MOLDFLOW CORP - 10-Q Quarterly Report

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 x No o

There were 10,498,816 shares of our common stock, par value $0.01, outstanding on February 6, 2004.

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

Moldflow Corporation (“Moldflow” or the “Company”) designs, develops, manufactures and markets computer software applications and enabling hardware for the design, engineering and manufacture of injection-molded plastic parts and, as such, revenues are derived primarily from the plastics 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 and six-month periods ended December 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 week of the reporting period.

The Company accounts for stock-based awards to employees using the intrinsic value method as prescribed by Accounting Principles Board (“APB”) Opinion No. 25 “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation expense is recorded for options issued to employees in fixed amounts with fixed exercise prices at least equal to the fair market value of the Company’s common stock at the date of the grant. The Company has adopted the provisions of SFAS No. 123, “Accounting for Stock Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure,” through disclosure only. All stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS No. 123.

No compensation cost has been recognized for employee stock-based awards in the three-month and six-month periods ended December 27, 2003. In the three-month and six month periods ended December 28, 2002, compensation cost for employee stock-based awards was not significant. 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.

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

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

Options to purchase 1,009,166 and 1,141,765 shares of common stock were not included in the calculation of diluted net income per share for the three months ended December 27, 2003 and December 28, 2002, respectively, because the option exercise prices were greater than the average market price of the Company’s common stock during those periods.

Options to purchase 1,025,823 and 1,129,583 shares of common stock were not included in the calculation of diluted net income per share for the six months ended December 27, 2003 and December 28, 2002, respectively, because the option exercise prices were greater than the average market price of the Company’s common stock during those periods.

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

At December 27, 2003, currency options and collars designated as hedging instruments with notional amounts of $3.1 million, $9.3 million and $1.9 million to exchange Euros, Japanese yen and Australian dollars for U.S. dollars, respectively, were outstanding. At December 27, 2003, the total fair values of all currency options and collars held by the Company of $304,000 and $281,000 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 $50,000 were included in accumulated other comprehensive income. The Company expects these instruments to affect earnings as they mature over the next eighteen months. During the three-month and six-month periods ended December 27, 2003, net losses of $37,000 and $117,000 were recorded as components of other income and expense on the effective portion of options that were settled. For the three-month and six-month periods December 27, 2003, unrealized losses of $43,000 and $64,000 were recognized on the ineffective portion of the options and collars dedesignated as hedging instruments. As of December 27, 2003, there were no financial instruments or derivatives outstanding that did not qualify for hedge accounting.

At December 28, 2002, currency options and collars designated as hedging instruments with notional amounts of $2.7 million, $7.0 million and $1.3 million to exchange Euros, Japanese yen and Australian dollars for U.S. dollars, respectively, were outstanding. During the first quarter of fiscal 2003, the Company discontinued hedge accounting for the excess portion of instruments that were used to hedge transactions considered no longer probable of occurring. At December 28, 2002, these instruments had notional amounts of $1.2 million and $204,000 to exchange Japanese yen and Australian dollars for U.S. dollars, respectively. At December 28, 2002, the total fair values of all currency options and collars held by the Company of $160,000 and $351,000 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 $295,000 were included in accumulated other comprehensive income. During the three-month and six-month periods ended December 28, 2002, losses of $73,000 and $62,000, respectively, were recorded as components of other income and expense on the effective portion of options that were settled. For the three-month and six-month periods ended December 28, 2002, unrealized losses of $10,000 and net unrealized gains of $28,000, respectively, were recognized on the ineffective portion of the options and collars dedesignated as hedging instruments.

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. A portion of the acquired intangible assets is recorded in the accounts of our French subsidiary and, as such, is subject to translation at the currency exchange rates in effect at the balance sheet date.

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

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.

In the second quarter of fiscal 2004, the Company established technological feasibility of two products, MPI 7.0 and MMS/Production Monitoring, both of which were commercially released in December 2003. Accordingly, research and development costs of $220,000 were capitalized in the consolidated balance sheet.

All such costs have been included in other assets in the consolidated balance sheet and are being amortized to cost of product revenue over a five-year period, the estimated useful lives of the products.

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.

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):

In April 2002, the Company enacted a corporate restructuring plan (the “April 2002 plan”) to resize the Company’s operations 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 December 27, 2003 relate to long-term contractual obligations from facility commitments that will be paid over five years. The following table presents the balance of the accrued restructuring charges:

In November 2002, the Financial Accounting Standards Board (“FASB”) issued Emerging Issues Task Force 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables.” EITF 00-21 requires revenue arrangements with multiple deliverables to be divided into separate units of accounting. If the deliverables in the arrangement meet certain criteria, arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. Applicable revenue recognition criteria are to be considered for separate units of accounting. The guidance in EITF 00-21 was effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company’s adoption of EITF 00-21 did not have a material impact on its financial position or results of operations.

On December 17, 2003, the Staff of the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 104 (SAB 104), “Revenue Recognition”, which supersedes SAB 101, “Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is to rescind the accounting guidance contained in SAB 101 related to multiple-element revenue arrangements that was superseded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Additionally,

SAB 104 rescinds the SEC’s related “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” issued with SAB 101 that had been codified in SEC Topic 13, “Revenue Recognition.” While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104, which was effective upon issuance. The Company’s adoption of SAB 104 did not have a material effect on its financial position or results of operations.

In January 2004, the Company completed the renewal of its unsecured $5.0 million working capital credit facility with a domestic bank. The terms of the facility, which expires December 2, 2004, are substantially the same as those 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 December 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 December 27, 2003, the Company had employed $2.0 million of the available borrowing base through outstanding foreign exchange contracts and letters of credit. These advances do not incur interest charges. As of December 27, 2003, there were no loans advanced against the facility, and the remaining available borrowing base was $3.0 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 December 27, 2003.

Certain subsidiaries of the Company have established other credit facilities totaling $207,000 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 $114,000 term deposit and the assets of an Australian subsidiary of the Company. There were no advances against these facilities as of December 27, 2003.

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

Revenue from unaffiliated customers in Japan for the three months ended December 27, 2003 and December 28, 2002 was $2.2 million and $1.7 million (20% and 20% of total revenue), respectively. Revenue from unaffiliated customers in Japan for the six months ended December 27, 2003 and December 28, 2002 was $4.6 million and $3.6 million (23% and 21% 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.

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. We also may have indemnity obligations in connection with acquisition transactions, and do have such obligations pursuant to the acquisition of American MSI Corporation. 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 December 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 to 120 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 (in thousands):

On January 23, 2004, the Company acquired all of the outstanding stock of American MSI Corporation, (“AMSI”), a leading solution provider of hot runner control systems for the injection molding industry, in exchange for a cash payment of $7.3 million, which includes the repayment of AMSI’s long-term debt, and the issuance of 349,288 shares of the Company’s common stock. The Company has not yet completed its identification and valuation of the intangible assets acquired. Preliminarily, the Company expects such intangible assets to include AMSI’s existing software technology and products, customer base and non-compete covenant with AMSI’s founder. After allocation to the identifiable assets, any remaining excess of purchase price over the value of assets acquired will be attributed to goodwill. For accounting purposes, the total purchase price resulting from the cash and stock issued is expected to be approximately $12.0 million.

Under the terms of the merger agreement with AMSI, the Company agreed to register 174,644 shares of its common stock issued in connection with the acquisition. These shares will be registered on Form S-3 which is expected to be filed within 30 days of the closing date of the acquisition. Such registration statement will remain continuously effective until the earlier of two years after the closing date and such time as all of the shares registered thereunder and held by the selling stockholder may be sold in a single day pursuant to Rule 144 under the Securities Act of 1933, as amended.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 27. 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.

Our primary business is the development, sale and support of software applications and enabling hardware 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. In addition some software is developed by commercial contractors. Historically, we categorized 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 part and 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.

On January 23, 2004, we acquired all of the outstanding stock of American MSI (“AMSI”), a leading solution provider of hot runner control systems for the injection molding industry located in California, in exchange for $7.3 million of cash, and the issuance of 349,288 shares of our common stock. In conjunction with the acquisition, we announced our intention to reorganize our operations into two business units along our Design Optimization and Manufacturing Solutions product lines. In connection with this reorganization, we have renamed our Design Optimization Solutions as our Design Analysis Solutions business. The products and services provided by AMSI became part of the Manufacturing Solutions product line, effective the date of the acquisition.

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

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, 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 accounting and capitalization of software development costs. For a more detailed explanation of the judgments included in these areas, refer to the Company’s Annual Report on Form 10-K for the year ended June 30, 2003.


	•	license fees for our packaged software and enabling hardware products, and

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

Product revenue. Typically, our customers pay an up-front, one-time fee for our products. The amount of the fee depends upon the number and type of software modules licensed, the associated enabling hardware components and the number of the customers’ employees or other users who can access the software product simultaneously. Our MPA product is subject to the terms of a “click-wrapped” software license agreement that is included as part of each customer’s installation process. Revenue for our iMPA product, a fully functional, application service provider version of our Part Adviser product, is earned on a pay-per-use basis and, to date, has not been significant. For sales of our other products, we generally require a signed license agreement. In addition, we receive royalty payments from developers of other software products related to the bundling of our software with their design software programs. We generally record a larger percentage of our quarterly revenue in the third month of each fiscal quarter. Accordingly, our quarterly results, and particularly our product revenues, are often difficult to predict prior to the final days of each quarter.

Services revenue. We derive revenue from maintenance and support contracts that require us to provide technical support services to customers and unspecified product upgrades and enhancements on a when-and-if-available basis. We also provide consulting and implementation services, training of customers’ employees and material testing services.

Cost of product revenue. Cost of product revenue consists primarily of the costs associated with hardware components for our Manufacturing Solutions products, compact discs and related packaging material, duplication and shipping costs and the salaries of our distribution personnel. In some cases, we pay royalties to third parties for usage-based licenses of their products that are embedded in our products. Product royalties are expensed when the related obligation arises, which is generally upon the license of our products, and are included in cost of product revenue. Also included in cost of product revenue is amortization expense related to capitalized software development costs.

Cost of services revenue. Cost of services revenue consists primarily of salary, fringe benefit and facility related costs of our maintenance and support, consulting, implementation and training activities and of our material testing laboratories, and is expensed when incurred. Additionally, from time to time, we engage outside consultants to meet peaks in customer demand for consulting and implementation services.

Research and development. We employ a development staff to create new products and enhance our existing products. Product development expenditures, which include salaries, benefits, travel, payments to universities and other research institutions and facilities costs, are generally charged to operations as incurred. SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,” requires the capitalization of certain software development costs subsequent to the establishment of technological feasibility up to the point of the product’s release for commercial sale. We established technological feasibility of Shotscope 2.6 and MPI 4.0 in the second quarter of fiscal 2003 and released the products commercially in November and December 2002, respectively. In accordance with SFAS No. 86, research and development costs of $170,000 were capitalized in the six months ended December 28, 2002 related to Shotscope 2.6 and MPI 4.0. In the second quarter of fiscal 2004, we established technological feasibility of MPA 7.0 and the MMS/Production Monitoring product, and released these products commercially in December 2003. This resulted in the capitalization of $220,000 of research and development costs.

Selling and marketing. We sell our products primarily through our direct sales force and indirect distribution channels. Selling and marketing expenses consist primarily of salaries, commissions to our sales staff, employee benefits costs, sales office facilities, travel and promotional events such as trade shows, advertising, print and web-based collateral materials and public relations programs.

General and administrative. General and administrative expenses include compensation, routine legal, audit, tax consulting, regulatory compliance, insurance and other costs of our executive management, finance, information technology, human resources and administrative support activities.

Amortization of acquired intangible assets. These costs represent the amortization of intangible assets recorded in connection with our acquisitions. These assets include developed technology, customer base and non-compete agreements.

Interest income, net. Interest income, net includes interest income earned on invested cash balances, net of our cost of borrowings, including interest cost incurred on our working capital lines of credit.

Other income (loss), net. Other income (loss), net includes realized and unrealized gains and losses arising from translation of foreign currency denominated asset and liability balances, recognized gains and losses on our foreign currency hedging instruments, and other non-operating income and expense items.

Provision for income taxes. Our income tax expense includes federal, state and foreign income taxes. The determination of our provision for income tax expense requires significant management judgment regarding forecasts of net income and tax obligations in the various jurisdictions in which the Company operates and includes the tax effects of certain items of income and expense that are reported in differing periods for financial statement and tax return purposes. Further, we must assess the likelihood of the realization of our deferred tax assets. If it is more likely than not that any or all of our deferred tax assets will not be realized, we must establish a valuation allowance by including an expense within the income tax provision. Accordingly, our effective tax rate may vary from period to period based on changes in estimated taxable income or loss, changes to the valuation allowance, changes to federal, state or foreign tax laws, changes in our business across different jurisdictions with varying country, state and local income tax rates, deductibility of certain costs and expenses by jurisdiction and as a result of acquisitions.

The following table sets forth statement of operations data for the periods indicated as a percentage of total revenue:

Three Months Ended December 27, 2003 compared to Three Months Ended December 28, 2002

Total revenue increased 19%, or $1.7 million, to $10.6 million for the three months ended December 27, 2003, from $8.9 million for the three months ended December 28, 2002. On a constant currency basis, which excludes the impact of changes in foreign currency exchange rates from those of the previous year, total revenue increased approximately 7%. The following table sets forth our total revenue by geographic region for the second quarter of fiscal 2004 and 2003:

Product revenue. Product revenue increased 21%, or $897,000, to $5.1 million for the three months ended December 27, 2003, from $4.2 million for the three months ended December 28, 2002. On a constant currency basis, product revenue increased approximately 7%. The following table sets forth our product revenue by product group and geography for the second quarter of fiscal 2004 and 2003:

The increase in product revenue in the second quarter of fiscal 2004 was primarily a result of an increase in Design Analysis Solutions revenue from our French and German markets. This increase was a result of favorable currency exchange rates and increased sales of our in-depth part and mold design product, MPI. Product revenue also increased in our Asia/Australia region, driven primarily by increased sales to customers in the Japanese automotive industry and the Asian electronics industry. To a lesser degree, our release of MPA 7.0 in mid-December 2003, which introduced complementary add-on modules to our existing MPA

We added 122 new customers in the second quarter of fiscal 2004, compared to 87 new customers in the same period of fiscal 2003. Sales to new customers represented 49% of total product revenues in the second quarter of fiscal 2004, compared to 31% in the same period of fiscal 2003. We sold 115 seats of Design Analysis Solutions products and 223 seats of Manufacturing Solutions products in the second quarter of fiscal 2004, compared to 97 seats and 133 seats, respectively, in the corresponding period of fiscal 2003. Pricing of individual products within these product families can vary greatly, and the mix of products sold during a given period can significantly impact our average sales price per seat. As such, we do not believe that average sales prices per seat provide a meaningful measure of our business.

Services revenue. Services revenue increased 17%, or $808,000, to $5.5 million for the three months ended December 27, 2003, from $4.7 million for the three months ended December 28, 2002. On a constant currency basis, service revenue increased approximately 7%. This increase was primarily in the sale of maintenance contracts, which is the result of historical growth in our customer base arising from product license sales.

No customer accounted for more than 10% of our total revenue during the three-month periods ended December 27, 2003 and December 28, 2002.

Cost of product revenue. The cost of product revenue decreased 10%, or $69,000, to $605,000 for the three months ended December 27, 2003, from $674,000 for the three months ended December 28, 2002. The decrease was a result of reduced hardware costs and a redirection of some employees to post-sales support activities which are included in the cost of services revenue, partially offset by increased amortization expense related to capitalized software development costs.

Cost of services revenue. Our cost of services revenue increased 230%, or $651,000, to $934,000 for the three months ended December 27, 2003, from $283,000 for the three months ended December 28, 2002. The increase reflects the impact of organizational changes to redirect technical staff during the last six months from research and development, sales and cost of product revenue to our post-sales implementation group, the cost of which is included in cost of services revenue. The implementation resources were expanded as a result of the increased requirements to provide technical assistance to the growing customer base for our Manufacturing Solutions products. To enhance the benefits realized by our customers from the purchase of our solutions, we provide services including the training of customer personnel, data conversion, and building of interfaces to other plant and business management systems. Accordingly, as sales of our Manufacturing Solutions products increase, we anticipate that our cost of service revenue will increase when compared with previous periods.

Research and development. Research and development expenses increased 16%, or $216,000, to $1.5 million for the three months ended December 27, 2003, from $1.3 million for the three months ended December 28, 2002. The increase is primarily attributable to increased compensation expense, which resulted from the combination of several factors, including the impact of changes in foreign currency exchange rates, annual salary increases which took effect in October, and development staff added in our January 2003 acquisition of CPI. These increases were partially offset by the capitalization of software development costs in accordance with SFAS No. 86, which was higher than the corresponding period in fiscal 2003 by $50,000.

Selling and marketing. Selling and marketing expenses increased 5%, or $235,000 to $4.7 million for the three months ended December 27, 2003, from $4.5 million for the three months ended December 28, 2002 due to increased employee costs resulting from increased sales and annual salary adjustments, and additional travel and promotional activities. These increases were partially offset by the impact of the aforementioned redirection of resources to customer support and implementation activities, which reduced selling and marketing expenses by $217,000 as compared to the prior period and increased cost of services revenue by a corresponding amount.

General and administrative. General and administrative expenses increased 17%, or $315,000, to $2.1 million for the three months ended December 27, 2003, from $1.8 million for the three months ended December 28, 2002. The increase was primarily due to increased compensation expense, resulting from our annual salary increases for our staff and changes in foreign currency exchange rates and increased professional service fees, including the cost of audit, tax, and other accounting services. In addition to these ongoing expenses, we incurred expenses of $145,000 in connection with preparation for, and compliance with, the Sarbanes-Oxley Act in the three months ended December 27, 2003. A significant portion of these expenses were a result of first-year implementation activities related to the requirement that companies certify, and the independent auditors audit and attest to a system of internal controls. As the audit standards related to the newly required attestation related to a company’s system of internal controls have not yet been finalized by the Public Company Accounting Oversight Board, our estimates of the total costs of compliance, a portion of which was expensed during our second quarter of fiscal 2004, are subject to further revision. We anticipate, however, that these costs will continue to be significant over the remainder of our fiscal year.

Amortization of acquired intangible assets. Amortization expense decreased 31%, or $49,000, to $110,000 for the three months ended December 27, 2003, from $159,000 for the three months ended December 28, 2002. The decrease was primarily a result of our March 2003 restructuring plan that included the write-off of certain intangible assets that were acquired in our purchase of Branden Technologies in March 2001. The reduction of amortization expense resulting from this write-off was partially offset by amortization of intangible assets acquired in the January 2003 acquisition of CPI.

Interest income, net. Interest income, net did not significantly change from the prior period.

Other income (loss), net. Other income (loss), net increased 111%, or $93,000, to a gain of $9,000 for the three months ended December 27, 2003, from a loss of $84,000 for the three months ended December 28, 2002. This was primarily due to gains arising from our foreign exchange hedging activities for the three months ended December 27, 2003, while hedge losses were incurred during the three months ended December 28, 2002.

Provision for income taxes. The provision for income taxes increased 49%, or $111,000, to $336,000 for the three months ended December 27, 2003, from $225,000 for the three months ended December 28, 2002, primarily a result of higher income before income taxes. In 2004, our effective annual income tax rate is estimated to be 37% of income before income taxes, excluding any impact from the acquisition of AMSI. The expected annual income tax rate of 37% in 2004 is higher than the U.S. statutory income tax rate due principally to the effect of income taxes levied at the state level, the tax impact of net operating losses for which no financial statement benefit may be recorded currently, and permanent differences between the deductibility of certain items for book and tax accounting purposes, offset, in part, by the impact of differences in tax rates on income earned in foreign jurisdictions. Our estimated effective annual income tax rate of 37% is lower than the actual effective income tax rate for the comparable period of the prior year due primarily to the effect, in the prior year, of taxable income in certain jurisdictions that was not offset in the financial statement income tax provision by losses in other jurisdictions.

Six Months Ended December 27, 2003 compared to Six Months Ended December 28, 2002

Total revenue increased 17%, or $2.9 million, to $20.1 million for the six months ended December 27, 2003, from $17.2 million for the six months ended December 28, 2002. On a constant currency basis, which excludes the impact of changes in foreign exchange rates from those of the previous year, total revenue increased approximately 7%. The following table sets forth our total revenue by geographic region for the first six months of fiscal 2004 and 2003:

Product revenue. Product revenue increased 20%, or $1.6 million to $9.5 million for the six months ended December 27, 2003, from $7.9 million for the six months ended December 28, 2002. On a constant currency basis, product revenue increased approximately 8%. The following table sets forth our product revenue by product group and geography for the first two quarters of fiscal 2004 and 2003:

The increase in product revenue for the six months ended December 27, 2003 was primarily a result of an increase in product revenue in our European market, particularly in France and Germany, offset in part by lower revenues from each of our product families in the Americas region. This increase was a result of favorable currency exchange rates and increased sales of our in-depth part and mold design product, MPI. In addition, product revenue increased in our Asia/Australia region, particularly in Japan, China and Taiwan, where we currently are selling primarily Design Analysis Solutions products. We believe that the increase in product revenue in Japan is a result of a broadening of the market for our products beyond our traditional customer base to include members of the original equipment manufacturers (“OEM”) supply chain and the result of a mild economic recovery in Japan, which resulted in higher levels of capital spending by our customers. In China and Taiwan, we believe that local manufacturers are expanding their capabilities to include a value-added design component to their businesses, which has resulted in an increase in our product revenue in those countries.

We added 224 new customers in the six months ended December 27, 2003, compared to 154 new customers in the same period of fiscal 2003. Sales to new customers represented 38% of total product revenues in the six months ended December 27, 2003, compared to 36% in the same period of fiscal 2003. We sold 249 seats of Design Analysis Solutions products and 313 seats of Manufacturing Solutions products in the six months ended December 27, 2003, compared to 186 seats and 190 seats, respectively, in the corresponding period of fiscal 2003. Pricing of individual products within these product families can vary greatly, and the mix of products sold during a given period can significantly impact our average sales price per seat. As such, we do not believe that average sales prices per seat provide a meaningful measure of our business.

Services revenue. Services revenue increased 15%, or $1.4 million, to $10.7 million for the six months ended December 27, 2003, from $9.3 million for the six months ended December 28, 2002. On a constant currency basis, service revenue increased approximately 6%. This increase was primarily in the sale of maintenance contracts, which is the result of historical growth in our customer base arising from product license sales.

No customer accounted for more than 10% of our total revenue during the six-month periods ended December 27, 2003 and December 28, 2002.

Cost of product revenue. The cost of product revenue decreased 7%, or $92,000, to $1.2 million for the six months ended December 27, 2003, from $1.3 million for the six months ended December 28, 2002. The decrease was a result of reduced hardware costs and a redirection of some staff to post-sales support activities which are included in the cost of services revenue, partially offset by increased amortization expense related to capitalized software development costs.

Cost of services revenue. Our cost of services revenue increased 178%, or $1.0 million, to $1.6 million for the six months ended December 27, 2003, from $563,000 for the six months ended December 28, 2002. The

increase reflects the impact of organizational changes to redirect technical staff during the last six months from research and development, sales and cost of product revenue to our post-sales implementation group, the cost of which is included in cost of services revenue. The implementation resources were expanded as a result of the increased requirements to provide technical assistance to the growing customer base for our Manufacturing Solutions products. To enhance the benefits realized by our customers from the purchase of our solutions, we provide services including the training of customer personnel, data conversion, and building of interfaces to other plant and business management systems. Accordingly, as sales of our Manufacturing Solutions products increase, we anticipate that our cost of service revenue will increase when compared with previous periods.

Research and development. Research and development expenses increased 13%, or $354,000, to $3.1 million for the six months ended December 27, 2003, from $2.8 million for the six months ended December 28, 2002. The increase is primarily attributable to increased compensation expense which resulted from the combination of several factors, including the impact of changes in foreign currency exchange rates, our annual salary increases which took effect in October, and development staff added in our January 2003 acquisition of CPI. These increases were partially offset by the capitalization of software development costs in accordance with SFAS No. 86, which was higher than the corresponding period of fiscal 2003 by $50,000.

Selling and marketing. Selling and marketing increased 3%, or $256,000, to $8.9 million for the six months ended December 27, 2003, from $8.6 million for the six months ended December 28, 2002 due to a $496,000 increase in employee costs resulting from increased sales and annual salary adjustments and additional travel expenses. These increases were partially offset by the impact of our redirection of resources to customer support and implementation activities, which is included in cost of services revenue, which reduced our selling and marketing expenses by $361,000 as compared to the prior period and increased cost of services revenue by a corresponding amount.

General and administrative. General and administrative expenses increased 17%, or $579,000, to $4.0 million for the six months ended December 27, 2003, from $3.5 million for the six months ended December 28, 2002. The increase was primarily due to increased compensation expense, resulting from our annual salary increases, changes in foreign currency exchange rates and increased professional service fees, including the cost of audit, tax, Sarbanes-Oxley compliance and preparation costs, and other accounting services.

Amortization of acquired intangible assets. Amortization expense decreased 31%, or $97,000, to $221,000 for the six months ended December 27, 2003, from $318,000 for the six months ended December 28, 2002. The decrease was primarily a result of our March 2003 restructuring plan that included the write-off of certain intangible assets that were acquired in our purchase of Branden Technologies in March 2001. The reduction of amortization expense resulting from this write-off was partially offset by amortization of intangible assets acquired in the January 2003 acquisition of CPI.

Interest income, net. Interest income, net decreased 2%, or $13,000, to $558,000 for the six months ended December 27, 2003 from $571,000 for the six months ended December 28, 2002.

Other income (loss), net. Other income (loss), net increased 45%, or $28,000, to a smaller loss of $34,000 for the six months ended December 27, 2003, from a loss of $62,000 for the six months ended December 28, 2002.

Provision for income taxes. The provision for income taxes increased 30%, or $134,000, to $584,000 for the six months ended December 27, 2003, from $450,000 for the six months ended December 28, 2002, primarily a result of higher income before income taxes. In 2004, our effective annual income tax rate is estimated to be 37% of income before income taxes excluding the impact of the acquisition of AMSI. The expected annual income tax rate of 37% in 2004 is higher than the U.S. statutory income tax rate due principally to the effect of income taxes levied at the state level, the tax impact of net operating losses for which no financial statement benefit may be recorded currently, and permanent differences between the deductibility of certain items for book and tax accounting purposes, offset, in part, by the impact of differences in tax rates on income earned in foreign jurisdictions. Our estimated effective annual income tax rate of 37% is

Historically, we have financed our operations and met our capital expenditure requirements primarily through funds generated from operations, sales of our capital stock and borrowings from lending institutions. As of December 27, 2003, our primary sources of liquidity consisted of our total cash and cash equivalents balance of $41.0 million, our marketable securities balance of $12.0 million and our credit facilities. In January 2004, we renewed our primary $5.0 million, unsecured working capital credit facility. The available borrowing base of the facility is subject to a calculation that is based upon eligible accounts receivable. At December 27, 2003, we had employed $2.0 million of available borrowings through outstanding foreign exchange contracts and letters of credit. The remaining available borrowings were $3.0 million. In addition to our primary working capital line of credit, we also utilize domestic and foreign banking institutions to provide liquidity to our subsidiaries. We also have relationships with other banking institutions in order to facilitate foreign currency and hedging transactions. As of December 27, 2003, we had no outstanding debt.

At December 27, 2003, our marketable securities consisted of corporate bonds with maturities in excess of three months but less than one year. Investments in marketable securities are made in accordance with our corporate investment policy. The primary objective of this policy is the preservation of capital. Investments are limited to high quality corporate debt, government securities, municipal debt securities, money market funds and similar instruments. The policy establishes maturity limits, liquidity requirements and concentration limits. At December 27, 2003, we were in compliance with this policy.

Operating activities of the six months ended December 27, 2003 generated $61,000 of net cash. This was a result of our net income, adjusted for certain non-cash charges and expenses such as depreciation and amortization, and decreases in account receivable balances, which increased cash by $359,000, and a net decrease in other current and non-current assets, which generated $353,000 of cash, and increases in accounts payable, which increased cash by $221,000. These increases were offset by $690,000 of cash used to reduce accrued expenses and a $2.3 million reduction of cash due to lower deferred revenue balances. Many of our European and Japanese customers renew their existing maintenance and support contracts in January and April. This timing contributes to a seasonal decrease in deferred revenue in our second fiscal quarter which, in turn, reduces our cash generated from operations.

Net cash provided by investing activities was $915,000 for the six months ended December 27, 2003. Cash of $1.8 million was generated from the proceeds of sales and maturities of our marketable securities. This was partially offset by our purchases of fixed assets and capitalization of software development costs, which together used $902,000 of cash.

Net cash of $210,000 was provided by financing activities during the six months ended December 27, 2003. This cash was generated by exercises of stock options and proceeds received for common stock under the Company’s Employee Stock Purchase Plan.

On January 23, 2004, the Company utilized $7.3 million of cash to fund the cash portion of the purchase price of the acquisition of AMSI. We believe that our current cash, cash equivalents, marketable securities and available lines of credit will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months following the date of this Quarterly Report. On a long-term basis or to complete acquisitions in the short term, we may require additional external financing through credit facilities, sales of additional equity or other financing vehicles. There can be no assurance that such financing can be obtained on favorable terms, if at all.

The Company does not have any special purpose entities or off-balance sheet financing arrangements. The Company’s cash commitments, as disclosed in Note 18 to the Company’s audited consolidated financial statements, included in our Annual Report on Form 10-K for the year ended June 30, 2003, have not changed significantly.

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):

revenue arrangements with multiple deliverables to be divided into separate units of accounting. If the deliverables in the arrangement meet certain criteria, arrangement consideration should be allocated among the separate units of accounting based on their relative fair values. Applicable revenue recognition criteria are to be considered for separate units of accounting. The guidance in EITF 00-21 was effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The Company’s adoption of EITF 00-21 did not have a material impact on its financial position or results of operations.

On December 17, 2003, the Staff of the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition”, which supersedes SAB 101, “Revenue Recognition in Financial Statements.” SAB 104’s primary purpose is to rescind the accounting guidance contained in SAB 101 related to multiple-element revenue arrangements that was superseded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds the SEC’s related “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” issued with SAB 101 that had been codified in SEC Topic 13, “Revenue Recognition.” While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104, which was effective upon issuance. The Company’s adoption of SAB 104 did not have a material effect on its financial position or results of operations.

We believe that our revenue and results of operations have not been significantly impacted by inflation.

You should carefully consider the following risks and uncertainties prior to making an investment in our common stock. These risks and uncertainties may also cause our actual results to differ materially from those contained in or predicted by our forward-looking statements.

The demand for our products is largely driven by the demand for the products in our primary end markets. Many of these end markets, particularly the automotive, telecommunications and electronics industries experienced severe economic declines which significantly and adversely affected our business in fiscal 2002 and 2003. While general economic trends have improved in some geographic markets, continuation of this general economic slowdown will materially and adversely affect us by decreasing our revenue as compared to prior years, or by lowering our revenue growth.

The development and implementation of a robust set of Manufacturing Solutions products has required that we devote significant research and development, marketing and executive level resources to this product family. Further expenditures of time and effort will be required in order to maximize the potential of this set of

products. We recently completed the acquisition of AMSI, a provider of hot runner control systems, with products focused solely on the manufacturing market. In connection with this acquisition, we reorganized our business into two strategically focused business units, one focused on Design Analysis products and one on Manufacturing Solutions Products. This change in organizational structure may lead to disruption in our business operations, as we have begun to split our direct sales into product-specific sales forces, which will be reporting directly to the responsible business unit leader. In addition, the Company’s executive vice president of sales resigned from the Company and the transition of the sales force may cause disruption in our selling cycles and have a material adverse effect on our results of operations. Our results of operations could be adversely affected by significant delays in developing, completing or shipping our new or enhanced Manufacturing Solutions products as well as by delays in acceptance of these products by customers. Because these products interact with other factory or enterprise-wide systems, we may be required to provide additional functionality or services, which may delay the recognition of revenue. Further, our acquisition of AMSI may delay the development and completion of our Manufacturing Solutions products as we seek to integrate newly acquired technology into our product platform. Our Manufacturing Solutions business unit will be managed by the former chief executive officer and sole stockholder of AMSI and our ability to successfully integrate the AMSI business will be dependent on our ability to retain this employee.

We have experienced significant historical fluctuations in our results of operations on a quarterly basis. We expect to continue to experience significant fluctuations in our future quarterly results of operations due to a variety of factors, many of which are outside of our control, including:


	•	seasonal slowdowns, in particular, in our first fiscal quarter, in many of the markets in which we sell our products,

	•	changes in the mix of products and services we provide as sales of our Manufacturing Solutions products and our services will result in lower gross margins and may result in a longer selling cycle, which may be more significant following the acquisition of AMSI, which will result in a higher percentage of sales coming from our Manufacturing Solutions products as compared to our Design Analysis products,

	•	the timing and magnitude of capital expenditures, including costs relating to the expansion of our operations and infrastructure, and planned program spending, such as that required for major marketing initiatives or tradeshows,

	•	the timing and magnitude of our tax expense, resulting from the globally distributed nature of our selling and research and development operations that may lead to increased taxable income in certain jurisdictions that may not be offset by losses in other tax jurisdictions,

	•	introductions of new services or enhancements by us and our competitors and changes in our and our competitors’ pricing policies,

	•	currency fluctuations, and

	•	timing and integration of acquisitions, particularly the acquisition of AMSI which will require time and focus by our management team and may lead to disruptions in our business.

In addition, like many software companies, we usually record a larger percentage of our quarterly revenue in the third month of the fiscal quarter. Also, our Manufacturing Solutions products may involve a longer selling cycle with corresponding larger order sizes which may lead to an inability to close on orders or make shipments in the period immediately preceding the end of the fiscal quarter. Accordingly, our quarterly results are often difficult to predict prior to the final days of the quarter.


	•	rapid technological advances,

	•	evolving industry standards,

	•	changes in end-user requirements,

	•	intense competition,

	•	technically complex products,

	•	frequent new product introductions, and

	•	evolving offerings by product manufacturers.

We believe our future success will depend, in part, on our ability to anticipate or adapt to these factors and to offer on a timely basis products that meet customer demands. For example, the introduction of new products and services embodying new technologies and the emergence of new industry standards can render our existing products obsolete. The development of new or enhanced products is a complex and uncertain process, requiring the anticipation of technological and market trends. We may experience design, manufacturing, marketing and other difficulties that could delay or prevent our development, introduction or marketing of new products and enhancements and result in unexpected expenses.

Our growth and profitability also will depend upon our ability to expand the use and market penetration of our existing product lines as well as new products we introduce. Market acceptance of our products will depend in part on our ability to demonstrate the cost-effectiveness, ease of use and technological advantages of our products over competing products.

In January 2004 we acquired American MSI Corporation, a privately held company specializing in development and sale of hot runner control systems for the plastics processing industry. Further, we may engage in other acquisitions and strategic relationships in the future. We may not be able to identify suitable acquisition candidates, and, if we do identify suitable candidates, we may not be able to make such acquisitions on commercially acceptable terms or at all. If we merge with or acquire another company including AMSI, we will only receive the anticipated benefits if we successfully integrate the acquired business into our existing business in a timely and non-disruptive manner. We will have to devote a significant amount of time and management and financial resources to do so. Even with this investment of management and financial resources, the acquisition of AMSI or another business may not produce the revenues, earnings or business synergies that we anticipated. If we fail to integrate the acquired business effectively or if key employees of that business leave, the anticipated benefits of the acquisition would be jeopardized. The time, capital, management and other resources spent on an acquisition that failed to meet our expectations could cause our business and financial condition to be materially and adversely affected. In addition, acquisitions can involve non-recurring charges and amortization of significant amounts of acquired identifiable intangible assets that could adversely affect our results of operations.

Our products include proprietary intellectual property. We may become subject to claims that we infringe on the proprietary rights of others. In the United States and elsewhere, a significant number of software and business method patents have been issued over the past decade and the holders of these patents have been actively seeking out potential infringers. In addition, our Manufacturing Solutions products require interaction

with an injection molding machine, the use and technology of which are subject to a wide variety of world-wide patents and other intellectual property protection. If any element of our products or services violates third-party proprietary rights, we might not be able to obtain licenses on commercially reasonable terms to continue offering our products or services without substantial re-engineering and any effort to undertake such re-engineering might not be successful. In addition, any claim of infringement could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract our management from our business. Any judgment against us could require us to pay substantial damages and could also include an injunction or other court order that could prevent us from offering our products and services.

Our ability to compete effectively against other companies in our industry will depend, in part, on our ability to protect our proprietary rights in our technology. We may be unable to maintain the proprietary nature of our technology. While we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be completely successful in doing so.


	•	we cannot be certain that our pending United States and foreign patent applications will result in issued patents or that the claims allowed are or will be sufficiently broad to protect our technology,

	•	third parties may design around our patented technologies or seek to challenge or invalidate our patented technologies,

	•	patents of others may have an adverse effect on our ability to do business,

	•	the contractual provisions that we rely on, in part, to protect our trade secrets and proprietary knowledge may be breached, and we may not have adequate remedies for any breach and our trade secrets and proprietary information may be disclosed to the public,

	•	our trade secrets may also become known without breach of such agreements or may be independently developed by competitors,

	•	foreign countries, including some of those in which we do business, may reduce or limit the protection of our intellectual property rights, and

	•	the cost of enforcing the protection of our intellectual property rights may reduce our future profitability.

The majority of our employees, including sales, support and research and development personnel, are located outside of the United States. Similarly, the majority of our revenues are derived from customers outside the United States and certain intellectual property is owned by subsidiary companies located outside the United States. Conducting business outside of the United States is subject to numerous risks, including:


	•	decreased liquidity resulting from longer accounts receivable collection cycles typical of certain foreign countries,

	•	decreased revenue on foreign sales resulting from possible foreign currency exchange and conversion issues,

	•	lower productivity resulting from difficulties managing our sales, support and research and development operations across many countries,

	•	decreased earnings based on changes in tax regulations in foreign jurisdictions or the timing of required tax payments in foreign jurisdictions that may not yet, or ever, be offset by tax benefits arising from losses in other jurisdictions,


	•	lost revenue resulting from difficulties associated with enforcing agreements and collecting receivables through foreign legal systems,

	•	lost revenue resulting from the imposition by foreign governments of trade protection measures, and

	•	higher cost of sales resulting from import or export licensing requirements.

We operate in a highly competitive environment and may not be able to successfully compete. Companies in our industry and entities in similar industries could decide to focus on the development of software and enabling hardware solutions for the design, analysis and manufacturing of injection molded plastic parts. Many of these entities have substantially greater financial, research and development, manufacturing and marketing resources than we do. Increased competition may result in price reductions, reduced profitability and loss of market share.

A significant portion of our computer equipment, source code and personnel, including critical resources dedicated to research and development, are presently located at operating facilities in Australia, the United States and Europe. The occurrence of a natural disaster or other unanticipated catastrophe at any of these facilities could cause interruptions in our operations and services. Extensive or multiple interruptions in our operations at our development facilities could severely disrupt our product development.

Our Manufacturing Solutions products are installed directly on our customers’ injection molding machines and, in certain cases, automatically adjust the operation of these machines. As a result, it is possible that our customers may claim that our product interfered with the proper operation of their machines and may seek reimbursement for consequential and other damages from us. Although we expressly disclaim any liability for consequential or other damages in connection with our sale of these products, this disclaimer may not protect us from claims for damages from our customers and these claims may adversely affect our relationships with our customers or our reputation generally. In addition, our insurance coverage limits may not be adequate to protect us against any product liability claims that arise. This insurance is expensive and may not be available on acceptable terms, or at all.

The stock market has experienced extreme price and volume fluctuations. In addition, the per share price of our common stock has experienced significant volatility since we have been a public company. Many factors may cause the market price for our common stock to decline, including:


	•	revenues and operating results failing to meet the expectations of securities analysts or investors in any quarter,

	•	downward revisions in securities analysts’ estimates or changes in general market conditions,

	•	changes in our senior management personnel,

	•	distribution or sale of shares of our common stock by insiders or affiliated person, including the shares received by the selling stockholder in connection with the acquisition of AMSI, a portion of which will be registered for resale on Form S-3 and could therefore be sold at any time,

	•	technological innovations by competitors or in competing technologies,

	•	a decrease in the demand for our common stock,


	•	investor perception of our industry or our prospects, and

	•	general technology or economic trends.

In the past, companies that have experienced volatility in the market price of their stock have been the subjects of securities class action litigation. We may be involved in securities class action litigation in the future. Such litigation often results in substantial costs which may not be covered by our directors’ and officers’ liability insurance, and a diversion of management’s attention and resources and could harm our business, financial condition and results of operations.

We make significant estimates in determining our worldwide income tax provision. These estimates are subject to many transactions, calculations and proceedings where the ultimate tax outcome is uncertain. These proceedings currently include customary inquiry activities by various taxing authorities. Although we believe that our estimates are reasonable, the final outcome of tax matters and proceedings could be different than the estimates reflected in the historical income tax provision and accruals. Such differences could have a material impact on income tax expense and net income in the period in which such determination is made.

Following the acquisition of AMSI, we will distribute a substantial portion of our Manufacturing Solutions products through a network of independent, regional channel partners. The channel partners sell our products to new and existing customers, expand installations within their existing customer base, offer consulting services and provide the first line of technical support. Consequently, we will be highly dependent on the efforts of the channel partners. Difficulties in ongoing relationships with channel partners, such as delays in collecting accounts receivable, failure to meet performance criteria or to promote our products as aggressively as we expect, and differences in the handling of customer relationships could adversely affect our performance. Additionally, the loss of any major channel partner for any reason, including a channel partner’s decision to sell competing products rather than our products, could have a material adverse effect on us. Moreover, our future success will depend substantially on the ability and willingness of our channel partners to continue to dedicate the resources necessary to promote our products and to support a larger installed base of our products following the acquisition of AMSI by Moldflow. If the channel partners are unable or unwilling to do so, we may be unable to achieve revenue growth with respect to the products sold primarily through this channel.

We develop our products in research centers in Australia, the United Kingdom, France and the United States. We sell our products globally through our direct sales force and indirect distributor channels. As a result, our financial results are affected by factors such as changes in foreign currency exchange rates, political climate and weak economic conditions in foreign markets. In the future, we expect to increase our international operations in our existing markets and in geographic locations where we do not have any operations now.

We collect amounts representing a substantial portion of our revenues and pay amounts representing a substantial portion of our operating expenses in foreign currencies. As a result, changes in currency exchange rates from time to time may affect our operating results. We engage in hedging transactions designed to reduce our exposure to changes in currency exchange rates. We cannot assure you, however, that any efforts we make to hedge our exposure to currency exchange rate changes will be successful.

We invest our excess cash balances in highly liquid, interest bearing instruments. These instruments expose us to interest rate risk and, as a result, changes in interest rates from time to time may affect our operating results. These instruments, along with our accounts receivable, also potentially expose us to credit risk. Our investments are limited to high-grade corporate debt securities, government issued debt, municipal debt securities, money market funds, and similar high quality instruments to mitigate this credit risk. The credit risk associated with accounts receivable is minimal due to the large number of customers and their broad dispersion over geographic regions and industries.

As required by Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, we have evaluated with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. In designing and evaluating our disclosure controls and procedures, we and our management recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that they believe that, as of December 27, 2003, our disclosure controls and procedures were reasonably effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. In compliance with the rules, we intend to continue to review and document our disclosure controls and procedures, including our internal control over financial reporting, on an ongoing basis, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business. There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

From time to time, we may be involved in various claims and legal proceedings arising in the ordinary course of business. We are not currently a party to any such claims or proceedings, which, if decided adversely to us, would either individually or in the aggregate have a material adverse effect on our business, financial condition or results of operations.

On November 18, 2003, the Company held its Annual Meeting of Stockholders. The stockholders voted to elect two Class I Directors for a three-year term and to amend the Company’s 2000 Stock Option and Incentive Plan to modify the number and frequency of the options to purchase shares of common stock automatically granted to non-employee members of the Board of Directors of the Company. The results of the stockholder vote were as follows:

On October 23, 2003, the Company filed a Form 8-K disclosing the financial results for the fiscal quarter ended September 27, 2003.

On December 18, 2003, the Company filed a Form 8-K disclosing the election of Robert J. Lepofsky to its Board of Directors.

On January 26, 2004, the Company filed a Form 8-K disclosing the acquisition of American MSI Corporation, the resignation of Richard Underwood, the Company’s Executive Vice President of Sales, and the financial results for the fiscal quarter ended December 27, 2003.

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.


	By:	/s/ A. ROLAND THOMAS



	A. Roland Thomas
	President and Chief Executive Officer

	MOLDFLOW CORPORATION


	By:	/s/ SUZANNE E. MACCORMACK



	Suzanne E. MacCormack
	Executive Vice President of Finance and
	Administration and Chief Financial Officer
	(Principal Financial Officer)


Delaware		04-3406763
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)


TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEET
CONDENSED CONSOLIDATED STATEMENT OF INCOME
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-2.2 AGREEMENT AND PLAN OF MERGER
EX-10.40 EMPLOYMENT AGREEMENT - TIMOTHY TRIPPLETT
EX-10.48 2000 STOCK OPTION & INCENTIVE PLAN
EX-10.49 LOAN MODIFICATION AGREEMENT
EX-31.1 CERTIFICATION OF THE C.E.O.
EX-31.2 CERTIFICATION OF THE C.F.O.
EX-32.1 SECT. 1350 CERTIFICATION OF THE C.E.O.
EX-32.2 SECT. 1350 CERTIFICATION OF THE C.F.O.


		Page
		Number

PART I. FINANCIAL INFORMATION
Item 1.	Unaudited Financial Statements:
	Condensed Consolidated Balance Sheet as of December 27, 2003 and June 30, 2003		2
	Condensed Consolidated Statement of Income for the three months ended December 27, 2003 and December 28, 2002 and for the six months ended December 27, 2003 and December 28, 2002		3
	Condensed Consolidated Statement of Cash Flows the six months ended December 27, 2003 and December 28, 2002		4
	Notes to Unaudited Condensed Consolidated Financial Statements		5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		32
Item 4.	Controls and Procedures		33
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		34
Item 4.	Submission of Matters to a Vote of Security Holders		34
Item 6.	Exhibits and Reports on Form 8-K		34
Signatures			35


			December 27,			June 30,
			2003			2003


			(In thousands)
			(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	40,956		$	38,320
	Marketable securities			12,004			13,820
	Accounts receivable, net			6,233			6,147
	Inventories			428			313
	Prepaid expenses			2,411			2,189
	Other current assets			2,859			2,509

		Total current assets		64,891			63,298
Fixed assets, net				4,107			3,891
Acquired intangible assets, net				471			685
Goodwill				9,720			9,670
Other assets				1,500			1,933

		Total assets	$	80,689		$	79,477


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Accounts payable		$	1,990		$	1,684
	Accrued expenses			5,794			5,732
	Other current liabilities			1,759			1,707
	Deferred revenue			6,480			8,551

		Total current liabilities		16,023			17,674
Deferred revenue				788			513
Other long-term liabilities				592			641

		Total liabilities		17,403			18,828

Stockholders’ equity:
	Common stock			102			102
	Additional paid-in capital			62,974			62,867
	Treasury stock			(823	)		(926	)
	Accumulated deficit			(3,078	)		(4,090	)
	Accumulated other comprehensive income			4,111			2,696

		Total stockholders’ equity		63,286			60,649

		Total liabilities and stockholders’ equity	$	80,689		$	79,477



		Three Months Ended					Six Months Ended

		December 27,		December 28,			December 27,			December 28,
		2003		2002			2003			2002


		(In thousands, except per share data)
		(Unaudited)
Revenue:
	Product	$	5,113	$	4,216		$	9,467		$	7,912
	Services		5,518		4,710			10,675			9,315

	Total revenue		10,631		8,926			20,142			17,227

Costs and expenses:
	Cost of product revenue		605		674			1,243			1,335
	Cost of services revenue		934		283			1,563			563
	Research and development		1,535		1,319			3,128			2,774
	Selling and marketing		4,698		4,463			8,884			8,628
	General and administrative		2,117		1,802			4,031			3,452
	Amortization of acquired intangible assets		110		159			221			318

	Total operating costs and expenses		9,999		8,700			19,070			17,070

	Income from operations		632		226			1,072			157
Interest income, net			290		284			558			571
Other income (loss), net			9		(84	)		(34	)		(62	)

	Income before income taxes		931		426			1,596			666
Provision for income taxes			336		225			584			450

	Net income	$	595	$	201		$	1,012		$	216

Net income per common share:
	Basic	$	0.06	$	0.02		$	0.10		$	0.02
	Diluted	$	0.06	$	0.02		$	0.10		$	0.02
Shares used in computing net income per common share:
	Basic		10,059		9,973			10,054			10,040
	Diluted		10,658		10,269			10,619			10,320

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	Three Months Ended


	December 27, 2003					December 28, 2002

				Weighted Average					Weighted Average
	Shares			Exercise Price		Shares			Exercise Price

Outstanding at beginning of period		2,785,799		$	9.40		2,566,199		$	9.25
Granted		42,200			11.19		50,000			7.50
Exercised		(9,675	)		4.26		(3,998	)		1.33
Canceled		(23,157	)		14.55		(130,871	)		6.29

Outstanding at end of period		2,795,167		$	9.41		2,481,330		$	9.35

Weighted average fair value of options granted				$	7.63				$	4.37


4.	Derivative Financial Instruments and Hedging Activities



		December 27, 2003							June 30, 2003

		Gross					Net		Gross					Net
		Carrying		Accumulated			Carrying		Carrying		Accumulated			Carrying
		Amount		Amortization			Amount		Amount		Amortization			Amount


		(In thousands)
Acquired intangible assets:
	Customer base	$	429	$	(191	)	$	238	$	421	$	(116	)	$	305
	Developed technology		675		(615	)		60		675		(533	)		142
	Non-compete agreements		1,214		(1,041	)		173		1,205		(967	)		238

Total		$	2,318	$	(1,847	)	$	471	$	2,301	$	(1,616	)	$	685


	Estimated
	Amortization
	Expense

	(In thousands)
Fiscal Year
2004 (remainder)	$	173
2005		160
2006		50
2007		50
2008		38

Total future amortization expense	$	471



	Non-Cash Charges								Charges Requiring Cash Payments

			Write-off of		Write-off of				Employee			Lease
	Write-off of		Intangible		Other				Severance			Termination			Other
	Inventories		Asset		Assets		Total		Costs			Costs			Costs			Total

Restructuring charge in fiscal 2003	$	179	$	217	$	75	$	471	$	79		$	45		$	22		$	146
Revision of estimated liability										1			(34	)		—			(33	)
Cash payments										(49	)		(11	)		(22	)		(82	)

Balance at June 30, 2003										31			—			—			31
Cash payments										(31	)		—			—			(31	)

Balance at December 27, 2003									$	—		$	—		$	—		$	—


	Accrued Lease
	Termination
	Costs

	(In thousands)
Balance at June 30, 2003	$	596
Cash payments		(50	)
Foreign exchange impact and other adjustments		42

Balance at December 27, 2003	$	588



	Six Months Ended

	December 27		December 28
	2003		2002

Beginning balance	$	42	$	13
Additional accruals		5		20
Settlements made		—		—

Ending balance	$	47	$	33


	Accrued Lease
	Termination Costs

	(In thousands)
Balance at June 30, 2003	$	596
Cash payments		(50	)
Foreign exchange impact and other adjustments		42

Balance at December 27, 2003	$	588


	*A general economic slowdown, particularly in our end markets, may continue to impact our results.*


	Our business model is changing as we further develop and exploit our Manufacturing Solutions products, and our recent reorganization of our sales, marketing and support staff along business unit lines may result in disruption in our sales.


Item 1.	*Unaudited Financial Statements*


3.	Net Income Per Common Share


6.	Software Development Costs


	*April 2002 Plan*


	Our quarterly operating results are subject to significant fluctuations and, as a result, period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance.


	*If we experience delays in introducing new products or if our existing or new products do not achieve market acceptance, we may lose revenue.*


	Our recent acquisition of AMSI and any future mergers, acquisitions and strategic relationships may result in lost revenue caused by business disruptions and missed opportunities caused by the distraction of our management.


	*If we become subject to intellectual property infringement claims, we could incur significant expenses and we could be prevented from offering specific products or services.*


	*We may lose sales to competitors if we are unable to protect important intellectual property.*


	*Our financial condition or results of operations may be adversely affected by international business risks.*


	*We have more limited financial and other resources than many of our competitors and potential competitors and may be unable to compete successfully against them.*


	*Disruption of operations at our development facilities could interfere with our product development and production cycles.*


	*Our Manufacturing Solutions products may lead to product liability claims against us.*


	*Our stock price is highly volatile and our stock price could experience substantial declines and our management’s attention may be diverted from more productive tasks.*


	*We make estimates in determining our worldwide income tax provision.*


	*We are dependent on distributors to distribute a substantial portion of our Manufacturing Solutions products.*


NAME OF DIRECTOR	FOR		WITHHELD

Mr. Schechter		7,860,080		1,494,055
Mr. Thomas		7,873,632		1,480,503


	*PROPOSAL 2: AMENDMENT OF 2000 STOCK OPTION AND INCENTIVE PLAN*


2.2		Agreement and Plan of Merger by and among Moldflow Corp., MF Merger Sub I, Inc., American MSI Corp., the Timothy and Deborah Triplett Family Trust, Timothy L. Triplett and Deborah A. Triplett dated January 23, 2004.
10.40		Employment Agreement, dated January 23, 2004 between Moldflow Corporation and Timothy Triplett.
10.48		Third Amendment to the Moldflow Corporation 2000 Stock Option and Incentive Plan.
10.49		Loan Modification Agreement, dated January 15, 2004, between Silicon Valley Bank and Moldflow Corporation.
31.1		Certification of CEO.
31.2		Certification of CFO.
32.1		Section 1350 Certification of CEO.
32.2		Section 1350 Certification of CFO.