SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-24077
Mobius Management Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3078745
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
120 Old Post Road, Rye, New York 10580
(Address of principal executive offices) (zip code)
(914) 921-7200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES |X| NO ||
Number of shares outstanding of the issuer's common stock as of May 4, 1999
Class Number of Shares Outstanding
Common Stock, par value $0.0001 per share 17,896,400
<PAGE>
MOBIUS MANAGEMENT SYSTEMS, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1998 and March 31, 1999
Consolidated Statements of Operations
Three and nine months ended March 31, 1998 and 1999
Consolidated Statement of Stockholders' Equity
Nine months ended March 31, 1999
Consolidated Statements of Cash Flows
Nine months ended March 31, 1998 and 1999
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of
Securities Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
MOBIUS MANAGEMENT SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data and per share data)
<TABLE>
<CAPTION>
March 31,
June 30, 1999
1998 (Unaudited)
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 42,222 $ 36,445
Marketable securities, at market - 9,700
Accounts receivable, net of allowance for doubtful
accounts of $612 and $623, respectively 10,733 8,981
Software license installments 7,330 10,026
Other current assets 1,682 2,707
------- -------
Total current assets 61,967 67,859
Software license installments,
non-current portion, net of allowance for
doubtful accounts of $767 and $819, respectively 13,686 13,870
Property and equipment, net 2,932 3,662
Other assets 215 471
-------- --------
Total assets $ 78,800 $ 85,862
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 9,471 $ 9,973
Deferred maintenance revenue 11,408 13,332
Deferred income taxes 2,054 3,595
Other liabilities 969 51
------- -------
Total current liabilities 23,902 26,951
------- -------
Deferred maintenance revenue, non-current portion 5,616 4,110
Deferred income taxes, non-current portion 3,124 3,704
Capital lease obligations, less current portion 36 -
Stockholders' equity:
Common stock $.0001 par value; authorized
40,000,000 shares; issued and outstanding
17,694,500 and 17,896,400 shares, respectively 2 2
Additional paid-in capital 47,994 48,396
Deferred compensation (2,076) (1,156)
Retained earnings 12,199 16,099
Accumulated other comprehensive income, net of tax 3 (244)
Treasury stock, at cost, 4,091,000
and 4,091,000 shares, respectively (12,000) (12,000)
-------- --------
Total stockholders' equity 46,122 51,097
-------- --------
Total liabilities and stockholders' equity $ 78,800 $ 85,862
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MOBIUS MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31
1998 1999 1998 1999
--------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Software license revenues $ 8,075 $ 11,223 $22,368 $ 34,645
Maintenance and other revenues 4,816 6,660 13,594 18,099
--------------------------------------------
Total revenues 12,891 17,883 35,962 52,744
Cost of revenues:
Software license revenues 217 282 895 825
Maintenance and other revenues 866 1,209 2,420 3,687
--------------------------------------------
Total cost of revenues 1,083 1,491 3,315 4,512
--------------------------------------------
Gross profit 11,808 16,392 32,647 48,232
Operating expenses:
Sales and marketing 6,566 9,684 17,363 27,732
Research and development 1,975 2,630 5,525 7,907
General and administrative 1,740 2,098 4,744 6,078
Stock compensation expense 313 213 313 879
-------------------------------------------
Total operating expenses 10,594 14,625 27,945 42,596
Income from operations 1,214 1,767 4,702 5,636
Miscellaneous income, net 533 687 1,353 2,021
-------------------------------------------
Income before income taxes 1,747 2,454 6,055 7,657
Provision for income taxes 979 1,174 3,334 3,757
Accretion on preferred stock - - 102 -
-------------------------------------------
Net income $ 768 $1,280 $ 2,619 $3,900
===========================================
Basic weighted average shares 10,909 17,815 10,909 17,783
===========================================
Basic earnings per share $0.07 $0.07 $0.24 $0.22
===========================================
Diluted weighted average shares 16,435 19,239 16,277 18,973
===========================================
Diluted earnings per share $0.05 $0.07 $0.16 $0.21
===========================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MOBIUS MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive Total
Common Stock Paid in Deferred Retained Income, Treasury Stock Stockholders'
Shares Amount Capital Compensation Earnings net of tax Shares Amount Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1998 17,695 $ 2 $47,994 $(2,076) $12,199 $ 3 4,091 $(12,000) $46,122
Net income - - - - 3,900 - - - 3,900
Change in other comprehensive income - - - - - (247) - - (247)
Stock options exercised 201 - 443 - - - - - 443
Change in deferred compensation - - (41) 920 - - - - 879
--------------------------------------------------------------------------------------------
Balance at March 31, 1999 17,896 $ 2 $48,396 $(1,156) $16,099 $(244) 4,091 $(12,000) $51,097
============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MOBIUS MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
1998 1999
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,619 $ 3,900
Adjustments to reconcile net income to
net cash provided by operating activities:
Deferred income taxes 1,433 2,121
Depreciation and amortization 508 841
Accretion of Preferred Stock 102 -
Stock compensation expense 313 879
Change in operating assets and liabilities:
Accounts receivable, net 4,651 1,752
Software license installments (5,679) (2,880)
Other assets (1,481) (1,281)
Accounts payable and accrued expenses (2,289) 692
Other liabilities 71 (918)
Deferred maintenance revenue 4,880 418
------- ------
Total adjustments 2,509 1,624
------- ------
Net cash provided by operating activities 5,128 5,524
------- ------
Cash flows from investing activities:
Purchase of marketable securities - (9,697)
Capital expenditures (1,101) (1,571)
------- -------
Net cash used in investing activities (1,101) (11,268)
------- -------
Cash flows from financing activities:
Cash received from exercise of stock options - 253
Payments on capital lease obligations (43) (36)
------- ------
Net cash (used in) provided by financing activities (43) 217
------- ------
Effect of exchange rate changes on
cash and cash equivalents 13 (250)
------- ------
Net change in cash and cash equivalents 3,997 (5,777)
Cash and cash equivalents at beginning
of period 5,672 42,222
------- -------
Cash and cash equivalents at end of period $ 9,669 $36,445
======= =======
</TABLE>
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 9 $ 15
Income taxes 1,804 3,222
See accompanying notes to consolidated financial statements.
<PAGE>
MOBIUS MANAGEMENT SYSTEMS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(1) Basis of Presentation
The accompanying consolidated financial statements as of June 30, 1998 and March
31, 1999 and for the three and nine month periods ended March 31, 1998 and 1999,
have been prepared in accordance with the requirements of the Securities and
Exchange Commission (SEC) for interim reporting. Under those rules, certain
footnotes or other financial information that are normally required by generally
accepted accounting principles (GAAP) can be condensed or omitted.
Revenues, expenses, assets and liabilities vary during the year and GAAP
requires us to make estimates and assumptions in preparing our interim financial
statements. We have made our best effort in establishing good faith estimates
and assumptions, however, actual results may differ.
We are responsible for the financial statements included in this Form 10-Q.
These financial statements include all normal and recurring adjustments that are
necessary for the fair presentation of our financial position, results of
operations and changes in cash flow. These statements should be read in
conjunction with the consolidated financial statements and notes in our latest
Form 10-K.
(2) Significant Accounting Policies
Earnings Per Share
Basic EPS is computed by dividing income available to common stockholders by the
weighted average number of shares of common stock outstanding during the period.
The computation of Diluted EPS is similar to the computation of Basic EPS except
that it gives effect to all potentially dilutive instruments that were
outstanding during the period. Stock options were dilutive instruments in all
four periods and our Series A Convertible Preferred Stock was dilutive for the
three and nine months ended March 31, 1998. All of our Seris A Convertible
Preferred Stock was converted into common stock upon the completion of our
initial public offering ("IPO").
The following is a reconciliation of the numerators and denominators for the
Basic and Diluted EPS calculations:
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1999
------------------------------------------- ----------------------------------------
Net Income Shares Per Share Net Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- --------------- ------------ ------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income $ 768 $ 1,280
===== =======
Weighted average
shares outstanding 10,909 17,815
Basic EPS $0.07 $0.07
===== =====
Diluted EPS:
Net income $ 768 $ 1,280
===== =======
Dilutive effect of
convertible securities 4,171 -
Dilutive effect of
stock options 1,355 1,424
------ ------
Diluted EPS 16,435 $0.05 19,239 $0.07
====== ===== ====== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended March 31,
1998 1999
------------------------------------------- -----------------------------------------
Net Income Shares Per Share Net Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-------------- --------------- ------------ ------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income $ 2,619 $ 3,900
======= =======
Weighted average
shares outstanding 10,909 17,783
Basic EPS $0.24 $0.22
===== =====
Diluted EPS:
Net income $ 2,619 $ 3,900
======= =======
Dilutive effect of
convertible securities 4,127 -
Dilutive effect of
stock options 1,241 1,190
------ ------
Diluted EPS 16,277 $0.16 18,973 $0.21
====== ===== ====== =====
</TABLE>
Marketable Securities
Our marketable securities are categorized as available-for-sale securities, as
defined by Statement of Financial Accounting Standards No. 115, Accounting for
Certain Investments in Debt and Equity Securities. Unrealized holding gains and
losses are reflected as a net amount in a separate component of stockholders'
equity until realized. For the purpose of computing realized gains and losses,
cost is identified on a specific identification basis.
Recent Accounting Pronouncements
On December 15, 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions." SOP 98-9,
which is effective for transactions entered into in fiscal years beginning after
March 15, 1999, requires the application of the "residual method" for certain
multiple element arrangements. Under this method, the arrangement fee is
recognized as follows: (1) the total fair value of the undelivered elements, as
indicated by vendor-specific objective evidence, is deferred and subsequently
recognized in accordance with the relevant sections of SOP 97-2 and (2) the
difference between the total arrangement fee and the amount deferred for the
undelivered elements to be recognized as revenue related to the delivered
elements. All other provisions of SOP 97-2 remain in effect. We will adopt SOP
98-9 for software transactions in our next fiscal year, which begins on July 1,
1999. We believe our current accounting policies substantially comply with SOP
98-9 and therefore do not expect it to have a material effect on our operations.
<PAGE>
3) Marketable Securities
In January 1999, we invested in marketable securities. Our available for sale
securities at March 31, 1999 are summarized as follows:
Gross Unrealized
Cost Gain Loss Market Value
Debt Securities $9,697 $4 $1 $9,700
The difference between gross unrealized gains and losses was included in
accumulated other comprehensive income in the consolidated statement of
stockholders' equity as of March 31, 1999. There were no sales of available for
sale marketable securities during the three and nine months ended March 31,
1999.
4) Software License Installments
We offer extended payment terms to some of our customers. For software license
contracts of 15 years, the related financing period is generally 5 years. For
software license installment contracts of 3 to 5 years, the payments are
generally spread ratably over the term. Software license installments are
discounted at a market rate of interest at the date the software license
contract revenue is recognized. The discount is amortized to interest income
using the interest method over the term of the license contract.
(5) Property and Equipment
Property and equipment consist of the following:
June 30, March 31,
1998 1999
------ --------
Furniture, fixtures and office equipment $ 508 $ 590
Computer equipment and software 4,410 5,899
Leasehold improvements 544 602
------ ------
5,462 7,091
Less accumulated depreciation and amortization (2,530) (3,429)
------ ------
Property and equipment, net $2,932 $3,662
====== ======
Depreciation and amortization expense on property and equipment, including
capital leases, was $203, $508, $311 and $841 for the three and nine month
period ended March 31, 1998 and March 31, 1999, respectively.
(6) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following:
June 30, March 31,
1998 1999
------ -------
Accounts payable $ 801 $1,051
Compensation and related benefits 4,872 4,893
Royalty payable 1,318 1,164
Other 2,480 2,865
------ ------
$9,471 $9,973
====== ======
<PAGE>
(7) Stock Incentive Plan
In January, February and March 1998 we granted 350, 370 and 53 stock options,
respectively, under our 1996 Stock Incentive Plan at an exercise price of $9.86,
$11.00 and $11.00 per share, respectively, which were deemed by the Board of
Directors to be fair market values for the shares on these dates. We
subsequently determined that these options were granted at exercise prices below
the fair market value of $14.00 per share, the low end of our range of per share
prices for our Initial Public Offering ("IPO") in April 1998. As a result, we
recognized compensation expense of $313 for the three and nine months ended
March 31, 1998 and $213 and $879 for the three and nine months ended March 31,
1999, respectively. We expect to recognize additional compensation expense of
approximately $1,156 in future periods. This compensation expense will be
amortized over the respective option holders' service periods, adjusted for
option holders' terminations.
(8) Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" requires that we disclose comprehensive income, which includes net
income, foreign currency translation adjustments and unrealized gains and losses
on marketable securities classified as available for sale. Comprehensive income
is as follows:
Three months ended Nine months ended
March 31, March 31,
1998 1999 1998 1999
---- ---- ---- ----
Net Income $ 768 $1,280 $2,619 $3,900
Unrealized marketable securities gain - 3 - 3
Unrealized translation gain (loss) 83 (295) 13 (250)
-------------------------------------
Comprehensive Income $ 851 $ 988 $2,632 $3,653
=====================================
(9) Commitments and Contingencies
Our revolving line of credit expired on October 20, 1998. We are in negotiations
to expand our line of credit for working capital. We expect that the new line of
credit will be secured by certain assets and may contain certain financial
restrictions and covenants such as maintaining minimum amounts of cash, net
worth and profitability. In compliance with the lease of our corporate
headquarters, our landlord holds a letter of credit with Silicon Valley Bank for
$275. This letter of credit is secured by a certificate of deposit.
(10) Sale of INFOPAC-Tapesaver
In January 1999, we sold our INFOPAC-TapeSaver product to Technologic Software
Concepts, Incorporated of Irvine, California for approximately $3,000. Under the
terms of the sale, Technologic will assume responsibility for maintenance
support for all current TapeSaver licenses. As a result of this arrangement, we
will recognize $3,000 of license revenue as Technologic makes payments to us
over the next five years, and approximately $1,000 of maintenance revenue
through December 31, 1999. For the quarter ended March 31, 1999, we recognized
approximately $400 of license revenue and approximately $400 of maintenance
revenue related to this arrangement. Future license revenue will be variable
through December 31, 1999 as Technologic sells TapeSaver to its customers and
will be $112,500 each quarter thereafter for the remaining four years of the
contract.
<PAGE>
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In this section, readers are given a more detailed assessment of our operating
results and changes in financial position. This section should be read in
conjunction with our Consolidated Financial Statements and Notes. Please note
that references in this section to "last year's quarter" and "this quarter"
refer to our fiscal quarters ended March 31, 1998 and 1999, respectively. Our
quarterly revenues and operating results have varied substantially from quarter
to quarter in the past, and are likely to continue to do so in the future.
Certain factors underlying such fluctuations, as well as a number of other
factors relevant to a reader's understanding of this Management Discussion and
Analysis, are set forth under the heading "Factors Affecting Future Performance"
contained in our Form 10-K, the full text of which is incorporated in this Form
10-Q by this reference and filed as an exhibit hereto.
Statements contained in this quarterly report, other than historical financial
results, may contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements
involve risks and uncertainties. In particular, any statements contained herein
regarding expectations with respect to future sales and profitability, as well
as product development and/or introductions, are subject to known and unknown
risks, uncertainties and contingencies, many of which are beyond our control,
which may cause actual results, performance or achievements to differ materially
from those projected or implied in such forward-looking statements. Factors that
might affect actual results, performance or achievements include, among other
things, overall economic and business conditions, the demand for our goods and
services, and technological advances and competitive factors in the markets in
which we compete. These risks and uncertainties are described in detail from
time to time in our filings with the Securities and Exchange Commission,
including our Form 10-K filed on September 28, 1998. We accept no obligation to
update these forward-looking statements and do not intend to do so.
Overview
We are a leading provider of enterprise software products designed to optimize
the storage, retrieval and presentation of large volumes of transactional
information. Major financial services, healthcare, manufacturing, retail and
telecommunications companies and governmental entities use our products to
facilitate customer service and other mission-critical functions.
<PAGE>
Results of Operations
The following table presents our Consolidated Statements of Income as a
percentage of total revenues for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
1998 1999 1998 1999
------ ----- ---- -----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Software license revenues 62.6% 62.8% 62.2% 65.7%
Maintenance and other revenues 37.4 37.2 37.8 34.3
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
Costs of revenues:
Software license revenues 1.7 1.6 2.5 1.6
Maintenance and other revenues 6.7 6.7 6.7 7.0
----- ----- ----- -----
Total costs of revenues 8.4 8.3 9.2 8.6
----- ----- ----- -----
Gross profit 91.6 91.7 90.8 91.4
Operating expenses:
Sales and marketing 51.0 54.2 48.3 52.5
Research and development 15.3 14.7 15.4 15.0
General and administrative 13.5 11.7 13.2 11.5
Stock compensation expense 2.4 1.2 0.9 1.7
----- ----- ----- -----
Total operating expenses 82.2 81.8 77.8 80.7
----- ----- ----- -----
Income from operations 9.4 9.9 13.0 10.7
Miscellaneous income, net 4.2 3.8 3.8 3.8
----- ----- ----- -----
Income before income taxes 13.6 13.7 16.8 14.5
Provision for income taxes 7.6 6.5 9.2 7.1
Accretion on preferred stock - - 0.3 -
------ ----- ----- -----
Net income 6.0% 7.2% 7.3% 7.4%
===== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1999
Revenues.
o Software license revenues increased 39.0% from $8.1 million in last year's
quarter to $11.2 million this quarter. The increase was primarily
attributable to increased sales of our ViewDirect and DocumentDirect
products. These increases were offset by decreased sales of the INFOPAC ABS
product.
o Maintenance and other revenues increased 38.3% from $4.8 million in last
year's quarter to $6.7 million this quarter. The increase was primarily
attributable to the growth of the number of maintenance contracts and
within the contracts, the number of users. Other revenues for both periods
were not significant.
o Total revenues increased 38.7% from $12.9 million in last year's quarter to
$17.9 million this quarter. U.S. revenues increased 36.2% from $11.8
million in last year's quarter to $16.0 million this quarter. Our
international revenues increased 64.9% from $1.1 million in last year's
quarter to $1.9 million this quarter. Our total revenues have increased
primarily because we have sold more licenses for our products to new and
existing customers.
<PAGE>
Costs of Revenues.
o Costs of license revenues consist primarily of royalties and sublicense
fees. The costs of license revenues increased 30.0% from $217,000 in last
year's quarter to $282,000 this quarter, representing 2.7% and 2.5%,
respectively, of license revenues in those periods. Royalties and
sublicense fees decreased as a percentage of license revenue as a result of
changes in the mix of products subject to royalties and a decrease in the
number of software components subject to royalties.
o Costs of maintenance and other revenues consist primarily of customer
support staff costs. The costs of maintenance and other revenues increased
39.6% from $866,000 in last year's quarter to $1.2 million this quarter,
representing 18.0% and 18.2% of maintenance and other revenues,
respectively. This increase was primarily attributable to increased
staffing and personnel-related costs.
Operating Expenses.
o Sales and marketing expenses consist primarily of the cost of personnel
associated with the selling and marketing of our products, including
salaries, commissions, performance based bonuses and travel and
entertainment costs. Sales and marketing expenses also include the cost of
branch sales offices, marketing, promotional materials and advertising.
Sales and marketing expenses increased 47.5% from $6.6 million in last
year's quarter to $9.7 million this quarter. This increase was primarily
attributable to hiring more sales staff, which increased personnel related
costs.
o Research and development expenses consist primarily of personnel costs
attributable to the development of new software products and the
enhancement of existing products. Research and development expenses
increased 33.2% from $2.0 million in last year's quarter to $2.6 million
this quarter. The increase was primarily attributable to increased staffing
and personnel-related costs. We believe that a significant level of
research and development expenses will be required to maintain our
competitive position in the future.
o General and administrative expenses consist of personnel costs related to
management, accounting, human resources, network services, administration
and associated overhead costs, as well as fees for professional services.
General and administrative expenses increased 20.6% from $1.7 million in
last year's quarter to $2.1 million this quarter. This increase was due to
hiring additional personnel, using more subcontractors to assist in
enhancing and improving our infrastructure for future growth and an
increase in professional fees. We expect general and administrative
expenses to increase in fiscal 1999 as a result of adding personnel needed
to support our continued expansion of our operations.
Miscellaneous Income consists of license and other interest income, interest
expense and foreign currency transaction gains (losses). License and other
interest income consists of interest on cash balances and a portion of license
payments under installment contracts allocated to interest based on a discount
rate. License and other interest income increased from $541,000 in last year's
quarter to $700,000 this quarter primarily as a result of the earnings on higher
cash and marketable securities balances as a result of our IPO in April 1998 and
higher software license installment sales.
Interest expense consists primarily of costs associated with our capital lease
obligations. Foreign currency losses consist of realized transaction losses
relating to foreign currency exchange rate fluctuations. Both, interest expense
and foreign currency transaction losses were not material in last year's quarter
nor this quarter.
<PAGE>
Provision for Income Taxes was $1.0 million in last year's quarter and $1.2
million this quarter. The effective tax rates were 56.0% in last year's quarter
and 47.8% this quarter. The effective tax rate has decreased due to new tax
structures for certain new foreign subsidiaries which permit consolidation of
losses for U.S. tax purposes, tax free investment earnings on higher cash
balances in the U.S. and smaller losses in some of our foreign subsidiaries.
Nine Months Ended March 31, 1998 Compared to Nine Months Ended March 31, 1999
Revenues.
o Software license revenues increased 54.9% from $22.4 million in the first
nine months of fiscal 1998 to $34.6 million the first nine months of fiscal
1999. The increase was primarily attributable to increased sales of our
ViewDirect and DocumentDirect products. These increases were offset by
decreased sales of our Infopac ABS product.
o Maintenance and other revenues increased 33.1% from $13.6 million in first
nine months of fiscal 1998 to $18.1 million the first nine months of fiscal
1999. The increase was primarily attributable to the growth of the number
of maintenance contracts and within the contracts, the number of users.
Other revenues for both periods were not significant.
o Total revenues increased 46.7% from $36.0 million in the first nine months
of fiscal 1998 to $52.7 million the first nine months of fiscal 1999. U.S.
revenues increased 41.8% from $32.1 million in the first nine months of
fiscal 1998 to $45.5 million the first nine months of fiscal 1999. Our
international revenues increased 87.8% from $3.8 million in the first nine
months of fiscal 1998 to $7.2 million the first nine months of fiscal 1999.
Our total revenues have increased primarily because we have sold more
licenses for our products to new and existing customers.
Costs of Revenues.
o Costs of license revenues decreased 7.8% from $895,000 in the first nine
months of fiscal 1998 to $825,000 the first nine months of fiscal 1999,
representing 4.0% and 2.4%, respectively, of license revenues in those
periods. This decrease was a result of decreases in the sales of products
subject to royalties.
o Costs of maintenance and other revenues increased 52.4% from $2.4 million
in the first nine months of fiscal 1998 to $3.7 million the first nine
months of fiscal 1999, representing 17.8% and 20.4% of maintenance and
other revenues, respectively. This increase was primarily attributable to
increased staffing and personnel-related costs.
Operating Expenses.
o Sales and marketing expenses increased 59.7% from $17.4 million in the
first nine months of fiscal 1998 to $27.7 million the first nine months of
fiscal 1999. This increase was primarily attributable to hiring more sales
staff, which increased personnel related costs.
o Research and development expenses increased 43.1% from $5.5 million in the
first nine months of fiscal 1998 to $7.9 million the first nine months of
fiscal 1999. The increase is primarily attributable to increased staffing
and personnel-related costs.
o General and administrative expenses increased 28.1% from $4.7 million in
the first nine months of fiscal 1998 to $6.1 million the first nine months
of fiscal 1999. This increase is due to hiring additional personnel and
using more subcontractors to assist in enhancing and improving our
infrastructure for future growth.
<PAGE>
Miscellaneous Income. License and other interest income increased from $1.4
million in the first nine months of fiscal 1998 to $2.1 million the first nine
months of fiscal 1999 primarily as a result of earnings on higher cash balances
as a result of our IPO in April 1998 and higher software license installments.
Interest expense was not material in the first nine months of fiscal 1998 and
the first nine months of fiscal 1999. Foreign currency transaction losses
increased from $12,000 in the first nine months of fiscal 1998 to $102,000 in
the first nine months of fiscal 1999. This loss is due to the increase in the
value of the dollar in relation to the foreign currency in the countries where
we operate our largest subsidiaries.
Provision for Income Taxes was $3.3 million for the first nine months of fiscal
1998 and $3.8 million for the first nine months of fiscal 1999. The effective
tax rates for these respective periods were 55.1% and 49.1%. The effective tax
rate has decreased due to new tax structures for certain new foreign
subsidiaries which permit consolidation of losses for U.S. tax purposes, tax
free investment earnings on higher cash balances in the U.S. and smaller losses
of some of our foreign subsidiaries.
Liquidity and Capital Resources
Since our inception, we have funded our operations principally through cash
flows from operating activities and, to a lesser extent, bank financings and
capital leases. As of March 31, 1999, we had cash and cash equivalents of $36.4
million, a decrease of $5.8 million from the $42.2 million held at June 30,
1998. This decrease was the result of investing $9.7 million of our cash into
marketable securities.
Net cash provided by operating activities was $5.1 million and $5.5 million in
the first nine months of fiscal 1998 and 1999, respectively. Our primary sources
of cash during the first nine months of fiscal 1999 were increased net income,
increased deferred taxes and decreased accounts receivable. These sources were
offset by increases in software license installments, increases in other assets
and decreases in other liabilities. Accounts receivable decreased 16.3% from
$10.7 million at June 30, 1998 to $9.0 million at March 31, 1999 which
corresponds with fluctuations in license revenue, software installments and
maintenance billings. Software license installments increased 13.7% from $21.0
million at June 30, 1998 to $23.9 million at March 31, 1998.
Cash used in investing activities primarily consisted of the purchase of
investments of $9.7 million in marketable securities. In addition, there were
capital expenditures of $1.1 million in the first nine months of fiscal 1998 and
$1.6 million in the first nine months of fiscal 1999 for the purchase of
computer equipment and software.
Net cash used in financing activities was $43,000 in the first nine months of
fiscal 1998 and related to the repayment of capital leases. Net cash provided by
financing activities was $217,000 in the first nine months of fiscal 1999
primarily due to cash received from the exercise of stock options.
We believe that our existing cash balances and cash flows expected from future
operations will be sufficient to meet our capital requirements for at least 12
months. We continue negotiations to expand our line of credit for working
capital and expect that the new line of credit will be secured by certain assets
and may contain certain financial restrictions and covenants such as maintaining
minimum amounts of cash, net worth and profitability. In compliance with the
lease of our corporate headquarters in Rye, NY, our landlord holds a letter of
credit with Silicon Valley Bank for $275,000. This letter of credit is secured
by a certificate of deposit.
In January 1999, we sold our INFOPAC-TapeSaver product to Technologic Software
Concepts, Incorporated of Irvine, California for approximately $3,000. Under the
terms of the sale, Technologic will assume responsibility for maintenance
support for all current TapeSaver licenses. As a result of this arrangement, we
will recognize $3,000 of license revenue as Technologic makes payments to us
over the next five years, and approximately $1,000 of maintenance revenue
through December 31, 1999. For the quarter ended March 31, 1999, we recognized
approximately $400 of license revenue and approximately $400 of maintenance
revenue related to this arrangement. Future license revenue will be variable
through December 31, 1999 as Technologic sells TapeSaver to its customers and
will be $112,500 each quarter thereafter for the remaining four years of the
contract.
Year 2000 Compliance
Many currently installed operating systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
need additional digits to distinguish 21st century dates from 20th century
dates. As a result, computer systems and/or software used by many companies may
need to be upgraded to comply with such "Year 2000" requirements. Significant
uncertainty exists in the software industry concerning the potential effects
associated with such compliance. Since our products are designed for long-term
storage and retrieval of data with end of life dates well beyond 2000, we
believe that our products are and have been Year 2000 compliant. There can be no
assurance that our products will not experience Year 2000 compliance
difficulties, or that third party products, including operating systems, that
are not Year 2000 compliant will not have a detrimental effect on the operation
of our products.
We believe that Year 2000 issues may significantly affect the purchasing
patterns of our customers and potential customers. Many companies are expending
significant resources to correct or modify their current software systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase software products such as those we offer. Conversely, Year 2000
issues may cause other companies to accelerate purchases, thereby causing an
increase in short-term demand and a consequent decrease in long-term demand for
software products.
Additionally, Year 2000 compliance issues could cause a significant number of
companies, including our customers to re-evaluate their current systems' needs,
and as a result, consider switching to other systems or suppliers. This could
have a material adverse effect on our business, operating results and financial
condition.
Management has implemented a Company-wide program to prepare our internal
computer systems and applications (such as our accounting and word processing
programs) for Year 2000 compliance. We expect to incur internal staff costs as
well as other expenses necessary during the course of such efforts and we expect
to both replace some systems and upgrade others. Maintenance or modification
costs will be expensed as incurred. The total cost of this effort is still being
evaluated, but we do not expect the cost to be material.
In light of the above, we do not anticipate any serious Year 2000 problems. We
will, however, continue to assess this situation and develop contingency plans
as necessary. Our expectations with respect to these Year 2000 issues are based
on the assumption that there will be no general failure of external systems
(including power, communications, transportation, or financial systems)
necessary for the ordinary conduct of business.
Recent Accounting Pronouncements
On March 15, 1998, the AICPA issued SOP 98-9, "Modification of SOP 97-2,
Software Revenue Recognition, With Respect to Certain Transactions". SOP 98-9,
which is effective for transactions entered into in fiscal years beginning after
March 15, 1999, requires the application of the "residual method" for multiple
element arrangements. Under this method, the arrangement fee is recognized as
follows: (1) the total fair value of the undelivered elements, as indicated by
vendor-specific objective evidence, is deferred and subsequently recognized in
accordance with the relevant sections of SOP 97-2 and (2) the difference between
the total arrangement fee and the amount deferred for the undelivered elements
is recognized as revenue related to the delivered elements. All other provisions
of SOP 97-2 remain in effect. We will adopt SOP 98-9 for software transactions
in our next fiscal year, which begins on July 1, 1999. We believe our current
accounting policies substantially comply with SOP 98-9 and therefore do not
expect it to have a material effect on our operations.
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
From time to time, we are involved in litigation relating to claims arising out
of our operations in the normal course of business. We are not a party to any
legal proceedings, the adverse outcome of which, individually or in the
aggregate, would have a material adverse effect on our business, operating
results and financial condition.
Item 2 - Changes in Securities and Use of Proceeds
(a) Not applicable
(b) Not applicable
(c) Not applicable
(d) On April 27, 1998, the Securities and Exchange Commission declared effective
our Registration Statement on Form S-1 (File No. 333-47117) with respect to our
initial public offering. To date, we have not used any of the approximately $33
million of proceeds from the offering. The proceeds are currently invested in
short term, investment grade, interest bearing securities.
Item 3 - Defaults Upon Senior Securities
None
Item 4 - Submission of Matters to a Vote of Security Holders
None
Item 5 - Other Information
None
<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit
No. Description
3.1* Form of Second Amended and Restated Certificate of
Incorporation of the Registrant.
3.2* Form of Amended and Restated By-Laws of the Registrant.
4.1* Specimen certificate representing the Common Stock
27 Financial Data Schedule (EDGAR only)
99.1 Factors Affecting Future Performance
* Filed as an exhibit to Mobius' Registration Statement on Form S-1
(File No. 333-47117) or an amendment thereto and incorporated
herein by reference to the same exhibit number.
(b) Reports on Form 8-K
Not Applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: May 14, 1999
MOBIUS MANAGEMENT SYSTEMS, INC.
By: /s/ E. Kevin Dahill
E. Kevin Dahill
Vice President, Finance, Chief Financial
Officer and Treasurer
(Principal Financial and Accounting Officer)
<PAGE>
EXHIBIT INDEX
Exhibit Sequential
No. Description Page no.
3.1* -- Form of Second Amended and Restated Certificate of
Incorporation of the Registrant.
3.2* -- Form of Amended and Restated By-Laws of the Registrant.
4.1* -- Specimen certificate representing the Common Stock
27 -- Financial Data Schedule (EDGAR only)
99.1 Factors Affecting Future Performance
* Filed as an exhibit to Mobius' Registration Statement on Form S-1
(File No. 333-47117) or an amendment thereto and incorporated
herein by reference to the same exhibit number.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains Summary Financial Information extracted
from the Balance Sheet and Income Statement for the nine months
ended March 31, 1999 for Mobius Management Systems, Inc. and is
qualified in its entirety by reference to such Financial
Statements.
</LEGEND>
<CIK> 0001025148
<NAME> MOBIUS MANAGEMENT SYSTEMS, INC.
<MULTIPLIER> 1,000
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-1-1998
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1.0
<CASH> 36,445
<SECURITIES> 9,700
<RECEIVABLES> 9,604
<ALLOWANCES> 623
<INVENTORY> 0
<CURRENT-ASSETS> 67,859
<PP&E> 7,091
<DEPRECIATION> 3,429
<TOTAL-ASSETS> 85,862
<CURRENT-LIABILITIES> 26,951
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0
0
<COMMON> 2
<OTHER-SE> 51,095
<TOTAL-LIABILITY-AND-EQUITY> 85,862
<SALES> 52,744
<TOTAL-REVENUES> 52,744
<CGS> 4,512
<TOTAL-COSTS> 32,244
<OTHER-EXPENSES> 14,864
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15
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<INCOME-TAX> 3,757
<INCOME-CONTINUING> 3,900
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<NET-INCOME> 3,900
<EPS-PRIMARY> 0.22
<EPS-DILUTED> 0.21
</TABLE>
The following is an excerpt from our Form 10-K filed on September 28, 1998. We
accept no obligation to update these forward-looking statements and do not
intend to do so.
FACTORS AFFECTING FUTURE PERFORMANCE
Fluctuations in Period to Period Results; Seasonality; Uncertainty of
Future Operating Results
Our quarterly revenues and operating results have varied significantly
in the past and are likely to vary substantially from quarter to quarter in the
future. Quarterly revenues and operating results are expected to fluctuate as a
result of a variety of factors, including lengthy product sales cycles, changes
in the level of operating expenses, demand for our products, introductions of
new products and product enhancements by Mobius or its competitors, changes in
customer budgets, competitive conditions in the industry and general domestic
and international economic conditions.
The timing, size and nature of individual license transactions are
important factors in the Company's quarterly operating results. Many of our
license transactions involve large dollar commitments by customers, and the
sales cycles for these transactions are often lengthy and unpredictable. There
can be no assurance that we will be successful in closing large license
transactions within the fiscal quarter in which they are budgeted, if at all.
We have often recognized a substantial portion of our revenue in the
last month of the quarter and often in the last week of that month. As a result,
license fees in any quarter are often substantially dependent on orders booked
and shipped in the last month or last week of that quarter. Accordingly, delays
in the closing of sales near the end of a quarter could cause quarterly revenues
and, to a greater degree, net income, to fall substantially short of anticipated
levels.
Our business has experienced and is expected to continue to experience
significant seasonality, with revenues typically peaking primarily in our fourth
(June) fiscal quarter and to a lesser extent in our second (December) fiscal
quarter. These fluctuations are caused primarily by customer purchasing patterns
and the Company's sales force incentive programs, which recognize and reward
sales personnel on the basis of achievement of annual and other periodic
performance quotas, as well as by the factors described above.
We recognize revenue in accordance with Statement of Position ("SOP")
91-1, "Software Revenue Recognition", issued by the American Institute of
Certified Public Accountants ("AICPA"). For transactions occurring on or after
July 1, 1998, we will be required to recognize revenue in accordance with SOP
97-2, "Software Revenue Recognition", issued by the AICPA in October 1997, which
supersedes SOP 91-1. For a discussion of the possible effect the adoption of SOP
97-2 may have on our financial results in general, and the recognition of
revenues in specific periods in particular, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
Due to all of the foregoing factors and other factors described below,
revenues for any period are subject to significant variation, and we believe
that period-to-period comparisons of our operating results are not necessarily
meaningful. Such comparisons may not be reliable indicators of future
performance.
Technological Change
The market for our software is characterized by a high degree of
technological change, frequent new product introductions, evolving industry
standards and changes in customer demands. The introduction of competitive
products embodying new technologies and the emergence of new industry standards
could render our existing products obsolete and unmarketable. Our future success
will depend in part on our ability to enhance existing products and to develop
and introduce new products to meet diverse and evolving customer requirements
and keep pace with technological developments and emerging industry standards
such as new operating systems, hardware platforms, user interfaces and storage
media. The development of new products or enhanced versions of existing products
and services entails significant technical risks. There can be no assurance that
we will be successful in developing and marketing product enhancements or new
products that respond to technological change or evolving industry standards,
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction, implementation and marketing of these
products and enhancements, or that any new products and product enhancements we
may introduce will achieve market acceptance.
Product Concentration
To date, a substantial portion of our revenues have been attributable
to the licensing of our ViewDirect and DocumentDirect software and the provision
of related maintenance services. We currently expect this to continue for the
foreseeable future. As a result, factors adversely affecting the pricing of, or
demand for, these products and services, such as competition or technological
change, could have a material adverse effect on our business, operating results
and financial condition.
Competition
The market for our products is intensely competitive, subject to rapid
change and significantly affected by new product introductions and other market
activities of industry participants. We think the most important competitive
factors in the market for storage, retrieval and presentation software are
scalability, breadth of supported operating systems and document formats, ease
of use, product reputation, quality, performance, price, sales and marketing
effort and customer service. We currently encounter direct competition from a
number of public and private companies including Computer Associates
International, Computron Software, Inc., FileNet Corporation, International
Business Machines Corp., Eastman Kodak Co., New Dimension Software Ltd., and RSD
S.A. Due to the relatively low barriers to entry in the software market,
additional competition from other established and emerging companies is likely
as the market for storage, retrieval and presentation software continues to
develop and expand. Some of these companies are substantially larger than Mobius
and have significantly greater financial, technical and marketing resources, and
a larger installed base of customers, than Mobius. Some of such competitors also
have extensive direct and indirect channels of distribution. As a result, they
may be able to respond more quickly to new or emerging technologies and changes
in customer requirements, or to devote greater resources to the development,
promotion and sale of their products than Mobius. In addition, current and
potential competitors have established or may establish cooperative
relationships among themselves with prospective customers. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Increased competition may result in
price reductions, reduced gross margins and loss of market share, any of which
would have a material adverse effect on the Company's business, operating
results and financial condition. There can be no assurance that Mobius will be
able to compete successfully against current or future competitors or that
competitive pressures will not have a material adverse effect on our business,
operating results and financial condition.
<PAGE>
International Sales and Operations
We believe that our revenues and future operating results will depend
in part on our ability to increase sales in international markets. Our
international subsidiaries have not been profitable to date, and we expect
achieving profitability will require significant management attention and
financial resources. There can be no assurance that we will be able to maintain
or increase international market demand for our products or hire additional
qualified personnel who will successfully be able to market our products
internationally. Our international sales are subject to the general risks
inherent in doing business abroad, including unexpected changes in regulatory
requirements, tariffs and other trade barriers, costs and difficulties of
localizing products for foreign countries, lack of acceptance of localized
products in foreign countries, longer accounts receivable payment cycles,
difficulties in managing international operations, potentially adverse tax
consequences, restrictions on the repatriation of earnings, the burdens of
complying with a wide variety of foreign laws and economic instability. There
can be no assurance that such factors will not have a material adverse effect on
our future international revenues and, consequently, on our business, operating
results and financial condition.
An increase in the value of the U.S. dollar relative to foreign
currencies could make our products more expensive, and, therefore, potentially
less competitive in those markets. Although we do not currently engage in
international currency hedging transactions, we are exploring the possibility of
doing so in the future. To the extent that the U.S. dollar strengthens against
foreign currencies in international markets in which we maintain operations, our
net assets that are denominated in such foreign currencies will be devalued,
resulting in a foreign currency translation loss. For more information on our
international operations, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 and Notes 2 and 12 of Notes to
Consolidated Financial Statements.
Expansion of Indirect Channels
To date, sales through indirect sales channels have been immaterial. We
intend to invest resources to develop these channels; however, if our efforts do
not generate sufficient license revenues our operating results will be
negatively impacted. Our ability to achieve revenue growth in the future will be
affected by our success in expanding existing and establishing additional
relationships with strategic partners. We expect to receive lower unit prices
when selling through indirect channels, therefore, if we are successful in
selling products through indirect channels; our gross margins as a percentage of
revenue will decrease.
Extended Payment Risk
Terms of sale are a competitive factor in our markets. We offer
extended payment terms to some of our customers, generally three years for
server products and five years for client products. The license revenue for
these extended payment agreements is recorded at the time of sale as the present
value of the contract payments expected over the life of the agreement, net of
bundled maintenance fees. Interest income from these agreements is recognized
over the term of the financing based on the discount rate used by the Company to
determine present value. Although we have established reserves against possible
future bad debts and we believe that these installment contracts are enforceable
and that ultimate collection is probable, there can be no assurances that
customers will not default under such financing arrangements, or that any such
default would not have a material adverse effect on the Company's business,
operating results and financial condition. For more information on these
extended payment agreements see Notes 2 and 3 of Notes to Consolidated Financial
Statements.
<PAGE>
Protection of Intellectual Property
Our success is heavily dependent upon our confidential and proprietary
intellectual property. We have no patents or patent applications pending
covering any aspect of our software products. We rely primarily on a combination
of confidentiality agreements, copyright, trademark and trade secret laws and
confidentiality procedures to protect our proprietary rights. Trade secret and
copyright laws afford only limited protection to Mobius. Despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy aspects
of our products or obtain and use information that we regard as proprietary. In
addition, the laws of some foreign countries do not protect our proprietary
rights to as great an extent as do the laws of the United States. There can be
no assurance that our means of attempting to protect our proprietary rights will
be adequate or that our competitors will not independently develop similar or
competitive technology.
Our products are generally provided to customers in object code format
only. However, we enter into arrangements with our customers that releases the
source code to the customer upon the occurrence of certain events, such as
bankruptcy or insolvency of Mobius or certain material breaches of the license
agreement by Mobius. In the event of any release of the source code pursuant to
these arrangements, the customer's license is generally limited to use of the
source code to maintain, support and configure our software products.
Notwithstanding such provision, the delivery of source code to customers may
increase the likelihood of misappropriation or other misuse of our intellectual
property.
We are not aware that any of our products infringe the proprietary
rights of third parties. There can be no assurance, however, that third parties
will not claim infringement by Mobius with respect to current or future
products. Defense of any such claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require Mobius to enter into royalty or licensing agreements. Such royalty or
licensing agreements, if required, may not be available on terms acceptable to
Mobius or at all, which could have a material adverse effect on our business,
operating results and financial condition.
Dependence on Licensed Technology
We rely on certain software and other information that we license from
third parties, including software that is used to perform certain functions in
our products. Although we believe that there are alternatives for these
products, any significant interruption in the availability of such third-party
software could have a material adverse impact on our sales unless and until we
can replace the functionality provided by these products. In addition, we are to
a certain extent dependent upon such third parties' abilities to enhance their
current products, to develop new products on a timely and cost-effective basis
and to respond to emerging industry standards and other technological changes.
There can be no assurance that we would be able to replace the functionality
provided by the third party software currently offered in conjunction with our
products in the event that such software becomes obsolete or incompatible with
future versions of our products or is otherwise not adequately maintained or
updated. The absence of or any significant delay in the replacement of that
functionality could have a material adverse effect on our business, operating
results and financial condition.
Risk of Product Defects; Product Liability
Software products as complex as those offered by Mobius frequently
contain defects, especially when first introduced or when new versions are
released. Although we conduct extensive product testing, we have in the past
discovered software defects in certain of our new products and enhancements
after their introduction. We could in the future lose, or delay recognition of,
revenues as a result of software errors or defects. We believe that our
customers and potential customers are highly sensitive to defects in our
software. Although our business has not been materially adversely affected by
any such errors to date, there can be no assurance that, despite testing by
Mobius and by current and potential customers, errors will not be found in new
products or releases after commencement of commercial shipments, resulting in
loss of revenue or delay in market acceptance, diversion of development
resources, damage to our reputation, or increased service and warranty costs,
any of which could have a material adverse effect on our business, operating
results and financial condition.
Our license agreements with our customers typically contain provisions
designed to limit our exposure to potential product liability claims. However,
it is possible that the limitation of liability provisions contained in our
license agreements may not be effective under the laws of certain jurisdictions.
Although we have not experienced any product liability claims to date, the sale
and support of products by Mobius may entail the risk of such claims, and there
can be no assurance that Mobius will not be subject to such claims in the
future. We do not maintain product liability insurance. A successful product
liability claim brought against Mobius could have a material adverse effect on
our business, operating results and financial condition.
Year 2000 Compliance
Many currently installed operating systems and software products are
coded to accept only two digit entries in the date code field. These date code
fields need additional digits to distinguish 21st century dates from 20th
century dates. As a result, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
Significant uncertainty exists in the software industry concerning the potential
effects associated with such compliance. For a discussion on Year 2000
compliance by Mobius and how Year 2000 compliance may effect our future
performance, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Item 7.
Management of Growth; Dependence on Senior Management and Other Key Employees
Our ability to effectively manage our future growth, if any, will
require us to continue to improve our operational, financial and management
controls, accounting and reporting systems, and other internal processes. There
can be no assurance that we will be able to make such improvements in an
efficient or timely manner or that any such improvements will be sufficient to
manage our growth, if any. If we are unable to manage growth effectively, our
business, operating results and financial condition would be materially
adversely affected.
Our success depends to a significant extent upon our senior management
and certain other key employees of Mobius. The loss of the service of senior
management or other key employees could have a material adverse effect on
Mobius. Furthermore, we believe that our future success will also depend to a
significant extent upon our ability to attract, train and retain highly skilled
technical, management, sales and marketing personnel. Competition for such
personnel is intense, and we expect that such competition will continue for the
foreseeable future. We have from time to time experienced difficulty in locating
candidates with appropriate qualifications. The failure to attract or retain
such personnel could have a material adverse effect on our business, operating
