americas region is derived from
the United States.
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
------------- -------------
FIXED ASSETS, NET:
Asia/Australia................................... $1,613 $ 2,044
Americas......................................... 1,550 1,417
Europe........................................... 1,046 862
------ -------
Total consolidated............................... $4,209 $ 4,323
====== =======
All of the net fixed assets included in the Americas are located in the
United States.
11. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and replaces
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This Statement is
effective for exit or disposal activities initiated after December 31, 2002,
with early application encouraged. Management does not believe SFAS No. 146 will
have a material impact on its financial position and results of operations.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
21E of the Securities Exchange Act of 1934, as amended. You can identify these
statements by forward-looking words such as "may," "will," "expect,"
"anticipate," "believe," "estimate," and "continue" or similar words. You should
read statements that contain these words carefully because they discuss our
future expectations, contain projections of our future results of operations or
of our financial condition, or state other "forward-looking" information. We
believe that it is important to communicate our future expectations to our
investors. However, there may be events in the future that we are not able to
accurately predict or control and that may cause our actual results to differ
materially from the expectations we describe in our forward-looking statements.
Investors are cautioned that all forward-looking statements involve risks and
uncertainties, and actual results may differ materially from those discussed as
a result of various factors, including those factors described in "Risk Factors
and Important Factors That May Affect Future Results" beginning on page 17.
Readers should not place undue reliance on our forward-looking statements. We do
not undertake any obligation to update any of our forward-looking statements to
reflect events occurring after the date of this report.
BUSINESS OVERVIEW
Our primary business is the development, sale and support of software
applications for the design and manufacture of injection molded plastic parts.
We develop software products internally and through cooperative research
relationships with a number of public and private educational and research
organizations around the world. We categorize our products into two groups. Our
Design Optimization Solutions allow a product designer or engineer to simulate
the manufacture of a plastic part to determine the optimal part design and
part/mold combination. Our Design Optimization Solutions include our Moldflow
Plastics Insight ("MPI") series for in-depth mold design and our Moldflow
Plastics Advisers ("MPA") series for part design and high level mold design. Our
Manufacturing Solutions allow plant engineers and managers to maintain and
optimize manufacturing conditions throughout the manufacturing process. Our
Manufacturing Solutions include three products. Our Moldflow Plastics Xpert
("MPX") series for production set-up and production monitoring was introduced in
fiscal 1999. In fiscal 2001, two additional products were launched under the
Moldflow brand, Shotscope and EZ-Track. Shotscope is a shop floor product that
monitors, analyzes and assists in the scheduling of injection molding production
processes. EZ-Track provides real-time, plant-wide production monitoring and
reporting.
We sell our products and services internationally through our direct sales
operations in 14 countries. We also sell through a network of distributors and
value-added resellers and through distribution arrangements with developers of
other design software products.
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT JUDGMENTS AND ESTIMATES
The preparation of consolidated financial statements requires estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, management evaluates its estimates and judgments, including
those related to bad debts, inventories, income taxes, intangible assets, and
contingencies and litigation. We base our estimates on historical experience and
on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates.
11
The accounting policies that we believe are most critical to fully
understand our consolidated financial statements include: revenue recognition,
valuation allowances, acquisition accounting, impairment of intangible assets,
goodwill and other long-lived assets, and hedge accounting. For a more detailed
explanation of the judgments included in these areas, refer to the Company's
Annual Report on Form 10-K for the year ended June 30, 2002.
RESULTS OF OPERATIONS
We generate revenue from two principal sources:
- license fees for our packaged software products, and
- services revenue derived from maintenance and support services related to
our software products, consulting, training and material testing.
PRODUCT REVENUE. Typically, our customers pay an up-front, one-time fee for
our products. The amount of the fee depends upon the number and type of software
modules licensed, the associated hardware components and the number of the
customers' employees or other users who can access the software product
simultaneously. Our MPA product is subject to the terms of a "click-wrapped"
software license agreement that is included as part of each customer's
installation process. Revenue for our IMPA product is earned on a pay-per-use
basis and, to date, has not been significant. For sales of our MPI, MPX,
Shotscope and EZ-Track products, we generally require a signed license
agreement. In addition, we receive royalty payments from developers of other
software products related to the bundling of our software with their design
software programs.
SERVICES REVENUE. We also derive revenue from maintenance and support
contracts which require us to provide technical support services to customers
and unspecified product upgrades and enhancements on a when-and-if-available
basis. We also provide consulting services, training of customers' employees and
material testing services.
COST OF PRODUCT REVENUE. Cost of product revenue consists primarily of the
costs associated with compact discs and related packaging material, duplication
and shipping costs, hardware components for our Manufacturing Solutions products
and the salaries of our distribution personnel. In some cases, we pay royalties
to third parties for usage-based licenses of their products that are embedded in
our software programs. Product royalties are expensed when the related
obligation arises, which is generally upon the license of our products, and are
included in cost of product revenue. Also included in cost of product revenue in
the three months ended September 28, 2002 is amortization expense of $31,000
related to capitalized software development costs.
COST OF SERVICES REVENUE. Cost of services revenue consists primarily of
salary, fringe benefit and facility related costs of our maintenance and
support, consulting and training activities and of our material testing
laboratories, and is expensed when incurred. Additionally, from time to time, we
engage outside consultants to meet peaks in customer demand for consulting and
implementation services.
RESEARCH AND DEVELOPMENT. We employ a development staff to develop new
products and enhance our existing products. Product development expenditures,
which include salaries, benefits, travel and facilities costs, are generally
charged to operations as incurred. Statement of Financial Accounting Standards
("SFAS") No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed," requires the capitalization of certain software
development costs subsequent to the establishment of technological feasibility
up to the point of the product's release. Software development costs eligible
for capitalization prior to the first quarter of fiscal 2002 were not
significant. We established technological feasibility of MPI 3.0 in the first
quarter of fiscal 2002 and released the product commercially in November 2001.
In accordance with SFAS No. 86, research and development
12
costs of $602,000 were capitalized in fiscal 2002, of which $341,000 were
capitalized during the three months ended September 29, 2001, related to MPI
3.0. These development costs are being amortized to cost of product revenue over
the estimated economic life of the product.
SELLING AND MARKETING. We sell our products primarily through our direct
sales force and indirect distribution channels. Selling and marketing expenses
consist primarily of salaries, commissions to our sales staff, employee benefits
costs, sales office facilities, travel and promotional events such as trade
shows, advertising, print and web-based collateral materials, and public
relations programs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
compensation, routine legal, audit, insurance and other costs of our executive
management, finance, information technology, human resources and administrative
support activities.
AMORTIZATION OF OTHER INTANGIBLE ASSETS. These costs represent the
amortization of other intangible assets recorded in connection with our
acquisitions. These assets include developed technology, customer base and
non-compete agreements.
INTEREST INCOME (EXPENSE), NET. Interest income (expense), net includes our
cost of borrowings, including interest cost incurred on our working capital
lines of credit, net of interest income earned on invested cash balances.
OTHER INCOME (LOSS), NET. Other income (loss), net includes realized and
unrealized gains and losses arising from translation of foreign currency
denominated asset and liability balances, recognized gains and losses on our
foreign currency hedging instruments, and other non-operating income and expense
items.
PROVISION FOR INCOME TAXES. Our provision for income taxes includes
federal, state and foreign taxes on our income in the countries in which we do
business.
The following table sets forth statement of income data for the periods
indicated as a percentage of total revenue:
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
------------- -------------
Revenue:
Product.......................................... 44.5% 49.0%
Services......................................... 55.5 51.0
----- -----
Total revenue.................................... 100.0% 100.0%
===== =====
Costs and expenses:
Cost of product revenue.......................... 8.0% 7.0%
Cost of services revenue......................... 3.4 3.9
Research and development......................... 17.5 16.7
Selling and marketing............................ 50.2 54.9
General and administrative....................... 19.9 19.5
Amortization of intangible assets................ 1.9 2.0
----- -----
Total operating expenses......................... 100.9 104.0
----- -----
Loss from operations............................. (0.9) (4.0)
Interest income, net............................... 3.5 6.1
Other income, net.................................. 0.3 0.3
----- -----
Income before income taxes....................... 2.9 2.4
Provision for income taxes......................... 2.7 0.8
----- -----
Net income....................................... 0.2% 1.6%
===== =====
13
THREE MONTHS ENDED SEPTEMBER 28, 2002 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 29, 2001
REVENUE. Total revenue increased 2%, or $129,000, to $8.3 million for the
three months ended September 28, 2002, from $8.2 million for the three months
ended September 29, 2001. In the same period, product revenue decreased 8%, or
$311,000, to $3.7 million from $4.0 million. The following table sets forth our
product revenue by product group:
THREE MONTHS ENDED
-----------------------------
SEPTEMBER 28, SEPTEMBER 29,
2002 2001
------------- -------------
(IN THOUSANDS,
EXCEPT PERCENTAGE DATA)
Product revenue:
Design Optimization Solutions.................... $2,747 $3,341
Manufacturing Solutions.......................... 949 666
------ ------
Total............................................ $3,696 $4,007
====== ======
Percentage of total product revenue:
Design Optimization Solutions.................... 74.3% 83.4%
Manufacturing Solutions.......................... 25.7 16.6
------ ------
Total............................................ 100.0% 100.0%
====== ======
The decrease in product revenue in the first quarter of fiscal 2003 was a
result of the continued economic slowdown experienced in the markets we address,
particularly with respect to our Design Optimization Solutions. Demand for our
products is largely driven by the demand for the end products of our customers.
The industries in which many of our customers operate, including the consumer
products, telecommunications and electronics industries have been among those
most severely impacted by the prolonged economic slowdown. As such, these
companies have typically reduced their spending on capital items including
spending on our products. A continuation of this general economic slowdown could
materially and adversely affect us in the future by decreasing our revenue.
The overall decline in product revenue was partially offset by increased
sales of our Manufacturing Solutions. Product revenue from our Manufacturing
Solutions in the three months ended September 28, 2002 increased $283,000, or
42%, to $949,000 from $666,000 for the three months ended September 29, 2001.
We added 67 new customers in the first quarter of fiscal 2003, compared to
117 new customers in the same period of fiscal 2002. Sales to new customers
represented 43% of total product revenues in fiscal 2003, compared to 37% in the
same period of fiscal 2002. We sold 121 seats of Design Optimization Solutions
products and 133 seats of Manufacturing Solutions products in the first quarter
of fiscal 2003, compared to 239 seats and 28 seats in the corresponding period
of fiscal 2002, respectively. Pricing of individual products within these
product families can vary greatly, and the mix of products sold during a given
period can significantly impact our average sales price per seat. As such, we do
not believe that average sales prices per seat provide a meaningful measure of
our business.
Services revenue increased 11%, or $440,000, to $4.6 million for the three
months ended September 28, 2002, from $4.2 million for the three months ended
September 29, 2001. This increase was primarily in the sale of maintenance
contracts, which is the result of historical growth in our customer base arising
from product license sales.
No customer accounted for more than 10% of the total revenue during the
three-month periods ended September 28, 2002 and September 29, 2001.
14
COST OF REVENUE. The cost of product revenue increased 16%, or $91,000, to
$661,000 for the three months ended September 28, 2002, from $570,000 for the
three months ended September 29, 2001. This increase was primarily attributable
to increased sales of our Manufacturing Solutions, which include hardware
components and therefore have a higher cost of materials than our Design
Optimization Solutions. We expect that sales of our Manufacturing Solutions will
continue to increase as a percentage of our total product revenues. Since these
products include hardware components and therefore have a higher cost of
materials, we expect our gross margins on product revenue to remain consistent
with or slightly lower than the gross margin we experienced on our product
revenues in the quarter ended September 28, 2002.
The cost of services revenue decreased 12%, or $39,000, to $280,000 for the
three months ended September 28, 2002, from $319,000 for the three months ended
September 29, 2001. This decrease was primarily due to reduced compensation
expense resulting from the decrease in headcount under the April 2002
restructuring plan.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 7%,
or $90,000, to $1.5 million for the three months ended September 28, 2002, from
$1.4 million for the three months ended September 29, 2001. In the first quarter
of fiscal 2002, we capitalized $341,000 of research and development costs in
accordance with SFAS No. 86 related to our development of MPI 3.0. No such
amounts were capitalized in the first quarter of fiscal 2003, resulting in a
comparative increase in research and development expenses. Partially offsetting
this increase was the impact of our elimination of 12 technical positions
pursuant to our April 2002 restructuring plan.
SELLING AND MARKETING. Selling and marketing expenses decreased 7%, or
$319,000, to $4.2 million for the three months ended September 28, 2002, from
$4.5 million for the three months ended September 29, 2001. This decrease was
primarily due to the elimination of 17 sales and marketing positions, as a part
of the restructuring in April 2002 and a decrease in promotional activities.
GENERAL AND ADMINISTRATIVE. General and administrative expenses of
$1.6 million for the three months ended September 28, 2002 were relatively
unchanged from the three months ended September 29, 2001. Increases in insurance
costs and professional service fees, including the cost of audit and other
accounting services, were offset by the elimination of eight administrative
personnel as part of our April 2002 restructuring plan.
AMORTIZATION OF INTANGIBLE ASSETS. These costs represent the amortization
of intangible assets recorded in connection with our acquisitions, including
developed technology and protective covenants. Amortization expense decreased
3%, or $5,000, to $159,000 for the three months ended September 28, 2002, from
$164,000 for the three months ended September 29, 2001.
INTEREST INCOME, NET. Interest income, net decreased 43%, or $215,000, to
$287,000 for the three months ended September 28, 2002 from $502,000 for the
three months ended September 29, 2001. The decrease was primarily the result of
declining interest rates and the conversion of marketable securities to cash and
other highly liquid instruments.
OTHER INCOME, NET. Other income, net of $22,000 for the three months ended
September 28, 2002 was relatively unchanged from the $24,000 for the three
months ended September 29, 2001. Other income, net includes realized and
unrealized exchange gains and losses on intercompany account balances and
realized and unrealized gains and losses on our foreign exchange derivative
instruments.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
$159,000, to $225,000 for the three months ended September 28, 2002 from $66,000
for the three months ended September 29, 2001. In fiscal 2003, our tax expense
increased because we generated losses in certain jurisdictions which did not yet
give rise to financial statement tax provision benefits to offset increased
income and taxes in other jurisdications.
15
LIQUIDITY AND CAPITAL RESOURCES
Historically, we have financed our operations and met our capital
expenditure requirements primarily through funds generated from operations,
sales of our capital stock and borrowings from lending institutions. As of
September 28, 2002, our primary source of liquidity consisted of our total cash
and cash equivalents balance of $49.2 million. In fiscal 2002, we restructured
our primary working capital credit facility, resulting in an available credit
facility of $5.0 million with a domestic bank. The available borrowing base of
the facility is subject to a calculation which is based upon eligible accounts
receivable. At September 28, 2002, we had employed $2.2 million of available
borrowings through outstanding foreign exchange contracts and letters of credit.
The remaining available borrowings were $2.8 million. In addition to our primary
working capital line of credit, we also utilize domestic and foreign banking
institutions to provide liquidity to our subsidiaries. We also have
relationships with other banking institutions in order to facilitate foreign
currency and hedging transactions. As of September 28, 2002, we had no
outstanding debt.
Operating activities in the three months ended September 28, 2002 consumed
$267,000 of cash. Included in this amount were $152,000 of payments for
restructuring related obligations. Additional reductions in cash were a result
of decreases in other assets, accounts payable, accrued expenses and deferred
maintenance and support contracts revenue. These reductions were partially
offset by non-cash adjustments to net income and decreases to accounts
receivable, inventories, prepaid expenses and other current assets. In the three
months ended September 29, 2001, net cash of $1.8 million was generated by
operations. Cash was generated by increases in net income as adjusted for
non-cash charges, an increase in accounts payable, and decreases in accounts
receivable, prepaid expenses and other current assets, partially offset by
decreases in accrued expenses and deferred revenue.
Net cash provided by investing activities was $1.2 million for the three
months ended September 28, 2002 and $7.6 million for the corresponding period
ended September 29, 2001. Cash was provided in both reporting periods primarily
by the conversion of marketable securities into cash, offset by purchases of
fixed assets.
Net cash of $733,000 was used in financing activities during the three
months ended September 28, 2002, reflecting the impact of the Company's share
repurchase program, under which the Company purchased 194,000 shares of common
stock at a cost of $909,000. This use of cash was partially offset by exercises
of stock options and proceeds received for common stock under the Company's
Employee Stock Purchase Plan. In the corresponding period of fiscal 2002, net
cash of $276,000 was used in financing activities reflecting 50,000 shares of
common stock purchased by the Company under the repurchase program at a cost of
$464,000. This use of cash was partially offset by exercises of stock options
and proceeds received for common stock under the Company's Employee Stock
Purchase Plan.
We believe that our current cash, cash equivalents, marketable securities
and available lines of credit will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least the next twelve
months following the date of this Quarterly Report. On a long-term basis or to
complete acquisitions in the short term, we may require additional external
financing through credit facilities, sales of additional equity or other
financing vehicles. There can be no assurance that such financing can be
obtained on favorable terms, if at all.
The Company does not have any special purpose entities or off-balance sheet
financing arrangements. The Company's cash commitments, as disclosed in Note 18
to the Company's audited consolidated financial statements, included in our
Annual Report on Form 10-K for the year ending June 30, 2002, have not changed
significantly.
16
RESTRUCTURING
On April 19, 2002, the Company announced a corporate restructuring plan
which included the involuntary termination of 37 employees, closing certain
leased offices and reducing the size of other leased offices. The 37 employees
were terminated in fiscal 2002 and included 12 technical positions, 17 sales and
marketing positions and 8 administrative positions. During the three months
ended September 28, 2002, cash payments of restructuring obligations included
$23,000 of employee severance costs, $39,000 of lease termination costs and
$90,000 of other costs. All of the facility closures and activities to which
these charges relate were completed as of September 28, 2002.
The following table presents the balance of the accrued restructuring
charges (in thousands):
EMPLOYEE LEASE OTHER
SEVERANCE COSTS TERMINATION COSTS COSTS TOTAL
--------------- ----------------- -------- --------
Balance at June 30, 2002......................... $ 31 $642 $124 $ 797
Cash payments.................................... (23) (39) (90) (152)
Foreign exchange impact and other adjustments.... -- 30 -- 30
---- ---- ---- -----
Balance at September 28, 2002.................... $ 8 $633 $ 34 $ 675
==== ==== ==== =====
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses financial accounting
and reporting for costs associated with exit or disposal activities and replaces
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This Statement is
effective for exit or disposal activities that are initiated after December 31,
2002, with early application encouraged. Management does not believe SFAS
No. 146 will have a material impact on its financial position and results of
operations.
IMPACT OF INFLATION
We believe that our revenue and results of operations have not been
significantly impacted by inflation.
RISK FACTORS AND IMPORTANT FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the following risks and uncertainties prior to
making an investment in our common stock. The following risks and uncertainties
may also cause our actual results to differ materially from those contained in
or predicted by our forward-looking statements.
THE EXISTING GENERAL ECONOMIC SLOWDOWN, PARTICULARLY IN OUR END MARKETS, MAY
CONTINUE TO IMPACT OUR RESULTS.
The demand for our products is largely driven by the demand for the products
in our primary end markets. Many of these end markets, particularly the
automotive, telecommunications, and electronics industries have experienced
severe economic declines over the past twelve months which significantly and
adversely affected our business in fiscal 2002 and in the first quarter of
fiscal 2003. A continuation of this general economic slowdown will materially
and adversely affect us by decreasing our revenue as compared to prior years, as
was the case in fiscal 2002, or by lowering our revenue growth rates when
compared to those experienced prior to fiscal 2002. In addition, terrorist
attacks on the United States and other increased hostilities around the world
are continuing to cause widespread uncertainty and speculation in the United
States and world financial markets. This uncertainty and speculation may result
in further economic contraction and a further suspension of purchasing by our
customers.
17
OUR BUSINESS MODEL AND MARKET FOCUS IS CHANGING AS WE FURTHER DEVELOP AND
EXPLOIT OUR MANUFACTURING SOLUTIONS PRODUCTS.
The development and implementation of a robust set of products in our
Manufacturing Solutions group has required that we devote significant research
and development, marketing and executive level resources to this product family.
Further expenditures of time and effort will be required in order to maximize
the potential of this new set of products. Optimizing sales of this product
group will also require that we capitalize on existing customer synergies
through a common product strategy and that our sales model be effective in
selling both Design Optimization Solutions and Manufacturing Solutions products.
Our results of operations could be adversely affected by significant delays in
developing, completing or shipping our new or enhanced Manufacturing Solutions
products as well as by delays in acceptance of these products by customers.
OUR QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS AND,
AS A RESULT, PERIOD-TO-PERIOD COMPARISONS OF OUR RESULTS OF OPERATIONS ARE NOT
NECESSARILY MEANINGFUL AND SHOULD NOT BE RELIED UPON AS INDICATORS OF FUTURE
PERFORMANCE.
We have experienced significant fluctuations in our results of operations on
a quarterly basis. For instance, our total revenue in the fourth quarter of
fiscal 2002 was $8.3 million as compared with total revenue of $9.4 million in
the immediately preceding quarter. Similarly, the revenue for the first quarter
of fiscal 2003 was generally unchanged as compared to the previous quarter, in
keeping with seasonal trends. We expect to continue to experience significant
fluctuations in our future quarterly results of operations due to a variety of
factors, many of which are outside of our control, including:
- seasonal slowdowns, in particular, in our first fiscal quarter, in many of
the markets in which we sell our products,
- changes in the mix of products and services we provide as sales of our
Manufacturing Solutions products and our services will result in lower
gross margins and a longer selling cycle,
- the timing and magnitude of capital expenditures, including costs relating
to the expansion of our operations and infrastructure and planned program
spending, such as that required for major marketing initiatives or trade
shows,
- introductions of new services or enhancements by us and our competitors
and changes in our and our competitors' pricing policies,
- currency fluctuations, and
- timing and integration of acquisitions.
In addition, like many software companies, we usually record a significantly
larger percentage of our quarterly revenue in the third month of the fiscal
quarter. Accordingly, our quarterly results are often difficult to predict prior
to the final days of the quarter.
IF WE EXPERIENCE DELAYS IN INTRODUCING NEW PRODUCTS OR IF OUR EXISTING OR
NEW PRODUCTS DO NOT ACHIEVE MARKET ACCEPTANCE, WE MAY LOSE REVENUE.
Our industry is characterized by:
- rapid technological advances,
- evolving industry standards,
- changes in end-user requirements,
- intense competition,
18
- technically complex products,
- frequent new product introductions, and
- evolving offerings by product manufacturers.
We believe our future success will depend, in part, on our ability to
anticipate or adapt to these factors and to offer on a timely basis products
that meet customer demands. For example, the introduction of new products and
services embodying new technologies and the emergence of new industry standards
can render our existing products obsolete. The development of new or enhanced
products is a complex and uncertain process, requiring the anticipation of
technological and market trends. We may experience design, manufacturing,
marketing and other difficulties that could delay or prevent our development,
introduction or marketing of new products and enhancements and result in
unexpected expenses.
Our growth and profitability also will depend upon our ability to expand the
use and market penetration of our existing product lines as well as new products
we introduce. Market acceptance of our products will depend in part on our
ability to demonstrate the cost-effectiveness, ease of use and technological
advantages of our products over competing products.
FUTURE MERGERS, ACQUISITIONS AND STRATEGIC RELATIONSHIPS MAY RESULT IN LOST
REVENUE CAUSED BY BUSINESS DISRUPTIONS AND MISSED OPPORTUNITIES CAUSED BY THE
DISTRACTION OF OUR MANAGEMENT.
We may engage in mergers, acquisitions and strategic relationships in the
future. We may not be able to identify suitable candidates, and, if we do
identify suitable candidates, we may not be able to make such business
combinations on commercially acceptable terms or at all. If we merge with or
acquire another company, we will only receive the anticipated benefits if we
successfully integrate any such business into our existing business in a timely
and non-disruptive manner. We may have to devote a significant amount of time
and management and financial resources to do so. Even with this investment of
management and financial resources, a business combination may not produce the
revenues, earnings or business synergies that we anticipated. If we fail to
integrate the target business effectively or if key employees of that business
leave, the anticipated benefits of the transaction would be jeopardized. The
time, capital, management and other resources spent on a business combination
that failed to meet our expectations could cause our business and financial
condition to be materially and adversely affected. In addition, mergers and
acquisitions can involve non-recurring charges and amortization of significant
amounts of acquired identifiable intangible assets that could adversely affect
our results of operations.
IF WE BECOME SUBJECT TO INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS, WE COULD
INCUR SIGNIFICANT EXPENSES AND WE COULD BE PREVENTED FROM OFFERING SPECIFIC
PRODUCTS OR SERVICES.
Our products include proprietary intellectual property. We may become
subject to claims that we infringe on the proprietary rights of others. In the
United States and elsewhere, a significant number of software and business
method patents have been issued over the past decade and the holders of these
patents have been actively seeking out potential infringers. In addition, our
Manufacturing Solutions products require interaction with an injection molding
machine, the use and technology of which are subject to a wide variety of
domestic and foreign patents and other intellectual property protection. If any
element of our products or services violates third-party proprietary rights, we
might not be able to obtain licenses on commercially reasonable terms to
continue offering our products or services without substantial re-engineering
and any effort to undertake such re-engineering might not be successful. In
addition, any claim of infringement could cause us to incur substantial costs
defending against the claim, even if the claim is invalid, and could distract
our management from our business. Any judgment against us could require us to
pay substantial damages and could also include an injunction or other court
order that could prevent us from offering our products and services.
19
WE MAY LOSE SALES TO COMPETITORS IF WE ARE UNABLE TO PROTECT IMPORTANT
INTELLECTUAL PROPERTY.
Our ability to compete effectively against other companies in our industry
will depend, in part, on our ability to protect our proprietary rights in our
technology. We may be unable to maintain the proprietary nature of our
technology. While we have attempted to safeguard and maintain our proprietary
rights, we do not know whether we have been or will be completely successful in
doing so.
We face the following risks in protecting our intellectual property:
- we cannot be certain that our pending United States and foreign patent
applications will result in issued patents or that the claims allowed are
or will be sufficiently broad to protect our technology,
- third parties may design around our patented technologies or seek to
challenge or invalidate our patented technologies,
- the contractual provisions that we rely on, in part, to protect our trade
secrets and proprietary knowledge may be breached, and we may not have
adequate remedies for any breach and our trade secrets and proprietary
information may be disclosed to the public,
- our trade secrets may also become known without breach of such agreements
or may be independently developed by competitors,
- foreign countries, including some of those in which we do business, may
reduce or limit the protection of our intellectual property rights, and
- the cost of enforcing the protection of our intellectual property rights
may reduce our future profitability.
OUR FINANCIAL CONDITION OR RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED
BY INTERNATIONAL BUSINESS RISKS.
The majority of our employees, including sales, support and research and
development personnel, are located outside of the United States. Similarly, the
majority of our revenues are derived from customers outside the United States
and certain intellectual property is owned by subsidiary companies located
outside the United States. Conducting business outside of the United States is
subject to numerous risks, including:
- decreased liquidity resulting from longer accounts receivable collection
cycles typical of foreign countries,
- decreased revenue on foreign sales resulting from possible foreign
currency exchange and conversion issues,
- lower productivity resulting from difficulties managing our sales, support
and research and development operations across many countries,
- decreased earnings based on changes in tax regulations in foreign
jurisdictions,
- lost revenue resulting from difficulties associated with enforcing
agreements and collecting receivables through foreign legal systems,
- lost revenue resulting from the imposition by foreign governments of trade
protection measures, and
- higher cost of sales resulting from import or export licensing
requirements.
20
WE HAVE MORE LIMITED FINANCIAL AND OTHER RESOURCES THAN MANY OF OUR
COMPETITORS AND POTENTIAL COMPETITORS AND MAY BE UNABLE TO COMPETE SUCCESSFULLY
AGAINST THEM.
We operate in a highly competitive environment and may not be able to
successfully compete. Companies in our industry and similar industries could
decide to focus on the development of software solutions for the design,
analysis and manufacturing of injection molded plastic parts. Many of these
entities have substantially greater financial, research and development,
manufacturing and marketing resources than we do. Increased competition may
result in price reductions, reduced profitability and loss of market share.
DISRUPTION OF OPERATIONS AT OUR DEVELOPMENT FACILITIES COULD INTERFERE WITH
OUR PRODUCT DEVELOPMENT AND PRODUCTION CYCLES.
A significant portion of our computer equipment, source code and personnel,
including critical resources dedicated to research and development, are
presently located at operating facilities in Australia, the United States and
the United Kingdom. The occurrence of a natural disaster or other unanticipated
catastrophe at any of these facilities could cause interruptions in our
operations and services. Extensive or multiple interruptions in our operations
at our development facilities could severely disrupt our product development.
OUR MANUFACTURING SOLUTIONS PRODUCTS MAY LEAD TO PRODUCT LIABILITY CLAIMS
AGAINST US.
Our Manufacturing Solutions products are installed directly on our
customers' injection molding machines and, in certain cases, automatically
adjust the operation of these machines. As a result, it is possible that our
customers may claim that our product interfered with the proper operation of
their machines and may seek reimbursement for consequential and other damages
from us. Although we expressly disclaim any liability for consequential or other
damages in connection with our sale of these products, this disclaimer may not
protect us from claims for damages from our customers and these claims may
adversely affect our relationships with our customers or our reputation
generally. In addition, our insurance coverage limits may not be adequate to
protect us against any product liability claims that arise. This insurance is
expensive and may not be available on acceptable terms, or at all.
OUR STOCK PRICE IS HIGHLY VOLATILE AND OUR STOCK PRICE COULD EXPERIENCE
SUBSTANTIAL DECLINES AND OUR MANAGEMENT'S ATTENTION MAY BE DIVERTED FROM MORE
PRODUCTIVE TASKS.
The stock market has experienced extreme price and volume fluctuations. In
addition, the per share price of our common stock has experienced significant
volatility in the past twelve months. Many factors may cause the market price
for our common stock to decline, including:
- revenues and operating results failing to meet the expectations of
securities analysts or investors in any quarter,
- downward revisions in securities analysts' estimates or changes in general
market conditions,
- changes in our senior management personnel,
- distribution or sale of shares of Moldflow stock by insiders or affiliated
persons,
- technological innovations by competitors or in competing technologies,
- a decrease in the demand for our common stock,
- investor perception of our industry or our prospects, and
- general technology or economic trends.
21
In the past, companies that have experienced volatility in the market price
of their stock have been the subjects of securities class action litigation. We
may be involved in securities class action litigation in the future. Such
litigation often results in substantial costs and a diversion of management's
attention and resources and could harm our business, financial condition and
results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop our products in research centers in Australia, the United Kingdom
and the United States. We sell our products globally through our direct sales
force and indirect distributor channels. As a result, our financial results are
affected by factors such as changes in foreign currency exchange rates,
political climate and weak economic conditions in foreign markets. In the
future, we expect to increase our international operations in our existing
markets and in geographic locations where we do not have any operations now.
We collect amounts representing a substantial portion of our revenues and
pay amounts representing a substantial portion of our operating expenses in
foreign currencies. As a result, changes in currency exchange rates from time to
time may affect our operating results. We engage in hedging transactions
designed to reduce our exposure to changes in currency exchange rates. We cannot
assure you, however, that any efforts we make to hedge our exposure to currency
exchange rate changes will be successful.
We invest our excess cash balances in highly liquid, interest bearing
instruments. These instruments expose us to interest rate risk and, as a result,
changes in interest rates from time to time may affect our operating results.
These instruments, along with our accounts receivable, also potentially expose
us to credit risk. Our investments are limited to high grade corporate debt
securities, government issued debt, municipal debt securities, money market
funds, and similar high quality instruments to mitigate this credit risk. The
credit risk associated with accounts receivable is minimal due to the large
number of customers and their broad dispersion over geographic regions and
industries.
ITEM 4. CONTROLS AND PROCEDURES
a. Within the 90 days prior to the date of filing of this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of the Company's disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures
are effective. We will continue to review and document our disclosure
controls and procedures, including our internal controls and procedures
for financial reporting, on an ongoing basis, and may from time to time
make changes aimed at enhancing their effectiveness and to ensure that
our systems evolve with our business.
b. There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect internal
controls subsequent to the date the Company completed this evaluation.
22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in various claims and legal
proceedings arising in the ordinary course of business. We are not currently a
party to any such claims or proceedings which, if decided adversely to us, would
either individually or in the aggregate have a material adverse effect on our
business, financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS FROM REGISTERED SECURITIES
The effective date of the Securities Act registration statement for which
the use of proceeds information is being disclosed was March 27, 2000, and the
Commission file number assigned to the registration statement is 333-95289. As
disclosed in our quarterly report on Form 10-Q for the period ended April 1,
2000, we used approximately $11.2 million of the net proceeds to fund the
acquisition of C-Mold on April 13, 2000. On March 28, 2001, we used
approximately $3.7 million to fund the acquisition of Branden
Technologies, Inc. The remaining net proceeds were used to fund our ongoing
operations. No payments of the net proceeds were made to (i) any of our
directors, officers, general partners or their associates, (ii) any person
owning 10% or more of any class of our equity securities or (iii) any of our
affiliates.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a.) Exhibits:
None.
(b.) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOLDFLOW CORPORATION
By: /s/ A. ROLAND THOMAS
-----------------------------------------
A. Roland Thomas
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MOLDFLOW CORPORATION
By: /s/ SUZANNE E. ROGERS MACCORMACK
-----------------------------------------
Suzanne E. Rogers MacCormack
EXECUTIVE VICE PRESIDENT OF FINANCE AND
ADMINISTRATION AND CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Date: November 12, 2002
24
CERTIFICATIONS
I, A. Roland Thomas, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Moldflow
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 12, 2002
/s/ A. ROLAND THOMAS
- ---------------------------------------------------
A. Roland Thomas, President and Chief Executive Officer
25
I, Suzanne E. Rogers MacCormack, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Moldflow
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.
Date: November 12, 2002
/s/ SUZANNE E. ROGERS MACCORMACK
- --------------------------------------------------
Suzanne E. Rogers MacCormack, Executive Vice President of
Finance and Administration and Chief Financial Officer
26