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, 2004
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 in Rule 12b-2 of the Exchange Act): YES |X| NO ||
Number of shares outstanding of the issuer's common stock as of November
2, 2004
Class Number of Shares Outstanding
Common Stock, par value $0.0001 per share 18,387,664
MOBIUS MANAGEMENT SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2004 and September 30, 2004
Consolidated Statements of Operations
Three months ended September 30, 2003 and 2004
Consolidated Statements of Stockholders' Equity
Three months ended September 30, 2004
Consolidated Statements of Cash Flows
Three months ended September 30, 2003 and 2004
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. Unregistered Sales of Equity 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
SIGNATURES
CERTIFICATIONS
2
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,
2004 2004
--------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 33,592 $ 32,261
Accounts receivable, net of allowances of $674
and $751, respectively 11,874 6,766
Software license installments, current portion 14,172 14,597
Other current assets 2,348 2,438
-------- --------
Total current assets 61,986 56,062
-------- --------
Software license installments, net of allowance for
doubtful accounts of $420 and $308, respectively 22,358 22,586
Property and equipment, net 4,257 4,091
Deferred income taxes, non-current 2,514 3,632
Other non-current assets 4,461 4,313
-------- --------
Total assets $ 95,576 $ 90,684
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 18,039 $ 14,105
Deferred revenues 21,973 22,187
Deferred income taxes 5,482 5,651
-------- --------
Total current liabilities 45,494 41,943
Deferred revenues 4,704 4,240
Deferred income taxes 239 239
-------- --------
Total liabilities 50,437 46,422
-------- --------
Stockholders' equity:
Common stock, $.0001 par value;
authorized 40,000,000 shares; issued
23,633,381 and 23,690,456 shares,
respectively; outstanding 18,279,158 and
18,336,233 shares, respectively 2 2
Additional paid-in capital 54,301 54,550
Retained earnings 6,268 4,995
Accumulated other comprehensive income 550 697
Treasury stock, at cost, 5,354,223 shares (15,982) (15,982)
-------- --------
Total stockholders' equity 45,139 44,262
-------- --------
Total liabilities and stockholders' equity $ 95,576 $ 90,684
======== ========
See accompanying notes to unaudited consolidated financial statements.
3
MOBIUS MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share data)
Three Months Ended
September 30,
2003 2004
-------- --------
Revenues:
Software license $ 12,501 $ 6,204
Maintenance 10,002 10,003
Professional service and other 908 921
-------- --------
Total revenues 23,411 17,128
-------- --------
Cost of revenues:
Software license 335 216
Maintenance 1,694 2,079
Professional service and other 1,062 840
-------- --------
Total cost of revenues 3,091 3,135
-------- --------
Gross profit 20,320 13,993
-------- --------
Operating expenses:
Sales and marketing 9,433 8,128
Research and development 5,003 5,646
General and administrative 2,810 2,712
-------- --------
Total operating expenses 17,246 16,486
-------- --------
Income (loss) from operations 3,074 (2,493)
Interest income, net 439 527
Other income (expense) (14) 34
-------- --------
Income (loss) before income taxes 3,499 (1,932)
Provision for (benefit from) income taxes 1,463 (659)
-------- --------
Net income (loss) $ 2,036 $ (1,273)
======== ========
Basic earnings (loss) per share $ 0.12 $ (0.07)
Basic weighted average shares outstanding 17,555 18,300
Diluted earnings (loss) per share $ 0.10 $ (0.07)
Diluted weighted average shares outstanding 19,454 18,300
See accompanying notes to unaudited consolidated financial statements.
4
MOBIUS MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 2004
(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, 2004 18,279 $ 2 $ 54,301 $ 6,268 $ 550 5,354 $(15,982) $ 45,139
Net loss -- -- -- (1,273) -- -- -- (1,273)
Change in other comprehensive income,
net of tax -- -- -- -- 147 -- -- 147
--------
Comprehensive income (1,126)
Stock options exercised, net of tax 57 -- 227 -- -- -- -- 227
Stock purchase plan, net of tax -- -- 22 -- -- -- -- 22
------ -------- -------- -------- -------- ------- -------- --------
Balance at September 30, 2004 18,336 $ 2 $ 54,550 $ 4,995 $ 697 5,354 $(15,982) $ 44,262
======= ======== ======== ======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
5
MOBIUS MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three Months Ended
September 30,
2003 2004
-------- ---------
Cash flows provided by (used in) operating activities:
Net income (loss) $ 2,036 $ (1,273)
-------- --------
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Deferred income taxes 1,168 (821)
Depreciation and amortization 493 546
Change in operating assets and liabilities:
Accounts receivable, net (289) 5,108
Software license installments (7,074) (653)
Other assets (532) (90)
Accounts payable and accrued expenses (462) (3,934)
Deferred revenue 2,603 (250)
-------- --------
Total adjustments (4,093) (94)
-------- --------
Net cash used in operating activities (2,057) (1,367)
-------- --------
Cash flows used in investing activities:
Capital expenditures (292) (233)
-------- --------
Net cash used in investing activities (292) (233)
-------- --------
Cash flows provided by financing activities:
Cash received from exercise of stock options 95 121
-------- --------
Net cash provided by financing activities 95 121
-------- --------
Effect of exchange rate changes on cash and
cash equivalents 71 148
-------- --------
Net change in cash and cash equivalents (2,183) (1,331)
Cash and cash equivalents at beginning of period 37,315 33,592
-------- --------
Cash and cash equivalents at end of period $ 35,132 $ 32,261
======== ========
Supplemental disclosure of cash flow information:
Cash (received) paid during the period for:
Interest $ 6 $ 1
Income taxes, net of refunds $ (55) $ 100
See accompanying notes to unaudited consolidated financial statements.
6
MOBIUS MANAGEMENT SYSTEMS, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying consolidated financial statements at June 30, 2004 and
September 30, 2004 and for the three month periods ended September 30, 2003 and
2004 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 Management Systems, Inc. ("Mobius" or the "Company") 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,
-------------------------------
2003 2004
---------------------------------------------- ------------------------------------------
Net Income Shares Per Share Net Loss Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS:
Net income (loss) $2,036 $(1,273)
====== =======
Weighted average
shares outstanding 17,555 18,300
Basic earnings (loss)
per share $0.12 $(0.07)
===== ======
Diluted EPS:
Net income (loss) $2,036 $(1,273)
====== =======
Dilutive effect of
stock options 1,899 -
------ ------
Weighted average shares
outstanding 19,454 18,300
====== ======
Diluted earnings (loss)
per share $0.10 $(0.07)
===== ======
7
Certain outstanding stock options for the three months ended September 30,
2003 and all outstanding stock options for the three months ended September 30,
2004, representing an aggregate of 594,870 and 2,459,426 shares of common stock,
respectively, were excluded from the calculation of diluted earnings (loss) per
share because the effect would be antidilutive. Stock options were the only
dilutive instruments outstanding for the three months ended September 30, 2003
and 2004.
(3) 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 over the related
term. Software license installments are discounted at a market rate of interest.
The discount is amortized to interest income using the interest method over the
term of the financing. 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. As of September 30, 2004, total
software license installments receivable have an average age of two years. The
Company entered into an arrangement during its fiscal first quarter of 2005
providing it with the option of selling certain installments receivable to
General Electric Capital Corporation. This arrangement gives the Company
enhanced flexibility in offering financing alternatives to our customers and to
manage our cash flow.
(4) Property and Equipment
Property and equipment consists of the following (in thousands):
Useful June 30, September 30,
Life 2004 2004
---- ------- ------------
Computer equipment 2-5 years $8,316 $ 8,470
Furniture, fixtures and office equipment 5 years 1,506 1,506
Leasehold improvements 5-15 years 4,127 3,921
------ -------
13,949 13,897
Less accumulated depreciation and amortization (9,692) (9,806)
------ -------
Property and equipment, net $4,257 $ 4,091
====== =======
Depreciation and amortization expense on property and equipment was
$433,000 and $390,000 for the three months ended September 30, 2003 and 2004,
respectively.
(5) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in
thousands):
June 30, September 30,
2004 2004
------- ------------
Accounts payable $ 3,044 $ 1,953
Compensation and related benefits 7,997 5,857
Royalties payable 991 925
Other 6,007 5,370
------- -------
$18,039 $14,105
======= =======
(6) 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
8
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 (loss) and net income (loss) 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,
-------------
2003 2004
--------- ---------
Net income (loss), as reported $ 2,036 $ (1,273)
Less: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of tax (273) (578)
--------- ---------
Pro forma net income (loss) $ 1,763 $ (1,851)
========= =========
Basic net income (loss) per share- as reported $ 0.12 $ (0.07)
Basic net income (loss) per share- pro forma $ 0.10 $ (0.10)
Diluted net income (loss) per share-as reported $ 0.10 $ (0.07)
Diluted net income (loss) per share- pro forma $ 0.09 $ (0.10)
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, 2003 and 2004 was $5.16 and
$3.75 on the date of grant, respectively. Grants during the three months ended
September 30, 2003 and 2004 assumed volatility of 108% and 98%, expected
dividend yield of 0.0% and an expected life of 3.9 years and 4.3 years,
respectively. The assumed risk free interest rate on the date of grants was 2.9%
and 3.8% for the three months ended September 30, 2003 and 2004, respectively.
(7) Comprehensive Income (Loss)
SFAS No. 130, "Reporting Comprehensive Income" requires the disclosure of
comprehensive income, which includes net income and foreign currency translation
adjustments. Comprehensive income (loss) for the three months ended September
30, 2003 and 2004 is as follows (in thousands):
Three Months Ended
September 30,
-------------
2003 2004
------ -------
Net income (loss) $2,036 $(1,273)
Unrealized translation gain 94 147
------ -------
Comprehensive income (loss) $2,130 $(1,126)
====== =======
(8) Commitments and Contingencies
In compliance with the lease of the Company's corporate headquarters in
Rye, NY, the landlord holds a letter of credit issued by a bank totaling
$275,000, secured by a certificate of deposit.
(9) 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 a
result of
9
this arrangement, the Company was going to recognize $3.0 million of license
revenues as the buyer made payments over a five-year period ended December 31,
2003. The buyer has been delinquent on these payments since June 2001 and, as
such, no license revenue relating to this transaction was recognized in the
three months ended September 30, 2003 and 2004.
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 for the full amount of the debt due of approximately $1.2
million 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.
(10) 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, 2004 for a further
discussion of this plan. Through June 30, 2004, cash payments totaled $1.5
million.
As of June 30, 2004 and September 30, 2004, the Company had $6,000
remaining in the facilities restructuring accrual, which will be paid during the
fiscal second quarter of 2005 in accordance with the plan provisions.
(11) eManage Asset Acquisition
On April 26, 2004 (the "eManage Closing Date"), the Company, through a
wholly-owned subsidiary, acquired technology and certain other assets of eManage
Inc. ("eManage"), a privately held company, for an aggregate of approximately
$2.4 million in cash, which was paid from the Company's existing cash balances.
In addition, the Company assumed liabilities of $111,000 and incurred
acquisition-related expenses of $250,000, for an aggregate purchase price of
approximately $2.7 million. eManage develops software solutions for e-mail
archiving, records management and lifecycle management that enable organizations
to manage corporate records at an enterprise level. In addition, under the terms
of the agreement, Mobius may be obligated to pay eManage up to an additional
$1.2 million if certain revenue and other operating targets are achieved as of
the end of each quarter through June 30, 2005. During the fiscal fourth quarter
of 2004, certain targets were met, and, accordingly, the Company recorded
incremental goodwill and a payable to eManage of $340,000, which was paid during
the fiscal first quarter of 2005. Refer to the Company's Annual Report on Form
10-K for a further discussion of this acquisition.
10
(12) Goodwill and Other Intangible Assets
Intangible assets as of June 30, 2004 and September 30, 2004 were as
follows (in thousands):
June 30, 2004 September 30, 2004
------------------------------------ -----------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
----- ------------ ------ ------ ------------ ------
Completed technology $1,780 $ 469 $1,311 $1,780 $ 602 $1,178
Customer relationships 277 15 262 277 38 239
------ ------ ------ ------ ------ ------
Total $2,057 $ 484 $1,573 $2,057 $ 640 $1,417
====== ====== ====== ====== ====== ======
Aggregate amortization expense for intangible assets for the quarters
ended September 30, 2003 and 2004 was $60,000 and $156,000, respectively.
Amortization expense for the remainder of the fiscal year ended June 30, 2005,
and for the fiscal years ended June 30, 2006 and 2007, for acquisitions
completed through September 30, 2004, is estimated to be $470,000, $626,000 and
$321,000, respectively.
Changes in the carrying amount of goodwill for the quarter ended September
30, 2004 were as follows (in thousands):
Total
------
Balance as of June 30, 2004 $2,566
Effect of exchange rate changes and other 7
------
Balance as of September 30, 2004 $2,573
======
11
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, 2003 and 2004,
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 be forward-looking 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, long and unpredictable
sales cycles, 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, concerns about transaction
security on the Internet, changes in accounting for employee stock options and
the impact of recently enacted and proposed regulations. 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 business- and operations
mission-critical content, such as 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 computer systems -- that is needed to fuel
next-generation Web-based applications. ViewDirect TCM includes facilities for
integrated access to disparate content repositories, as well as products that
support content-intensive applications including:
o Web site, digital asset and document management;
o e-mail management;
o records management;
12
o business process management;
o high-volume imaging;
o enterprise report distribution;
o check image archive; and
o 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:
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 revenues from
renewable support and software enhancements and professional service revenues
from consulting activities performed for license customers. Revenue from
software license contracts includes fees related to licenses with terms
generally of 3, 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.
Historically, Mobius's contracts included a software license and an obligation
to provide maintenance. Assuming all other revenue recognition criteria were
met, revenue was recognized upon delivery using the residual method in
accordance with SOP 98-9, where the fair value of the undelivered elements was
deferred and the remaining portion of the arrangement fee was recognized as
revenue. Accordingly, when the Company entered into a contract that included
both a software license and an obligation to provide maintenance, the
maintenance revenue was unbundled from the initial license fee and recognized
ratably over the maintenance period, starting from the inception of the software
license agreement. The Company determined the portion of the contract price
attributable to maintenance (which did 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 was 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 did not exist, all revenue from the
arrangement was deferred until such evidence existed or until all elements were
delivered. Beginning in the third quarter of fiscal 2004, the vast majority of
the Company's software license revenue contracts provide for optional
maintenance in the first year, billed separately from the software license
arrangement. Accordingly, license revenue is recognized upon
13
delivery of the software under the provisions of SOP 97-2 and SOP 98-9.
Maintenance revenue is recognized ratably over the maintenance period.
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. The discount is recognized as interest income over the term of the
arrangement. The Company entered into an arrangement during its fiscal first
quarter of 2005 providing it with the option of selling certain installments
receivable to General Electric Capital Corporation. This arrangement gives the
Company enhanced flexibility in offering financing alternatives to our customers
and to manage our cash flow.
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.
14
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,
2003 2004
---- ----
Revenues:
Software license 53.4% 36.2%
Maintenance 42.7 58.4
Professional service and other 3.9 5.4
----- -----
Total revenues 100.0 100.0
----- -----
Cost of revenues:
Software license 1.4 1.3
Maintenance 7.2 12.1
Professional service and other 4.6 4.9
----- -----
Total costs of revenues 13.2 18.3
----- -----
Gross profit 86.8 81.7
----- -----
Operating expenses:
Sales and marketing 40.3 47.4
Research and development 21.4 33.0
General and administrative 12.0 15.8
----- -----
Total operating expenses 73.7 96.2
----- -----
Income (loss) from operations 13.1 (14.5)
Interest income, net 1.9 3.1
Other income (expense) (0.1) 0.2
----- -----
Income (loss) before income taxes 14.9 (11.2)
Provision for (benefit from) income taxes 6.2 (3.8)
----- -----
Net income (loss) 8.7% (7.4)%
===== =====
15
Executive Overview
Total revenues in the fiscal first quarter of 2005 of $17.1 million were
26.8% lower than revenues of $23.4 million in the same period last year. This
quarter was impacted by delays in contract signings, including one particularly
large opportunity. Certain of these contracts have been signed in the fiscal
second quarter of 2005 and will be included in our revenues for that quarter.
Operating loss in the fiscal first quarter of 2005 was $2.5 million, or (14.5)%
of revenues, as compared with operating income of $3.1 million, or 13.1% of
revenues, in the same period last year. Net loss for the fiscal first quarter of
2005 was $1.3 million, or ($0.07) per share, as compared with net income of $2.0
million, or $0.10 per diluted share, in the same period last year.
While the delays mentioned above had a significant impact on the Company's
results, we were also not satisfied with the level of sales pipeline available
during the fiscal first quarter. The Company began to make changes during fiscal
2004, continuing into the fiscal first quarter of 2005, to spur pipeline
building. The Company believes that the content management markets in which we
operate will experience growth in the near term and that our recent product
introductions and acquisitions (e-mail archiving and records management
technology) will provide additional opportunities for growth. However, we
believe market factors are driving customers to cautiously spend on enterprise
software which can result in unpredictability in the timing of orders.
Additionally, the sales cycle is long and involves complexity as customers
consider a number of factors before committing to purchase enterprise software.
Factors considered by customers include product benefits, cost, time of
implementation, return on investment, ability to meet existing and future
computer systems and the ability to accommodate increased transaction volume and
product reliability. The Company has also noticed a trend whereby delays in
customer approval processes have resulted in protracted contractual
negotiations. The Company is attempting to alleviate the impact of this trend by
making it easier to do business with the Company by simplifying some of its
contract and financial terms. We are seeing progress and anticipate that the
impact will be reflected in our results over the remainder of the fiscal year.
However, there are no assurances that the growth in the overall content
management market or the success of our newer products, such as
WorkflowDirect(TM), ViewDirect E-mail Management, ViewDirect Contenuity,
ViewDirect(R) Total Content Integrator and ViewDirect-ABS, will develop as
anticipated.
The Company also believes that customers are focusing on purchasing
solutions for particular applications that have well defined rates of return, as
well as on simplifying their environments to gain access to disparate
repositories and content throughout their organization quickly and easily. To
address these purchasing patterns, Mobius began to market licenses of ViewDirect
TCM products under the term "Solution Packs" during the latter part of fiscal
2003. Solution Packs combine server and client products designed to address
specific customer applications and requirements. License terms on Solution Packs
are generally five years, compared to the 15 year terms most commonly offered by
the Company in prior periods. The Company offers extended payment terms to our
customers, which we believe enhances the Company's competitive position.
However, there are no assurances that the offering of Solution Packs or extended
payment terms will have positive results. Mobius continues to monitor the level
of sales that include extended payment terms to manage the use of cash
associated with these sales. Additionally, the Company entered into an
arrangement during its fiscal first quarter of 2005 providing it with the option
of selling certain installments receivable to General Electric Capital
Corporation. This arrangement gives the Company enhanced flexibility in offering
financing alternatives to our customers and to manage our cash flow.
16
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2004
Revenues:
o Total revenues decreased 26.8% from $23.4 million in last year's quarter
to $17.1 million this quarter. Domestic revenues decreased 19.1% from
$17.6 million in last year's quarter to $14.2 million this quarter.
International revenues decreased 50.4% from $5.8 million in last year's
quarter to $2.9 million this quarter, primarily due to two large contracts
that closed during the fiscal first quarter of 2004. 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, 2004, as compared with the quarter ended
September 30, 2003.
o Software license revenues decreased 50.4% from $12.5 million in last
year's quarter to $6.2 million this quarter. This quarter was
impacted by delays in contract signings, including one particularly
large opportunity, which slipped out of this quarter's results. In
addition, uncertainty over the direction of the economy and less
than satisfactory internal execution in creating potential sales
opportunities resulted in an available sales pipeline that was not
adequate to offset these delays. The fiscal first quarter of 2004
included record license revenues due in part to the successful
introduction of Solution Packs.
o Maintenance revenues totaled $10.0 million in both last year's
quarter and this quarter. Increases in new licensed software covered
by maintenance agreements and increased maintenance fees were offset
by non-renewal of existing maintenance contracts. Non-renewals are
the result of a number of factors, including the consolidation of
our customer base, consolidation of data centers by our customers,
scaling back of obsolete operating systems by our customers and
migration of our customers to products such as Solution Packs.
Historically, Mobius has charged primarily 15% of contract value for
server product annual maintenance and between 5% and 15% of contract
value for client product annual maintenance, with a significant
portion of the maintenance contracts covering server products.
Beginning in the latter part of fiscal 2003, annual maintenance for
new 15 year licenses for server and client products is generally
based on 15% of the contract value. Annual maintenance for Solution
Packs, which comprised a significant portion of license revenues in
the fiscal first quarter of 2004 and 2005, is generally based on 10%
of contract value. If Solution Packs continue to comprise a
significant portion of the Company's revenues and its customer base
remains the same, maintenance revenues could potentially decrease.
o Professional service and other revenues totaled $908,000 in last
year's quarter and $921,000 this quarter. The Company's professional
services group offers installation and conversion services and, to a
lesser extent, business consulting and training to our customers. A
large percentage of the Mobius suite of products are generally not
difficult to install and do not require significant installation
services. As such, while this line of our business provides a
valuable service to our customers, revenues from professional
services are not a significant percentage of overall revenue.
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
decreased 35.5% from $335,000 in last year's quarter to $216,000 this
quarter, representing 2.7% and 3.5%, 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
17
decrease in cost of software license revenue is consistent with lower
software license revenues for the quarter, partially offset by an increase
in license revenues for products for which Mobius pays royalties and
sub-license fees.
o Cost of maintenance revenues consists primarily of personnel costs related
to our Customer Support group, and to a lesser extent, royalties on
third-party products. The cost of maintenance revenues increased 22.7%
from $1.7 million in last year's quarter to $2.1 million this quarter,
representing 16.9% and 20.8%, respectively, of maintenance revenues in
those quarters. The increase in cost of maintenance revenues is primarily
due to personnel-related costs resulting from increased staffing. It also
reflects increased utilization of Professional Services personnel in
Customer Support projects, resulting in a higher allocation of these costs
to cost of maintenance revenues.
o Cost of professional service and other revenues consists primarily of
personnel costs associated with providing professional services. The cost
of professional service and other revenues decreased 20.9% from $1.1
million in last year's quarter to $840,000 this quarter. These costs as a
percentage of professional service and other revenues decreased from
117.0% in last year's quarter to 91.2% in this quarter. The cost of
professional service decreased due to lower personnel costs (reflecting
decreased headcount) and lower miscellaneous expenses, as well as the
allocation of some of the personnel costs to cost of maintenance revenues
due to the utilization of Professional Services personnel in Customer
Support projects.
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 decreased 13.8% from $9.4 million in last year's quarter to
$8.1 million this quarter, representing 40.3% and 47.4%, respectively, of
total revenues in those quarters. The decrease in sales and marketing
expenses was primarily attributable to lower incentive compensation costs
as a result of lower license revenue. The higher percentage of sales and
marketing expenses to total revenues reflects the inability to leverage
the fixed portion of these expenses over a lower sales volume.
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; Orlando, FL; and Ottawa, Canada, and utilizes subcontractors in India
and the Ukraine. Research and development expenses increased 12.9% from
$5.0 million in last year's quarter to $5.6 million this quarter,
representing 21.4% and 33.0%, respectively, of total revenues in those
quarters. The increase in research and development expenses is primarily
attributable to higher personnel costs on increased headcount, including
personnel added as a result of the acquisition of the technology and
certain other assets of eManage Inc. ("eManage"), and increased
subcontractor fees. For a further discussion of the acquisition of the
technology and certain other assets of eManage, see the section entitled,
"Liquidity and Capital Resources" below.
o General and administrative expenses consist primarily 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 totaled $2.8 million in last year's quarter and
$2.7 million in this quarter, representing 12.0% and 15.8%, respectively,
of total revenues in those quarters.
Interest income and other income (expense):
Interest income, net of interest expense, was $439,000 in last year's
quarter and $527,000 in this quarter. The increase in interest income is
primarily
18
attributable to higher interest from increased installment receivables balances.
Other income (expense), comprised of foreign currency transactions, was a loss
of $14,000 in last year's quarter and a gain of $34,000 this quarter.
Provision for (benefit from) income taxes:
The provision for income taxes was $1.5 million (effective tax provision
rate of 41.8%) in last year's quarter and a benefit from income taxes of
$659,000 (effective tax benefit rate of 34.1%) in this quarter. The decrease in
the effective tax rate was primarily due to the impact of foreign taxes for
which no U.S. foreign tax credit is available and to losses in certain foreign
subsidiaries for which no tax benefit was recorded. These items reduced the tax
benefit that was recorded on a consolidated basis.
Liquidity and Capital Resources
Executive Overview
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, 2004, Mobius had cash and cash equivalents of
$32.3 million, a decrease of $1.3 million from the $33.6 million held at June
30, 2004. The decrease was primarily due to a decrease in accounts payable and
accrued expenses and the net loss for this quarter, substantially offset by a
decrease in accounts receivable. As of September 30, 2004 and June 30, 2004, the
Company had no bank debt outstanding.
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. As discussed in the section entitled,
"Software License Installments Receivable" below, the Company has entered into a
number of license contracts having extended payment terms. The Company continues
to monitor the level of sales that include extended payment terms to manage the
use of cash associated with these sales. The Company entered into an arrangement
during its fiscal first quarter of 2005 providing it with the option of selling
certain installments receivable to General Electric Capital Corporation
("GECC"). This arrangement gives the Company enhanced flexibility in offering
financing alternatives to our customers and to manage our cash flow. If the
level of software license revenues financed by installments receivable continues
at the current rate and the Company is unable to assign a substantial percentage
of such receivables to GECC or other vendor financing firms, the Company's cash
position is likely to be adversely affected.
The Company continues to evaluate potential acquisition candidates whose
products, technology and expertise or market share would enhance Mobius's
strategic market position.
*****
Net cash used in operating activities was $2.1 million and $1.4 million
during the first three months of fiscal 2004 and 2005, respectively. Mobius's
primary uses of cash during the first three months of fiscal 2005 were from a
21.8% decrease in accounts payable and accrued expenses, primarily due to the
payment of year-end commissions, salaries and bonuses, and a net loss of $1.3
million. These uses were partially offset by a reduction in accounts receivable
balances of $5.1 million, primarily due to collections and decreased software
license revenues. Mobius's depreciation and amortization expense adjustment in
operating activities increased 10.8% from $493,000 in the first three months of
fiscal 2004 to $546,000 in the first three months of fiscal 2005. Deferred
revenue totaled $26.7 million at June 30, 2004 and $26.4 million at September
30, 2004. Net accounts receivable decreased 43.0% from $11.9 million at June 30,
2004 to $6.8 million at September 30, 2004.
Net cash used in investing activities was $292,000 and $233,000 in the
first three months of fiscal 2004 and 2005, respectively, representing the
purchase of computer equipment, furniture and fixtures and leasehold
improvements.
19
Net cash provided by financing activities was $95,000 and $121,000 in the
first three months of fiscal 2004 and 2005, respectively, due to 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, 2004, the future minimum
lease payments for these operating leases are as follows (in thousands):
Operating
Year Ended: Leases
- ----------- ------
September 30, 2005 $ 2,840
September 30, 2006 2,497
September 30, 2007 2,105
September 30, 2008 1,927
September 30, 2009 1,816
Thereafter 1,307
-------
Total minimum lease payments $12,492
=======
In addition to the commitments shown above, the Company is committed to
make future purchases of goods and services of approximately $525,000.
In compliance with the lease of the Company's corporate headquarters in
Rye, NY, the landlord holds a letter of credit issued by a bank totaling
$275,000, secured by a certificate of deposit.
On April 26, 2004 (the "eManage Closing Date"), the Company, through a
wholly-owned subsidiary, acquired technology and certain other assets of
eManage, a privately held company, for an aggregate of approximately $2.4
million in cash, which was paid from the Company's existing cash balances. In
addition, the Company assumed liabilities of $111,000 and incurred
acquisition-related expenses of $250,000, for an aggregate purchase price of
approximately $2.7 million. eManage develops software solutions for e-mail
archiving, records management and lifecycle management that enable organizations
to manage corporate records at an enterprise level. In addition, under the terms
of the agreement, Mobius may be obligated to pay eManage up to an additional
$1.2 million if certain revenue and other operating targets are achieved as of
the end of each quarter through June 30, 2005. During the fiscal fourth quarter
of 2004, certain targets were met, and, accordingly, the Company recorded
incremental goodwill and a payable to eManage of $340,000, which was paid during
the fiscal first quarter of 2005.
Accounts Receivable Reserves
Accounts receivable reserves are provided for potential problem accounts
and for the potential 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 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,
2004 and September 30, 2004, approximately 77% 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 $674,000 and $751,000 at June 30, 2004 and
September 30, 2004, respectively.
20
Software License Installments Receivable
As of September 30, 2004, software license installments amounted to $37.2
million, an increase of 1.8% compared with the June 30, 2004 balance of $36.5
million. This slight increase reflects new licenses of ViewDirect TCM products
during the fiscal first quarter of 2005 that the Company has offered to finance
for its customers. The Company offers extended payment terms to our customers
that meet specified standards of creditworthiness, which we believe enhances the
Company's competitive position. 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. Software license installments receivable
will fluctuate with the amount of license revenue sold on an installment basis.
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 4.1% of total software license installments, and 69% of the total
is comprised of customers with balances under $600,000. As of June 30, 2004 and
September 30, 2004, software license installments reserves were $420,000 and
$308,000, respectively. The Company entered into an arrangement during its
fiscal first quarter of 2005 providing it with the option of selling certain
installments receivable to General Electric Capital Corporation. This
arrangement gives the Company enhanced flexibility in offering financing
alternatives to our customers and to manage our cash flow.
Deferred Revenues
Deferred revenues consist primarily of the unearned portion of maintenance
revenues and license contracts. Current and non-current deferred revenues
totaled $26.7 million at June 30, 2004 and $26.4 million at September 30, 2004.
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, 2004, current deferred revenues totaled $22.2 million and
non-current deferred revenues totaled $4.2 million. It is anticipated that
current deferred revenues of $22.2 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 a
result of this arrangement, the Company was going to recognize $3.0 million of
license revenues as the buyer made payments over a five-year period ended
December 31, 2003. The buyer has been delinquent on these payments since June
2001 and, as such, no license revenue relating to this agreement was recognized
in the three months ended September 30, 2003 and 2004.
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 for the full amount of the debt due of approximately $1.2
million 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.
21
FACTORS AFFECTING FUTURE PERFORMANCE
We operate in a rapidly changing economic and technological environment
that involves numerous risks and uncertainties. Prospective and existing
investors are strongly urged to carefully consider the various cautionary
statements and risks set forth in this quarterly report and our other public
filings. The following section describes the material risks and uncertainties
that we believe may adversely affect our business, operating results or
financial condition. Many of these risks and uncertainties are beyond our
control and are driven by factors that we cannot predict.
Our operating results are subject to significant fluctuations and uncertainties,
our business has experienced significant seasonality, and it is difficult for us
to predict future revenues.
Our 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 our
products, changes in the level of operating expenses, introductions of new
products and product enhancements by us or our competitors and competitive
conditions in the industry.
The timing, size and nature of individual license transactions are
important factors in our quarterly operating results. Many of our 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 we will be successful in closing large license transactions
within the fiscal period in which they are budgeted, if at all.
Historically, our business has 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 our 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.
Currently, we believe that external market factors are driving customers
to cautiously spend on enterprise software which can result in unpredictability
in the timing of orders. For example, during the fiscal first quarter of 2005,
our operating results were impacted by a number of transactions that for several
reasons, including protracted negotiations of terms and delays in our customers'
approval process, did not close as anticipated. We believe that this trend is
also affecting other vendors in the market. This condition 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 we believe
that period-to-period comparisons of our operating results are not necessarily
meaningful and may not be reliable indicators of future performance.
Our products have a long and unpredictable sales cycle, which could result in
significant fluctuations in license revenue being recognized from quarter to
quarter.
The period between initial contact with a prospective customer or existing
customer and the licensing of our software applications can range from three to
more than twelve months. Our sales cycle involves complexity as customers
consider a number of factors before committing to purchase our products. Factors
considered by customers when evaluating our products include product benefits,
cost and time of implementation, return on investment, ability to operate with
existing and future
22
computer systems and the ability to accommodate increased transaction volume and
product reliability. Customer evaluation, purchasing and budgeting processes
vary significantly from company to company. As a result, we spend a significant
amount of time and resources informing prospective customers about our software
products, which may not result in a completed transaction. Even if our software
products have been chosen by the customer, completion of the sales transaction
is subject to a number of factors, which makes our quarterly revenues difficult
to forecast. Particularly in the current economic environment of reduced
information technology spending, it can take several months, or even quarters,
for sales transactions to close.
During fiscal 2004 and continuing during the fiscal first quarter of 2005,
our sales cycles continued to lengthen due to increased organizational review by
sales prospects and protracted contract negotiations, regardless of transaction
size. A continued lengthening in sales cycles and our inability to predict these
trends could result in lower than expected future revenues, which could have a
material adverse effect on our business and operating results.
If we are unable to keep pace with technological changes in our industry, our
products may become obsolete or fail to achieve market acceptance.
The market for our 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 our existing products obsolete and unmarketable. Our future success
will depend in part on our 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 we will be successful in developing and marketing
product enhancements or that new products will respond to technological change
or evolving industry standards, or that we 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 we may introduce will achieve market acceptance.
We offer extended payment terms to many of our customers, and we cannot be sure
that those customers will be able to pay us.
We offer extended payment terms to some of our customers. For software
license contracts with extended payment terms, the related financing period is
generally three to five years. During the fiscal quarter ended September 30,
2004, there was a 1.8% increase in software license installments receivable,
reflecting an increase in licenses having extended payment terms, including
licenses of our ViewDirect TCM products that we began to market in the latter
part of fiscal 2003 under the term "Solution Packs." Solution Packs combine
server and client products designed to address specific customer applications
and requirements with, generally, license terms of five years. The Company
entered into an arrangement during its fiscal first quarter of 2005 providing it
with the option of selling certain installments receivable to General Electric
Capital Corporation ("GECC"). This arrangement gives the Company enhanced
flexibility in offering financing alternatives to our customers and to manage
our cash flow. If the level of software license revenues financed by
installments receivable continues at the current rate and we are unable to
assign a substantial percentage of such receivables to GECC or other vendor
financing firms, our cash position is likely to be adversely affected. We
continue to monitor the level of sales that include extended payment terms to
manage the use of cash associated with these sales.
We have established reserves against possible future bad debts and believe
that these installment contracts are enforceable, that the underlying companies
23
provided financing have strong credit profiles, that we have a history of
successfully enforcing original payment terms and that ultimate collection is
probable. There can be no assurances, however, that customers will not default
under such financing arrangements. A significant default could have a material
adverse effect on our business, operating results and financial condition.
We rely significantly on one suite of products for our revenues.
To date, a substantial portion of our revenues is attributable to the
licensing and related maintenance service of our ViewDirect TCM suite of
products. We currently expect 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 our business, operating results
and financial condition.
We face intense competition in our business, and we may be unable to compete
successfully against our current and future competitors.
The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We believe 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. We
currently encounter direct competition from a number of public and private
companies including IBM Corp., FileNet Corporation, EMC Corporation, BMC
Software, Inc. and Quest Software, Inc., as well as a number of smaller
competitors in niche markets.
Some of our competitors are substantially larger than we are and have
significantly greater financial, technical and marketing resources, and a larger
installed base of customers, than we have. 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 we are able to. In addition, current
and potential competitors have established or may establish cooperative
relationships among themselves with prospective customers. 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 our business, operating results and financial condition. There can be
no assurance that we will be able to compete successfully against current or
future competitors or that competitive pressures will not have a material
adverse effect on our business, operating results and financial condition.
We may be unable to maintain or expand our international operations.
We believe that our revenues and future operating results will depend in
part on our ability to increase sales in international markets. There can be no
assurance that we will be able to maintain or increase international market
demand for our products or attract and retain qualified personnel who will be
able to successfully market our products internationally. The majority of our
current international revenues are derived from the direct sales force of our
wholly-owned subsidiaries. These subsidiaries also derive revenue in certain
geographies through third-party
24
agents. Our 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 fluctuations in currency exchange rates;
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 our future international revenues, and
consequently, on our business, operating results and financial condition.
An increase in the value of the U.S. dollar relative to foreign currencies
could make our 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 we maintain
operations, our net assets that are denominated in such foreign currencies will
be devalued, resulting in a foreign currency translation loss.
We may be unable to successfully expand or develop relationships with strategic
partners which could adversely affect our future revenue growth.
To date, sales through indirect sales channels have not been significant
although we continue to invest resources to develop these channels. Our revenue
growth in the future may be adversely affected if we do not expand existing
relationships and establish additional relationships with strategic partners.
We may be unable to generate sufficient revenues from our professional services
business to cover the costs of our increased investment in that business.
We have committed significant resources to the development of our
professional services business which provides implementation assistance and
training related to our 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 totaled $908,000 and $921,000 for the quarters ended September
30, 2003 and 2004, respectively. In addition, we have recently experienced
negative gross margins related to this business, although fiscal first quarter
2005 gross profit totaled $81,000. There is no assurance that we will generate
significant revenues in the professional services marketplace, or that the
direct and indirect costs associated with operating the professional services
business will not be greater than revenues generated therefrom.
We may be unable to successfully protect our confidential and proprietary
technology, and we may be required to defend our products against infringement
claims.
Our success depends heavily on our confidential and proprietary
intellectual property. We rely primarily on a combination of confidentiality
agreements, copyright, patent, trademark and trade secret laws and
confidentiality procedures to protect our proprietary rights. Trade secret,
patent and copyright laws afford only limited protection. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects
of our products or obtain and use information that we regard as proprietary. In
addition, the laws of some countries do not protect our proprietary rights to as
great an extent as do the laws of the United States. There can be no assurance
that our means of attempting to protect our
25
proprietary rights will be adequate or that our competitors will not
independently develop similar or competitive technology.
Our products are generally provided to customers in object code format
only. However, we enter into arrangements with some of our customers that
provide for the release of our source code to the customer upon the occurrence
of certain events, such as our bankruptcy or insolvency or certain material
breaches by us of the license agreement between us and our customer. 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 our software products. Notwithstanding this protection,
the delivery of source code to customers may increase the likelihood of
misappropriation or other misuse by third parties of our intellectual property.
We are not aware that any of our products infringe on the proprietary
rights of any third party. From time to time, however, a third party may claim
infringement by us 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 us to enter into royalty or
licensing agreements for the right to use any such third party's proprietary
rights. Such royalty or licensing agreements, if required, may not be available
on terms acceptable to us or at all, which could have a material adverse effect
on our business, operating results and financial condition.
If we are unable to license the technology that we need from third parties, our
sales may be negatively impacted and our products may become obsolete.
We rely on certain software and other information that we license from
third parties, including software that is used to perform certain functions in
our products. Although we believe 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 our sales unless and until we
can replace the functionality provided by these products. In addition, to a
certain extent, we depend 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 we would be able to replace the functionality
provided by the third party software currently offered in conjunction with our
products in the event that such software becomes obsolete or incompatible with
future versions of our 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 our business, operating
results and financial condition.
Our products may contain defects, and we may be required to pay damages for
product liability claims.
Software products as complex as those offered by us frequently contain
defects, especially when first introduced or when new versions are released.
Although we conduct extensive product testing, we have in the past discovered
software defects in certain of our new products and enhancements after their
introduction. In the future, we could lose, or delay recognition of, revenues as
a result of software errors or defects. We believe that our customers and
potential customers are highly sensitive to defects in our software. Our
business has not been materially adversely affected by any such errors to date.
There can be no assurance, however, that despite testing by us and by our
current and potential customers, errors will not be found in new products or
releases after commencement of commercial shipments. If there are errors, it
could result in loss of revenue or delay in market acceptance, diversion of
development resources, damage to our reputation, or increased service and
warranty costs, any of which could have a material adverse effect on our
business, operating results and financial condition.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. However,
it is
26
possible that the limitation of liability provisions contained in our license
agreements may not be effective under the laws of certain jurisdictions.
Although we have not experienced any product liability claims to date, the sale
and support of products by us may entail the risk of such claims, and there can
be no assurance that we will not be subject to such claims in the future. A
successful product liability claim brought against us could have a material
adverse effect on our business, operating results and financial condition.
We may be unable to effectively manage our future growth, if any.
Our ability to effectively manage our future growth, if any, will require
us to continue to improve our operational, financial and management controls,
accounting and reporting systems, and other internal processes. There can be no
assurance that we will be able to make such improvements in an efficient or
timely manner or that any such improvements will be sufficient to manage our
growth, if any. In addition, management has stated that part of our growth
strategy is to make acquisitions of other businesses or certain assets of other
businesses. There are no assurances that we will be able to identify attractive
acquisition candidates, consummate acquisition transactions or effectively
integrate an acquired business into our operations. If we are unable to manage
growth organically or by acquisition effectively, our business, operating
results or financial condition would be materially adversely affected.
If we lose key personnel or subcontractors, then we may be unable to
successfully develop our business or our research and development efforts.
Our success depends to a significant extent upon our executive management
and certain other key employees. The loss of the service of executive management
or other key employees could have a material adverse effect on us. Furthermore,
we believe that our future success also will depend to a significant extent upon
our ability to attract, train and retain highly skilled technical, management,
sales and marketing personnel. Competition for such personnel is intense, and we
expect that such competition will continue for the foreseeable future. We have
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 our business, operating results and financial
condition.
We utilize development subcontractors in India and the Ukraine. The loss
of services of these subcontractors could have a material adverse effect on our
research and development.
Customer concerns about the security of transactions conducted over the Internet
may hinder our product sales.
A significant barrier to electronic commerce and communications is the
secure transmission of private information over public networks. Our products
rely on encryption and authentication technology, some of which we have
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 our products use to protect customer transaction data.
Any breaches in security could cause a significant decrease in the use of our
products, which could undermine future product sales.
Our operating results may be affected if we are required to change our
accounting for employee stock options.
We currently account for the issuance of employee stock options under the
intrinsic value method of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees." Under APB No. 25, we do 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 Financial
27
Accounting Standards Board (FASB) has proposed changes to U.S. generally
accepted accounting principles that, if implemented, would require companies to
treat the granting of employee stock options as an expense. The proposed
standard's effective date would be applicable for awards granted, modified or
settled in cash in interim or annual periods beginning after June 15, 2005. If
such proposals are adopted and we are required to change the way we account for
stock options, our operating results could be negatively impacted as a result of
the additional expenses associated with stock options. See Note 7, Stock
Incentive Plan, of the Notes to Consolidated Financial Statements for a more
detailed presentation of our accounting for stock-based compensation plans.
We have incurred increased costs in response to recently enacted and proposed
regulations.
Recently enacted and proposed changes in the laws and regulations
affecting public companies, including but not limited to the Sarbanes-Oxley Act
of 2002, have caused us to incur increased costs as we evaluate and respond to
the resulting requirements. Additionally, we have incurred and expect to incur
on an ongoing basis increased accounting, audit and legal fees to assist us in
assessing, implementing and complying with such rules. The new and proposed
rules could also make it more difficult for us to attract and retain qualified
persons to serve on our Board of Directors. Although we are evaluating and
monitoring developments with respect to these new and proposed rules, we cannot
estimate the amount of the additional costs we may incur or the timing of such
costs at this time.
28
Item 3. - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Mobius's investment portfolio is comprised primarily of money market
accounts and is subject to interest rate sensitivity. The primary objective of
Mobius's investment activities is to preserve principal, while at the same time
maximizing interest income. As of September 30, 2004, Mobius held no marketable
securities.
The Company may be subject to foreign exchange gains or losses on
transactions denominated in other than the functional currency of Mobius or our
subsidiaries. Net gains and losses resulting from foreign exchange transactions
are included in the determination of net income or loss. Mobius does not use
derivative financial investments to hedge potential foreign exchange losses.
Item 4. - CONTROLS AND PROCEDURES
Evaluation of Disclosure 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, 2004 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.
Changes in Internal Control Over Financial Reporting. There were no
changes in the Company's internal control over financial reporting during the
Company's fiscal quarter ended September 30, 2004 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
29
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. - Unregistered Sales of Equity Securities and Use of Proceeds
(a) Not applicable.
(b) Not applicable.
(c) 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
The Board of Directors of Mobius Management Systems, Inc. (the (Company")
has set the date of this year's annual meeting of stockholders for Wednesday,
February 9, 2005. The Company's proxy statement for last year's annual meeting
indicated that requests for the inclusion in the Company's 2004 proxy statement
of stockholder proposals intended to be presented at the 2004 annual meeting
should have been received by July 10, 2004, based on the mailing date of the
proxy materials for last year's annual meeting. The Company will now consider
for inclusion in its 2004 proxy statement proposals that are received by
December 10, 2004. On request, the Assistant Secretary will provide detailed
instructions for submitting proposals. Stockholders must also comply with such
rules as may be prescribed from time to time by the Securities and Exchange
Commission regarding proposals of security holders. Moreover, under Securities
and Exchange Commission rules, the Company's proxies will have discretionary
voting authority with respect to any such proposal unless, among other things,
that proposal is submitted a reasonable time prior to the mailing of the
Company's proxy statement for the 2004 annual meeting; that mailing is presently
anticipated to occur on or about January 6, 2005. Even if such notice is timely
received, the people named next year as proxies may nevertheless be entitled to
vote as they think best on such proposals to the extent permitted by the rules
of the Securities and Exchange Commission.
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Item 6. - 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.
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.
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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.
Date: November 8, 2004
MOBIUS MANAGEMENT SYSTEMS, INC.
By: /s/ Raymond F. Kunzmann
-----------------------------------
Raymond F. Kunzmann
Chief Financial Officer
(Principal Financial and Accounting
Officer)
32