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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

For the Quarterly Period Ended: September 27, 2003

Commission File Number: 000-30027

Moldflow Corporation

430 Boston Post Road, Wayland, MA 01778

(508) 358-5848

     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 o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No x

     There were 10,058,053 shares of our common stock, par value $0.01, outstanding on November 7, 2003.

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MOLDFLOW CORPORATION

FORM 10-Q

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PART I.     FINANCIAL INFORMATION

MOLDFLOW CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEET

The accompanying notes are an integral part of the condensed consolidated financial statements.

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MOLDFLOW CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF INCOME

The accompanying notes are an integral part of the condensed consolidated financial statements.

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MOLDFLOW CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

The accompanying notes are an integral part of the condensed consolidated financial statements.

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MOLDFLOW CORPORATION

1.     Basis of Presentation and Nature of Business

      Moldflow Corporation (“Moldflow” or the “Company”) designs, develops, manufactures and markets computer software applications for the design, engineering and manufacture of injection-molded plastic parts and, as such, revenues are derived primarily from the plastic design and manufacturing industry. The Company sells its products primarily to customers in the United States, Europe, Asia and Australia.

      The accompanying unaudited condensed consolidated financial statements include the accounts of Moldflow Corporation and its wholly-owned subsidiaries. The condensed consolidated financial statements have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2003 included in the Company’s Annual Report on Form 10-K. The June 30, 2003 condensed consolidated balance sheet was derived from the Company’s audited consolidated financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting only of those of a normal recurring nature, necessary for a fair presentation of results for the interim periods presented. The results of operations for the three-month period ended September 27, 2003 are not necessarily indicative of the results to be expected for any future period or the full fiscal year. Certain prior year amounts have been reclassified to conform to the fiscal 2004 presentation.

      The Company’s fiscal year end is June 30. During the fiscal year, the Company follows a schedule in which each interim quarterly period ends on the Saturday of the thirteenth full week of the reporting period.

2.     Stock Plans and Stock-based Employee Compensation

      A summary of the Company’s stock option activity follows:

      No compensation cost has been recognized for employee stock-based awards for the three months ended September 27, 2003 and September 28, 2002. Had compensation cost been determined based on the fair value at the grant dates, the Company’s net income would have been the pro forma amounts indicated in the table below.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED

      The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

3.     Net Income Per Common Share

      The following table presents the calculation for both basic and diluted net income per common share:

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED

4.     Derivative Financial Instruments and Hedging Activities

      The Company has established a hedging program designed to reduce the exposure to changes in currency exchange rates.

      At September 27, 2003, currency options and collars designated as hedging instruments with notional amounts of $1.5 million, $4.5 million and $1.8 million to exchange Euros, Japanese yen and Australian dollars for U.S. dollars, respectively, were outstanding. At September 27, 2003, the total fair values of all currency options and collars held by the Company of $157,000 and $268,000 were recorded as components of other current assets and other current liabilities, respectively. Net unrealized losses on options and collars that qualified as hedging instruments of $95,000 were included in accumulated other comprehensive income. During the three months ended September 27, 2003, net losses of $80,000 were recorded as components of other income and expense on the effective portion of options that were settled. For the three months ended September 27, 2003, an unrealized loss of $21,000 was recognized on the ineffective portion of the options and collars dedesignated as hedging instruments.

      At September 28, 2002, currency options and collars designated as hedging instruments with notional amounts of $3.2 million, $6.6 million and $1.8 million to exchange Euros, Japanese yen and Australian dollars for U.S. dollars, respectively, were outstanding. In August 2002, the Company discontinued hedge accounting for the excess portion of instruments that were used to hedge transactions considered no longer probable of occurring. At September 28, 2002, these instruments had notional amounts of $1.4 million and $243,000 to exchange Japanese yen and Australian dollars for U.S. dollars, respectively. At September 28, 2002, the total fair values of all currency options and collars held by the Company of $163,000 and $299,000 were recorded as components of other current assets and other current liabilities, respectively. Net unrealized losses on options and collars that qualified as hedging instruments of $222,000 were included in accumulated other comprehensive income. During the three months ended September 28, 2002, gains of $11,000 were recorded as components of other income and expense on the effective portion of options that were settled. For the three months ended September 28, 2002, an unrealized gain of $38,000 was recognized on the ineffective portion of the options and collars dedesignated as hedging instruments.

5.     Acquired Intangible Assets

      Intangible assets acquired in the Company’s business combinations include goodwill, customer base, developed technology and non-compete agreements. All of the Company’s acquired intangible assets, except for goodwill, are subject to amortization over their estimated useful lives. No significant residual value is estimated for these intangible assets.

      The components of acquired intangible assets are as follows:

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED

      The following table summarizes the expected remaining amortization of acquired intangible assets as of September 27, 2003:

6.     Software Development Costs

      Costs associated with the development of computer software and related products are expensed prior to establishing technological feasibility, as defined by Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,” and capitalized thereafter until commercial release of the software products. Development costs eligible for capitalization in the three months ended September 27, 2003 and September 28, 2002 were not significant.

      A summary of capitalized software development costs follows:

      All such costs have been included in other assets and are being amortized to cost of product revenue over a five-year period.

7.     Treasury Stock

      On September 19, 2001, the Board of Directors authorized the Company to repurchase up to 500,000 shares of its outstanding common stock. In September 2002, the Company reacquired 194,165 shares of its outstanding common stock for $909,000, at an average cost of $4.68 per share. As of September 27, 2003, 80,726 of these shares were reissued under the Company’s Employee Stock Purchase Plan and 163,439 shares remained in treasury.

8.     Comprehensive Income

      Comprehensive income is comprised of net income and other comprehensive income and losses. Other comprehensive income includes certain changes in equity that are excluded from net income, such as cumulative foreign currency translation adjustments. Other comprehensive income also includes unrealized gains and losses on the Company’s hedging instruments and unrealized gains and losses on the Company’s marketable securities.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED

      The following table presents the calculation of comprehensive income (loss):

9.     Restructuring Plans

March 2003 Plan

      In March 2003, the Company initiated a corporate restructuring plan (the “March 2003 plan”) related to its January 2003 acquisition of Côntrole de Processus Industriels s.a.r.l. (“CPI”). The March 2003 plan included the involuntary termination of four technical employees and a reduction of space at a leased facility, related to the integration of CPI’s operations. In addition, the March 2003 plan included the write-off of inventories and other assets and certain intangible assets originally acquired in the purchase of Branden Technologies in fiscal 2001, which were deemed impaired by the acquisition of a similar product in connection with the CPI transaction.

      As a result of the March 2003 plan, the Company recorded pre-tax charges and related accruals of $584,000 ($486,000 after tax, or $0.05 per diluted share) in its third fiscal quarter of 2003. Of this charge, $179,000 related to the write-off of inventories and, as such, was included as a component of the cost of product revenue. The remainder of the charge was recorded as a restructuring charge in the Company’s Consolidated Statement of Income. All significant activities under the March 2003 plan were completed as of June 30, 2003.

      The following table presents the pre-tax charges incurred by category of expenditure, and related restructuring costs included in accrued expenses in the Company’s balance sheet (in thousands):

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED

April 2002 Plan

      In April 2002, the Company enacted a corporate restructuring plan (the “April 2002 plan”) to resize the Company and to reduce overhead costs. The April 2002 plan included the involuntary termination of 37 employees, the closing of certain leased offices and the reduction in size of other leased offices. All significant activities under the April 2002 plan are complete. As a result of the April 2002 plan, the Company recorded pre-tax charges and related accruals in fiscal 2002 of $1.3 million. The remaining accrual balances as of September 27, 2003 relate to long-term contractual obligations from facility commitments that will be paid over six years. The following table presents the balance of the accrued restructuring charges:

10.     Credit Facilities

      In December 2002, the Company renewed its unsecured $5.0 million working capital credit facility with a domestic bank. The terms of the facility, which expires December 5, 2003, are substantially the same as that of the previous facility. The available borrowing base of the facility is subject to a calculation that is based upon eligible accounts receivable. Advances may be in the form of loans, letters of credit, foreign exchange contracts or other cash management lines. Loans against the facility bear interest at the bank’s prime rate. The facility includes certain restrictive covenants, all of which the Company was in compliance with as of September 27, 2003. These covenants include certain liquidity and profitability measures and restrictions that limit the ability of the Company to merge, acquire or sell certain assets without prior approval from the bank. As of September 27, 2003, the Company had employed $1.6 million of the available borrowing base through outstanding foreign exchange contracts and letters of credit. These advances do not incur interest charges. As of September 27, 2003, there were no loans advanced against the facility, and the remaining available borrowing base was $2.1 million.

      Certain subsidiaries of the Company have established credit facilities with two separate financial institutions primarily for the purposes of establishing foreign exchange contracts. Advances against these facilities bear interest at the institutions’ published rates plus 2% per annum. These credit facilities are unsecured. Advances against these facilities are guaranteed by the Company. There were no advances against these facilities as of September 27, 2003.

      Certain subsidiaries of the Company have established other credit facilities totaling $365,000 with two separate financial institutions for general working capital requirements and foreign exchange facilities. Advances against these facilities bear interest at the institutions’ published rates, plus 1.5% per annum. Advances against one of these facilities are secured by a $102,000 term deposit and the assets of a subsidiary of the Company. There were no advances against these facilities as of September 27, 2003.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED

11.     Segment and Geographic Information

      The Company is engaged in one reportable industry segment: the development, marketing and support of software products for the plastic part and mold design and manufacturing industry.

      Geographic information regarding the Company’s operations follows:

      Revenue from unaffiliated customers in Japan for the three months ended September 27, 2003 and September 28, 2002 was $2.4 million and $2.0 million (25% and 24% of total revenue), respectively. Substantially all of the revenue in the Americas region is derived from the United States.

      All of the net fixed assets included in the Americas are located in the United States.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED

12.     Contingencies, Commitments and Guarantor Arrangements

      In the normal course of business, the Company has indemnified third parties and has commitments and guarantees under which it may be required to make payments in certain circumstances. These indemnities, commitments and guarantees include: its indemnities to various lessors in connection with facility leases; indemnities to customers related to intellectual property and performance of services subcontracted to other providers; indemnities to vendors that guarantee expenses incurred by employees of the Company; indemnities and guarantees to financial institutions related to sales of the Company’s equity securities and performance under credit facilities of the Company’s subsidiaries; and indemnities to directors and officers of the Company to the maximum extent permitted under the laws of the State of Delaware. The duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments the Company could be obligated to make. The Company has never incurred material costs to settle claims or defend lawsuits related to these indemnities, commitments and guarantees. As a result, the estimated fair value of these agreements is minimal. Accordingly, no liabilities have been recorded for these agreements as of September 27, 2003.

      The Company generally warrants that its products will perform in all material respects in accordance with its standard published specifications in effect at the time of delivery of the products to the customer for a period of 90 days from the date of shipment or any longer period that may be required by local law. The Company records a liability based upon its history of claims against the contractual warranty provisions. The following table describes changes to the warranty provision:

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Forward-Looking Statements

      This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” and “continue” or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition, or state other “forward-looking” information. We believe that it is important to communicate our future expectations to our investors.

      However, there may be events in the future that we are not able to accurately predict or control and that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including those factors described in “Risk Factors and Important Factors That May Affect Future Results” beginning on page 21. Readers should not place undue reliance on our forward-looking statements. We do not undertake any obligation to update any of our forward-looking statements to reflect events occurring after the date of this report.

Business Overview

      Our primary business is the development, sale and support of software applications for the design and manufacture of injection molded plastic parts. We develop software products internally and through cooperative research relationships with a number of public and private educational and research organizations around the world. We categorize our products into two groups, Design Optimization Solutions and Manufacturing Solutions. Our Design Optimization Solutions allow a product designer or engineer to simulate the manufacture of a plastic part to determine the optimal part design and part/mold combination. Our Design Optimization Solutions include our MPI series for in-depth mold design and our MPA series for part design and high-level mold design. Our Manufacturing Solutions deliver a complete collaborative manufacturing management system which provides production and process data for use in real-time business performance management and functions to automate the setup and control of the injection molding process. Our Manufacturing Solutions products are an integration of our existing MPX product, our Shotscope product acquired from Branden Technologies in April 2003, and our CPI production monitoring system product introduced in January 2003 after our acquisition of the assets and the ongoing operations of Côntrole de Processus Industriels s.a.r.l.

      We sell our products and services internationally through our direct sales operations in 14 countries. We also sell through a network of distributors and value-added resellers and through distribution arrangements with developers of other design software products.

Critical Accounting Policies and Significant Judgments and Estimates

      The preparation of consolidated financial statements requires estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, inventories, income taxes, warranty obligations, intangible assets, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

      The accounting policies that we believe are most critical to fully understand our consolidated financial statements include: revenue recognition, valuation allowances, acquisition accounting, impairment of intangible assets, goodwill and other long-lived assets, income tax accounting, restructuring charges, hedge

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Results of Operations

      We generate revenue from two principal sources:

	•	license fees for our packaged software products, and
	•	services revenue derived from maintenance and support services related to our software products, consulting, implementation, training and material testing.