UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______
Commission File Number: 0-24077
Mobius Management Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3078745
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
120 Old Post Road, Rye, New York 10580
(Address of principal executive offices) (Zip Code)
(914) 921-7200
(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 ||
Indicate by check mark whether the registrant is an accelerated filer
(as defined by Rule 12b-2 of the Securities Exchange Act of 1934):
YES | | NO |X|
Number of shares outstanding of the issuer's common stock as of
November 10, 2003
Class Number of Shares Outstanding
Common Stock, par value $0.0001 per share 17,924,181
MOBIUS MANAGEMENT SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2003 and September 30, 2003
Consolidated Statements of Operations
Three months ended September 30, 2002 and 2003
Consolidated Statements of Stockholders' Equity
Three months ended September 30, 2003
Consolidated Statements of Cash Flows
Three months ended September 30, 2002 and 2003
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
PART I. - FINANCIAL INFORMATION
Item 1. - Financial Statements
MOBIUS MANAGEMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share data and per share data)
June 30, September 30,
2003 2003
-------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 37,315 $ 35,132
Accounts receivable, net of allowances of $819 and
$901, respectively 10,551 10,840
Software license installments, current portion 8,017 10,471
Other current assets 2,897 3,364
-------- --------
Total current assets 58,780 59,807
Software license installments, net of allowance for
doubtful accounts of $671 and $700, respectively 15,435 20,055
Property and equipment, net 4,546 4,424
Deferred income taxes, non-current 328 72
Other non-current assets 2,729 2,738
-------- --------
Total assets $ 81,818 $ 87,096
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 15,726 $ 15,227
Deferred revenues 21,306 24,086
Deferred income taxes 2,869 3,781
-------- --------
Total current liabilities 39,901 43,094
Deferred revenues 5,560 5,383
-------- --------
Total liabilities 45,461 48,477
-------- --------
Stockholders' equity:
Common stock, $.0001 par value; authorized
40,000,000 shares; issued 22,879,401 and
22,929,726 shares, respectively; outstanding
17,525,178 and 17,575,503 shares, respectively 2 2
Additional paid-in capital 50,653 50,785
Retained earnings 1,466 3,502
Accumulated other comprehensive income 218 312
Treasury stock, at cost, 5,354,223 shares (15,982) (15,982)
-------- --------
Total stockholders' equity 36,357 38,619
-------- --------
Total liabilities and stockholders' equity $ 81,818 $ 87,096
======== ========
See accompanying notes to unaudited consolidated financial statements.
MOBIUS MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
Three months ended
September 30,
2002 2003
-------- --------
Revenues:
Software license $ 7,756 $ 12,501
Maintenance 9,190 10,002
Professional service and other 1,968 908
-------- --------
Total revenues 18,914 23,411
-------- --------
Cost of revenues:
Software license 88 335
Maintenance 1,482 1,694
Professional service and other 1,985 1,062
-------- --------
Total cost of revenues 3,555 3,091
-------- --------
Gross profit 15,359 20,320
-------- --------
Operating expenses:
Sales and marketing 8,573 9,433
Research and development 4,067 5,003
General and administrative 2,430 2,810
-------- --------
Total operating expenses 15,070 17,246
-------- --------
Income from operations 289 3,074
Interest income 326 445
Interest expense (3) (6)
Foreign currency transactions 13 (14)
Other income 113 --
-------- --------
Income before income taxes 738 3,499
Provision for income taxes 354 1,463
-------- --------
Net income $ 384 $ 2,036
======== ========
Basic earnings per share $ 0.02 $ 0.12
Basic weighted average shares outstanding 17,220 17,555
Diluted earnings per share $ 0.02 $ 0.10
Diluted weighted average shares
outstanding 17,534 19,454
See accompanying notes to unaudited consolidated financial statements.
MOBIUS MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2003
(Unaudited, in thousands)
Accumulated
Common Stock Additional Other Treasury Stock Total
------------ Paid-in Retained Comprehensive -------------- Stockholders'
Shares Amount Capital Earnings Income Shares Amount Equity
------ ------- -------- -------- ------------- ------ ------ ------------
Balance at June 30, 2003 17,526 $ 2 $ 50,653 $ 1,466 $ 218 5,354 $(15,982) $ 36,357
Net income -- -- -- 2,036 -- -- -- 2,036
Change in other comprehensive income,
net of tax -- -- -- -- 94 -- -- 94
--------
Comprehensive income 2,130
Stock options exercised 50 -- 132 -- -- -- -- 132
-------- -------- -------- -------- -------- -------- -------- --------
Balance at September 30, 2003 17,576 $ 2 $ 50,785 $ 3,502 $ 312 5,354 $(15,982) $ 38,619
======== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
MOBIUS MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three Months Ended
September 30,
2002 2003
-------- --------
Cash flows provided by operating activities:
Net income $ 384 $ 2,036
-------- --------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes 228 1,168
Depreciation and amortization 799 493
Stock compensation expense 18 --
Change in operating assets and liabilities:
Accounts receivable, net 5,933 (289)
Software license installments, net (3,151) (7,074)
Other assets 245 (532)
Accounts payable and accrued expenses (2,791) (462)
Deferred revenue 3,234 2,603
-------- --------
Total adjustments 4,515 (4,093)
-------- --------
Net cash provided by (used in) operating activities 4,899 (2,057)
-------- --------
Cash flows provided by (used in) investing activities:
Sale of marketable securities 2,042 --
Capital expenditures (259) (292)
-------- --------
Net cash provided by (used in) investing activities 1,783 (292)
-------- --------
Cash flows provided by (used in) financing activities:
Cash received from exercise of stock options 53 95
-------- --------
Net cash provided by financing activities 53 95
-------- --------
Effect of exchange rate changes on cash and cash
equivalents 33 71
-------- --------
Net change in cash and cash equivalents 6,768 (2,183)
Cash and cash equivalents at beginning of year 31,099 37,315
-------- --------
Cash and cash equivalents at end of period $ 37,867 $ 35,132
======== ========
Supplemental disclosure of cash flow information:
Cash (received) paid during the period for:
Interest $ 3 $ 6
Income taxes, net of refunds $ (514) $ (55)
See accompanying notes to unaudited consolidated financial statements.
MOBIUS MANAGEMENT SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying consolidated financial statements at June 30, 2003 and
September 30, 2003 and for the three month periods ended September 30, 2002 and
2003 have been prepared in accordance with the requirements of the Securities
and Exchange Commission (SEC) for interim reporting. Under those rules, certain
footnotes or other financial information that is normally required by generally
accepted accounting principles (GAAP) may be condensed or omitted.
GAAP requires the Company to make estimates and assumptions in preparing
the interim financial statements. The Company has used its best efforts in
establishing good faith estimates and assumptions. Actual results, however, may
differ.
Mobius is responsible for the financial statements included in this Form
10-Q. These financial statements include all normal and recurring adjustments
that are necessary for the fair presentation of Mobius's financial position,
results of operations and changes in cash flow. These statements should be read
in conjunction with the consolidated financial statements and notes in Mobius's
latest Form 10-K.
(2) Earnings Per Share
Earnings per share are presented in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No. 128
stipulates that the calculation of earnings per share (EPS) be shown for all
historical periods as Basic EPS and Diluted EPS. Basic EPS is computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during the period. The computation of Diluted EPS is similar to the
computation of Basic EPS except that it gives effect to all potentially dilutive
instruments that were outstanding during the period.
The following is a reconciliation of the numerators and denominators for
the Basic and Diluted EPS calculations (in thousands, except per share data):
Three Months Ended September 30,
2002 2003
------------------------------------------ ----------------------------------------
Net Income Shares Per Share Net Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- --------- ----------- ------------- ---------
Basic EPS:
Net income $384 $2,036
==== ======
Weighted average shares
outstanding 17,220 17,555
Basic earnings per share $0.02 $0.12
===== =====
Diluted EPS:
Net income $384 $2,036
==== ======
Dilutive effect of
stock options 314 1,899
------ -----
Weighted average shares
outstanding 17,534 19,454
====== ======
Diluted earnings per share $0.02 $0.10
===== =====
Certain outstanding stock options for the three months ended September 30,
2002 and 2003, representing an aggregate of 2,767,880 and 594,870 shares of
common stock, respectively, were excluded from the calculation of diluted
earnings per share because the effect would be antidilutive. Stock options were
the only dilutive instruments outstanding for the three months ended September
30, 2002 and 2003.
(3) Marketable Securities
Marketable securities are categorized as available-for-sale securities, as
defined by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." Unrealized holding gains and losses are reflected as a net amount
in a separate component of stockholders' equity until realized. For the purpose
of computing realized gains and losses, cost is identified on a specific
identification basis. There were no realized gains and losses for the three
months ended September 30, 2003. Realized gains for the three months ended
September 30, 2002 were $113,000. As of June 30, 2003 and September 30, 2003,
there was no unamortized investment premium and unrealized holding gains and
losses.
(4) Software License Installments Receivable
In the ordinary course of business, the Company offers extended payment
terms to some of its customers. For software license contracts of 15 years, the
related financing period is generally 5 years. For software installment
contracts of 3 to 5 years, the payments are generally spread ratably over the
related term. Software license installments are discounted at a market rate of
interest at the date the software license contract revenue is recognized. The
discount is amortized to interest income using the interest method over the
payment term. Using the interest method, interest income is periodically accrued
so that as an installment becomes due the sum of the installment receivable and
the interest receivable equals the amount of the payment required to be made by
the customer.
(5) Property and Equipment
Property and equipment consists of the following (in thousands):
Useful June 30, September 30,
Life 2003 2003
------- ------- ------------
Computer equipment 2-5 years $ 7,265 $ 7,586
Furniture, fixtures and office
equipment 5 years 1,437 1,457
Leasehold improvements 5-15 years 4,026 4,030
------- -------
12,728 13,073
Less accumulated depreciation and amortization (8,182) (8,649)
------- -------
Property and equipment, net $ 4,546 $ 4,424
======= =======
Depreciation and amortization expense on property and equipment was
$751,000 and $433,000 for the three months ended September 30, 2002 and 2003,
respectively.
(6) Non-Current Investments
In June 1999, the Company invested $1,501,000 in Home Account Network
("HAN"), a privately-held, information technology company providing processing
and Internet outsourcing to financial services companies. During fiscal 2000,
Mobius provided an additional $750,000 to HAN in short term loans that were
converted to preferred stock in May 2000. Mobius's total investment in HAN
represented an ownership position of less than 5%. In the first quarter of
fiscal 2001, Mobius provided an additional $281,000 as a short term loan to HAN.
Mobius regularly assessed the recoverability of the HAN investment and
concluded that other than temporary impairment losses had occurred. As a result,
Mobius recorded impairment losses of $2.4 million through December 31, 2000.
In January 2001, HAN was purchased by Intelidata Technologies
("Intelidata"). As a result, during fiscal 2002, Mobius received Intelidata
shares in exchange for its investment in HAN. Mobius sold a portion of these
shares and realized a $150,000 gain in fiscal 2002. During the first quarter of
fiscal 2003, Mobius sold its remaining shares of Intelidata, resulting in a
realized gain of $113,000.
(7) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in
thousands):
June 30, September 30,
2003 2003
---- ----
Accounts payable $ 3,110 $ 3,627
Compensation and related benefits 6,934 6,193
Facilities restructuring 112 91
Royalties payable 1,025 1,166
Other 4,545 4,150
------- -------
$15,726 $ 15,227
======= ========
(8) Stock Incentive Plan
The Company has adopted the disclosure provisions of SFAS No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure, an
amendment of FASB Statement No. 123." SFAS No. 148 requires prominent
disclosures in both annual and interim financial statements regarding the method
of accounting for stock-based employee compensation and the effect of the method
used on reported results. The Company accounts for employee stock options under
the intrinsic value method of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees." Accordingly, the Company does not
recognize compensation expense related to employee stock options, since options
are granted at exercise prices equal to the fair market value on the date of
grant. The following table presents the effect on the Company's net income and
net income per share if the Company had applied the fair value recognition
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" (in
thousands, except per share data):
Three Months ended
September 30,
2002 2003
---- ----
Net income, as reported $ 384 $ 2,036
Add: Stock-based compensation
expense included in reported net
income, net of tax 18 --
Less: Total stock-based employee
compensation expense determined under fair
value based method for all awards,
net of tax (241) (273)
------- ---------
Pro forma net income $ 161 $ 1,763
======= =========
Basic net income per share- as reported $ 0.02 $ 0.12
Basic net income per share- pro forma $ 0.01 $ 0.10
Diluted net income per share- as reported $ 0.02 $ 0.10
Diluted net income per share- pro forma $ 0.01 $ 0.09
The Black Scholes option pricing model has been used for grants subsequent to
July 1, 1998. The per share weighted average fair value of stock options granted
during the three months ended September 30, 2002 and 2003 was $1.56 and $5.16 on
the date of grant, respectively. Grants during the three months ended September
30, 2002 and 2003
assumed 110% and 108% of volatility, expected dividend yield of 0.0% and an
expected life of 3.6 years and 3.9 years, respectively. The assumed risk free
interest rate on the date of grants was 2.8% and 2.9% in the three months ended
September 30, 2002 and 2003, respectively.
(9) Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income," requires the disclosure of
comprehensive income, which includes net income, foreign currency translation
adjustments and unrealized gains and losses on marketable securities classified
as available-for-sale. Comprehensive income for the three months ended September
30, 2002 and 2003 is as follows (in thousands):
Three Months ended
September 30,
2002 2003
---- ----
Net income $384 $2,036
Unrealized marketable securities gain (loss) (95) -
Unrealized translation gain (loss) 32 94
------- ------
Comprehensive income $321 $2,130
======= ======
(10) Commitments and Contingencies
In compliance with the lease of the corporate headquarters in Rye, NY, the
landlord holds a letter of credit issued by Silicon Valley Bank for $275,000.
This letter of credit is secured by a certificate of deposit, which is included
in other assets.
(11) Sale of INFOPAC-TapeSaver
In January 1999, the Company sold the INFOPAC-TapeSaver product to a third
party for approximately $3.0 million payable over a five-year period. As the
buyer has been delinquent on these payments since June 2001, no license revenue
relating to this transaction was recognized in the three months ended September
30, 2002 and 2003.
Mobius commenced arbitration proceedings against the buyer to enforce the
payment terms in the sales agreement. On March 26, 2002, the arbitrator issued
an award in Mobius's favor against the buyer and its president in the amount of
$381,750, which represented the amount past due under such agreement. The
arbitrator also directed the buyer and its president to pay Mobius $37,500 per
month from March 31, 2002 through December 31, 2003 and to pay Mobius's share of
the arbitration expenses. In April 2002, Mobius commenced an action against the
buyer and its president in the United States District Court for the Southern
District of New York to confirm the arbitration award. The Court entered an
order confirming the award on September 23, 2002. The Company has docketed the
judgment in California and is currently pursuing actions to enforce the
judgment. To date, the Company has not recorded any amounts due in connection
with the arbitration. As a result of the uncertainty of collection, any amounts
ultimately recorded will be accounted for on the cash basis.
(12) Facilities Restructuring
In connection with management's plan to reduce costs and improve operating
efficiencies, the Company recorded a facilities restructuring charge of $1.4
million in the fourth quarter of fiscal 2002 and an additional charge of
$194,000 in the second quarter of fiscal 2003. Refer to the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2003 for a further
discussion of this plan. Through June 30, 2003, cash payments totaled $1.5
million. During the first quarter of fiscal 2004, the Company made additional
cash payments of $21,000. The Company will
pay the remaining obligations of $91,000 in future periods in accordance with
the plan provisions.
(13) Cytura Asset Acquisition
On October 11, 2002 (the "Closing Date"), the Company, through a
wholly-owned subsidiary, acquired technology (the "Contenuity Software") and
certain other assets of Cytura Corp. ("Cytura"), a privately held company, for
an aggregate of approximately $2.2 million in cash, which was paid from the
Company's existing cash balances. In addition, the Company assumed capital lease
obligations of $36,000 and incurred acquisition-related expenses of $250,000,
for an aggregate purchase price of approximately $2.5 million. Under the terms
of the agreement, the Company is obligated to pay Cytura an additional $800,000
within 60 days of the first anniversary of the transaction since, during the
fourth quarter of fiscal 2003, the average closing price of the Company's common
stock for a 30-day period exceeded specified amounts set forth in the agreement.
As a result, Mobius will be required to make an additional payment of $800,000
to Cytura in accordance with the terms of the agreement. During the fourth
quarter of fiscal 2003, the Company recorded the goodwill and a payable to
Cytura of $800,000 reflecting the requirement to pay this amount.
A portion of the purchase price for the Contenuity Software and the other
Cytura assets has been allocated to completed technology ($900,000) and goodwill
($1,236,000). Completed technology is being amortized on a straight-line basis
over the estimated useful life of 3.75 years. Accordingly, during the three
months ended September 30, 2003, the Company had amortized $60,000 of the
completed technology, and will amortize $180,000 during the remainder of fiscal
2004 and $240,000 in each of the fiscal years 2005 and 2006.
The following table reflects the unaudited pro forma combined results of
operations for the three months ended September 30, 2002 of the Company and
Cytura on the basis that the Cytura acquisition had taken place at the beginning
of the 2003 fiscal year and the unaudited results of operations for the three
months ended September 30, 2003 of the Company (in thousands):
Three months ended September 30,
--------------------------------
2002 2003
---- ----
Pro Forma Actual
--------- ------
Revenues $19,208 $23,411
Net income $46 $2,036
Basic earnings per share $0.00 $0.12
Diluted earnings per share $0.00 $0.10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this section, readers are given a more detailed assessment of
Mobius's operating results and changes in financial position. This section
should be read in conjunction with Mobius's Consolidated Financial Statements
and Notes. Please note that references in this section to "last year's quarter"
and "this quarter" refer to Mobius's fiscal quarters ended September 30, 2002
and 2003, respectively. Mobius's quarterly revenues and operating results have
varied substantially from quarter to quarter in the past, and are likely to
continue to do so in the future.
Statements contained in this quarterly report, other than historical
financial results, may contain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve risks and uncertainties. They are not historical facts or guarantees of
future performance or events. They are based on current expectations, estimates,
beliefs, assumptions, goals and objectives, and are subject to uncertainties
that are difficult to predict. In particular, any statements contained herein
regarding expectations with respect to future sales and profitability, as well
as product development and/or introductions, are subject to known and unknown
risks, uncertainties and contingencies, many of which are beyond Mobius's
control, which may cause actual results, performance or achievements to differ
materially from those projected or implied in such forward-looking statements.
Important factors that might affect actual results, performance or achievements
include, among other things, fluctuations in period to period results,
seasonality, uncertainty of future operating results, technological change,
extended payment risk, product concentration, competition, international sales
and operations, expansion of indirect channels, increased investment in
professional services, protection of intellectual property, dependence on
licensed technology, risk of product defects, product liability, management of
growth, dependence on executive management, other key employees and
subcontractors, whether the Internet can accommodate continued growth and
concerns about transaction security on the Internet. Certain of these risks and
uncertainties are described in detail from time to time in Mobius's filings with
the Securities and Exchange Commission, including without limitation, as set
forth under the heading "Factors Affecting Future Performance" below.
Forward-looking statements included in this quarterly report are based on
information known to Mobius as of the date of this quarterly report and Mobius
accepts no obligation (and expressly disclaims any obligations) to update these
forward-looking statements and does not intend to do so.
Overview
Mobius is a leading provider of integrated solutions for total content
management (TCM). For over two decades, Mobius has delivered innovative software
that captures, stores, manages and delivers mission- and business-critical
documents, reports, images and transactions in multiple formats from multiple
sources. Mobius solutions have achieved industry-wide recognition for their
breadth of functionality, breadth of supported information formats and the
ability to meet high-volume, high-performance requirements in distributed
environments that range from the desktop to the mainframe.
The Company's ViewDirect(R) TCM is a comprehensive suite of solutions that
meet a broad and diverse range of enterprise requirements for managing and
delivering content. ViewDirect TCM supports both "human-created" content --
generated by desktop applications -- and the "application-created" content --
generated by production systems -- that is needed to fuel next-generation
Web-based applications. ViewDirect TCM includes facilities for integrated access
to disparate content as well as products that support content-intensive
applications including Web site, digital asset and document management; business
process management; imaging; Internet presentment and payment; records
management; enterprise report distribution; check image archive; and an audit
and balancing facility that monitors the accuracy and consistency of enterprise
data.
Critical Accounting Policies and Estimates
Mobius's discussion and analysis of its financial condition and results of
operations are based upon Mobius's consolidated financial statements, which have
been prepared in accordance with GAAP. The preparation of financial statements
in accordance with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenue and expenses during the reporting period.
Management bases its estimates and judgments on historical experience and on
various other factors that are believed to be reasonable under the
circumstances. These estimates are evaluated on an on-going basis. Actual
results could differ from those estimates.
Management believes that its significant judgments and estimates used in
the preparation of Mobius's consolidated financial statements are influenced by
the following critical accounting policies, among others:
Revenue Recognition
The Company recognizes license and maintenance revenue in accordance with
the provisions of Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," as amended by SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions." The Company
generates license revenues from licensing the rights to use its software
products to its customers. The Company also generates maintenance and
professional service revenues from renewable support and software enhancements
(maintenance) and from consulting activities performed for license customers.
Revenue from software license contracts includes fees related to licenses with
terms generally of 5 or 15 years.
Revenues from software license agreements are recognized upon delivery of
the software if evidence of an arrangement exists, pricing is fixed and
determinable, and collectibility is probable. If an acceptance period is
required, revenues are recognized upon the earlier of customer acceptance or the
expiration of the acceptance period. The Company allocates revenue on software
arrangements involving multiple elements to each element based on
vendor-specific objective evidence of the fair value allocable to each element.
Generally, Mobius's contracts include a software license and an obligation to
provide maintenance. Assuming all other revenue recognition criteria are met,
revenue is recognized upon delivery using the residual method in accordance with
SOP 98-9, where the fair value of the undelivered elements is deferred and the
remaining portion of the arrangement fee is recognized as revenue. Accordingly,
when the Company enters into a contract that includes both a software license
and an obligation to provide maintenance, the maintenance revenue is unbundled
from the initial license fee and recognized ratably over the maintenance period,
starting from the inception of the software license agreement. The Company
determines the portion of the contract price attributable to maintenance (which
may not necessarily track the allocation between license and maintenance fees
set out in the contract) using a percentage derived from Mobius's pricing
structure. The unbundled portion of such maintenance revenue is classified as
deferred revenue, with amounts extending beyond one year reported as non-current
deferred revenue. If evidence of the fair value for undelivered elements does
not exist, all revenue from the arrangement is deferred until such evidence
exists or until all elements are delivered.
The Company offers installment contracts to its customers, which provide
for payments in installments, generally over periods ranging from 3 to 5 years.
Under such contracts, software license revenue reflects the present value of
future payments under non-cancelable license arrangements. The Company has an
established business practice of offering installment contracts to customers and
has a history of successfully enforcing original payment terms on these
contracts without making concessions. In addition, the payment obligations are
unrelated to product implementation or any other post-transaction activity;
therefore, revenues from installment contracts are generally recognized in the
same manner as those requiring
current payment. In the case of installment contracts, software license revenue
includes the present value of future payments. A portion of the discount is
recognized as interest income over the term of the arrangement.
Maintenance revenue is generally recognized ratably over the term of the
support, typically 12 months. The unearned portion of maintenance revenue is
classified as deferred revenue.
Professional service revenue is generally recognized using the percentage
of completion method of accounting. In accordance with this method, revenue from
professional service contracts is recognized based on the percentage of costs
incurred to date to the total estimated costs of the project. The financial
reporting for these contracts depends on estimates, which are regularly assessed
and subject to revision as the contract progresses to completion. When the
current estimate of total contract costs indicates that a contract will result
in a loss, a provision for the full loss is recognized. Professional service
revenue associated with new products is generally deferred until completion of
the project and acceptance by the customer.
Software Development Costs
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 once
technological feasibility is established. The capitalized costs are then
amortized on a straight-line basis over the estimated product life, or on the
ratio of current revenues to total projected product revenues, whichever is
greater.
The Company determines technological feasibility based on the working
model method. The period between establishment of a working model and the
general availability of Mobius's software has historically been short and,
accordingly, software development costs qualifying for capitalization have been
insignificant. As a result, the Company has expensed all software development
costs.
Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes." SFAS No. 109 requires the use of the asset and liability method
of accounting for income taxes. Under this method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities, and their respective tax bases. Deferred tax assets are
recognized for deductible temporary differences, net operating loss
carryforwards, and tax credit carryforwards if it is more likely than not that
the tax benefits will be realized. A valuation allowance is established if it is
more likely than not that a deferred tax asset will not be realized.
Results of Operations
The following table sets forth certain items from the Company's
Consolidated Statements of Operations as a percentage of total revenues for the
fiscal periods indicated:
Three months ended
September 30,
2002 2003
---- ----
Revenues:
Software license 41.0% 53.4%
Maintenance 48.6 42.7
Professional service and other 10.4 3.9
----- -----
Total revenues 100.0 100.0
----- -----
Cost of revenues:
Software license 0.5 1.4
Maintenance 7.8 7.2
Professional service and other 10.5 4.6
----- -----
Total costs of revenues 18.8 13.2
----- -----
Gross profit 81.2 86.8
----- -----
Operating expenses:
Sales and marketing 45.3 40.3
Research and development 21.5 21.4
General and administrative 12.9 12.0
----- -----
Total operating expenses 79.7 73.7
----- -----
Income from operations 1.5 13.1
Interest income 1.7 1.9
Foreign currency transactions 0.1 (0.1)
Gain on investment 0.6 --
----- -----
Income before income taxes 3.9 14.9
Provision for income taxes 1.9 6.2
----- -----
Net income 2.0% 8.7%
===== =====
Three Months Ended September 30, 2002 Compared to Three Months Ended
September 30, 2003
Revenues.
o Total revenues increased 23.8% from $18.9 million in last year's quarter to
$23.4 million in this quarter. Domestic revenues increased 9.5% from $16.1
million in last year's quarter to $17.6 million in this quarter.
International revenues increased 104.3% from $2.8 million in last year's
quarter to $5.8 million this quarter. The following provides a discussion of
the changes in software license revenues, maintenance revenues and
professional service and other revenues for the quarter ended September 30,
2003, as compared with the quarter ended September 30, 2002.
o Software license revenues increased 61.2% from $7.8 million in last year's
quarter to $12.5 million in this quarter. Mobius believes this increase is
attributable to factors including increased spending for Mobius products
primarily by existing
Mobius customers. During the latter part of fiscal 2003, Mobius began to
market licenses of ViewDirect TCM products under the term "Solution Packs."
Solution Packs are bundles of server products and client products designed to
address specific customer applications and requirements with, generally,
license terms of five years.
o Maintenance revenues increased 8.8% from $9.2 million in last year's quarter
to $10.0 million in this quarter. The increase in maintenance revenue is
primarily attributable to the growth in the amount of licensed software
covered by maintenance agreements and increases in the maintenance fees
charged by the Company. During the latter part of fiscal 2003, Mobius began
to market licenses of ViewDirect TCM products under the term Solution Packs.
Historically, Mobius has charged primarily 15% of contract value for server
product annual maintenance and primarily 5% of contract value for client
product annual maintenance, with a significant portion of the maintenance
contracts covering server products. Annual maintenance for Solution Packs is
typically based on 10% of the contract value. If a significant portion of the
Company's revenues is derived from Solution Packs and its customer base
remains the same, maintenance revenues could potentially decrease.
o Professional service and other revenues decreased 53.9% from $2.0 million in
last year's quarter to $908,000 in this quarter. The decrease in professional
service revenues was the result of fewer large professional service
engagements, slower than expected rollout of new service package offerings
and deferral of revenues associated with delays in the start and completion
of implementation projects.
Cost of Revenues.
o Cost of software license revenues consists primarily of the cost of royalties
and sublicense fees. The cost of software license revenues increased 280.7%
from $88,000 in last year's quarter to $335,000 in this quarter, representing
1.1% and 2.7%, respectively, of software license revenues in those quarters.
The cost of software license revenues is a variable expense related to
software license revenues that are subject to third-party royalties and
sub-license fees. The increase in cost of software license revenues is
consistent with the increase in license revenues. Additionally, last year's
quarter included a benefit from negotiating more favorable terms with respect
to a royalty agreement.
o Cost of maintenance revenues consists primarily of personnel costs related to
Customer Satisfaction. The cost of maintenance revenues increased 14.3% from
$1.5 million in last year's quarter to $1.7 million in this quarter,
representing 16.1% and 16.9%, respectively, of maintenance revenues in those
quarters. Last year's quarter included a benefit from negotiating more
favorable terms with respect to a royalty agreement. In addition, the cost of
maintenance revenues increased due to increased staffing and
personnel-related costs.
o Cost of professional service and other revenues consists primarily of
personnel and subcontractor costs directly associated with providing
professional services. The cost of professional service and other revenues
decreased 46.5% from $2.0 million in last year's quarter to $1.1 million in
this quarter, representing 100.9% and 117.0%, respectively, of professional
service and other revenues in those quarters. The cost of professional
service and other revenues decreased primarily due to a decrease in
third-party vendor costs and deferral of costs associated with certain
implementation projects. The cost of professional service revenue as a
percentage of professional service and other revenues has increased due to
Mobius developing this business and dedicating more internal resources. In
addition, there were lower gross margins recognized on larger engagements
and, to a lesser extent, a loss accrued on a contract. The gross profit for
professional service and other revenue is also dependent on the level of
revenues generated, since there are substantial fixed personnel costs
associated with the professional service operations.
Operating Expenses.
o Sales and marketing expenses consist primarily of the cost of personnel
associated with the selling and marketing of Mobius's products, including
salaries, incentive compensation costs, travel and entertainment costs and
bad debt expense. Sales and marketing costs also include the cost of branch
sales offices, marketing, promotional materials and advertising. These
expenses increased 10.0% from $8.6 million in last year's quarter to $9.4
million in this quarter, representing 45.3% and 40.3%, respectively, of total
revenues in those quarters. Sales and marketing expenses increased primarily
due to increased incentive compensation costs as a result of increased
license revenues and higher personnel costs (reflecting increased headcount)
offset by lower depreciation and bad debt expense.
o Research and development expenses consist primarily of personnel costs
attributable to the development of new software products and the enhancement
of existing products. The Company employs developers in Rye, NY and Orlando,
FL and utilizes subcontractors in India and the Ukraine. Research and
development expenses increased 23.0% from $4.1 million in last year's quarter
to $5.0 million in this quarter, representing 21.5% and 21.4%, respectively,
of total revenues in those quarters. The increase in research and development
expenses is primarily attributable to increased personnel costs arising from
the acquisition of the Contenuity Software and increased operating expenses.
For a further discussion of the acquisition of the Contenuity Software, see
the section entitled "Liquidity and Capital Resources" below.
o General and administrative expenses consist of personnel costs related to
management, accounting, human resources, information technology services,
administration and associated overhead costs, as well as fees for
professional services, primarily legal and accounting. General and
administrative expenses increased 15.6% from $2.4 million in last year's
quarter to $2.8 million in this quarter, representing 12.9% and 12.0%,
respectively, of total revenues in those quarters. The increase in general
and administrative expenses is primarily attributable to higher personnel
costs and professional fees, offset by lower depreciation costs.
Interest income; gain on investment; foreign currency transactions; interest
expense.
Interest income was $326,000 in last year's quarter and $445,000 in this
quarter. The increase in interest income is attributable to higher interest from
installment receivables offset by lower returns on investments. Gain on
investments of $113,000 during last year's quarter was the result of the sale of
the remaining investment in Intelidata stock. Foreign currency gains were
$13,000 in last year's quarter compared with losses of $14,000 in this quarter.
During both quarters, interest expense was insignificant.
Provision for income taxes.
The provision for income taxes was $354,000 in last year's quarter and
$1.5 million in this quarter. The provision for income taxes as a percentage of
income before taxes was 48.0% and 41.8% for last year's quarter and this
quarter, respectively. The effective tax rates for last year's quarter and this
year's quarter primarily reflect the statutory tax provision for income in the
United States offset by limitations on the tax benefit which may be taken from
certain foreign subsidiary losses and by foreign taxes paid in certain
jurisdictions for which no U.S. foreign tax credit is available.
Liquidity and Capital Resources
Since its inception, Mobius has funded its operations principally through
cash flows from operating activities and, to a lesser extent, equity or bank
financings. As of September 30, 2003, Mobius had cash and cash equivalents of
$35.1 million, a decrease of $2.2 million from the $37.3 million held at June
30, 2003.
Net cash provided by operating activities was $4.9 million in last year's
quarter compared with net cash used in operating activities of $2.1 million this
quarter. Mobius's primary sources of cash during this quarter were from improved
results of operations and increased deferred revenue. These sources were offset
by increased software license installment receivables and decreased accounts
payable. Software license installments, which increased 30.2% from $23.5 million
at June 30, 2003 to $30.5 million at September 30, 2003, represent payments due
from customers for license fees that are paid over the term of the installment
agreement. This increase was due to a proportionately greater amount of current
license revenues being financed by the Company. For additional information, see
the section entitled, "Software License Installments Receivable" below. Mobius's
depreciation and amortization expense adjustment in operating activities
decreased 38.3% from $799,000 in last year's quarter to $493,000 in this
quarter. Deferred revenue increased 9.7% from $26.9 million at June 30, 2003 to
$29.5 million at September 30, 2003. Net accounts receivable increased 2.7% from
$10.6 million at June 30, 2003 to $10.8 million at September 30, 2003.
Net cash provided by investing activities was $1.8 million in last year's
quarter compared with net cash used in investing activities of $292,000 in this
quarter. During last year's quarter, the Company sold marketable securities of
$2.0 million. For the quarters ended September 30, 2002 and 2003, cash of
$259,000 and $292,000, respectively, was used for the purchase of computer
equipment, furniture and fixtures and leasehold improvements.
Net cash provided by financing activities was $53,000 in last year's
quarter and $95,000 in this quarter. In last year's quarter and this year's
quarter, cash was provided by the exercise of stock options by employees.
The Company's material obligations and commitments to make future payments
under contracts consist of its operating leases for its office facilities. These
leases expire on various dates through fiscal 2010 and provide for additional
payments relating to utility costs. As of September 30, 2003, the future minimum
lease payments for these operating leases are as follows (in thousands):
Operating
Leases
---------
Year Ended:
- ----------
September 30, 2004 $2,712
September 30, 2005 2,488
September 30, 2006 2,165
September 30, 2007 1,872
September 30, 2008 1,791
Thereafter 2,792
--------
Total minimum lease payments $13,820
=======
In compliance with the lease of the Company's corporate headquarters in
Rye, NY, the landlord holds a letter of credit issued by Silicon Valley Bank for
$275,000. This letter of credit is secured by a certificate of deposit.
The Company believes that its existing cash balances and cash flows
expected from future operations will be sufficient to meet the Company's capital
requirements for at least 12 months. The Company's cash position decreased
during the fiscal first quarter of 2004 as a result of the Company entering into
a significant number of license contracts having extended payment terms (see the
section entitled, "Software License Installments Receivable" below). If the
level of software license revenues financed by installments receivable continues
at the current rate, the Company's cash position is likely to continue to
decrease.
On October 11, 2002 (the "Closing Date"), the Company, through a
wholly-owned subsidiary, acquired technology (the "Contenuity Software") and
certain other assets
of Cytura Corp. ("Cytura"), a privately held company, for an aggregate of
approximately $2.2 million in cash, which was paid from the Company's existing
cash balances. In addition, the Company assumed capital lease obligations of
$36,000 and incurred acquisition-related expenses of $250,000, for an aggregate
purchase price of approximately $2.5 million. Under the terms of the agreement,
the Company is obligated to pay Cytura an additional $800,000 within 60 days of
the first anniversary of the transaction since, during the fourth quarter of
fiscal 2003, the average closing price of the Company's common stock for a
30-day period exceeded specified amounts set forth in the agreement. As a
result, Mobius will be required to make an additional payment of $800,000 to
Cytura in accordance with the terms of the agreement. During the fourth quarter
of fiscal 2003, the Company recorded the goodwill and a payable to Cytura of
$800,000 reflecting the requirement to pay this amount.
The Company continues to evaluate potential acquisition candidates whose
products or technology would enhance Mobius's strategic market position.
Accounts Receivable Reserves
Accounts receivable reserves are primarily calculated by identifying
problem accounts and in recognition that some customers decide to cancel or
reduce the number of products covered by maintenance arrangements upon their
anniversary but do not always notify Mobius in sufficient time to prevent some
portion of the annual maintenance billings from being recognized. Mobius also
maintains a reserve to absorb losses based upon historical experience that may
result from current receivables. Mobius specifically identifies problem accounts
based on the age of the receivable and through discussions with the customer and
Mobius's sales representatives. Based on the specific account information and
the historical relationship of actual losses to revenues and receivable
balances, Mobius exercises its judgment as to what portion of the accounts
receivable balance requires a reserve. As of June 30, 2003 and September 30,
2003, approximately 79% and 81%, respectively, of the total accounts receivable
reserve balances were related to specific accounts. To the extent that an
account for which a specific reserve was provided is subsequently collected,
Mobius reduces the reserves in the period of collection. Accounts receivable
reserves were $819,000 and $901,000 at June 30, 2003 and September 30, 2003,
respectively.
Software License Installments Receivable
As of September 30, 2003, software license installments amounted to $30.5
million, an increase of 30.2% compared with the June 30, 2003 balance of $23.5
million. The increase reflects a significant increase in licenses having
extended payment terms, including licenses of ViewDirect TCM products that the
Company began to market in fiscal 2003 under the term "Solution Packs." Solution
Packs are ViewDirect TCM product bundles that offer customers technology
solutions through application-based licensing with, generally, license terms of
five years. The Company believes the practice of providing financing enhances
our competitive position. Since payments are made over multiple reporting
periods, software license installments receivable will fluctuate with the amount
of license revenue sold on an installment basis. Mobius provides financing to
customers that meet our specified standards of creditworthiness. Software
license installments are discounted at a market rate of interest at the date the
software license contract revenue is recognized. The discount is amortized to
interest income using the interest method over the term of the financing.
The Company determines the reserve for software license installments based
upon customer-specific information, including a credit review of the customer,
historical write-off experience, the ability of the Company to enforce original
payment terms and current economic conditions. No single customer has a balance
in excess of 6% of total software license installments, and 70% of the total is
comprised of customers with balances under $600,000. As of June 30, 2003 and
September 30, 2003, software license installments reserves were $671,000 and
$700,000, respectively.
Deferred Revenues
Deferred revenues consist primarily of the unearned portion of maintenance
billings, unbundled maintenance and license contracts. Current and non-current
deferred revenues increased 9.7% from $26.9 million at June 30, 2003 to $29.5
million at September 30, 2003. Deferred revenues can fluctuate due to the timing
of annual maintenance billings, increases or decreases in current license
revenues and increases or decreases in license contracts that include more than
one year of maintenance. As of September 30, 2003, current deferred revenues
totaled $24.1 million and non-current deferred revenues totaled $5.4 million. It
is anticipated that current deferred revenues of $24.1 million will be
recognized as revenues within the next twelve months.
Other Matters
In January 1999, the Company sold the INFOPAC-TapeSaver product to a third
party for approximately $3.0 million payable over a five-year period. As the
buyer has been delinquent on these payments since June 2001, no license revenue
relating to this agreement was recognized in the three months ended September
30, 2002 and 2003.
Mobius commenced arbitration proceedings against the buyer to enforce the
payment terms in the sales agreement. On March 26, 2002, the arbitrator issued
an award in Mobius's favor against the buyer and its president in the amount of
$381,750, which represented the amount past due under such agreement. The
arbitrator also directed the buyer and its president to pay Mobius $37,500 per
month from March 31, 2002 through December 31, 2003 and to pay Mobius's share of
the arbitration expenses. In April 2002, Mobius commenced an action against the
buyer and its president in the United States District Court for the Southern
District of New York to confirm the arbitration award. The Court entered an
order confirming the award on September 23, 2002. The Company has docketed the
judgment in California and is currently pursuing actions to enforce the
judgment. To date, the Company has not recorded any amounts due in connection
with the arbitration. As a result of the uncertainty of collection, any amounts
ultimately recorded will be accounted for on the cash basis.
FACTORS AFFECTING FUTURE PERFORMANCE
Fluctuations in Period to Period Results; Seasonality; Uncertainty of Future
Operating Results
Mobius's quarterly revenues and operating results have varied
significantly in the past and are likely to vary substantially from quarter to
quarter in the future. Quarterly revenues and operating results are expected to
fluctuate as a result of a variety of factors, including mix of products,
lengthy product sales cycles, general domestic and international economic
conditions, demand for Mobius's products, changes in the level of operating
expenses, introductions of new products and product enhancements by Mobius or
its competitors and competitive conditions in the industry.
The timing, size and nature of individual license transactions are
important factors in Mobius's quarterly operating results. Many of Mobius's
license transactions involve large dollar commitments by customers, and the
sales cycles for these transactions are often lengthy and unpredictable. There
can be no assurance that Mobius will be successful in closing large license
transactions within the fiscal period in which they are budgeted, if at all.
Historically, Mobius's business experienced significant seasonality, with
revenues typically peaking in the fourth fiscal quarter (ending June 30) and to
a lesser extent in the second fiscal quarter (ending December 31). Fluctuations
have historically been caused by customer purchasing patterns and Mobius's sales
force incentive programs, which recognize and reward sales personnel on the
basis of achievement of annual and other periodic performance quotas, as well as
by the factors described above. Changes in buying patterns, product mix, and
sales force incentive programs may alter these historical seasonality patterns.
Mobius expects that the difficult global economy, as well as delays in
information technology spending, may continue to impact future quarterly
operating results and have an adverse effect on Mobius.
Due to all of the foregoing factors and other factors described below,
revenues for any period are subject to significant variation, and Mobius
believes that period-to-period comparisons of its operating results are not
necessarily meaningful and may not be reliable indicators of future performance.
Technological Change
The market for Mobius's software products is characterized by a high
degree of technological change, frequent new product introductions, evolving
industry standards and changes in customer demands. The introduction of
competitive products embodying new technologies and the emergence of new
industry standards could render Mobius's existing products obsolete and
unmarketable. Mobius's future success will depend in part on its ability to
enhance existing products, develop and introduce new products to meet diverse
and evolving customer requirements, and keep pace with technological
developments and emerging industry standards such as Web-based functionality,
new operating systems, hardware platforms, user interfaces and storage media.
The development of new products or enhanced versions of existing products and
services entails significant technical risks. There can be no assurance that
Mobius will be successful in developing and marketing product enhancements or
that new products will respond to technological change or evolving industry
standards, or that Mobius will not experience difficulties that could delay or
prevent the successful development, introduction, implementation and marketing
of these products and enhancements, or that any new products and product
enhancements Mobius may introduce will achieve market acceptance.
Extended Payment Risk
The Company offers extended payment terms to some of its customers. For
software license contracts with extended payment terms, the related financing
period is generally 3 to 5 years. During the quarter ended September 30, 2003,
there was a
30.2% increase in software license installments receivable, reflecting a
significant increase in licenses having extended payment terms, including
licenses of ViewDirect TCM products that Mobius began to market in fiscal 2003
under the term "Solution Packs." Solution Packs are bundles of server products
and client products designed to address specific customer applications and
requirements with, generally, license terms of five years. The Company's cash
position decreased during the fiscal first quarter of 2004 as a result of the
Company entering into a significant number of license contracts having extended
payment terms. If the level of software license revenues financed by
installments receivable continues at the current rate, the Company's cash
position is likely to continue to decrease. The Company continues to monitor the
level of sales that include extended payment terms to manage the use of cash
associated with these sales.
Mobius has established reserves against possible future bad debts and
believes that these installment contracts are enforceable and that ultimate
collection is probable. There can be no assurances, however, that customers will
not default under such financing arrangements. Any such default could have a
material adverse effect on Mobius's business, operating results and financial
condition.
Product Concentration
To date, a substantial portion of Mobius's revenues have been attributable
to the licensing and related maintenance service of its ViewDirect TCM suite of
products. Mobius currently expects this to continue for the foreseeable future.
As a result, factors adversely affecting the pricing of, or demand for, these
products and services, such as economic downturns, competition or technological
change, could have a material adverse effect on Mobius's business, operating
results and financial condition.
Competition
The market for Mobius's products is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
market activities of industry participants. Mobius believes that the most
important competitive factors in the market for content management software are
breadth of functionality, scalability, breadth of supported operating systems
and content formats, vendor viability, ease of use, product reputation, quality,
performance, price, sales and marketing effort and customer service. Mobius
currently encounters direct competition from a number of public and private
companies including IBM Corp., FileNet Corporation, Documentum, Inc., BMC
Software, Inc. and Quest Software, Inc.
Some of our competitors are substantially larger than Mobius and have
significantly greater financial, technical and marketing resources, and a larger
installed base of customers than Mobius. Some of these competitors also have
extensive direct and indirect channels of distribution. As a result, they may be
able to respond more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion and sale of their products than Mobius. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves with prospective customers. In addition, due to
the relatively low barriers to entry in the software market, additional
competition from other established and emerging companies is likely as the
market for content management software continues to develop and expand.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Some of our competitors
may also combine with, or be acquired by other parties, providing them with
additional resources with which to compete.
Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which would have a material adverse
effect on Mobius's business, operating results and financial condition. There
can be no assurance that Mobius will be able to compete successfully against
current or future competitors or that competitive pressures will not have a
material adverse effect on Mobius's business, operating results and financial
condition.
International Sales and Operations
Mobius believes that its revenues and future operating results will depend
in part on its ability to increase sales in international markets. As a group,
Mobius's international subsidiaries have been unprofitable to date, and Mobius
expects that achieving profitability will continue to require significant
management attention and financial resources. There can be no assurance that
Mobius will be able to maintain or increase international market demand for its
products or attract and retain qualified personnel who will be able to
successfully market its products internationally. Mobius's international sales
are subject to the general risks inherent in doing business internationally,
including:
o unexpected changes in regulatory requirements;
o tariffs and other trade barriers;
o costs and difficulties of localizing products for international
countries;
o lack of acceptance of localized products in international countries;
o longer accounts receivable payment cycles;
o difficulties in managing international operations;
o potentially adverse tax consequences;
o restrictions on the repatriation of earnings;
o the burdens of complying with a wide variety of international laws;
and
o economic instability.
There can be no assurance that any or all of the foregoing factors will not have
a material adverse effect on Mobius's future international revenues and,
consequently, on its business, operating results and financial condition.
An increase in the value of the U.S. dollar relative to foreign currencies
could make Mobius's products more expensive, and, therefore, potentially less
competitive in those markets. To the extent that the U.S. dollar strengthens
against foreign currencies in international markets in which Mobius maintains
operations, its net assets that are denominated in such foreign currencies will
be devalued, resulting in a foreign currency translation loss.
Expansion of Indirect Channels
To date, sales through indirect sales channels have not been significant
although Mobius continues to invest resources to develop these channels.
Mobius's revenue growth in the future may be affected by its success in
expanding existing and establishing additional relationships with strategic
partners.
Increased Investment in Professional Services
In recent periods, Mobius has committed greater resources to grow its
professional services business relating to the implementation of and training
related to Mobius's packaged software products. The growth of business areas
requires increased management time and resources prior to generating significant
revenues. There is no assurance that an increase in investment in professional
services will result in an increase in revenues. For example, professional
services revenues decreased in the fiscal first quarter of 2004 compared with
the comparable quarter in fiscal 2003. In addition, the Company has experienced
negative gross margins related to this business during the quarter ended
September 30, 2003. There is no assurance that Mobius will generate significant
revenues in the professional services marketplace, or that the direct and
indirect costs associated with expanding and operating the professional services
business will not be greater than revenues generated therefrom.
Protection of Intellectual Property
Mobius's success is heavily dependent upon its confidential and
proprietary intellectual property. Mobius relies primarily on a combination of
confidentiality agreements, copyright, trademark and trade secret laws and
confidentiality procedures to protect its proprietary rights. Trade secret and
copyright laws afford only
limited protection. Despite Mobius's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of its products or obtain and
use information that Mobius regards as proprietary. In addition, the laws of
some countries do not protect Mobius's proprietary rights to as great an extent
as do the laws of the United States. There can be no assurance that Mobius's
means of attempting to protect its proprietary rights will be adequate or that
its competitors will not independently develop similar or competitive
technology.
Mobius's products are generally provided to customers in object code
format only. However, Mobius enters into arrangements with its customers that
provide for the release of the source code to the customer upon the occurrence
of certain events, such as bankruptcy or insolvency of Mobius or certain
material breaches of the license agreement by Mobius. In the event of any
release of the source code pursuant to these arrangements, the customer's
license is generally limited to use of the source code to maintain, support and
configure Mobius's software products. Notwithstanding such provision, the
delivery of source code to customers may increase the likelihood of
misappropriation or other misuse of Mobius's intellectual property.
Mobius is not aware that any of its products infringes on the proprietary
rights of third parties. From time to time, however, third parties may claim
infringement by Mobius with respect to current or future products. Defense of
any such claims, with or without merit, could be time-consuming, result in
costly litigation, cause product shipment delays or require Mobius to enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on terms acceptable to Mobius or at all, which
could have a material adverse effect on its business, operating results and
financial condition.
Dependence on Licensed Technology
Mobius relies on certain software and other information that it licenses
from third parties, including software that is used to perform certain functions
in its products. Although Mobius believes that there are alternatives for these
products, any significant interruption in the availability of such third party
software could have a material adverse impact on Mobius's sales unless and until
Mobius can replace the functionality provided by these products. In addition, to
a certain extent, Mobius is dependent upon such third parties' abilities to
enhance their current products, to develop new products on a timely and
cost-effective basis and to respond to emerging industry standards and other
technological changes. There can be no assurance that Mobius would be able to
replace the functionality provided by the third party software currently offered
in conjunction with its products in the event that such software becomes
obsolete or incompatible with future versions of its products or is otherwise
not adequately maintained or updated. The absence of or any significant delay in
the replacement of that functionality could have a material adverse effect on
Mobius's business, operating results and financial condition.
Risk of Product Defects; Product Liability
Software products as complex as those offered by Mobius frequently contain
defects, especially when first introduced or when new versions are released.
Although Mobius conducts extensive product testing, Mobius has in the past
discovered software defects in certain of its new products and enhancements
after their introduction. In the future, Mobius could lose, or delay recognition
of, revenues as a result of software errors or defects. Mobius believes that its
customers and potential customers are highly sensitive to defects in Mobius's
software. Although Mobius's business has not been materially adversely affected
by any such errors to date, there can be no assurance that, despite testing by
Mobius and by current and potential customers, errors will not be found in new
products or releases after commencement of commercial shipments, resulting in
loss of revenue or delay in market acceptance, diversion of development
resources, damage to Mobius's reputation, or increased service and warranty
costs, any of which could have a material adverse effect on its business,
operating results and financial condition.
Mobius's license agreements with its customers typically contain
provisions designed to limit Mobius's exposure to potential product liability
claims. However,
it is possible that the limitation of liability provisions contained in its
license agreements may not be effective under the laws of certain jurisdictions.
Although Mobius has not experienced any product liability claims to date, the
sale and support of products by Mobius may entail the risk of such claims, and
there can be no assurance that Mobius will not be subject to such claims in the
future. A successful product liability claim brought against Mobius could have a
material adverse effect on its business, operating results and financial
condition.
Management of Growth; Dependence on Executive Management, Other Key Employees
and Subcontractors
Mobius's ability to effectively manage its future growth, if any, will
require Mobius to continue to improve its operational, financial and management
controls, accounting and reporting systems, and other internal processes. There
can be no assurance that Mobius will be able to make such improvements in an
efficient or timely manner or that any such improvements will be sufficient to
manage its growth, if any. If Mobius is unable to manage growth effectively, its
business, operating results or financial condition would be materially adversely
affected.
Mobius's success depends to a significant extent upon its executive
management and certain other key employees of Mobius. The loss of the service of
executive management or other key employees could have a material adverse effect
on Mobius. Furthermore, Mobius believes that its future success also will depend
to a significant extent upon its ability to attract, train and retain highly
skilled technical, management, sales and marketing personnel. Competition for
such personnel is intense, and Mobius expects that such competition will
continue for the foreseeable future. Mobius has from time to time experienced
difficulty in locating candidates with appropriate qualifications. The failure
to attract or retain such personnel could have a material adverse effect on
Mobius's business, operating results and financial condition.
Mobius utilizes development subcontractors in India and the Ukraine. The
loss of services of these subcontractors could have a material adverse effect on
the Company's research and development.
If the Internet Cannot Accommodate Continued Growth, Mobius's Business Will Be
Harmed
To the extent that there is an increase in Internet use, an increase in
frequency of use or an increase in the required bandwidth of users, the Internet
infrastructure may not be able to support the demands placed upon it. In
addition, the Internet could lose its viability as a commercial medium due to
delays in development or adoption of new standards or protocols required to
handle increased levels of Internet activity. Changes in or insufficient
availability of telecommunications or similar services to support the Internet
also could result in slower response times and could adversely impact use of the
Internet generally. If the Internet infrastructure, standards, protocols or
complementary products, services or facilities do not effectively or efficiently
support any growth in Internet usage that may occur, the Company's business may
be harmed.
Concerns about Transaction Security on the Internet May Hinder Mobius's Product
Sales
A significant barrier to electronic commerce and communications is the
secure transmission of private information over public networks. Mobius's
products rely on encryption and authentication technology some of which it has
developed and some of which may be licensed from third parties to provide the
required security and authentication to ensure the privacy of Internet
transactions. Advances in computer capabilities, new discoveries in the field of
cryptography or other events or developments may result in a compromise or
breach of the algorithms Mobius's products use to protect customer transaction
data. Any breaches in security could cause a significant decrease in the use of
Mobius's products, which could undermine future product sales.
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Mobius's investment portfolio is subject to interest rate sensitivity. The
primary objective of Mobius's investment activities is to preserve principal,
while at the same time maximizing the interest income, without significantly
increasing risk. Some of the marketable securities in which Mobius invested in
the past may have been subject to market rate interest risk. This means a change
in prevailing interest rates may cause the market value of the security to
fluctuate. For example, if Mobius holds a security that was issued with a fixed
interest rate at the then-prevailing rates and the prevailing interest rates
later rise, the market value of the security will probably decline. As of
September 30, 2003, Mobius held no marketable securities.
Mobius may be subject to foreign currency fluctuations in relation to
accounts receivable and accounts payable that may be denominated in a foreign
currency other than the functional currency in certain international
jurisdictions. To the extent that such foreign currency transactions are
negatively or positively affected by foreign currency fluctuations, foreign
currency transaction losses or gains would be recognized. Mobius does not use
derivative foreign exchange financial investments.
Item 4. - CONTROLS AND PROCEDURES
The Company, under the supervision and with the participation of the
Company's management, including the Company's Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of the Company's disclosure controls and procedures. Based on that evaluation,
the Chief Executive Officer and Chief Financial Officer have concluded that the
Company's disclosure controls and procedures were effective as of September 30,
2003 to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Securities Exchange Act of 1934 was
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
There were no changes in the Company's internal control over financial
reporting during the Company's fiscal first quarter ended September 30, 2003
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
PART II. - OTHER INFORMATION
Item 1. - Legal Proceedings
From time to time, Mobius is involved in litigation relating to claims
arising from its operations in the normal course of business. Mobius is not a
party to any legal proceedings, the adverse outcome of which, individually or in
the aggregate, would have a material adverse effect on its business, operating
results or financial condition.
Item 2. - Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
Item 3. - Defaults Upon Senior Securities
None.
Item 4. - Submission of Matters to a Vote of Security Holders
None.
Item 5. - Other Information
None.
Item 6. - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
3.1(1) Form of Second Amended and Restated Certificate of
Incorporation of the Registrant.
3.2(1) Form of Restated By-Laws of the Registrant.
4.1(1) Specimen certificate representing the Common
Stock.
10.1 Amendment No. 2 to Mobius Management Systems,
Inc. 1996 Stock Incentive Plan.
31.1 CEO Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 CFO Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 CEO Certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2 CFO Certification pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
(1) Filed as an exhibit to Mobius's Registration Statement on
Form S-1 (Registration Number 333-47117) or an amendment
thereto and incorporated herein by reference to the same
exhibit number.
(b) Reports on Form 8-K
On July 23, 2003, Mobius furnished a Form 8-K under Item 9, Regulation FD,
to report that Mobius issued a press release announcing, among other
things, its preliminary financial results for its fiscal fourth quarter
and year-end 2003.
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.
Date: November 13, 2003
MOBIUS MANAGEMENT SYSTEMS, INC.
By: /s/ Peter E. Takiff
------------------------
Peter E. Takiff
Chief Financial Officer
(Principal Financial and
Accounting Officer)