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 December 31, 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 February
1, 2005
Class Number of Shares Outstanding
Common Stock, par value $0.0001 per share 18,420,776
MOBIUS MANAGEMENT SYSTEMS, INC.
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2003 and December 31, 2004
Consolidated Statements of Operations
Three months and six months ended December 31, 2003 and 2004
Consolidated Statements of Stockholders' Equity and Comprehensive
Income - Six months ended December 31, 2004
Consolidated Statements of Cash Flows
Six months ended December 31, 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, December 31,
2004 2004
--------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 33,592 $ 31,109
Accounts receivable, net of allowances of $674 and
$688, respectively 11,874 10,438
Software license installments, current portion 14,172 14,469
Other current assets 2,348 2,436
-------- --------
Total current assets 61,986 58,452
-------- --------
Software license installments, net of allowance for
doubtful accounts of $420 and $240, respectively 22,358 21,121
Property and equipment, net 4,257 4,128
Deferred income taxes, non-current 2,514 5,048
Other non-current assets 4,461 4,290
-------- --------
Total assets $ 95,576 $ 93,039
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 18,039 $ 16,264
Deferred revenues 21,973 22,363
Deferred income taxes 5,482 5,609
-------- --------
Total current liabilities 45,494 44,236
Deferred revenues 4,704 4,090
Deferred income taxes 239 239
-------- --------
Total liabilities 50,437 48,565
-------- --------
Stockholders' equity:
Common stock, $.0001 par value; authorized
40,000,000 shares; issued 23,633,381 and
23,774,999 shares, respectively; outstanding
18,279,158 and 18,420,776 shares, respectively 2 2
Additional paid-in capital 54,301 55,106
Retained earnings 6,268 3,894
Accumulated other comprehensive income 550 1,454
Treasury stock, at cost, 5,354,223 shares (15,982) (15,982)
-------- --------
Total stockholders' equity 45,139 44,474
-------- --------
Total liabilities and stockholders' equity $ 95,576 $ 93,039
======== ========
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 Six Months Ended
December 31, December 31,
2003 2004 2003 2004
-------- -------- -------- --------
Revenues:
Software license $ 11,503 $ 6,875 $ 24,004 $ 13,079
Maintenance 10,044 10,216 20,046 20,219
Professional service and other 1,749 1,081 2,657 2,002
-------- -------- -------- --------
Total revenues 23,296 18,172 46,707 35,300
-------- -------- -------- --------
Cost of revenues:
Software license 389 240 724 456
Maintenance 1,562 1,908 3,256 3,987
Professional service and other 1,894 1,041 2,956 1,881
-------- -------- -------- --------
Total cost of revenues 3,845 3,189 6,936 6,324
-------- -------- -------- --------
Gross profit 19,451 14,983 39,771 28,976
-------- -------- -------- --------
Operating expenses:
Sales and marketing 8,880 9,128 18,313 17,256
Research and development 4,927 5,850 9,930 11,496
General and administrative 2,904 3,013 5,714 5,725
-------- -------- -------- --------
Total operating expenses 16,711 17,991 33,957 34,477
-------- -------- -------- --------
Income (loss) from operations 2,740 (3,008) 5,814 (5,501)
Interest income, net 461 556 900 1,083
Other income (expense) (7) (12) (21) 22
-------- -------- -------- --------
Income (loss) before income taxes 3,194 (2,464) 6,693 (4,396)
Provision for (benefit from) income taxes 1,146 (1,363) 2,609 (2,022)
-------- -------- -------- --------
Net income (loss) $ 2,048 $ (1,101) $ 4,084 $ (2,374)
======== ======== ======== ========
Basic earnings (loss) per share $ 0.11 $ (0.06) $ 0.23 $ (0.13)
Basic weighted average shares outstanding 17,857 18,383 17,706 18,341
Diluted earnings (loss) per share $ 0.10 $ (0.06) $ 0.21 $ (0.13)
Diluted weighted average shares outstanding 20,266 18,383 19,909 18,341
See accompanying notes to unaudited consolidated financial statements.
4
MOBIUS MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
SIX MONTHS ENDED DECEMBER 31, 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 -- -- -- (2,374) -- -- -- (2,374)
Change in other comprehensive
income, net of tax -- -- -- -- 904 -- -- 904
--------
Comprehensive income (1,470)
Stock options exercised, net of tax 93 -- 498 -- -- -- -- 498
Stock purchase plan, net of tax 49 -- 307 -- -- -- -- 307
-------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 2004 18,421 $ 2 $ 55,106 $ 3,894 $ 1,454 5,354 $(15,982) $ 44,474
======== ======== ======== ======== ======== ======== ======== ========
See accompanying notes to unaudited consolidated financial statements.
5
MOBIUS MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six Months Ended
December 31,
2003 2004
-------- --------
Cash flows provided by (used in) operating
activities:
Net income (loss) $ 4,084 $ (2,374)
-------- --------
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Deferred income taxes 2,207 (2,101)
Depreciation and amortization 933 1,075
Change in operating assets and liabilities:
Accounts receivable, net (686) 1,436
Software license installments (9,507) 940
Other assets 397 (101)
Accounts payable and accrued expenses 1,358 (1,775)
Deferred revenue 205 (224)
-------- --------
Total adjustments (5,093) (750)
-------- --------
Net cash used in operating activities (1,009) (3,124)
-------- --------
Cash flows used in investing activities:
Capital expenditures (760) (614)
-------- --------
Net cash used in investing activities (760) (614)
-------- --------
Cash flows provided by financing activities:
Cash received from exercise of stock options 1,446 217
Cash received from employee stock purchase plan 291 282
-------- --------
Net cash provided by financing activities 1,737 499
-------- --------
Effect of exchange rate changes on cash and cash equivalents 506 756
-------- --------
Net change in cash and cash equivalents 474 (2,483)
Cash and cash equivalents at beginning of period 37,315 33,592
-------- --------
Cash and cash equivalents at end of period $ 37,789 $ 31,109
======== ========
Supplemental disclosure of cash flow information:
Cash (received) paid during the period for:
Interest paid $ 6 $ 2
Income taxes, net of refunds $ (9) $ 131
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, 2003 and
December 31, 2004 and for the three and six month periods ended December 31,
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 December 31,
-------------------------------
2003 2004
--------------------------------------- ------------------------------------------
Per Per
Net Income Shares Share Net (Loss) Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS:
Net income (loss) $ 2,048 $ (1,101)
======== ========
Weighted average
shares outstanding 17,857 18,383
Basic earnings (loss)
per share $ 0.11 $ (0.06)
======= =======
Diluted EPS:
Net income (loss) $ 2,048 $ (1,101)
======== ========
Dilutive effect of
stock options 2,409 --
------ ------
Weighted average
shares outstanding 20,266 18,383
====== ======
Diluted earnings (loss)
per share $ 0.10 $ (0.06)
======= =======
7
Six Months Ended December 31,
-----------------------------
2003 2004
--------------------------------------- ------------------------------------------
Per Per
Net Income Shares Share Net (Loss) Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
Basic EPS:
Net income (loss) $4,084 $(2,374)
====== =======
Weighted average
shares outstanding 17,706 18,341
Basic earnings per
share $0.23 $ (0.13)
===== =======
Diluted EPS:
Net income $4,084 $(2,374)
====== =======
Dilutive effect of
stock options 2,203 --
------ -------
Weighted average
shares outstanding 19,909 18,341
====== ======
Diluted earnings per
share $0.21 $(0.13)
===== ======
Certain outstanding stock options for the three and six months ended
December 31, 2003, representing an aggregate of 15,000 and 452,359 shares of
common stock, respectively, and all outstanding stock options for the three and
six months ended December 31, 2004, representing an aggregate of 2,295,504 and
2,473,938 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 and six months ended December 31, 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 December 31, 2004, total
software license installments receivable have an average age of approximately
one and one-half 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. During the first six
months of fiscal 2005, the Company sold approximately $1.5 million of
installments receivable under this arrangement.
(4) Property and Equipment
Property and equipment consists of the following (in thousands):
Useful June 30, December 31,
Life 2004 2004
---- -------- -----------
Computer software and equipment 2-5 years $ 8,316 $ 8,574
Furniture, fixtures and office equipment 5 years 1,506 1,533
Leasehold improvements 5-15 years 4,127 3,916
------- -------
13,949 14,023
Less accumulated depreciation and amortization (9,692) (9,895)
------- --------
Property and equipment, net $ 4,257 $ 4,128
======= =======
8
Depreciation and amortization expense on property and equipment was
$380,000 and $372,000 for the three months ended December 31, 2003 and 2004,
respectively, and $813,000 and $762,000 for the six months ended December 31,
2003 and 2004, respectively.
(5) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in
thousands):
June 30, December 31,
2004 2004
------- -----------
Accounts payable $ 3,044 $ 2,232
Compensation and related benefits 7,997 6,027
Royalties payable 991 783
Other 6,007 7,222
------- -------
$18,039 $16,264
======= =======
(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 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 Six Months Ended
December 31, December 31,
2003 2004 2003 2004
--------- --------- --------- ---------
Net income (loss), as reported $ 2,048 $ (1,101) $ 4,084 $ (2,374)
Less: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of tax (566) (428) (839) (1,006)
--------- --------- --------- ---------
Pro forma net income (loss) $ 1,482 $ (1,529) $ 3,245 $ (3,380)
========= ========= ========= =========
Basic net income (loss) per share- as reported $ 0.11 $ (0.06) $ 0.23 $ (0.13)
Basic net income (loss) per share- pro forma $ 0.08 $ (0.08) $ 0.18 $ (0.18)
Diluted net income (loss) per share-as reported $ 0.10 $ (0.06) $ 0.21 $ (0.13)
Diluted net income (loss) per share- pro forma $ 0.07 $ (0.08) $ 0.16 $ (0.18)
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 December 31, 2003 and 2004 was $6.75 and
$4.46 on the date of grant, respectively. The per share weighted average fair
value of stock options granted during the six months ended December 31, 2003 and
2004 was $6.56 and $3.88 on the date of grant, respectively. Grants during the
three and six months ended December 31, 2003 assumed volatility of 107%,
expected dividend yield of 0.0% and an expected life of 3.5 years, respectively.
Grants during the three and six months ended December 31, 2004 assumed
volatility of 92% and 97%, respectively, expected dividend yield of 0.0% and an
expected life of 4.3 years for both periods. The assumed risk free interest rate
on the date of grants for the three and six
9
months ended December 31, 2003 was 3.3% and for the three and six months ended
December 31, 2004 was 3.4% and 3.7%, 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 and six months ended
December 31, 2003 and 2004 is as follows (in thousands):
Three Months Ended Six Months Ended
December 31, December 31,
2003 2004 2003 2004
------ ------- ------ -------
Net income (loss) $2,048 $(1,101) $4,084 $(2,374)
Unrealized translation gain (loss) 426 757 520 904
-------------------- ------------------
Comprehensive income (loss) $2,474 $ (344) $4,604 $(1,470)
==================== ==================
(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 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 and six months ended December 31, 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. During
January 2005, the buyer's president filed for personal bankruptcy protection.
The Company is currently determining the appropriate course of action to be
taken as a result of this development. 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 fiscal fourth quarter of 2002 and an additional charge of
$194,000 in the fiscal second quarter of 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.
10
As of June 30, 2004, the Company had $6,000 remaining in the facilities
restructuring accrual, which was 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. During the fiscal second quarter of 2005,
certain targets were met, and accordingly, the Company recorded incremental
goodwill of $85,000, which was paid during the same quarter. Refer to the
Company's Annual Report on Form 10-K for a further discussion of this
acquisition.
(12) Goodwill and Other Intangible Assets
Intangible assets as of June 30, 2004 and December 31, 2004 were as
follows (in thousands):
June 30, 2004 December 31, 2004
----------------------------------- -----------------------------------
Accumulated Accumulated
Gross Amortization Net Gross Amortization Net
----- ------------ --- ----- ------------ ---
Completed technology $1,780 $ 469 $1,311 $1,780 $ 736 $1,044
Customer relationships 277 15 262 277 61 216
------ ------ ------ ------ ------ ------
Total $2,057 $ 484 $1,573 $2,057 $ 797 $1,260
====== ====== ====== ====== ====== ======
Aggregate amortization expense for intangible assets for the quarters
ended December 31, 2003 and 2004 was $60,000 and $157,000, respectively, and for
the six months ended December 31, 2003 and 2004 was $120,000 and $313,000,
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 December 31, 2004, is estimated to be $313,000,
$626,000 and $321,000, respectively.
Changes in the carrying amount of goodwill for the six months ended
December 31, 2004 were as follows (in thousands):
Total
-----
Balance as of June 30, 2004 $ 2,566
Incremental goodwill - eManage 85
Effect of exchange rate changes 44
-------
Balance as of December 31, 2004 $ 2,695
=======
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
included in this quarterly report. Please note that references in this section
to "last year's quarter" and "this quarter" refer to Mobius's fiscal quarters
ended December 31, 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, ability to manage expenses, fluctuations in period
to period results, seasonality, uncertainty of future operating results,
compliance with Sarbanes-Oxley Act, long and unpredictable sales cycles,
technological change, extended payment risk, product concentration, competition,
international sales and operations, expansion of indirect channels,
profitability of 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, general
conditions in the economy 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:
12
o Web site, digital asset and document management;
o e-mail management;
o records management;
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
13
the software license arrangement. Accordingly, license revenue is recognized
upon 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 Six Months Ended
December 31, December 31,
2003 2004 2003 2004
---- ---- ---- ----
Revenues:
Software license 49.4% 37.8% 51.4% 37.0%
Maintenance 43.1 56.2 42.9 57.3
Professional service and other 7.5 6.0 5.7 5.7
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Cost of revenues:
Software license 1.7 1.3 1.6 1.3
Maintenance 6.7 10.5 7.0 11.3
Professional service and other 8.1 5.8 6.3 5.3
----- ----- ----- -----
Total costs of revenues 16.5 17.6 14.9 17.9
----- ----- ----- -----
Gross profit 83.5 82.4 85.1 82.1
----- ----- ----- -----
Operating expenses:
Sales and marketing 38.1 50.2 39.2 48.9
Research and development 21.1 32.2 21.3 32.5
General and administrative 12.5 16.6 12.2 16.2
----- ----- ----- -----
Total operating expenses 71.7 99.0 72.7 97.6
----- ----- ----- -----
Income (loss) from operations 11.8 (16.6) 12.4 (15.5)
Interest income, net 1.9 3.1 1.9 3.0
Other income (expense) -- (0.1) -- 0.1
----- ----- ----- -----
Income (loss) before income taxes 13.7 (13.6) 14.3 (12.4)
Provision for (benefit from) income taxes 4.9 (7.5) 5.6 (5.7)
----- ----- ----- -----
Net income (loss) 8.8% (6.1)% 8.7% (6.7)%
===== ===== ===== =====
15
Executive Overview
Total revenues in the fiscal second quarter of 2005 of $18.2 million were
22.0% lower than revenues of $23.3 million in the same quarter last year.
Operating loss in the fiscal second quarter of 2005 was $3.0 million, or (16.6)%
of revenues, as compared with operating income of $2.7 million, or 11.8% of
revenues, in the same quarter last year. Net loss for the fiscal second quarter
of 2005 was $1.1 million, or ($0.06) per share, as compared with net income of
$2.0 million, or $0.10 per diluted share, in the same quarter last year.
Total revenues in the first six months of fiscal 2005 of $35.3 million
were 24.4% lower than revenues of $46.7 million in the same period last year.
Operating loss in the first six months of fiscal 2005 was $5.5 million, or
(15.5)% of revenues, as compared with operating income of $5.8 million, or 12.4%
of revenues, in the same period last year. Net loss for the first six months of
fiscal 2005 was $2.4 million, or ($0.13) per share, as compared with net income
of $4.1 million, or $0.21 per diluted share, in the same period last year.
The Company believes revenues for both the fiscal second quarter of 2005
and for the first six months of fiscal 2005 were impacted by several factors,
including underperformance in (a) closing contracts for existing products, (b)
order pipeline building for new and existing products and (c) new product
integration. The Company has instituted changes to its business that it believes
will address these matters and improve its performance including, but not
limited to, personnel transfers, separating the management of the sales and
marketing functions to drive more focus in each area, and reallocating resources
in the development organization to speed the integration of our newer products
with existing products, while maintaining our high quality standards.
In addition to lower revenues, the Company incurred increased product
development and integration expenses related to newly developed and acquired
products. To address this, the Company recently made some reductions in spending
to reflect its current revenue run rate, while sustaining the Company's ability
to grow and deliver products to meet our customers' needs. The Company will
continue to monitor its spending levels and will make further adjustments as
appropriate.
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 (including its ability
to meet various regulatory compliance requirements), cost, time of
implementation, return on investment, the ability to operate with existing and
future computer systems, 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 longer sales cycles. 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 occur as anticipated, or that the changes we made to
improve our execution in closing contracts, building order pipeline and new
product integration will be successful.
16
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 periods prior to the introduction of Solution Packs.
The Company offers extended payment terms to our customers, which we
believe enhances the Company's competitive position. 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. During the
first six months of fiscal 2005, the Company sold approximately $1.5 million of
installments receivable under this arrangement. There are no assurances that the
offering of Solution Packs or extended payment terms will have positive results.
Three Months Ended December 31, 2003 Compared to Three Months Ended
December 31, 2004
Revenues:
o Total revenues decreased 22.0% from $23.3 million in last year's quarter
to $18.2 million this quarter. Domestic revenues decreased 25.9% from
$19.3 million in last year's quarter to $14.3 million this quarter.
International revenues decreased 3.3% from $4.0 million in last year's
quarter to $3.9 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 December 31,
2004, as compared with the quarter ended December 31, 2003.
o Software license revenues decreased 40.2% from $11.5 million in last
year's quarter to $6.9 million this quarter. The Company believes
this quarter was impacted by several factors, including
underperformance in (a) closing contracts for existing products, (b)
order pipeline building for new and existing products and (c) new
product integration. The Company has instituted changes to its
business that it believes will address these matters and improve its
performance including, but not limited to, personnel transfers,
separating the management of the sales and marketing functions to
drive more focus in each area, and reallocating resources in the
development organization to speed the integration of our newer
products with existing products, while maintaining our high quality
standards. Last year's quarter included record license revenues due
in part to the successful introduction of Solution Packs.
o Maintenance revenues increased slightly from $10.0 million in last
year's quarter to $10.2 million 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
17
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 last year's quarter and this quarter,
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 decreased 38.2% from $1.8
million in last year's quarter to $1.1 million this quarter.
Professional service revenues for last year's quarter included
approximately $500,000 relating to services associated with new
products that we had deferred revenue recognition pending acceptance
by the customer. Excluding this amount, professional service
revenues decreased almost 15%. 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 38.3% from $389,000 in last year's quarter to $240,000 this
quarter, representing 3.4% 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 decrease in cost of
software license revenue is consistent with lower software license
revenues for the quarter.
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 22.2%
from $1.6 million in last year's quarter to $1.9 million this quarter,
representing 15.6% and 18.7%, 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 45.0% from $1.9
million in last year's quarter to $1.0 million this quarter, representing
108.3% and 96.3%, respectively, of professional service and other revenues
in those quarters. The cost of professional service for last year's
quarter included almost $600,000 of costs relating to services associated
with new products that we had deferred pending acceptance by the customer.
Excluding this amount, the cost of professional service decreased 19.9%.
The cost of professional service decreased due to lower personnel costs
(reflecting decreased headcount), 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.
18
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 2.8% from $8.9 million in last year's quarter to
$9.1 million this quarter, representing 38.1% and 50.2%, respectively, of
total revenues in those quarters. The slight increase in sales and
marketing expenses was primarily attributable to higher personnel costs
(reflecting increased headcount and severance expense) and increases in
miscellaneous expenses and subcontractor fees, partially offset by lower
incentive compensation costs as a result of lower software 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 18.7% from
$4.9 million in last year's quarter to $5.9 million this quarter,
representing 21.1% and 32.2%, 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"), increased subcontractor
fees, and increased depreciation and amortization primarily related to
intangible assets recorded in connection with the eManage asset
acquisition. 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 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 slightly from $2.9 million in last
year's quarter to $3.0 million this quarter, representing 12.5% and 16.6%,
respectively, of total revenues in those quarters.
Interest income and other income (expense):
Interest income, net of interest expense, was $461,000 in last year's
quarter and $556,000 in this quarter. The increase in interest income is
primarily attributable to higher interest from installments receivable. Other
income (expense) is comprised of foreign currency transactions and other
miscellaneous income (expense), which were insignificant for both last year's
quarter and this quarter.
Provision for (benefit from) income taxes:
The provision for income taxes was $1.1 million (effective tax provision
rate of 35.9%) in last year's quarter and a benefit from income taxes of $1.4
million (effective tax benefit rate of 55.3%) in this quarter. The fluctuation
in the effective tax rate from last year's quarter to this quarter was primarily
due to the increased relative benefit of the research and development tax credit
on the annual projected tax rate. The current quarter's tax rate was further
impacted by the "catch-up" adjustment to reflect the reenactment of the research
and development tax credit, which was not available in the fiscal first quarter
of 2005.
19
Six Months Ended December 31, 2003 Compared to Six Months Ended December
31, 2004
Revenues:
o Total revenues decreased 24.4% from $46.7 million in the first six months
of fiscal 2004 to $35.3 million in the first six months of fiscal 2005.
Domestic revenues decreased 22.6% from $36.9 million in the first six
months of fiscal 2004 to $28.5 million in the first six months of fiscal
2005. International revenues decreased 31.1% from $9.8 million in the
first six months of fiscal 2004 to $6.8 million in the first six months of
fiscal 2005, primarily due to two large contracts that closed during the
first quarter of the prior period. The following provides a discussion of
the changes in software license revenues, maintenance revenues and
professional service and other revenues for the first six months of fiscal
2004, as compared with the first six months of fiscal 2005.
o Software license revenues decreased 45.5% from $24.0 million in the
first six months of fiscal 2004 to $13.1 million in the first six
months of fiscal 2005. The Company believes the first six months of
fiscal 2005 was impacted by several factors, including
underperformance in (a) closing contracts for existing products, (b)
order pipeline building for new and existing products and (c) new
product integration. The Company has instituted changes to its
business that it believes will address these matters and improve its
performance including, but not limited to, personnel transfers,
separating the management of the sales and marketing functions to
drive more focus in each area, and reallocating resources in the
development organization to speed the integration of our newer
products with existing products, while maintaining our high quality
standards. The first six months of fiscal 2004 included record
license revenues due in part to the successful introduction of
Solution Packs.
o Maintenance revenues increased slightly from $20.0 million in the
first six months of fiscal 2004 to $20.2 million in the first six
months of fiscal 2005. 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
last year's quarter and this quarter, 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 decreased 24.7% from $2.7
million in the first six months of fiscal 2004 to $2.0 million in
the first six months of fiscal 2005. Professional service revenues
for the first six months of fiscal 2004 included approximately
$500,000 relating to services associated with new products that we
had deferred revenue recognition pending acceptance by the customer.
Excluding this amount, professional service revenues decreased 8.0%.
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
20
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 37.0% from $724,000 in the first six months of fiscal 2004 to
$456,000 in the first six months of fiscal 2005, representing 3.0% and
3.5%, respectively, of software license revenues in those periods. 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 decrease in cost of software license revenues is
consistent with lower software license revenues for the first six months
of fiscal 2005.
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 22.5%
from $3.3 million in the first six months of fiscal 2004 to $4.0 million
in the first six months of fiscal 2005, representing 16.2% and 19.7%,
respectively, of maintenance revenues in those periods. 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 36.4% from $3.0
million in the first six months of fiscal 2004 to $1.9 million in the
first six months of fiscal 2005, representing 111.3% and 94.0%,
respectively, of professional service and other revenues in those periods.
The cost of professional service for the first six months of fiscal 2004
included approximately $500,000 of costs relating to services associated
with new products that we had deferred pending acceptance by the customer.
Excluding this amount, the cost of professional service decreased 24.6%.
The cost of professional service decreased due to lower personnel costs
(reflecting decreased headcount), 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 5.8% from $18.3 million in the first six months
of fiscal 2004 to $17.3 million in the first six months of fiscal 2005,
representing 39.2% and 48.9%, respectively, of total revenues in those
periods. Sales and marketing expenses decreased slightly due to lower
incentive compensation costs as a result of lower software license
revenue, partially offset by higher personnel costs (reflecting increased
headcount and severance expense) and increases in miscellaneous expenses.
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 15.8% from
$9.9 million in the first six months of fiscal 2004 to $11.5 million in
the first six months of fiscal 2005, representing 21.3% and 32.5%,
respectively, of total revenues in those periods. The increase in
21
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., increased subcontractor fees, and increased depreciation and
amortization primarily related to intangible assets recorded in connection
with the eManage asset acquisition.
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 totaled $5.7 million in both the first six months
of fiscal 2004 and in the first six months of fiscal 2005, representing
12.2% and 16.2%, respectively, of total revenues in those periods. The
increase in general and administrative expenses is due to higher personnel
costs, primarily as a result of increased headcount and salary increases,
and increased accounting fees related to Sarbanes-Oxley compliance work,
which was offset by lower legal fees.
Interest income and other income (expense):
Interest income, net of interest expense, was $900,000 in the first six
months of fiscal 2004 and $1.1 million in the first six months of fiscal 2005.
The increase in interest income is primarily attributable to higher interest
from installments receivable. Other income (expense) is comprised of foreign
currency transactions and other miscellaneous income (expense). Foreign currency
losses were $21,000 in the first six months of fiscal 2004, compared with gains
of $30,000 in the first six months of fiscal 2005. Other miscellaneous income
(expense) was insignificant for both periods.
Provision for (benefit from) income taxes:
The provision for income taxes was $2.6 million (effective tax provision
rate of 39.0%) in the first six months of fiscal 2004 and a benefit from income
taxes of $2.0 million (effective tax benefit rate of 46.0%) in the first six
months of fiscal 2005. The fluctuation in the effective tax rate from the first
six months of fiscal 2004 to the first six months of fiscal 2005 was primarily
due to the increased relative benefit of the research and development tax credit
on the annual projected tax rate.
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 December 31, 2004, Mobius had cash and cash equivalents of
$31.1 million, a decrease of $2.5 million from the $33.6 million held at June
30, 2004. The decrease was primarily due to the pre-tax loss for the period,
substantially offset by decreases in accounts receivable and software license
installments receivable. As of December 31, 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. During the
first six months of fiscal 2005, the Company sold approximately $1.5 million of
installments receivable under this arrangement. If the level of software license
revenues financed by installments receivable
22
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 $1.0 million and $3.1 million
during the first six months of fiscal 2004 and 2005, respectively. Mobius's uses
of cash during the first six months of fiscal 2005 were primarily due to pre-tax
losses of $4.4 million, as well as a 9.8% decrease in accounts payable and
accrued expenses, primarily due to decreases in accrued commissions, salaries
and bonuses. These uses were partially offset by a reduction in accounts
receivable balances of $1.5 million, primarily due to collections and decreased
software license revenues, and a decrease of $940,000 in software license
installments receivable. Mobius's depreciation and amortization expense
adjustment in operating activities increased 15.2% from $933,000 in the first
six months of fiscal 2004 to $1.1 million in the first six months of fiscal
2005. Deferred revenue totaled $26.7 million at June 30, 2004 and $26.5 million
at December 31, 2004. Net accounts receivable decreased 12.1% from $11.9 million
at June 30, 2004 to $10.4 million at December 31, 2004.
Net cash used in investing activities was $760,000 and $614,000 in the
first six months of fiscal 2004 and 2005, respectively, representing the
purchase of computer software and equipment, furniture and fixtures and
leasehold improvements.
Net cash provided by financing activities was $1.7 million and $499,000 in
the first six months of fiscal 2004 and 2005, respectively. In the first six
months of fiscal 2004 and 2005, cash was provided by the exercise of stock
options by employees and employee stock purchases under the employee stock
purchase plan.
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 December 31, 2004, the future minimum
lease payments for these operating leases are as follows (in thousands):
Operating
Leases
------
Year Ended:
December 31, 2005 $ 2,866
December 31, 2006 2,367
December 31, 2007 2,076
December 31, 2008 1,911
December 31, 2009 1,816
Thereafter 861
-------
Total minimum lease payments $11,897
=======
In addition to the commitments shown above, the Company has commitments at
December 31, 2004 for future purchases of goods and services of approximately
$475,000.
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,
23
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. During the fiscal second quarter of 2005,
certain targets were met, and accordingly, the Company recorded incremental
goodwill of $85,000, which was paid during the same quarter.
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 December 31, 2004, approximately 77% and 73%, 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 $688,000 at June 30, 2004 and
December 31, 2004, respectively.
Software License Installments Receivable
As of December 31, 2004, software license installments amounted to $35.6
million, a decrease of 2.6% compared with the June 30, 2004 balance of $36.5
million. This slight decrease reflects the sale during the first six months of
fiscal 2005 of approximately $1.5 million of installments receivable to General
Electric Capital Corporation under an arrangement entered into during the fiscal
first quarter of 2005. This arrangement provides the Company with the option of
selling certain installments receivable to General Electric Capital Corporation,
which affords the Company with enhanced flexibility in offering financing
alternatives to our customers and to manage our cash flow. 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 4.7% 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
December 31, 2004, software license installments reserves were $420,000 and
$240,000, respectively.
24
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 $26.5 million at December 31, 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 December 31, 2004, current deferred revenues totaled $22.4 million and
non-current deferred revenues totaled $4.1 million. It is anticipated that
current deferred revenues of $22.4 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 first nine months of fiscal 2003 or the first nine months of fiscal 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. During
January 2005, the buyer's president filed for personal bankruptcy protection.
The Company is currently determining the appropriate course of action to be
taken as a result of this development. 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.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board issued SFAS No.
123(R), Share-Based Payment (revised 2004), which replaces SFAS No. 123,
Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS No. 123(R) is effective as of the
beginning of the first interim or annual reporting period that begins after June
15, 2005, which coincides with our first quarter of fiscal 2006. SFAS No. 123(R)
applies to new awards and to awards modified, repurchased or cancelled after the
required effective date, as well as to the unvested portion of awards
outstanding as of the required effective date ("modified prospective
application"). Upon adoption, prior periods may be, but are not required to be,
restated. SFAS No. 123(R) requires the fair value of all share based payment
transactions to be recognized in the financial statements. As a result, upon
adoption of SFAS No. 123(R) the Company will be required to recognize
compensation expense for the fair value of employee stock options over the
applicable vesting period. Under APB Opinion No. 25, 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 Company is currently evaluating option valuation methodologies,
assumptions and other considerations in light of SFAS No. 123(R). The adoption
of SFAS No. 123(R) is not expected to have a significant effect on our financial
position or cash flows, but will impact our results of operations.
25
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. 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 six 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 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
26
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 first half of fiscal 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. As of December 31, 2004, software license
installments amounted to $35.6 million, compared with the June 30, 2004 balance
of $36.5 million. 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. During the first six
months of fiscal 2005, the Company sold approximately $1.5 million of
installments receivable under this arrangement. 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
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.
27
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, have
significantly greater financial, technical and marketing resources, and have a
larger installed base of customers. 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
geographic areas through third-party 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;
28
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.
Any or all of the foregoing factors may 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 for it to remain profitable.
We experienced negative gross margins related to this business in the
second quarter and first six months of fiscal 2004, although gross margins for
the second quarter and first six months of fiscal 2005 were slightly profitable.
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 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
29
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 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.
30
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.
On January 14, 2005, Mr. Joseph G. Tinnerello stepped down from his role
as Senior Vice President of Sales and Marketing, to devote all of his efforts to
his battle against his recently diagnosed cancer. Prior to Mr. Tinnerello's
diagnosis, we had determined to create separate sales and marketing Vice
President positions to drive a more focused effort in each area. In the interim,
sales management responsibilities are being handled by our three Vice Presidents
of Sales, covering all regions of the globe, who will be reporting directly to
the Company's President and Chief Executive Officer. We have begun a search for
a Vice President of Worldwide Sales and are well into our search for a Vice
President of Marketing. During this transition period, our ability to grow our
order pipeline and sales revenues could be negatively impacted.
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.
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
31
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.
32
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 December 31, 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 December 31, 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 December 31, 2004 that have materially affected,
or are reasonably likely to materially affect, the Company's internal control
over financial reporting.
33
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
None.
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: February 3, 2005
MOBIUS MANAGEMENT SYSTEMS, INC.
By: /s/ Raymond F. Kunzmann
---------------------------------
Raymond F. Kunzmann
Chief Financial Officer
(Principal Financial and
Accounting Officer)
35