Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2006 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission file number: 000-30027
Moldflow Corporation
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) | 04-3406763 (I.R.S. Employer Identification No.) |
492 OLD CONNECTICUT PATH, SUITE 401 FRAMINGHAM, MA 01701
(Address of principal executive offices) (Zip Code)
508-358-5848
(Registrant’s telephone number, including area code)
[None]
(Former name, former address and former fiscal year, if changed since last 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Outstanding at May 8, 2006 | |
Common Stock, $0.01 par value per share | 11,390,414 shares |
MOLDFLOW CORPORATION
FORM 10-Q
For the Quarter Ended March 31, 2006
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. | Unaudited Financial Statements |
MOLDFLOW CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
March 31, | June 30, | |||||||||
2006 | 2005 | |||||||||
(In thousands) | ||||||||||
(Unaudited) | ||||||||||
ASSETS | ||||||||||
Current assets: | ||||||||||
Cash and cash equivalents | $ | 54,577 | $ | 48,910 | ||||||
Marketable securities | 6,762 | 11,323 | ||||||||
Accounts receivable, net | 14,218 | 13,449 | ||||||||
Inventories | 1,747 | 1,381 | ||||||||
Prepaid expenses | 3,889 | 3,013 | ||||||||
Other current assets | 2,946 | 2,589 | ||||||||
Total current assets | 84,139 | 80,665 | ||||||||
Fixed assets, net | 3,217 | 3,336 | ||||||||
Acquired intangible assets, net | 1,300 | 1,555 | ||||||||
Goodwill | 18,625 | 18,622 | ||||||||
Other assets | 2,728 | 2,851 | ||||||||
Total assets | $ | 110,009 | $ | 107,029 | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
Current liabilities: | ||||||||||
Accounts payable | $ | 1,687 | $ | 3,764 | ||||||
Accrued expenses | 10,039 | 10,165 | ||||||||
Deferred revenue | 11,755 | 10,748 | ||||||||
Total current liabilities | 23,481 | 24,677 | ||||||||
Deferred revenue | 1,350 | 1,124 | ||||||||
Other long-term liabilities | 945 | 1,079 | ||||||||
Total liabilities | 25,776 | 26,880 | ||||||||
Stockholders’ equity: | ||||||||||
Common stock | 112 | 109 | ||||||||
Additional paid-in capital | 73,225 | 69,626 | ||||||||
Retained earnings | 6,736 | 5,295 | ||||||||
Accumulated other comprehensive income | 4,160 | 5,119 | ||||||||
Total stockholders’ equity | 84,233 | 80,149 | ||||||||
Total liabilities and stockholders’ equity | $ | 110,009 | $ | 107,029 | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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MOLDFLOW CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
Three Months Ended | Nine Months Ended | |||||||||||||||||
March 31, | March 26, | March 31, | March 26, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||||
(In thousands, except per share data) | ||||||||||||||||||
(Unaudited) | ||||||||||||||||||
Revenue: | ||||||||||||||||||
Product | $ | 9,503 | $ | 9,487 | $ | 28,319 | $ | 26,976 | ||||||||||
Services | 6,754 | 6,410 | 20,112 | 19,160 | ||||||||||||||
Total revenue | 16,257 | 15,897 | 48,431 | 46,136 | ||||||||||||||
Costs and operating expenses: | ||||||||||||||||||
Cost of product revenue | 2,528 | 2,088 | 7,540 | 5,804 | ||||||||||||||
Cost of services revenue | 1,784 | 1,642 | 5,102 | 4,588 | ||||||||||||||
Research and development | 2,459 | 2,160 | 7,135 | 5,845 | ||||||||||||||
Selling and marketing | 5,786 | 5,650 | 17,303 | 15,956 | ||||||||||||||
General and administrative | 2,684 | 2,869 | 9,762 | 8,445 | ||||||||||||||
Restructuring charges | — | — | 1,387 | — | ||||||||||||||
Amortization of acquired intangible assets | 49 | 73 | 147 | 224 | ||||||||||||||
Total costs and operating expenses | 15,290 | 14,482 | 48,376 | 40,862 | ||||||||||||||
Income from operations | 967 | 1,415 | 55 | 5,274 | ||||||||||||||
Interest income, net | 663 | 405 | 1,856 | 1,135 | ||||||||||||||
Other income, net | 62 | 86 | 96 | 44 | ||||||||||||||
Income before income taxes | 1,692 | 1,906 | 2,007 | 6,453 | ||||||||||||||
Provision for (benefit from) income taxes | 172 | (139 | ) | 566 | 1,054 | |||||||||||||
Net income | $ | 1,520 | $ | 2,045 | $ | 1,441 | $ | 5,399 | ||||||||||
Net income per common share: | ||||||||||||||||||
Basic | $ | 0.14 | $ | 0.19 | $ | 0.13 | $ | 0.50 | ||||||||||
Diluted | $ | 0.13 | $ | 0.17 | $ | 0.12 | $ | 0.47 | ||||||||||
Shares used in computing net income per common share: | ||||||||||||||||||
Basic | 11,139 | 10,837 | 11,076 | 10,713 | ||||||||||||||
Diluted | 11,817 | 11,890 | 11,816 | 11,599 |
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
Nine Months Ended | ||||||||||
March 31, | March 26, | |||||||||
2006 | 2005 | |||||||||
(In thousands) | ||||||||||
(Unaudited) | ||||||||||
Cash flows from operating activities: | ||||||||||
Net income | $ | 1,441 | $ | 5,399 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
Depreciation of fixed assets | 982 | 1,043 | ||||||||
Amortization of acquired intangible assets | 253 | 331 | ||||||||
Amortization of other intangible assets | 552 | 548 | ||||||||
Provisions for doubtful accounts | 36 | 74 | ||||||||
Share-based compensation | 1,703 | — | ||||||||
Change in deferred income taxes due to share-based compensation | (96 | ) | — | |||||||
Foreign exchange gains | (115 | ) | (66 | ) | ||||||
Changes in operating assets and liabilities: | ||||||||||
Accounts receivable | (937 | ) | (3,129 | ) | ||||||
Inventories, prepaid expenses, and other current assets | (1,665 | ) | (60 | ) | ||||||
Other assets | 34 | (24 | ) | |||||||
Accounts payable | (2,068 | ) | (552 | ) | ||||||
Accrued expenses and other liabilities | (142 | ) | 864 | |||||||
Deferred revenue | 1,480 | 658 | ||||||||
Net cash provided by operating activities | 1,458 | 5,086 | ||||||||
Cash flows from investing activities: | ||||||||||
Purchases of fixed assets | (1,015 | ) | (997 | ) | ||||||
Capitalization of software development costs | (410 | ) | (201 | ) | ||||||
Purchases of marketable securities | (11,150 | ) | (3,832 | ) | ||||||
Sales and maturities of marketable securities | 15,711 | 8,528 | ||||||||
Net cash provided by investing activities | 3,136 | 3,498 | ||||||||
Cash flows from financing activities: | ||||||||||
Proceeds from issuance of common stock | 1,964 | 1,879 | ||||||||
Tax benefit related to exercised stock options | 30 | — | ||||||||
Net cash provided by financing activities | 1,994 | 1,879 | ||||||||
Effect of exchange rate changes on cash and cash equivalents | (921 | ) | 1,338 | |||||||
Net increase in cash and cash equivalents | 5,667 | 11,801 | ||||||||
Cash and cash equivalents, beginning of period | 48,910 | 35,987 | ||||||||
Cash and cash equivalents, end of period | $ | 54,577 | $ | 47,788 | ||||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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MOLDFLOW CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. | Basis of Presentation and Nature of Business |
Moldflow Corporation (“Moldflow” or the “Company”) designs, develops, manufactures and markets computer software and hardware solutions 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 and its wholly-owned subsidiaries. The unaudited 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, 2005 included in the Company’s Annual Report on Form 10-K. The June 30, 2005 condensed consolidated balance sheet was derived from the Company’s audited consolidated financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. 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 statement of the results for the interim periods. The results of operations for the three-month and nine-month periods ended March 31, 2006 are not necessarily indicative of the results to be expected for any future period or the full fiscal year.
The Company’s fiscal year end is June 30. Starting in fiscal 2006, the Company follows a schedule in which each interim quarterly period ends on the last day of the last calendar month of the reporting period. Prior to fiscal 2006, each quarterly period ended on the Saturday of the thirteenth week of the reporting period. This change will not have a material impact on the comparability of reporting periods.
2. | Stock Plans and Share-Based Compensation |
Effective July 1, 2005, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” which establishes accounting for equity instruments exchanged for employee and director services. Under the provisions of SFAS No. 123(R), share-based compensation cost is measured at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the requisite service period, which generally is the vesting period of the equity grant. Prior to July 1, 2005, the Company accounted for share-based compensation to employees and directors in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation.” The Company elected to adopt the modified prospective transition method as provided by SFAS No. 123(R) and, accordingly, financial statement amounts for the periods prior to the first quarter of fiscal 2006 presented in this Form 10-Q have not been restated to reflect the fair value method of expensing share-based compensation.
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MOLDFLOW CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents share-based compensation expenses included in the Company’s unaudited condensed consolidated statement of income:
Three Months | Nine Months | ||||||||
Ended | Ended | ||||||||
March 31, | March 31, | ||||||||
2006 | 2006 | ||||||||
(In thousands) | (In thousands) | ||||||||
Cost of product revenue | $ | 15 | $ | 49 | |||||
Cost of services revenue | 24 | 81 | |||||||
Research and development | 89 | 261 | |||||||
Selling and marketing | 130 | 405 | |||||||
General and administrative | 253 | 907 | |||||||
Share-based compensation expense before tax | 511 | 1,703 | |||||||
Income tax benefit | (156 | ) | (230 | ) | |||||
Net compensation expense | $ | 355 | $ | 1,473 | |||||
Prior to fiscal 2006, no significant compensation cost related to share-based awards was recognized in the Company’s condensed consolidated statement of income.
The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted in the three and nine months ended March 31, 2006. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.
The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
March 31, | March 31, | |||||||
2006 | 2006 | |||||||
Dividend yield | 0 | % | 0% | |||||
Expected volatility factor(1) | 40.92 | % | 40.92%-49.16% | |||||
Risk-free interest rate(2) | 4.64 | % | 3.92%-4.64% | |||||
Expected term (in years)(3) | 3.5 | 3.5-5.8 |
(1) | Measured using a weighted average of historical daily price changes of the Company’s stock over the most recent period that matches the expected term of the option. |
(2) | The risk-free interest rate for periods equal to the expected term of the share option is based on the U.S. Treasury yield in effect at the time of grant. |
(3) | The expected term is the number of years that the Company estimates, based primarily on historical experience, that the options will be outstanding prior to exercise. The Company has elected to use the simplified method for estimating the expected term for its stock options, which qualify as “plain-vanilla” options. |
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MOLDFLOW CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
No compensation cost was recognized for share-based awards for the three and nine months ended March 26, 2005. 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.
Three Months | Nine Months | ||||||||
Ended | Ended | ||||||||
March 26, | March 26, | ||||||||
2005 | 2005 | ||||||||
(In thousands, | (In thousands, | ||||||||
except per | except per | ||||||||
share data) | share data) | ||||||||
Net income as reported | $ | 2,045 | $ | 5,399 | |||||
Less: | |||||||||
Total share-based compensation expense determined under fair value based method for all awards, net of related tax effects | (879 | ) | (2,653 | ) | |||||
Pro forma net income | $ | 1,166 | $ | 2,746 | |||||
Net income per share: | |||||||||
Basic — as reported | $ | 0.19 | $ | 0.50 | |||||
Basic — pro forma | $ | 0.11 | $ | 0.26 | |||||
Diluted — as reported | $ | 0.17 | $ | 0.47 | |||||
Diluted — pro forma | $ | 0.10 | $ | 0.23 |
The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:
Three Months | Nine Months | |||||||
Ended | Ended | |||||||
March 26, | March 26, | |||||||
2005 | 2005 | |||||||
Dividend yield | 0 | % | 0 | % | ||||
Volatility | 82.0 | % | 84.0 | % | ||||
Risk-free interest rate | 3.6 | % | 3.5 | % | ||||
Expected term (in years) | 4.3 | 4.4 |
Stock Plans
In August 1997, the Company adopted the 1997 Equity Incentive Plan (the “1997 Plan”), which provides for the grant of incentive stock options, non-qualified stock options, stock awards and stock purchase rights for the purchase of up to 931,303 shares of the Company’s common stock by officers, employees, consultants and directors of the Company. In April 1999, the number of shares available under the 1997 Plan was increased to 1,537,158 shares. The Board of Directors is responsible for administration of the 1997 Plan. The Company will not issue any more shares under the 1997 Plan.
On January 20, 2000, the Board of Directors approved the Moldflow Corporation 2000 Stock Option and Incentive Plan (the “2000 Plan”), which, as amended, provides for the grant of incentive stock options, stock awards and stock purchase rights for the purchase of up to 3,500,000 shares of common stock by officers, employees, consultants and directors of the Company. The Board determines the term of each option, the option exercise price, the number of shares for which each option is granted and the rate at which each option is exercisable. Incentive stock options may be granted to any officer or employee at an exercise price per share of not less than the fair value per common share on the date of the grant (not less than 110% of fair value in the case of holders of more than 10% of the Company’s voting stock) and with a term not to exceed ten years
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MOLDFLOW CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
from the date of the grant (five years for incentive stock options granted to holders of more than 10% of the Company’s voting stock). Non-qualified stock options may be granted to any officer, employee, consultant or director at an exercise price per share of not less than the par value per share. As of March 31, 2006, there were 976,967 shares available for future grant.
A summary of the Company’s stock option activity follows:
Nine Months Ended | ||||||||||||||||
March 31, 2006 | March 26, 2005 | |||||||||||||||
Weighted Average | Weighted Average | |||||||||||||||
Shares | Exercise Price | Shares | Exercise Price | |||||||||||||
Outstanding at beginning of period | 2,487,267 | $ | 10.22 | 2,634,157 | $ | 9.77 | ||||||||||
Granted | 183,029 | 15.07 | 337,800 | 12.20 | ||||||||||||
Exercised | (318,026 | ) | 6.92 | (282,205 | ) | 7.39 | ||||||||||
Canceled | (77,630 | ) | 14.84 | (88,406 | ) | 12.08 | ||||||||||
Outstanding at end of period | 2,274,640 | $ | 10.92 | 2,601,346 | $ | 10.26 | ||||||||||
Options exercisable at end of period | 1,778,980 | 1,754,262 | ||||||||||||||
Weighted average fair value of options granted in the period | $ | 6.00 | $ | 7.87 |
The following table summarizes information about outstanding stock options as of March 31, 2006:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted | ||||||||||||||||||||
Average | Weighted | |||||||||||||||||||
Remaining | Average | Weighted | ||||||||||||||||||
Contractual | Exercise | Average | ||||||||||||||||||
Range of Exercise Prices | Shares | Life | Price | Shares | Exercise Price | |||||||||||||||
$0.36-$5.00 | 604,749 | 1.4 years | $ | 4.61 | 604,749 | $ | 4.61 | |||||||||||||
$5.01-$10.00 | 378,244 | 2.7 years | 9.13 | 285,804 | 8.94 | |||||||||||||||
$10.01-$15.00 | 775,418 | 2.7 years | 12.24 | 544,726 | 12.32 | |||||||||||||||
$15.01-$20.00 | 434,679 | 3.2 years | 16.67 | 262,151 | 17.45 | |||||||||||||||
$20.01-$25.00 | 65,450 | 2.7 years | 21.75 | 65,450 | 21.75 | |||||||||||||||
$25.01-$30.00 | 16,100 | 2.8 years | 26.24 | 16,100 | 26.24 | |||||||||||||||
2,274,640 | 2.5 years | $ | 10.92 | 1,778,980 | $ | 10.39 | ||||||||||||||
The aggregate intrinsic value of outstanding options as of March 31, 2006 was $10.9 million, of which $9.5 million related to exercisable options. The intrinsic value of options exercised in the nine months ended March 31, 2006 was $2.5 million, and the intrinsic value of options that vested during the period was $666,000.
The total compensation cost not yet recognized as of March 31, 2006 related to non-vested awards was $1.6 million, which will be recognized over a weighted-average period of 1.3 years. During the three-month period ended March 31, 2006, there were 28,283 shares forfeited with a weighted average grant date fair value of $10.28. During the nine-month period ended March 31, 2006, there were 77,630 shares forfeited, with a weighted average grant date fair value of $11.03. The weighted average remaining contractual life for options exercisable at March 31, 2006 was 2.0 years.
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MOLDFLOW CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes restricted stock award activity under the 2000 Plan during the first nine months of fiscal year 2006:
Weighted | ||||||||
Average | ||||||||
Number | Grant Date | |||||||
of Shares | Fair Value | |||||||
Nonvested at June 30, 2005 | — | — | ||||||
Granted | 94,733 | $ | 15.39 | |||||
Vested | — | — | ||||||
Forfeited | — | — | ||||||
Nonvested at March 31, 2006 | 94,733 | $ | 15.39 | |||||
The shares of restricted stock have been issued at no cost to the recipients. The restricted stock vests annually over a three-year period. The fair value of the restricted stock is expensed ratably over the vesting period. The Company recorded share-based compensation expense related to restricted stock of $237,000 for the nine months ended March 31, 2006. As of March 31, 2006, the total compensation cost not yet recognized related to non-vested restricted stock awards is $1.1 million, which is expected to be recognized over a weighted-average period of 2.5 years.
3. | Net Income Per Common Share |
The following table presents the calculation for both basic and diluted net income per common share:
Three Months Ended | Nine Months Ended | ||||||||||||||||
March 31, | March 26, | March 31, | March 26, | ||||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||||||
(In thousands, except per share data) | |||||||||||||||||
Net income | $ | 1,520 | $ | 2,045 | $ | 1,441 | $ | 5,399 | |||||||||
Weighted average shares used in computing net income per common share — basic | 11,139 | 10,837 | 11,076 | 10,713 | |||||||||||||
Effect of dilutive securities: | |||||||||||||||||
Stock options and unvested restricted stock | 678 | 1,053 | 740 | 886 | |||||||||||||
Weighted average shares used in computing net income per common share — diluted | 11,817 | 11,890 | 11,816 | 11,599 | |||||||||||||
Net income per common share — basic | $ | 0.14 | $ | 0.19 | $ | 0.13 | $ | 0.50 | |||||||||
Net income per common share — diluted | $ | 0.13 | $ | 0.17 | $ | 0.12 | $ | 0.47 |
Weighted average common stock equivalents related to stock options of 586,000 and 479,000 shares were outstanding for the three and nine months ended March 31, 2006, respectively, but were not included in the calculation of diluted net income per share as the sum of the option exercise proceeds, including unrecognized compensation and unrecognized future tax benefits, divided by the aggregate number of shares under outstanding options exceeded the average stock price and, therefore, would be antidilutive.
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.
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MOLDFLOW CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At March 31, 2006, currency options and collars designated as hedging instruments with notional amounts of $1.1 million, $1.6 million and $1 million to exchange Euros, Japanese yen and Australian dollars for U.S. dollars, respectively, were outstanding. The fair values of these instruments, as derived from dealer quotations, were recorded as components of other current assets or other current liabilities depending on their valuation. At March 31, 2006, instruments with fair values of $148,000 were recorded as components of other current assets. Net unrealized gains on these instruments of $59,000 were included in accumulated other comprehensive income. The Company expects these instruments to affect earnings over the next three months. During the three and nine months ended March 31, 2006, net gains of $39,000 and $70,000, respectively, were recorded as components of other income, net, as a result of options that were settled.
At March 26, 2005, currency options and collars designated as hedging instruments with notional amounts of $1.2 million, $1.5 million and $1.2 million to exchange Euros, Japanese yen and Australian dollars for U.S. dollars, respectively, were outstanding. The fair values of these instruments, as derived from dealer quotations, were recorded as components of other current assets or other current liabilities depending on their valuation. At March 26, 2005, instruments with fair values of $160,000 were recorded as components of other current assets. Net unrealized gains on these instruments of $35,000 were included in accumulated other comprehensive income. During the three-month and nine-month periods ended March 26, 2005, net gains of $40,000 and $67,000, respectively, were recorded as components of other income (expense). These amounts were comprised of $40,000 and $88,000, respectively, of premiums paid for new instruments, net of $79,000 and $155,000 of gains, respectively, on the effective portion of options that were settled. As of March 26, 2005, there were no financial instruments or derivatives outstanding that did not qualify for hedge accounting.
5. | Acquired Intangible Assets |
Intangible assets acquired in the Company’s business combinations include goodwill, customer base, developed technology, customer order backlog 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 this amortization is included as a component of the Company’s cost of product revenue on the unaudited condensed consolidated statement of income. In addition, a portion of the acquired intangible assets is recorded in the accounts of a French subsidiary of the Company and, as such, is subject to translation at the currency exchange rates in effect at the balance sheet date.
The components of acquired intangible assets are as follows:
March 31, 2006 | June 30, 2005 | ||||||||||||||||||||||||
Gross | Net | Gross | Net | ||||||||||||||||||||||
Carrying | Accumulated | Carrying | Carrying | Accumulated | Carrying | ||||||||||||||||||||
Amount | Amortization | Amount | Amount | Amortization | Amount | ||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||
Acquired intangible assets: | |||||||||||||||||||||||||
Customer base | $ | 986 | $ | (496 | ) | $ | 490 | $ | 987 | $ | (380 | ) | $ | 607 | |||||||||||
Developed technology | 1,675 | (978 | ) | 697 | 1,675 | (870 | ) | 805 | |||||||||||||||||
Customer order backlog | 40 | (40 | ) | — | 40 | (40 | ) | — | |||||||||||||||||
Non-compete agreements | 1,410 | (1,297 | ) | 113 | 1,411 | (1,268 | ) | 143 | |||||||||||||||||
Total | $ | 4,111 | $ | (2,811 | ) | $ | 1,300 | $ | 4,113 | $ | (2,558 | ) | $ | 1,555 | |||||||||||
Acquired intangible asset amortization for three months ended March 31, 2006 and March 26, 2005 was $85,000 and $108,000, respectively. Acquired intangible asset amortization for the nine months ended
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
March 31, 2006 and March 26, 2005 was $253,000 and $331,000, respectively. The following table summarizes the expected remaining amortization of acquired intangible assets as of March 26, 2005:
Amortization | ||||
Fiscal Year | Expense | |||
(In thousands) | ||||
2006 (remainder) | $ | 84 | ||
2007 | 314 | |||
2008 | 298 | |||
2009 | 246 | |||
2010 | 228 | |||
Thereafter | 130 | |||
Total future amortization expense | $ | 1,300 | ||
Changes in the carrying value of goodwill since June 30, 2005 were due to foreign currency translation adjustments. At both March 31, 2006 and June 30, 2005, total goodwill amounted to $18.6 million of which $5.9 million and $12.7 million were allocated to the Design Analysis Solutions and Manufacturing Solutions business units, respectively.
6. | Inventories |
Inventories consisted of the following:
March 31, | June 30, | |||||||
2006 | 2005 | |||||||
(In thousands) | ||||||||
Raw materials | $ | 1,692 | $ | 991 | ||||
Finished goods | 55 | 390 | ||||||
$ | 1,747 | $ | 1,381 | |||||
7. | 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 the product is available for general release to customers. Software development costs eligible for capitalization were not significant in either the three months ended March 31, 2006 or March 26, 2005. In the nine months ended March 31, 2006 and March 26, 2005, costs of $410,000 and $201,000 were capitalized, respectively. All such costs have been included in other non-current assets in the Company’s condensed consolidated balance sheet and are being amortized to cost of product revenue over their estimated useful lives, which range from three to five years.
A summary of capitalized software development costs follows:
March 31, | June 30, | |||||||
2006 | 2005 | |||||||
(In thousands) | ||||||||
Gross carrying amount | $ | 2,738 | $ | 2,328 | ||||
Less — accumulated amortization | (1,548 | ) | (1,077 | ) | ||||
Net carrying amount | $ | 1,190 | $ | 1,251 | ||||
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MOLDFLOW CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 (loss) also includes unrealized gains and losses on the Company’s hedging instruments and unrealized gains and losses on the Company’s marketable securities.
The following table presents the calculation of comprehensive income:
Three Months Ended | Nine Months Ended | ||||||||||||||||
March 31, | March 26, | March 31, | March 26, | ||||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||||||
(In thousands) | |||||||||||||||||
Net income | $ | 1,520 | $ | 2,045 | $ | 1,441 | $ | 5,399 | |||||||||
Other comprehensive income (loss): | |||||||||||||||||
Increase (decrease) in fair value of marketable securities, net of related tax effects | 7 | (4 | ) | 27 | 1 | ||||||||||||
Increase (decrease) in value of financial instruments designated as hedges, net of related tax effects | (10 | ) | (45 | ) | 58 | 29 | |||||||||||
Foreign currency translation adjustment | (506 | ) | (219 | ) | (1,043 | ) | 1,652 | ||||||||||
Other comprehensive income (loss) | (509 | ) | (268 | ) | (958 | ) | 1,682 | ||||||||||
Comprehensive income | $ | 1,011 | $ | 1,777 | $ | 483 | $ | 7,081 | |||||||||
9. | Restructuring Plans |
2005 Plan
In October 2005, the Company initiated a corporate restructuring plan (the “2005 plan”) to reduce operating costs. The 2005 plan included the involuntary termination of seven employees within various departments of the Company in the United States, France and Italy and the closure of the Company’s leased facility in Oregon. As a result of the 2005 plan, the Company recorded charges of $1.4 million in the three months ended December 31, 2005, which included legal and travel costs associated with the activities. All such items were recorded as restructuring charges in the Company’s condensed consolidated statement of income. As of March 31, 2006, all significant activities under the 2005 plan were complete. The following table presents activity against the restructuring liability during the three months ended March 31, 2006.
Employee | Lease | |||||||||||||||
Severance | Termination | Other | ||||||||||||||
Costs | Costs | Costs | Total | |||||||||||||
(In thousands) | ||||||||||||||||
Restructuring charge | $ | 1,313 | $ | 14 | $ | 60 | $ | 1,387 | ||||||||
Cash payments | (272 | ) | (14 | ) | (26 | ) | (312 | ) | ||||||||
Foreign exchange impact | 3 | — | — | 3 | ||||||||||||
Balance at December 31, 2005 | 1,044 | — | 34 | 1,078 | ||||||||||||
Cash payments | (1,048 | ) | — | (35 | ) | (1,083 | ) | |||||||||
Foreign exchange impact | 4 | — | 1 | 5 | ||||||||||||
Balance at March 31, 2006 | $ | — | $ | — | $ | — | $ | — | ||||||||
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MOLDFLOW CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
April 2002 Plan
In April 2002, the Company initiated 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, except for cash payments of the remaining liabilities. As a result of the April 2002 plan, the Company recorded charges and related accruals in fiscal 2002 of $1.3 million. The remaining accrual balances as of March 31, 2006 relate to long-term contractual obligations from facility commitments that will be paid over three years. The following table presents activity against the restructuring liability during the nine months ended March 31, 2006 and the remaining liability at the period end included in other long-term liabilities in the Company’s condensed consolidated balance sheet:
Lease | ||||
Termination | ||||
Costs | ||||
(In | ||||
thousands) | ||||
Balance at June 30, 2005 | $ | 447 | ||
Cash payments | (76 | ) | ||
Foreign exchange impact | (23 | ) | ||
Balance at March 31, 2006 | $ | 348 | ||
10. | Segment and Geographic Information |
Segment Information
The Company operates in one industry — computer software and hardware products for the plastics part and mold design and manufacturing industry. The Company is organized into two separate business units: the Design Analysis Solutions unit and the Manufacturing Solutions unit. These business units are considered reportable segments as defined by SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information.” Under this organizational structure, there are significant functions, and therefore costs, that are considered corporate expenses and are not allocated to the reportable segments for the purposes of assessing performance and making operating decisions. These unallocated corporate expenses include certain marketing, development and general and administrative costs and a portion of the restructuring charges related to the 2005 plan. Costs and expenses of each reporting unit include direct costs associated with selling, supporting, developing and marketing the products and services sold by each reporting unit, as well as amortization of acquired intangible assets and a portion of the restructuring charges related to the 2005 plan.
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MOLDFLOW CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes information about the Company’s reportable segments for the indicated periods. Asset information by reportable segment is not reported as the Company does not accumulate such information internally. The Company had no customers from which it derived more than 10% of the total revenue of either reporting unit for the fiscal periods presented.
Three Months Ended | Nine Months Ended | ||||||||||||||||
March 31, | March 26, | March 31, | March 26, | ||||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||||||
Revenue: | |||||||||||||||||
Product revenue: | |||||||||||||||||
Design Analysis Solutions | $ | 5,649 | $ | 5,913 | $ | 17,733 | $ | 17,290 | |||||||||
Manufacturing Solutions | 3,854 | 3,574 | 10,586 | 9,686 | |||||||||||||
Total product revenue | 9,503 | 9,487 | 28,319 | 26,976 | |||||||||||||
Services revenue: | |||||||||||||||||
Design Analysis Solutions | 5,993 | 5,750 | 17,937 | 17,182 | |||||||||||||
Manufacturing Solutions | 761 | 660 | 2,175 | 1,978 | |||||||||||||
Total services revenue | 6,754 | 6,410 | 20,112 | 19,160 | |||||||||||||
Total revenue: | |||||||||||||||||
Design Analysis Solutions | 11,642 | 11,663 | 35,670 | 34,472 | |||||||||||||
Manufacturing Solutions | 4,615 | 4,234 | 12,761 | 11,664 | |||||||||||||
Total revenue | $ | 16,257 | $ | 15,897 | $ | 48,431 | $ | 46,136 | |||||||||
Costs and operating expenses: | |||||||||||||||||
Design Analysis Solutions | $ | 5,909 | $ | 5,589 | $ | 16,851 | $ | 15,064 | |||||||||
Manufacturing Solutions | 4,938 | 4,547 | 14,709 | 12,462 | |||||||||||||
Unallocated | 4,443 | 4,346 | 16,816 | 13,336 | |||||||||||||
Total costs and operating expenses | $ | 15,290 | $ | 14,482 | $ | 48,376 | $ | 40,862 | |||||||||
Segment income (loss) from operations: | |||||||||||||||||
Design Analysis Solutions | $ | 5,733 | $ | 6,074 | $ | 18,819 | $ | 19,408 | |||||||||
Manufacturing Solutions | (323 | ) | (313 | ) | (1,948 | ) | (798 | ) | |||||||||
Unallocated | (4,443 | ) | (4,346 | ) | (16,816 | ) | (13,336 | ) | |||||||||
Total income from operations | $ | 967 | $ | 1,415 | $ | 55 | $ | 5,274 | |||||||||
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MOLDFLOW CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Geographic Information
The Company licenses and sells its products to customers throughout the world. Sales and marketing operations outside the United States are conducted principally through the Company’s foreign sales subsidiaries in Europe and Asia. The Company’s research and development centers are located in Australia, the United States, France and the United Kingdom. Geographic information regarding the Company’s operations is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||
March 31, | March 26, | March 31, | March 26, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||||
(In thousands) | ||||||||||||||||||
Revenue: | ||||||||||||||||||
Asia/ Australia: | ||||||||||||||||||
Design Analysis Solutions products | $ | 3,218 | $ | 3,119 | $ | 9,256 | $ | 8,610 | ||||||||||
Manufacturing Solutions products | 173 | 4 | 329 | 43 | ||||||||||||||
Design Analysis Solutions services | 2,130 | 1,962 | 6,455 | 5,900 | ||||||||||||||
Manufacturing Solutions services | 5 | 4 | 20 | 9 | ||||||||||||||
Total Asia/ Australia | 5,526 | 5,089 | 16,060 | 14,562 | ||||||||||||||
Americas: | ||||||||||||||||||
Design Analysis Solutions products | 784 | 963 | 2,272 | 2,640 | ||||||||||||||
Manufacturing Solutions products | 3,118 | 3,082 | 8,407 | 8,121 | ||||||||||||||
Design Analysis Solutions services | 1,497 | 1,371 | 4,343 | 4,089 | ||||||||||||||
Manufacturing Solutions services | 549 | 433 | 1,560 | 1,235 | ||||||||||||||
Total Americas | 5,948 | 5,849 | 16,582 | 16,085 | ||||||||||||||
Europe: | ||||||||||||||||||
Design Analysis Solutions products | 1,647 | 1,831 | 6,205 | 6,040 | ||||||||||||||
Manufacturing Solutions products | 563 | 488 | 1,850 | 1,522 | ||||||||||||||
Design Analysis Solutions services | 2,366 | 2,417 | 7,139 | 7,193 | ||||||||||||||
Manufacturing Solutions services | 207 | 223 | 595 | 734 | ||||||||||||||
Total Europe | 4,783 | 4,959 | 15,789 | 15,489 | ||||||||||||||
Consolidated: | ||||||||||||||||||
Design Analysis Solutions products | 5,649 | 5,913 | 17,733 | 17,290 | ||||||||||||||
Manufacturing Solutions products | 3,854 | 3,574 | 10,586 | 9,686 | ||||||||||||||
Design Analysis Solutions services | 5,993 | 5,750 | 17,937 | 17,182 | ||||||||||||||
Manufacturing Solutions services | 761 | 660 | 2,175 | 1,978 | ||||||||||||||
Total consolidated | $ | 16,257 | $ | 15,897 | $ | 48,431 | $ | 46,136 | ||||||||||
Revenue from unaffiliated customers in Japan for the three months ended March 31, 2006 and March 26, 2005 was $3.1 million and $3.3 million, respectively, which represented 19% and 21% of total revenue in each period. Revenue from unaffiliated customers in Japan for the nine months ended March 31, 2006 and March 26, 2005 was $9.4 million and $9.2 million, respectively, which represented 19% and 20% of total revenue, respectively, in each period. Substantially all of the revenue in the Americas region is derived from the United States.
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MOLDFLOW CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. | Income Taxes |
For the three and nine months ended March 31, 2006, the Company recorded tax provisions of $172,000 and $566,000, respectively. The tax provision for the nine months ended March 31, 2006 reflected a one-time benefit of $126,000 recorded in the first quarter of fiscal 2006, which resulted from a reduction in the Company’s tax liabilities upon the resolution of certain tax position uncertainties. For the three and nine months ended March 26, 2005, the Company recorded a tax (benefit) provision of ($139,000) and $1.1 million, respectively, both of which included the impact of a $230,000 one-time benefit arising from the reduction of a valuation allowance recorded against deferred tax assets of one of the Company’s European subsidiaries.
In the first quarter of fiscal 2005, one of the Company’s Australian subsidiaries became subject to an audit by the local tax authority. In November 2005, the Company received a notice of assessment from the tax authority related to its 2001 tax year, which assessed a tax due in an amount of $1.3 million (A$1.8 million). Subsequently, the Company was issued penalty and interest charges totaling $1.0 million (A$1.4 million) related to the tax assessment for the 2001 year.
In order to limit the interest that may accrue on these amounts from the date of assessment through the ultimate resolution of this matter, the Company paid $667,000 (A$907,000), approximately 50% of the income tax assessment, to the tax authority in December 2005, which was recorded as a current asset as of March 31, 2006. In April 2006, the Company paid 50% of the penalty and interest charges totaling $502,000 (A$708,000), which was also recorded as a current asset.
The tax authority has agreed to defer any action to recover the remaining assessed tax amount outstanding and that no portion of the remaining interest and penalty charge for the 2001 tax year needs to be paid pending the resolution of the dispute. In addition, during the fourth quarter of fiscal 2006, the Company expects to receive a notice of assessment, interest and penalty charges related to 1994 and 1995 totaling approximately $3.6 million (A$5.0 million).
The Company currently estimates that the maximum amount of liabilities, including penalties and interest, that could be assessed against us by the tax authority, including amounts already assessed, is approximately $5.9 million (A$8.2 million). This estimated amount represents the total gross liabilities and does not include the benefits of the related tax effects of any such payments or tax benefits that may be available in other tax years, both of which may serve to mitigate our total expense that would be recorded in the Company’s results of operations.
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 indemnities to various lessors in connection with facility leases; indemnities to customers related to performance of services subcontracted to other providers; indemnities to vendors that guarantee expenses incurred by employees of the Company, indemnities to former employees in connection with their prior services as director or officer of the Company or its subsidiary companies, and performance under credit facilities of the Company’s subsidiaries. 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 March 31, 2006.
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MOLDFLOW CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 to two years 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 presents changes to the warranty provision:
Three Months Ended | Nine Months Ended | |||||||||||||||
March 31, | March 26, | March 31, | March 26, | |||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||
(In thousands) | ||||||||||||||||
? | ||||||||||||||||
Balance at beginning of period | $ | 157 | $ | 280 | $ | 120 | $ | 254 | ||||||||
Additions | 18 | — | 64 | 55 | ||||||||||||
Revisions to estimated liabilities | — | (100 | ) | — | (100 | ) | ||||||||||
Settlements | (16 | ) | (25 | ) | (25 | ) | (54 | ) | ||||||||
Balance at end of period | $ | 159 | $ | 155 | $ | 159 | $ | 155 | ||||||||
13. | Recent Accounting Pronouncements |
In October 2004, the American Jobs Creation Act of 2004 (the “AJCA”) was passed. The AJCA provides a deduction for income from qualified domestic production activities which will be phased in from 2005 through 2010. In return, the AJCA also provides for a two-year phase-out of the existing extra-territorial income exclusion for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. In accordance with these provisions, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction will be reported in the same period in which the deduction is claimed in our tax return. The AJCA also created a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations. The Company is currently evaluating the AJCA and is not yet in a position to decide whether, or to what extent, it may repatriate foreign earnings that have not yet been remitted to the U.S. and will make a final determination by the end of fiscal 2006. The amount of income tax the Company would incur should some level of earnings be repatriated cannot be reasonably estimated at this time.
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs.” This Statement amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This Statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for the Company’s 2006 fiscal year. The adoption of this Statement did not have a material impact on the Company’s financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of Accounting Principles Board (“APB”) Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 provides guidance on the accounting for, and reporting of, a change in accounting principle, in the absence of explicit transition requirements specific to a newly adopted accounting principle. Previously, most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. SFAS No. 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either
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MOLDFLOW CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the period-specific effects or the cumulative effect of the change. SFAS No. 154 is effective for the Company’s 2007 fiscal year. The Company will determine the impact of this standard on its condensed consolidated financial statements when and if an accounting change or error correction occurs.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”). This Statement permits fair value remeasurement for any hybrid financial instrument containing an embedded derivative that would otherwise require bifurcation, and broadens a Qualified Special Purpose Entity’s (“QSPE”) permitted holdings to include passive derivative financial instruments that pertain to other derivative financial instruments. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring after the beginning of an entity’s first fiscal year beginning after September 15, 2006. Earlier adoption is permitted, provided the entity has not yet issued financial statements, including for interim periods, for that fiscal year. The Company is in the process of assessing the impact , if any, of the adoption of this statement on its financial results.
In March 2006, the FASB issued SFAS No. 156 (“SFAS No. 156”), “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” which requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits the entities to elect either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of SFAS No. 140 for subsequent measurement. The subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value eliminates the necessity for entities that manage the risks inherent in servicing assets and servicing liabilities with derivatives to qualify for hedge accounting treatment and eliminates the characterization of declines in fair value as impairments or direct write-downs. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements for any period of that fiscal year. The Company is in the process of assessing the impact, if any, of the adoption of this statement on its financial results.
14. | Subsequent Event |
On April 13, 2006, the Company announced a corporate restructuring plan for its Manufacturing Solutions business unit (the “April 2006 plan”). The April 2006 plan includes the elimination of certain positions within the Company and termination of certain employees. The Company expects to record a charge of between $1.0 million and $1.5 million in its fourth fiscal quarter of 2006 related to this plan.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) with a review of our overall strategy and the strategy for our two business units to give the reader a view of the goals of our business and the direction in which our business and products are moving. This is followed by a discussion of the Critical Accounting Policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. Following that, beginning on page 22 we discuss our Results of Operations for the three and nine months ended March 31, 2006 compared to the three and nine months ended March 26, 2005. We then provide an analysis of changes in our balance sheet and cash flows, and discuss our financial commitments in the sections entitled “Liquidity and Capital Resources” and “Off-Balance Sheet Financing Arrangements.”
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. The forward-looking statements contained in this report include, but are not limited to, statements concerning growth opportunities for our business, taxes, working capital and capital expenditure requirements, inflation, international operations, shared-based compensation and restructuring plans. 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 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 Part II, Item 1A. “Risk Factors”. 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 goal is to be the world’s leading provider of software and hardware solutions for the optimization and control of plastics-focused manufacturing by offering customers a broad range of solutions to improve the way they design and produce parts and molds through powerful and robust technology-based products and services. Our focus is to help customers manufacture less expensive and more reliable plastic products by increasing the effectiveness of their designs and their manufacturing operations and improving efficiencies across the entire design-through-manufacture process.
We believe that our key competitive strength is our extensive domain knowledge in the fields of materials science and characterization, numerical methods and predictive modeling through simulation and analysis, coupled with our expertise in packaging and delivering this knowledge to our customers ineasy-to-use software and hardware applications. 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 of our products are developed by commercial contractors. Because of the strong body of intellectual property and knowledge that we have created over the course of twenty-eight years in serving the plastics design, engineering and manufacturing market, we have become the leading provider of highly sophisticated predictive software applications for the plastics design engineering and manufacturing communities. Our growth strategy is derived from these strengths. We continue to increase the business value of our Design Analysis Solutions and Manufacturing Solutions products for our customers in a number of ways. We improve the performance and functionality of existing products with each new release. We develop products addressing specific vertical market needs in each of the target market segments of our business. In the design
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phase, for example, we provide applications which address the process of microchip encapsulation, a process which is involved in the manufacture of semiconductors. In the manufacturing phase, we offer solutions to the die cast market, a conversion process that is similar to the plastics injection molding process.
Plastics are pervasive throughout a broad range of vertical industry applications including the automotive, electronics, packaging, medical products and consumer goods industries. These industries are generally large and growing and their use of plastics is growing.
Because the supply chains that support the design and production of plastic parts in these industries are often fragmented and comprised of multiple companies in various geographies around the globe, we have developed a wide range of applications that can be used by participants at all stages of the plastics value chain to optimize their process and reduce their costs. Our strategy is to deliver our deep domain expertise in plastics packaged in software and system solutions that address the specific issues of the participants in each of these stages and increase our penetration of these industries by making our products available through a combination of direct and independent sales representatives, resellers and engineering consultants around the globe.
For the design of plastic parts and molds, our strategy is to provide products which enable analysis-driven design in the earliest stages of product development, by making analysis technology more integral to the design process. In doing so, we seek to make our technology available to a wider audience of potential users in mainstream design markets, including those engineers who are not specialists in plastics design. By building upon our existing technology categories, we bring powerful solutions which are easy to learn and use, providing low cost of deployment and rapid return on investment.
For manufacturers of plastic parts, our strategy is to offer a range of products which address the need for optimizing and controlling the set-up, temperature, flow, control and monitoring of the primary equipment and other process elements in the manufacturing process. Our solutions include applications which provide real-time performance management information that enables companies to manage their manufacturing operations throughout the production process. Because of our extensive knowledge of the material properties of plastics and the physics involved in the process of converting raw plastic to finished goods, we can assist companies to obtain higher production yields, reduced cycle times, improved process reliability and better part quality.
We sell our products and services internationally through our direct sales operations in 16 countries. We also sell through a network of distributors and value-added resellers and through distribution arrangements with developers of other design software products. Expanding our geographic coverage is a key element of our growth strategy. We believe that the rapidly growing economies in China, Taiwan, India and other developing countries present significant longer-term growth opportunities for our business. Our ability to conduct research and development at various locations throughout the world allows us to optimize product development and lower costs. International development, however, also involves significant costs and challenges, including whether we can adequately protect our intellectual property and derive significant revenue in areas where laws regarding intellectual property are not in place or not effectively enforced.
A significant part of our growth strategy is based upon building on the customer loyalty that we have achieved and the large installed base that we have built. In the third quarter of fiscal 2006, we received approximately 58% of our overall revenue from repeat customers. We deliver product releases on a regular and timely basis which incorporate significant functionality improvements to ensure that our customers have access to the latest technology developments. We focus on customer satisfaction through programs aimed at involving our customers in the future direction of our products, enhancing their ease of use and user experience, and providing multiple points of contact within the company to ensure that their needs are met.
Our uses of cash include capital expenditures to support our operations and our product development, mergers and acquisitions, and investments in growth initiatives. We continue to evaluate merger and acquisition opportunities to the extent they support our strategy and our growth objectives.
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Design Analysis Solutions
The Design Analysis Solutions (“DAS”) business unit serves the product, part and mold tooling design markets. Our strategy is to provide powerful and sophisticated solutions that enable our customers to optimize the design of parts and molds in order to reduce the time to market, improve the reliability of the production process, improve part quality and lower the cost of manufacture for parts once in production.
Our primary product offerings are our Moldflow Plastics Advisers (“MPA”) for part and mold design optimization and our Moldflow Plastics Insight (“MPI”) for in-depth simulation for part and mold design validation and optimization.
Manufacturing Solutions
The Manufacturing Solutions (“MS”) business unit serves the plastics-focused discrete manufacturing sector. Our strategy is to provide powerful integrated solutions that enable our customers to optimize and control theset-up of an injection molding machine, monitor and control the injection molding process, control the temperature and flow of plastic into the mold and monitor and report on the process and production at both the machine and plant-wide level. These products enable customers to improve the reliability of their production process, improve their production yield and efficiency and reduce their costs of production by reducing material usage and cycle times.
MS includes two product types: real-time production management systems and process optimization and control products, both of which are included under the broad market category of Collaborative Production Management (“CPM”) products. CPM products provide manufacturers with the means to plan, control and run their manufacturing operations on an on-going basis. Our primary MS product is our Altanium hot runner process controller, which assures that plastic materials are kept in optimal molten state until injected in the part cavity in order to achieve higher yields, better part quality and reduced cycle time.
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 revenue recognition, 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; asset valuation allowances; acquisition accounting; impairment of acquired intangible assets, goodwill and other long-lived assets; income tax accounting; restructuring charges; hedge accounting; capitalization of software development costs and stock option accounting.
Effective July 1, 2005, our accounting policy related to stock option accounting changed upon our adoption of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment.” SFAS No. 123(R) requires us to expense the fair value of stock options and other forms of share-based compensation granted to employees and directors. Under the fair value recognition provisions of SFAS 123(R), share-based compensation cost is estimated at the grant date based on the value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of share-based awards requires judgment, including estimating stock price volatility, forfeiture rates and the expected life of the equity instrument. In accordance with SFAS No. 123(R), we recorded $355,000 and $1.5 million, respectively, of share-based compensation, net of related tax effects, in the three-month and nine-month periods ended March 31, 2006. Prior to fiscal 2006, we accounted for share-based compensation in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations and followed the disclosure requirements of SFAS No. 123, “Accounting
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for Stock-Based Compensation.” Thus, prior to the first quarter of fiscal 2006, we did not record any significant compensation cost related to share-based awards. Periods prior to our first quarter of fiscal 2006 were not restated to reflect the fair value method of expensing stock options and other forms ofshare-based compensation. The impact of expensing stock awards on our earnings is and will continue to be significant and is further described in Note 2 to the unaudited condensed consolidated financial statements.
For a more detailed explanation of the judgments included in our critical accounting policies, refer to the Company’s Annual Report on Form 10-K for the year ended June 30, 2005.
Overview of Results of Operations for the Three Months and Nine Months Ended March 31, 2006
Financial highlights included:
• | Revenue of $16.3 million in the third quarter of fiscal 2006 compared to $15.9 million in the third quarter of fiscal 2005, | |
• | Revenue of $48.4 million in the first nine months of fiscal 2006 compared to $46.1 million in the first nine months of fiscal 2005, | |
• | DAS revenue of $11.7 million and $35.7 million in the three and nine months ended March 31, 2006, respectively, compared to $11.7 million and $34.5 million, respectively, in the same periods of the previous fiscal year, | |
• | MS revenue of $4.6 million and $12.8 million in the three and nine months ended March 31, 2006, respectively, increased from $4.2 million and $11.7 million, respectively, in the same periods of the previous fiscal year, and | |
• | Income from operations of $967,000 and $55,000 for the three and nine months ended March 31, 2006, respectively, which included the effect of $355,000 and $1.5 million of costs, net of tax, respectively, related to share-based compensation expense. In addition, the nine months ended March 31, 2006, also included a charge of $1.2 million, net of related tax effects, related to our 2005 restructuring plan. |
Summary of Operating Performance:
Three Months | Three Months | |||||||||||||||
Ended | As a % | Ended | As a % | |||||||||||||
March 31, | of | March 26, | of | |||||||||||||
2006 | Revenue | 2005 | Revenue | |||||||||||||
(In thousands, except for percentage data) | ||||||||||||||||
Revenue | $ | 16,257 | 100 | % | $ | 15,897 | 100 | % | ||||||||
Cost of revenue | 4,312 | 26 | 3,730 | 23 | ||||||||||||
Operating expenses | 10,978 | 68 | 10,752 | 68 | ||||||||||||
Income from operations | $ | 967 | 6 | % | $ | 1,415 | 9 | % | ||||||||
Nine Months | Nine Months | |||||||||||||||
Ended | As a % | Ended | As a % | |||||||||||||
March 31, | of | March 26, | of | |||||||||||||
2006 | Revenue | 2005 | Revenue | |||||||||||||
(In thousands, except for percentage data) | ||||||||||||||||
Revenue | $ | 48,431 | 100 | % | $ | 46,136 | 100 | % | ||||||||
Cost of revenue | 12,642 | 26 | 10,392 | 23 | ||||||||||||
Operating expenses | 35,734 | 74 | 30,470 | 66 | ||||||||||||
Income from operations | $ | 55 | — | % | $ | 5,274 | 11 | % | ||||||||
Total revenue in our third quarter and first nine months of fiscal 2006 increased 2% and 5%, respectively, from the comparable periods of fiscal 2005. This was primarily the result of increased revenue from our DAS business unit in Japan, Korea and Taiwan, driven by sales to the automotive and electronics industries. This
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growth was partially offset by unfavorable changes in foreign currency exchange rates from the comparable periods of fiscal 2005.
Cost of revenue in our third quarter and first nine months of fiscal 2006 increased 16% and 22%, respectively, from the comparable periods of fiscal 2005. The increase in both periods was primarily a result of higher direct material costs associated with increased sales of our MS products, increased freight costs and the costs of distribution personnel arising from our expansion of our MS business in our European and Asia/ Australia regions.
Operating expenses in our third quarter and first nine months of fiscal 2006 increased 2% and 17%, respectively, from the comparable periods of fiscal 2005. We adopted the provisions of SFAS 123(R) on July 1, 2005, and, accordingly, we recorded $511,000 ($355,000, net of related tax effects) and $1.7 million ($1.5 million, net of related tax effects) of share-based compensation in the three and nine months ended March 31, 2006, respectively. These expenses were not required to be included in our operating expenses prior to July 1, 2005 and, thus, there is no corresponding expense in the prior fiscal year. For the three-month period, the remainder of the increase was primarily due to the cost of personnel added in our operations. For the nine month period, the remainder was due to the cost of personnel added in our operations, increased professional service fees, including those related to our Sarbanes-Oxley compliance efforts and the impact of our corporate restructuring plan undertaken in October of 2005 to reduce operating costs, which resulted in a charge of $1.2 million, net of related tax effects, related to the elimination of several positions and the termination of one facility lease.
We finished the first nine months of fiscal 2006 with $61.3 million of cash and marketable securities, compared to $60.2 million of cash and marketable securities as of June 30, 2005. We have no long-term debt.
Results of Operations
The following table sets forth statement of income data for the periods indicated as a percentage of total revenue:
Three Months Ended | Nine Months Ended | |||||||||||||||||
March 31, | March 26, | March 31, | March 26, | |||||||||||||||
2006 | 2005 | 2006 | 2005 | |||||||||||||||
Revenue: | ||||||||||||||||||
Product | 58 | % | 60 | % | 58 | % | 58 | % | ||||||||||
Services | 42 | 40 | 42 | 42 | ||||||||||||||
Total revenue | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||
Costs and operating expenses: | ||||||||||||||||||
Cost of product revenue | 16 | % | 13 | % | 15 | 13 | % | |||||||||||
Cost of services revenue | 11 | 10 | 11 | 10 | ||||||||||||||
Research and development | 15 | 14 | 15 | 13 | ||||||||||||||
Selling and marketing | 35 | 36 | 36 | 35 | ||||||||||||||
General and administrative | 17 | 18 | 20 | 18 | ||||||||||||||
Restructuring charges | — | — | 3 | — | ||||||||||||||
Amortization of acquired intangible assets | — | — | — | — | ||||||||||||||
Total costs and operating expenses | 94 | 91 | 100 | 89 | ||||||||||||||
Income from operations | 6 | 9 | — | 11 | ||||||||||||||
Interest income, net | 4 | 3 | 4 | 3 | ||||||||||||||
Other income, net | — | 1 | — | — | ||||||||||||||
Income before income taxes | 10 | 13 | 4 | 14 | ||||||||||||||
Provision for (benefit from) income taxes | — | — | 1 | 2 | ||||||||||||||
Net income | 10 | % | 13 | % | 3 | % | 12 | % | ||||||||||
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Revenue
We generate revenue from license fees for our packaged software, product fees for our hardware-based products and service fees derived primarily from maintenance and support contracts.
The following table sets forth our total revenue for the three-month and nine-month periods ended March 31, 2006 and March 26, 2005:
Three Months Ended | Nine Months Ended | ||||||||||||||||
March 31, | March 26, | March 31, | March 26, | ||||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||||||
(In thousands) | |||||||||||||||||
Revenue: | |||||||||||||||||
Product | $ | 9,503 | $ | 9,487 | $ | 28,319 | $ | 26,976 | |||||||||
Services | 6,754 | 6,410 | 20,112 | 19,160 | |||||||||||||
Total | $ | 16,257 | $ | 15,897 | $ | 48,431 | $ | 46,136 | |||||||||
The following table sets forth our total revenue by geographic region for the three-month and nine-month periods ended March 31, 2006 and March 26, 2005:
Three Months Ended | Nine Months Ended | ||||||||||||||||
March 31, | March 26, | March 31, | March 26, | ||||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||||||
(In thousands, except for percentage data) | |||||||||||||||||
Revenue: | |||||||||||||||||
Asia/ Australia | $ | 5,526 | $ | 5,089 | $ | 16,060 | $ | 14,562 | |||||||||
Americas | 5,948 | 5,849 | 16,582 | 16,085 | |||||||||||||
Europe | 4,783 | 4,959 | 15,789 | 15,489 | |||||||||||||
Total | $ | 16,257 | $ | 15,897 | $ | 48,431 | $ | 46,136 | |||||||||
Percentage of total revenue: | |||||||||||||||||
Asia/ Australia | 34 | % | 32 | % | 33 | % | 31 | % | |||||||||
Americas | 37 | 37 | 34 | 35 | |||||||||||||
Europe | 29 | 31 | 33 | 34 | |||||||||||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | |||||||||
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Product Revenue
The following table sets forth our product revenue by product group and geography for the three-month and nine-month periods ended March 31, 2006 and March 26, 2005:
Increase | |||||||||||||||||
(Decrease) | |||||||||||||||||
Three Months | Compared to | Three Months | |||||||||||||||
Ended | Prior Year | Ended | |||||||||||||||
March 31, | March 26, | ||||||||||||||||
2006 | $ | % | 2005 | ||||||||||||||
(In thousands, except for percentage data) | |||||||||||||||||
Asia/ Australia product revenue: | |||||||||||||||||
Design Analysis Solutions | $ | 3,218 | $ | 99 | 3 | % | $ | 3,119 | |||||||||
Manufacturing Solutions | 173 | 169 | 4225 | 4 | |||||||||||||
Total | 3,391 | 268 | 9 | 3,123 | |||||||||||||
Americas product revenue: | |||||||||||||||||
Design Analysis Solutions | 784 | (179 | ) | (19 | ) | 963 | |||||||||||
Manufacturing Solutions | 3,118 | 36 | 1 | 3,082 | |||||||||||||
Total | 3,902 | (143 | ) | 4 | 4,045 | ||||||||||||
Europe product revenue: | |||||||||||||||||
Design Analysis Solutions | 1,647 | (184 | ) | (10 | ) | 1,831 | |||||||||||
Manufacturing Solutions | 563 | 75 | 15 | 488 | |||||||||||||
Total | 2,210 | (109 | ) | (5 | ) | 2,319 | |||||||||||
Total product revenue: | |||||||||||||||||
Design Analysis Solutions | 5,649 | (264 | ) | (4 | ) | 5,913 | |||||||||||
Manufacturing Solutions | 3,854 | 280 | 8 | 3,574 | |||||||||||||
Total | $ | 9,503 | $ | 16 | — | % | $ | 9,487 | |||||||||
Percentage of total product revenue: | |||||||||||||||||
Design Analysis Solutions | 59 | % | 62 | % | |||||||||||||
Manufacturing Solutions | 41 | 38 | |||||||||||||||
Total | 100 | % | 100 | % | |||||||||||||
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Increase | |||||||||||||||||
(Decrease) | |||||||||||||||||
Nine Months | Compared to | Nine Months | |||||||||||||||
Ended | Prior Year | Ended | |||||||||||||||
March 31, | March 31, | ||||||||||||||||
2006 | $ | % | 2005 | ||||||||||||||
(In thousands, except for percentage data) | |||||||||||||||||
Asia/ Australia product revenue: | |||||||||||||||||
Design Analysis Solutions | $ | 9,256 | $ | 646 | 8 | % | $ | 8,610 | |||||||||
Manufacturing Solutions | 329 | 286 | 665 | 43 | |||||||||||||
Total | 9,585 | 932 | 11 | 8,653 | |||||||||||||
Americas product revenue: | |||||||||||||||||
Design Analysis Solutions | 2,272 | (368 | ) | (14 | ) | 2,640 | |||||||||||
Manufacturing Solutions | 8,407 | 286 | 4 | 8,121 | |||||||||||||
Total | 10,679 | (82 | ) | (1 | ) | 10,761 | |||||||||||
Europe product revenue: | |||||||||||||||||
Design Analysis Solutions | 6,205 | 165 | 3 | 6,040 | |||||||||||||
Manufacturing Solutions | 1,850 | 328 | 22 | 1,522 | |||||||||||||
Total | 8,055 | 493 | 7 | 7,562 | |||||||||||||
Total product revenue: | |||||||||||||||||
Design Analysis Solutions | 17,733 | 443 | 3 | 17,290 | |||||||||||||
Manufacturing Solutions | 10,586 | 900 | 9 | 9,686 | |||||||||||||
Total | $ | 28,319 | $ | 1,343 | 5 | % | $ | 26,976 | |||||||||
Percentage of total product revenue: | |||||||||||||||||
Design Analysis Solutions | 63 | % | 64 | % | |||||||||||||
Manufacturing Solutions | 37 | % | 36 | % | |||||||||||||
Total | 100 | % | 100 | % | |||||||||||||
Our product revenue includes both license fees for our packaged software application products and product fees for our collaborative product management systems. Typically, our customers pay an up-front, one-time fee for our products. For our packaged software applications, the amount of the fee depends upon the number and type of software modules licensed and the number of the customer’s employees or other users who can access the software product simultaneously. For our collaborative product management systems, the amount of the fee depends upon the number and type of software modules licensed with the system, if any, and the system’s hardware components. 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 record these payments as revenue as well, but such amounts have been immaterial to date.
Product revenue for the three months ended March 31, 2006 of $9.5 million was unchanged from the three months ended March 26, 2005, as increases in sales denominated in foreign currencies were fully offset by changes in currency exchange rates relative to those in effect during the same period of the prior fiscal year. We continue to expand the distribution of our Altanium hot runner process controller product into our Asia/ Australia and European regions, which increased overall MS product revenue. This growth was partially offset by declines in product revenue from our DAS business unit which arose due to challenging automotive markets in the United States and Germany.
We added 84 new customers in the third quarter of fiscal 2006, compared to 96 new customers in the same period of fiscal 2005. Sales to new customers represented 42% of total product revenue in the three months ended March 31, 2006, compared to 29% of total product revenue in the three months ended March 26, 2005.
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Product revenue for the first nine months of fiscal 2006 increased by 5% to $28.4 million from $27.0 million in the comparable period of the previous fiscal year. Again, changes in foreign exchange rates from those of the comparable period of the prior year had an unfavorable impact on product revenue, decreasing total product revenues by $811,000 compared to the same period of the prior year. Despite the negative impact of changes in foreign exchange rates, product revenue for the first nine months of the fiscal year increased from the same period of the prior year driven by increased sales of our Moldflow Plastics Insight product in our Asia/Australia region and increased sales of Altanium in all regions.
We added 278 new customers in the first nine months of fiscal 2006, compared to 274 new customers in the comparable period of fiscal 2005. Sales to new customers represented 35% of total product revenue in the nine months ended March 31, 2006, compared to 31% of total product revenue in the nine months ended March 26, 2005.
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, material testing services and repairs.
In the three months ended March 31, 2006, services revenue from the DAS business unit was $6.0 million and services revenue from the MS business unit was $761,000. In the three months ended March 26, 2005, services revenue from the DAS business unit was $5.8 million and services revenue from the MS business unit was $660,000. Total revenue derived from services increased by 5% in the third quarter of fiscal 2006 when compared to the third quarter of fiscal 2005. This increase was primarily from the sale of maintenance contracts, which was the result of growth in our installed customer base arising from software license sales made during the reporting period and in prior years. These increases were partially offset by unfavorable changes in foreign exchange rates from those of the comparable period of the prior year, which decreased total services revenue by $381,000.
In the nine months ended March 31, 2006, services revenue from the DAS business unit was $17.9 million and services revenue from the MS business unit was $2.2 million. In the nine months ended March 26, 2005, services revenue from the DAS business unit was $17.2 million and services revenue from the MS business unit was $2.0 million. Total revenue derived from services increased by 5% from the first nine months of fiscal 2005 due to growth in our installed customer base, which increased revenues from maintenance contracts. This was partially offset by unfavorable changes in foreign exchange rates, which decreased total services revenue by $709,000.
Cost of Revenue
Increase | |||||||||||||||||
Compared to | |||||||||||||||||
Three Months | Prior | Three Months | |||||||||||||||
Ended | Fiscal Year | Ended | |||||||||||||||
March 31, | March 26, | ||||||||||||||||
2006 | $ | % | 2005 | ||||||||||||||
(In thousands, except for percentage data) | |||||||||||||||||
Cost of revenue: | |||||||||||||||||
Product | $ | 2,528 | $ | 440 | 21 | % | $ | 2,088 | |||||||||
Services | 1,784 | 142 | 9 | 1,642 | |||||||||||||
$ | 4,312 | $ | 582 | 16 | % | $ | 3,730 | ||||||||||
As a percentage of total revenue | 27 | % | 23 | % |
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Increase | |||||||||||||||||
Compared to | |||||||||||||||||
Nine Months | Prior | Nine Months | |||||||||||||||
Ended | Fiscal Year | Ended | |||||||||||||||
March 31, | March 26, | ||||||||||||||||
2006 | $ | % | 2005 | ||||||||||||||
(In thousands, except for percentage data) | |||||||||||||||||
Cost of revenue: | |||||||||||||||||
Product | $ | 7,540 | $ | 1,736 | 30 | % | $ | 5,804 | |||||||||
Services | 5,102 | 514 | 11 | 4,588 | |||||||||||||
$ | 12,642 | $ | 2,250 | 22 | % | $ | 10,392 | ||||||||||
As a percentage of total revenue | 26 | % | 23 | % |
Cost of Product Revenue
Cost of product revenue consists primarily of the costs associated with hardware components for our MS products, compact discs and related packaging material, duplication and shipping costs and the compensation 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 and amortization expense related to acquired intangible assets.
Our cost of product revenue was $2.5 million in the three months ended March 31, 2006, compared to $2.1 million in the three months ended March 26, 2005, an increase of $440,000. Significant components of this change included: $327,000 of increased personnel and direct material costs attributed to the growth of the MS business in our European and Asia/ Australia regions, and $15,000 of share-based compensation expense, a result of our adoption of SFAS 123(R).
Our cost of product revenue was $7.5 million in the nine months ended March 31, 2006, compared to $5.8 million in the nine months ended March 26, 2005, an increase of $1.7 million. Significant components of this change included: $1.0 million of increased personnel and direct material costs attributed to the growth of the MS business in our European and Asia/ Australia regions, a $240,000 increase in shipping costs resulting from increased MS product revenue and $49,000 of share-based compensation expense.
Cost of Services Revenue
Cost of services revenue consists primarily of salary, fringe benefits and facility related costs of our maintenance and support, consulting 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.
Our cost of services revenue of $1.8 million in the three months ended March 31, 2006, compared to $1.6 million in the three months ended March 26, 2005, an increase of $142,000. Significant components of this change included: $81,000 of increased compensation and facility related costs, a result of additional personnel and salary increases, and $24,000 of share-based compensation expense, a result of our adoption of SFAS 123(R).
Our cost of service revenue was $5.1 million in the nine months ended March 31, 2006, compared to $4.6 million in the nine months ended March 26, 2005, an increase of $514,000. Significant components of this change included: $282,000 of increased compensation and facility related costs, a result of additional personnel and salary increases, and $81,000 of share-based compensation expense.
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Research and Development
Increase | ||||||||||||||||
Compared to | ||||||||||||||||
Three Months | Prior | Three Months | ||||||||||||||
Ended | Fiscal Year | Ended | ||||||||||||||
March 31, | March 26, | |||||||||||||||
2006 | $ | % | 2005 | |||||||||||||
(In thousands, except for percentage data) | ||||||||||||||||
Research and development | $ | 2,459 | $ | 299 | 14 | % | $ | 2,160 | ||||||||
As a percentage of total revenue | 15 | % | 14 | % |
Increase | ||||||||||||||||
Compared to | ||||||||||||||||
Nine Months | Prior | Nine Months | ||||||||||||||
Ended | Fiscal Year | Ended | ||||||||||||||
March 31, | March 26, | |||||||||||||||
2006 | $ | % | 2005 | |||||||||||||
(In thousands, except for percentage data) | ||||||||||||||||
Research and development | $ | 7,135 | $ | 1,290 | 22 | % | $ | 5,845 | ||||||||
As a percentage of total revenue | 15 | % | 13 | % |
We employ a staff to develop new products and enhance our existing products. Product development expenditures, which include compensation, benefits, travel, payments to universities and other research institutions and facilities costs, are generally charged to operations as incurred. However, 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 the product is available for commercial release to customers. In accordance with SFAS No. 86, the Company did not have any capitalized research and development costs in the three months ended March 31, 2006 and March 26, 2005. In the nine months ended March 31, 2006 and March 26, 2005, costs of $410,000 and $201,000, respectively, were capitalized. All such capitalized costs are amortized to cost of product revenue over the estimated economic life of the related products, which ranges from three to five years.
Our research and development expenses were $2.5 million in the three months ended March 31, 2006 compared to $2.2 million in the three months ended March 26, 2005, an increase of $299,000. Significant components of this change included: $292,000 of costs related to the redeployment of our product line management staff to our research and development group from our marketing group and $89,000 ofshare-based compensation expense, a result of our adoption of SFAS 123(R). These increases were partially offset by other cost reductions and the impact of foreign exchange rates.
Our research and development expenses were $7.1 million in the nine months ended March 31, 2006 compared to $5.8 million in the nine months ended March 26, 2005, an increase of $1.3 million. Significant components of this change included: $918,000 of costs related to the redeployment of our product line management staff to our research and development group from our marketing group and $261,000 ofshare-based compensation expense. These increases were partially offset by reductions in compensation and facility related costs, a result of fewer employees and the impact of foreign exchange rates.
Selling and Marketing
Increase | ||||||||||||||||
Compared to | ||||||||||||||||
Three Months | Prior | Three Months | ||||||||||||||
Ended | Fiscal Year | Ended | ||||||||||||||
March 31, | March 26, | |||||||||||||||
2006 | $ | % | 2005 | |||||||||||||
(In thousands, except for percentage data) | ||||||||||||||||
Selling and marketing | $ | 5,786 | $ | 136 | 2 | % | $ | 5,650 | ||||||||
As a percentage of total revenue | 36 | % | 36 | % |
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Increase | ||||||||||||||||
Compared to | ||||||||||||||||
Nine Months | Prior | Nine Months | ||||||||||||||
Ended | Fiscal Year | Ended | ||||||||||||||
March 31, | March 26, | |||||||||||||||
2006 | $ | % | 2005 | |||||||||||||
(In thousands, except for percentage data) | ||||||||||||||||
Selling and marketing | $ | 17,303 | $ | 1,347 | 8 | % | $ | 15,956 | ||||||||
As a percentage of total revenue | 36 | % | 35 | % |
We sell our products primarily through our direct sales force and indirect distribution channels. Selling and marketing expenses consist primarily of compensation paid to our sales staff and third-party manufacturers’ representatives, employee benefits costs, sales office facility rental and related costs, travel and promotional events such as trade shows, advertising, print and web-based collateral materials and public relations programs.
Our selling and marketing expenses were $5.8 million in the three months ended March 31, 2006, compared to $5.6 million in the three months ended March 26, 2005, an increase of $136,000. Significant components of this change included: $130,000 of share-based compensation expense, a result of our adoption of SFAS 123(R); $79,000 of increased third-party manufacturers’ representatives commissions; $79,000 of increased compensation and facility related costs, a result of additional personnel; and $85,000 of increased spending on promotional activities. All of these increases were partially offset by the redeployment of our product line management staff to our research and development group from our marketing group, which reduced selling and marketing costs by $292,000.
Our selling and marketing expenses were $17.3 million in the nine months ended March 31, 2006, compared to $16.0 million in the nine months ended March 26, 2005, an increase of $1.3 million. Significant components of this change included: $880,000 of increased compensation and facility related costs, a result of additional personnel; $405,000 of share-based compensation expense; $357,000 of travel and entertainment expense due to increased headcount and cost of travel; and $214,000 of increased third-party manufacturers’ representatives commissions. All of these increases were partially offset by the redeployment of our product line management staff to our research and development group from our marketing group, which reduced selling and marketing costs by $918,000.
General and Administrative
(Decrease) | ||||||||||||||||
Compared to | ||||||||||||||||
Three Months | Prior | Three Months | ||||||||||||||
Ended | Fiscal Year | Ended | ||||||||||||||
March 31, | March 26, | |||||||||||||||
2006 | $ | % | 2005 | |||||||||||||
(In thousands, except for percentage data) | ||||||||||||||||
General and administrative | $ | 2,684 | $ | (185 | ) | (6 | )% | $ | 2,869 | |||||||
As a percentage of total revenue | 17 | % | 18 | % |
Increase | ||||||||||||||||
Compared to | ||||||||||||||||
Nine Months | Prior | Nine Months | ||||||||||||||
Ended | Fiscal Year | Ended | ||||||||||||||
March 31, | March 26, | |||||||||||||||
2006 | $ | % | 2005 | |||||||||||||
(In thousands, except for percentage data) | ||||||||||||||||
General and administrative | $ | 9,762 | $ | 1,317 | 16 | % | $ | 8,445 | ||||||||
As a percentage of total revenue | 20 | % | 18 | % |
General and administrative expenses include legal, audit, tax consulting, regulatory compliance and insurance expenses and the compensation costs of our executive management, finance, information technology, human resources and administrative support groups.
Our general and administrative expenses were $2.7 million in the three months ended March 31, 2006, compared to $2.9 million in the three months ended March 26, 2005, a decrease of $185,000, as a result of a
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$397,000 reduction in financial statement audit and professional fees related to Sarbanes-Oxley compliance was partially offset by $253,000 of share-based compensation expense.
Our general and administrative expenses were $9.7 million in the nine months ended March 31, 2006, compared to $8.4 million in the nine months ended March 26, 2005, an increase of $1.3 million. Significant components of this change included: $900,000 of share-based compensation expense and $425,000 of increased compensation and facility related costs, a result of additional personnel.
Restructuring Charges
In October 2005, we enacted a corporate restructuring plan to reduce costs and consolidate operations. The plan included the involuntary termination of certain employees from various departments and the termination of an operating lease. As a result of these actions, we recorded a charge of $1.4 million in the three months ended December 31, 2005, which was recorded as a restructuring charge in our unaudited condensed consolidated statement of income. As of March 31, 2006, all significant activities under the plan were completed.
In April 2006, we announced a plan to restructure our Manufacturing Solutions business unit. This plan includes the elimination of certain positions within the Company and the termination of certain employees. We expect to record a charge of between $1.0 million and $1.5 million in our fourth fiscal quarter of 2006 related to this plan.
Amortization of Acquired Intangible Assets
Decrease | ||||||||||||||||
Compared to | ||||||||||||||||
Three Months | Prior | Three Months | ||||||||||||||
Ended | Fiscal Year | Ended | ||||||||||||||
March 31, | March 26, | |||||||||||||||
2006 | $ | % | 2005 | |||||||||||||
(In thousands, except for percentage data) | ||||||||||||||||
Amortization of acquired intangible assets | $ | 49 | $ | (24 | ) | (33 | )% | $ | 73 | |||||||
As a percentage of total revenue | 1 | % | 1 | % |
Decrease | ||||||||||||||||
Compared to | ||||||||||||||||
Nine Months | Prior | Nine Months | ||||||||||||||
Ended | Fiscal Year | Ended | ||||||||||||||
March 31, | March 26, | |||||||||||||||
2006 | $ | % | 2005 | |||||||||||||
(In thousands, except for percentage data) | ||||||||||||||||
Amortization of acquired intangible assets | $ | 147 | $ | (77 | ) | (34 | )% | $ | 224 | |||||||
As a percentage of total revenue | 1% | 1 | % |
These costs represent the amortization of intangible assets, other than goodwill, recorded in connection with our acquisitions. Those assets include customer base, developed technology, customer order backlog and non-compete agreements, which are amortized over their economic lives, ranging from six months to seven years.
The reduction in amortization expense in all periods reflects the completion of amortization of certain intangible assets that reached the end of their estimated useful life.
Interest Income, Net
Interest income, net, includes interest income earned on invested cash balances.
Our interest income was $663,000 in the three months ended March 31, 2006 compared to $405,000 in the three months ended March 26, 2005. Interest income was $1.9 million in the nine months ended March 31, 2006 compared to $1.1 million in the nine months ended March 26, 2005. The increase in interest income in both periods is due to higher levels of cash on-hand invested at higher interest rates than those existing during the three and nine months ended March 26, 2005.
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Other Income, Net
Other income, net includes 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.
Our other income was $62,000 in the three months ended March 31, 2006 compared to $86,000 in the three months ended March 26, 2005. Our other income was $96,000 in the nine months ended March 31, 2006 compared to a $44,000 expense for the nine months ended March 26, 2005.
Provision for Income Taxes
We are subject to income tax in numerous jurisdictions and at various rates worldwide, and the use of estimates is required in determining our provision for income taxes.
For the three and nine months ended March 31, 2006, we recorded tax provisions of $172,000 and $566,000, respectively, reflecting an effective tax rate of 10% and 28%, respectively. The difference between the effective tax rate and the U.S. federal statutory income tax rate of 34% was due primarily to limited levels of ordinary income at the end of the quarter as operating losses incurred in certain jurisdictions could not be benefited. The rate for the nine months ended March 31, 2006 also reflected a one-time benefit of $126,000 recorded in the first quarter of fiscal 2006, which resulted from a reduction in our tax liabilities upon the resolution of certain tax position uncertainties.
For the three and nine months ended March 26, 2005, we recorded tax provisions reflecting tax rates of (7)% and 16%, respectively. The difference between those effective tax rates and the U.S. federal statutory income tax rate of 34% was primarily due to a one-time $741,000 benefit arising from the reduction of a valuation allowance recorded against deferred tax assets of one of our European subsidiaries in the third fiscal quarter of 2005.
We currently estimate that our income tax rate for the remaining quarter of fiscal 2006 will be in the range of 41% to 46%, and that this will result in an estimated effective income tax rate in the range of 35% to 37% for the full fiscal year. This estimated annual rate range does not take into account any discrete items that may impact the rate in future periods and is subject to change based on a number of factors set forth below. Our effective tax rate for fiscal 2005 was 20%.
Our actual effective tax rate for 2006 may be materially impacted by the amount of income taxes associated with our foreign earnings, which are taxed at rates different from the U.S. federal statutory tax rate, as well as the timing and extent of the realization of deferred tax assets, changes in tax law and potential acquisitions. Further, we believe that our tax rate may fluctuate within a fiscal year, including from quarter to quarter, due to potential items arising from discrete events, including settlement of tax audits and assessments, acquisitions of other companies, changes in generally accepted accounting principles or other events. In connection with the American Jobs Creation Act of 2004, we may be able to repatriate certain of our foreign cash holdings in fiscal 2006 at a reduced rate of tax under the dividend reinvestment provisions of the Act. If we elect to do so, we will be required to record a provision for U.S. income tax purposes in our consolidated financial statements at the time our management and directors approve and commit to a reinvestment plan, which may increase our income tax rate for fiscal 2006.
We have established a valuation allowance against net deferred tax assets, consisting principally of net operating loss carryforwards in certain jurisdictions, including the United States, because we believe that it is more likely than not that the tax assets in those jurisdictions will not be realized prior to their expiration. At March 31, 2006, we had total net deferred tax assets of $398,000, net of a tax asset valuation allowance of $2.3 million and deferred tax liabilities of $786,000. Realization of our net deferred tax assets is dependent on our ability to generate future taxable income in the related tax jurisdictions. We believe that sufficient taxable income will be earned in the future to realize these assets.
In the first quarter of fiscal 2005, one of our Australian subsidiaries became subject to an audit by the local tax authority. In November 2005, we received a notice of assessment from the tax authority related to its
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2001 tax year, which assessed a tax due in an amount of $1.3 million (A$1.8 million). Subsequently, we were issued penalty and interest charges totaling $1.0 million (A$1.4 million) related to the tax assessment for the 2001 year.
In order to limit the interest that may accrue on these amounts from the date of assessment through the ultimate resolution of this matter, we paid $667,000 (A$907,000), approximately 50% of the income tax assessment, to the tax authority in December 2005, which was recorded as a current asset as of March 31, 2006. In April 2006, we paid 50% of the penalty and interest charges totaling $502,000 (A$708,000), which was also recorded as a current asset.
The tax authority has agreed to defer any action to recover the remaining assessed tax amount outstanding and that no portion of the remaining interest and penalty charge for the 2001 tax year needs to be paid pending the resolution of the dispute. In addition, during the fourth quarter of fiscal 2006, we expect to receive a notice of assessment, interest and penalty charges related to 1994 and 1995 totaling approximately $3.6 million (A$5.0 million).
We currently estimate that the maximum amount of liabilities, including penalties and interest, that could be assessed against us by the tax authority, including amounts already assessed, is approximately $5.9 million (A$8.2 million). This estimated amount represents the total gross liabilities and does not include the benefits of the related tax effects of any such payments or tax benefits that may be available in other tax years, both of which may serve to mitigate our total expense that would be recorded in our results of operations.
We believe that the positions taken in our tax returns with respect to these matters have merit and will be sustained, and we are taking steps to preserve our rights through the tax authority’s objection process. Accordingly, no liabilities have been recorded in our unaudited consolidated balance sheet related to amounts of additional tax, penalty or interest that have been assessed to date or that may be assessed by the Australian tax authority in the future. Because the resolution of these issues is inherently uncertain at this time, we cannot currently predict whether the ultimate resolution of these matters will have a material adverse effect on our results of operations. In addition, professional fees related to these matters have been and may continue to be significant.
Liquidity and Capital Resources
Nine Months | Nine Months | |||||||
Ended | Ended | |||||||
March 31, | March 26, | |||||||
2006 | 2005 | |||||||
(In thousands) | ||||||||
Cash provided by operating activities | $ | 1,458 | $ | 5,086 | ||||
Cash provided by investing activities | 3,136 | 3,498 | ||||||
Cash provided by financing activities | 1,994 | 1,879 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (921 | ) | 1,338 | |||||
Net increase in cash and cash equivalents | 5,667 | 11,801 | ||||||
Cash and cash equivalents, beginning of period | 48,910 | 35,987 | ||||||
Cash and cash equivalents, end of period | $ | 54,577 | $ | 47,788 | ||||
Marketable securities, end of period | $ | 6,762 | $ | 10,970 | ||||
Cash, cash equivalents and marketable securities, end of period | $ | 61,339 | $ | 58,758 | ||||
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 March 31, 2006, our primary sources of liquidity consisted of our total cash and cash equivalents balance of $54.6 million, our marketable securities balance of $6.8 million and our credit facilities. In February 2005, we renewed our primary $5.0 million unsecured working capital credit facility for a term of two years. The
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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. The facility includes restrictive covenants, all of which we were in compliance with at March 31, 2006. These covenants include liquidity and profitability measures and restrictions that limit our ability to merge, acquire or sell assets without prior approval from the bank. At March 31, 2006, we had employed $465,000 of available borrowings through outstanding foreign exchange contracts and letters of credit. The remaining available borrowings were $4.5 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 March 31, 2006, we had no outstanding debt.
At March 31, 2006, our marketable securities consisted of corporate bonds and U.S. government securities with maturity dates greater than three months from our date of purchase. 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 March 31, 2006, we were in compliance with this internal policy.
Operating activities generated $1.5 million of cash in the nine months ended March 31, 2006 as compared to $5.1 million in the nine months ended March 26, 2005. In the first nine months of fiscal 2006, cash of $4.8 million was provided by our net income adjusted for certain non-cash charges and expenses, such as depreciation and amortization. In addition, increases in deferred revenue due to customer renewals of prepaid maintenance contracts generated $1.5 million of cash. These items were partially offset by a $1.7 million increase in inventories and prepaid expenses, which included the impact of our payment of a portion of the assessment received from the Australian tax authority, and a $937,000 increase in accounts receivable and payments against accounts payable balances of $2.1 million. In the nine months ended March 26, 2005, cash of $7.2 million was provided by our net income adjusted for certain non-cash charges and expenses, such as depreciation and amortization, partially offset by net changes in operating assets and liabilities, which consumed $2.1 million of cash.
Investing activities provided $3.1 million of cash in the first nine months of fiscal 2006 and $3.5 in the same period of the previous year. In the first nine months of fiscal 2006, sales and maturities of marketable securities provided $15.7 million of cash, which was partially offset by purchases of marketable securities, fixed assets and the capitalization of software development costs which, in total, consumed $12.6 million of cash. In the first nine months of fiscal 2005, sales and maturities of marketable securities, net of purchases, provided $4.7 million of cash, which was partially offset by purchases of fixed assets and the capitalization of software development costs which, in total, consumed $1.2 million of cash.
Net cash of $2.0 million and $1.9 million was provided by financing activities in the first nine months of fiscal 2006 and 2005, respectively. In both periods, cash was generated by exercises of stock options and proceeds received for common stock under our Employee Stock Purchase Plan (“ESPP”). The ESPP was terminated by our Board of Directors effective June 30, 2005.
We are authorized to repurchase up to 500,000 shares of our common stock. Prior to fiscal 2005, we purchased 276,000 shares. Since then, we have not repurchased any such shares.
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 report. Capital expenditure requirements for fiscal 2006 are expected to be approximately $2 million of which, $1.4 million has been expended on purchases of fixed assets and capitalized software development costs as of March 31, 2006. Long-term cash requirements, other than normal operating expenses, are anticipated for the continued development of new products, the financing of anticipated growth, and the possible acquisition of businesses, software products or technologies complementary to our business. On a long-term basis or to complete acquisitions in the short term, we may require
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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.
Off-Balance Sheet Financing Arrangements
We do not have any special purpose entities or off-balance sheet financing arrangements.
Recent Accounting Pronouncements
In October 2004, the American Jobs Creation Act of 2004 was passed. The enactment of AJCA created a deduction from income for qualified domestic production activities, which will be phased in from 2005 through 2010. However, AJCA will also phase-out the existing extra-territorial income exclusion for foreign sales over a two-year period because it was viewed to be inconsistent with international trade protocols by the European Union. In accordance with these provisions, we have determined that the impact of this deduction will be reported in the same period in which the deduction is claimed in our tax return and will have no effect on the deferred tax assets and liabilities existing at the enactment date.
The AJCA also created a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to a number of limitations. We are currently evaluating the AJCA and are not yet in a position to decide whether, or to what extent, it may repatriate foreign earnings that have not yet been remitted to the U.S. and will make a final determination by the end of fiscal 2006. The amount of income tax we would incur should we repatriate some level of earnings cannot be reasonably estimated at this time.
In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 151, “Inventory Costs.” This Statement amends Accounting Research Bulletin No. 43, Chapter 4, “Inventory Pricing”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This Statement requires that those items be recognized as current period charges regardless of whether they meet the criterion of “abnormal”. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for our 2006 fiscal year. The adoption of this Statement did not have a material impact on our financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of Accounting Principles Board (“APB”) Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 provides guidance on the accounting for, and reporting of, a change in accounting principle, in the absence of explicit transition requirements specific to a newly adopted accounting principle. Previously, most voluntary changes in accounting principles were required to be recognized by way of a cumulative effect adjustment within net income during the period of the change. SFAS 154 requires retrospective application to prior periods’ financial statements, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for our 2007 fiscal year. We will determine the impact of this standard on our consolidated financial statements if an accounting change or error correction occurs.
In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”). SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument containing an embedded derivative that would otherwise require bifurcation, and broadens a Qualified Special Purpose Entity’s (“QSPE”) permitted holdings to include passive derivative financial instruments that pertain to other derivative financial instruments. SFAS No. 155 is effective for all financial instruments acquired, issued or subject to a remeasurement event occurring after the beginning of an entity’s first fiscal year beginning after September 15, 2006. Earlier adoption is permitted, provided the entity has not yet issued financial statements, including for interim periods, for that fiscal year. Management is in the process of assessing the impact, if any, of the adoption of this statement on our financial results.
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In March 2006, the FASB issued SFAS No. 156 (“SFAS No. 156”), “Accounting for Servicing of Financial Assets, an amendment of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” which requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable, and permits the entities to elect either fair value measurement with changes in fair value reflected in earnings or the amortization and impairment requirements of SFAS No. 140 for subsequent measurement. The subsequent measurement of separately recognized servicing assets and servicing liabilities at fair value eliminates the necessity for entities that manage the risks inherent in servicing assets and servicing liabilities with derivatives to qualify for hedge accounting treatment and eliminates the characterization of declines in fair value as impairments or direct write-downs. SFAS No. 156 is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements for any period of that fiscal year. Management is in the process of assessing the impact, if any, of the adoption of this statement on our financial results.
Impact of Inflation
We believe that our revenue and results of operations have not been significantly impacted by inflation. We do not believe that our revenue and results of operations will be significantly impacted by inflation in future periods.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
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 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 and our invested cash balances. At March 31, 2006, we had $19.2 million of cash and cash equivalents invested in foreign currency accounts. Our consolidated cash position will continue to be impacted by changes in foreign currency exchange rates. We engage in hedging transactions designed to reduce our exposure to changes in currency exchange rates. However, we cannot be sure that any efforts we make to hedge our exposure to currency exchange rate changes will be successful.
Our invested cash balances are subject to interest rate risk and, as a result, changes in interest rates from time to time may affect our operating results. We invest our excess cash balances in highly liquid, interest bearing instruments, including government and corporate bonds. At March 31, 2006, the fair value and principal amounts of our marketable securities portfolio amounted to $6.8 million, with a yield to maturity of 4.5%. Our investments are limited to high grade corporate debt securities, government issued debt, municipal debt securities, money market funds and similar high quality instruments. In a declining interest rate environment, we would experience a decrease in interest income. The opposite holds true in a rising interest rate environment. Our interest income will continue to fluctuate based upon changes in market interest rates and levels of cash available for investment. We do not use derivative financial instruments in our investment portfolio to manage interest rate risk. However, given the relatively short maturities and investment-grade quality of our marketable securities portfolio, a sharp rise in interest rates should not have a material adverse effect on the fair value of these instruments. These instruments potentially expose us to credit risk; however, we place our investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines. Those guidelines limit the amount of credit exposure to any one issue, issuer or type of instrument.
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In addition, our accounts receivable from our customers expose us to credit risk. We believe that such credit risk is limited due to the large number of customers comprising our accounts receivable and their broad dispersion over geographic regions and industries.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures
As required by Rules 13a-15 and15d-15 under the Securities Exchange Act of 1934, our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated 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, as of March 31, 2006, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act, (i) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to Moldflow’s management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. 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.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 1. | Legal Proceedings |
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.
Item 1A. | Risk Factors |
Risk Factors and Important Factors That May Affect Future Results
You should carefully consider the following risks and uncertainties prior to making an investment in our common stock. The following risks and uncertainties may also cause our actual results to differ materially from those contained in or predicted by our forward-looking statements.
Our business may be disrupted by the execution of our current restructuring plans and we may not achieve the anticipated savings associated with the plans. |
In the second and fourth quarters of fiscal 2006 we announced targeted restructuring plans, including an announcement in our fourth quarter of a worldwide restructuring of our Manufacturing Solutions (“MS”) business unit. These restructuring plans will require a significant amount of time and executive level resources for their implementation. We believe these actions will result in overall savings during our 2007 fiscal year. As these plans are implemented, they may require more executive level time and resources than we originally anticipated, may have a negative effect on the productivity of the MS business unit employees and the Company may not realize the anticipated savings from the restructuring plans during the time frames indicated. Even if the anticipated cost savings are achieved in our fourth quarter restructuring, the Manufacturing Solutions business unit may remain unprofitable which would have a material negative impact on our net income.
Our business model is changing as we further develop and exploit our MS products. |
We seek to develop and implement a robust set of MS products and plan to devote research and development, marketing and executive level resources to this business unit. Further expenditures of time and effort will be required in order to maximize the potential of this set of products. Our results of operations could be adversely affected by significant delays in developing, completing or shipping new or enhanced MS products or by delays in acceptance of these products by customers. Because the MS 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.
We make estimates in determining our worldwide income tax provision. |
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. 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 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.
In the first quarter of fiscal 2005, one of our Australian subsidiaries became subject to an audit by the local tax authority. In November 2005, we received a notice of assessment from the tax authority related to its 2001 tax year, which assessed a tax due in an amount of $1.3 million (A$1.8 million). Subsequently, we were issued penalty and interest charges totaling $1.0 million (A$1.4 million) related to the tax assessment for the 2001 year.
In order to limit the interest that may accrue on these amounts from the date of assessment through the ultimate resolution of this matter, we paid $667,000 (A$907,000), approximately 50% of the income tax
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assessment, to the tax authority in December 2005, which was recorded as a current asset as of March 31, 2006. In April 2006, we paid 50% of the penalty and interest charges totaling $502,000 (A$708,000), which was also recorded as a current asset.
The tax authority has agreed to defer any action to recover the remaining assessed tax amount outstanding and that no portion of the remaining interest and penalty charge for the 2001 tax year needs to be paid pending the resolution of the dispute. In addition, during the fourth quarter of fiscal 2006, we expect to receive a notice of assessment, interest and penalty charges related to 1994 and 1995 totaling approximately $3.6 million (A$5.0 million).
We currently estimate that the maximum amount of liabilities, including penalties and interest, that could be assessed against us by the tax authority, including amounts already assessed, is approximately $5.9 million (A$8.2 million). This estimated amount represents the total gross liabilities and does not include the benefits of the related tax effects of any such payments or tax benefits that may be available in other tax years, both of which may serve to mitigate our total expense that would be recorded in our results of operations.
In the event that such audit is resolved in a manner unfavorable to Moldflow or in the event that we are required to record a liability related to these matters in our consolidated balance sheet or make further cash payments, there would likely be a material adverse impact on our results of operations. In addition, our effective tax rate for fiscal 2006 may be materially and adversely impacted in the event that we are required to record a liability with respect to these matters, which would have a material adverse impact on our results of operations.
A general economic slowdown, particularly in our end markets, may adversely impact our results. |
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, a continuation of this general economic slowdown, particularly in the discrete manufacturing industry, could materially and adversely affect us by decreasing our revenue as compared to prior years, or by lowering our revenue growth.
We are dependent on third parties such as resellers and distributors to distribute a substantial portion of our MS products. |
We now distribute a substantial portion of our MS products through a network of independent, regional channel partners. In addition, we are adding more channel partners and entering into OEM agreements in geographically dispersed locations in order to sell our products to new customers. 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 are 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 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 support a larger installed base of our products. 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.
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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. |
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 and, to a lesser extent, our third fiscal quarter, in many of the markets in which we sell our products, | |
• | because the gross margins of our MS business are lower than the gross margins of our Design Analysis Solutions (“DAS”) business, our gross margin and operating income may decline as the MS business grows as a percentage of total revenue, | |
• | the timing and magnitude of capital expenditures, including costs relating to the expansion of our operations and infrastructure, and planned program spending, required for major marketing initiatives or tradeshows, | |
• | introductions of new services or enhancements by us and our competitors and corresponding changes in pricing policies, | |
• | our increased use of third parties such as distributors, OEM partners and resellers which may lessen the control we have over revenue and earnings during any particular period, | |
• | the timing and magnitude of our tax expense, resulting from the globally distributed nature of our selling and research and development operations, and certain on-going tax audits or investigations by various local tax authorities that may lead to the loss of certain planned-for tax benefits, or increased taxable income in certain jurisdictions that may not be offset by losses in other tax jurisdictions, | |
• | fluctuations in our tax rate from quarter to quarter due to the impact of discrete events, including the settlement of claims, the management of audits and other inquiries, the acquisition of other companies or other events, | |
• | the impact of expensing stock-based compensation, | |
• | currency and exchange rate fluctuations, | |
• | timing and integration of acquisitions, | |
• | costs of compliance with the Sarbanes-Oxley Act of 2002, and | |
• | restructuring charges taken during any fiscal year, including the restructuring charges taken in the second and fourth quarters of fiscal 2006. |
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 MS 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 conclusion of the quarter.
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 industry is characterized by:
• | rapid technological advances, | |
• | evolving industry standards, | |
• | changes in end-user requirements, |
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• | 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 release of new products and enhancements and result in unexpected expenses.
Our growth and profitability 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.
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. |
We may engage in 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, we may only receive the anticipated benefits if we successfully integrate the acquired business into our existing business in a timely and non-disruptive manner, and we will have to devote a significant amount of time, management and financial resources to do so. Even with this investment of management and financial resources, the acquisition of another business or strategic relationship 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 fails to meet our expectations could cause our business and financial condition to be materially and adversely affected. In addition, acquisitions can involve charges and amortization of significant amounts of acquired identifiable intangible assets that could adversely affect our results of operations.
If we determine that any of our goodwill or intangible assets, including technology purchased in acquisitions, are impaired, we would be required to take a charge to earnings, which could have a material adverse effect on our results of operations. |
The carrying value of goodwill and intangible assets recorded in connection with companies acquired into our DAS and MS business units was approximately $6.5 million and $13.5 million, respectively, as of the end of the third quarter of fiscal 2006. If we determine that any of the goodwill or other intangible assets associated with our acquisitions are impaired, then we would be required to reduce the value of those assets or to write them off completely by taking a related charge to earnings. If we are required to write down or write off all or a portion of those assets, or if financial analysts or investors believe we may need to take such action in the future, our stock price and results of operations could be materially and adversely affected.
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. |
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, many of our MS products require interaction with
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manufacturing equipment, the use and technology of which are subject to a wide variety of worldwide 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.
We may lose sales if we are unable to protect important intellectual property. |
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 face the following risks in protecting our intellectual property:
• | 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 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 software piracy, particularly in certain countries in Asia, may result in lost revenue in those countries or to customers with worldwide operations, and | |
• | the cost of enforcing our intellectual property rights, including actions currently on going, may reduce our future profitability. |
Our financial condition or results of operations may be adversely affected by international business risks. |
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 revenue is derived from customers outside the United States and certain intellectual property is owned by subsidiary companies located outside the United States. We also manufacture certain of our products outside of the United States and have contracted with third parties to assemble certain of our MS products 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, |
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• | 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 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, | |
• | interruptions of our operations due to political and social conditions of the countries in which we do business, | |
• | 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 have more limited financial and other resources than many of our competitors and potential competitors and may be unable to compete successfully against them. |
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 solutions for the design, analysis and manufacture 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.
Disruption of operations at our development or manufacturing facilities could interfere with our product development and production cycles. |
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. Our manufacturing operations are performed in the United States and Ireland. Also, we utilize contract manufacturing facilities in the United States, Ireland and Asia. 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 or manufacturing facilities could severely disrupt our operations.
Our MS products may lead to product liability claims against us. |
Our MS 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. Furthermore, 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.
Our net income and earnings per share have been and will continue to be significantly reduced as a result of the requirement that we record compensation expense for shares issued under our stock plans. |
In the past, we have used stock options as a key component of our employee compensation packages. We believe that stock options provide an incentive to our employees to maximize long-term shareholder value and can encourage valued employees to remain with the Company. Beginning in fiscal 2006, Statement of Financial Accounting Standards No. 123(R) (“SFAS No. 123(R)”), “Shared-Based Payment,” requires us to account for share-based compensation granted under our stock plans using a fair value-based model, such as Black-Scholes option-pricing model, on the grant date and to record those grants as stock-based compensation expense. As a result, our net income and earnings per share have been and will continue to be significantly
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reduced. Our results may reflect a loss in future periods. We currently calculate share-based compensation expense using the Black-Scholes option-pricing model, which requires the input of highly subjective assumptions and does not necessarily provide a reliable measure of the fair value of our stock options. Assumptions used under the Black-Scholes option-pricing model that are highly subjective include the expected stock price volatility and expected life of an option.
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. |
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, | |
• | sale of shares of our common stock by insiders or affiliated persons, | |
• | 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 and a diversion of management’s attention and resources and could harm our business, financial condition and results of operations.
Item 6. | Exhibits |
(a) Exhibits:
Exhibit | ||||
No. | ||||
31 | .1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer. (Filed herewith.) | ||
31 | .2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer. (Filed herewith.) | ||
32 | .1 | Section 1350 Certification of Chief Executive Officer.(1) (Filed herewith.) | ||
32 | .2 | Section 1350 Certification of Chief Financial Officer.(1) (Filed herewith.) |
(1) | This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Moldflow Corporation |
By: | /s/ A. ROLAND THOMAS |
A. Roland Thomas | |
President and Chief Executive Officer | |
Moldflow Corporation |
By: | /s/ CHRISTOPHER L. GORGONE |
Christopher L. Gorgone | |
Executive Vice President of Finance | |
and Chief Financial Officer | |
(Principal Financial Officer) |
Date: May 10, 2006
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