SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____to_____
Commission File Number: 0-24077
Mobius Management Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-3078745
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
120 Old Post Road, Rye, New York 10580
(Address of principal executive offices) (zip code)
(914) 921-7200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant:
(1) has filed all reportsrequired 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 February
10, 2000
Class Number of Shares Outstanding
Common Stock, par value $0.0001 per share 18,006,462
<PAGE>
MOBIUS MANAGEMENT SYSTEMS, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 1999 and December 31, 1999
Consolidated Statements of Operations
Three and six months ended December 31, 1998 and 1999
Consolidated Statement of Stockholders' Equity
Six months ended December 31, 1999
Consolidated Statements of Cash Flows
Six months ended December 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>
December 31,
June 30, 1999
1999 (Unaudited)
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 33,546 $ 32,518
Marketable securities, at market 9,362 9,772
Accounts receivable, net of allowance for doubtful
accounts of $860 and $764, respectively 12,631 7,213
Software license installments, current portion 10,603 9,571
Other current assets 2,281 1,868
-------- ---------
Total current assets 68,423 60,942
Software license installments, non-current portion,
net of allowance for doubtful accounts of $812
and $804, respectively 12,778 11,120
Investment, at cost 1,501 89
Property and equipment, net 6,039 8,431
Other assets 460 461
-------- --------
Total assets $ 89,201 $ 81,043
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 13,892 $ 11,138
Deferred maintenance revenue 12,840 13,594
Deferred income taxes 3,293 2,837
Other liabilities 36 5
-------- --------
Total current liabilities 30,061 27,574
Deferred maintenance revenue 3,811 3,135
Deferred income taxes 3,801 3,331
Stockholders' equity:
Common stock $.0001 par value; authorized 40,000,000
shares; issued 21,996,150 and 22,091,962 shares,
respectively; outstanding 17,905,150 and 18,000,962
shares, respectively 2 2
Additional paid-in capital 48,409 48,667
Retained earnings 16,497 11,130
Deferred stock compensation (982) (649)
Accumulated other comprehensive income (loss) (398) (147)
Treasury stock, at cost, 4,091,000
and 4,091,000 shares, respectively (12,000) (12,000)
-------- --------
Total stockholders' equity 51,528 47,003
-------- --------
Total liabilities and stockholders' equity $ 89,201 $ 81,043
======== ========
</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 Six Months Ended
December 31, December 31,
1998 1999 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Software license revenues $13,253 $ 7,256 $23,422 $13,686
Maintenance and other revenues 5,852 7,089 11,439 14,042
------- ------- ------- -------
Total revenues 19,105 14,345 34,861 27,728
Costs of revenues:
Software license revenues 232 305 543 490
Maintenance and other revenues 1,174 1,340 2,478 2,974
------- ------- ------- -------
Total costs of revenues 1,406 1,645 3,021 3,464
------- ------- ------- -------
Gross profit 17,699 12,700 31,840 24,264
------- ------- ------- -------
Operating expenses:
Sales and marketing 9,702 9,977 18,048 19,719
Research and development 2,706 3,248 5,277 6,207
General and administrative 2,326 2,973 3,980 5,935
Stock compensation expense 343 167 666 333
------- ------- ------- -------
Total operating expenses 15,077 16,365 27,971 32,194
Income (loss) from operations 2,622 (3,665) 3,869 (7,930)
License and other interest income 766 759 1,439 1,485
Interest expense (4) (1) (12) (2)
Foreign currency transaction (losses) gains (60) 2 (93) 48
Investment impairment - (821) - (1,412)
------- ------- ------- -------
Income (loss) before income taxes 3,324 (3,726) 5,203 (7,811)
Provision (benefit) for income taxes 1,595 (1,202) 2,583 (2,444)
------- ------- ------- -------
Net income (loss) $ 1,729 $(2,524) $ 2,620 $(5,367)
======= ======= ======= =======
Basic earnings (loss) per share $ 0.10 $ (0.14) $0.15 $ (0.30)
Basic weighted average shares
outstanding 17,788 17,963 17,767 17,940
Diluted earnings (loss) per share $ 0.09 $ (0.14) $0.14 $ (0.30)
Diluted weighted average
shares outstanding 18,928 17,963 18,901 17,940
</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 Total
Additional Comprehensive Stockholders'
Common Stock Paid-in Retained Deferred Income, net of Treasury Stock (Deficit)
Shares Amount Capital Earnings Compensation tax Shares Amount Equity
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 30, 1999 17,905 2 $48,409 $16,497 $(982) $(398) 4,091 $(12,000) $51,528
Net loss - - - (5,367) - - - - (5,367)
Change in other comprehensive
income, net of tax - - - - - 251 - - 251
------
Comprehensive loss - - - - - - - - (5,116)
Stock options exercised 42 - 90 - - - - - 90
Stock purchase plan shares issued 54 - 168 - - - - - 168
Change in deferred compensation - - - - 333 - - - 333
-----------------------------------------------------------------------------------------------
Balance at December 31, 1999 18,001 $ 2 $48,667 $11,130 $ (649) $ (147) 4,091 $(12,000) $47,003
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial
statements.
<PAGE>
MOBIUS MANAGEMENT SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
1998 1999
-------- --------
<S> <C> <C>
Cash flows provided by operating activities:
Net income (loss) $ 2,620 $ (5,367)
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Deferred income taxes 1,292 (926)
Depreciation and amortization 530 1,197
Stock compensation expense 666 333
Impairment of investment -- 1,412
Change in operating assets and liabilities:
Accounts receivable, net 2,059 5,418
Software license installments (2,823) 2,690
Other assets (359) 486
Accounts payable and accrued expenses (828) (2,693)
Other liabilities (908) --
Deferred maintenance revenue 774 78
-------- --------
Total adjustments 403 7,995
-------- --------
Net cash provided by operating activities 3,023 2,628
-------- --------
Cash flows used in investing activities:
Purchase of marketable securities -- (500)
Capital expenditures (943) (3,589)
-------- --------
Net cash used in investing activities (943) (4,089)
-------- --------
Cash flows (used) provided by financing activities:
Cash received from employee stock purchase -- 168
Cash received from exercise of stock options 118 52
Payments on capital lease obligations (31) (31)
-------- --------
Net cash provided by financing activities 87 189
-------- --------
Effect of exchange rate changes on
cash and cash equivalents 45 244
-------- --------
Net change in cash and cash equivalents 2,212 (1,028)
Cash and cash equivalents at beginning of period 42,222 33,546
-------- --------
Cash and cash equivalents at end of period $ 44,434 $ 32,518
======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 12 $ 2
Income taxes $ 2,484 $ -
</TABLE>
See accompanying notes to consolidated financial
statements.
<PAGE>
MOBIUS MANAGEMENT SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying consolidated financial statements at June 30, 1999 and
December 31, 1999 and for the three and six month periods ended December 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 the Company to make estimates and assumptions in preparing the
interim financial statements. The Company has made their best effort in
establishing good faith estimates and assumptions, however, actual results may
differ.
Mobius is responsible for the financial statements included in this
Form 10-Q. These financial statements include all normal and recurring
adjustments that are necessary for the fair presentation of Mobius's financial
position, results of operations and changes in cash flow. These statements
should be read in conjunction with the consolidated financial statements and
notes in Mobius's latest Form 10-K.
(2) Earnings Per Share
Effective December 1997, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share". SFAS No. 128
stipulates that the calculation of earnings per share (EPS) be shown for all
historical periods as Basic EPS and Diluted EPS. Basic EPS is computed by
dividing income available to common shareholders by the weighted average number
of common shares outstanding during the period. The computation of Diluted EPS
is similar to the computation of Basic EPS except that it gives effect to all
potentially dilutive instruments that were outstanding during the period. Such
dilutive instruments include stock options.
The following is a reconciliation of the numerators and denominators
for the Basic and Diluted EPS calculations (in thousands, except per share
data):
<TABLE>
<CAPTION>
Three Months Ended December 31,
1998 1999
---------------------------------------- --------------------------------------
Net Income Shares Per Share Net Loss Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
---------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) $1,729 $(2,524)
====== =======
Weighted average shares
outstanding 17,788 17,963
Basic earnings (loss)
per share $0.10 $(0.14)
===== ======
Diluted earnings (loss)
per share:
Net income (loss) $1,729 $(2,524)
====== =======
Dilutive effect of
stock options 1,140 -
------ ------
Diluted earnings (loss)
per share 18,928 $0.09 17,963 $(0.14)
====== ===== ====== ======
</TABLE>
<PAGE>
(2) Earnings Per Share (continued)
<TABLE>
<CAPTION>
Six Months Ended December 31,
1998 1999
--------------------------------------- --------------------------------------
Net Income Shares Per Share Net Loss Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
--------------------------------------- --------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS:
Net income (loss) $2,620 $(5,367)
====== =======
Weighted average shares
outstanding 17,767 17,940
Basic earnings (loss)
per share $0.15 $(0.30)
===== ======
Diluted earnings (loss)
per share:
Net income (loss) $2,620 $(5,367)
====== =======
Dilutive effect of
stock options 1,134 -
------ ------
Diluted earnings (loss)
per share 18,901 $0.14 17,940 $(0.30)
====== ===== ====== ======
</TABLE>
For the three and six months ended December 31, 1999 stock options were
not included in the Diluted EPS calculation because their effects were
anti-dilutive. There were approximately 757,000 and 770,000 weighted average
shares of options that were not included in the EPS calculation because their
effects were anti-dilutive in the three and six months ended December 31, 1998,
respectively.
<PAGE>
(3) Marketable Securities
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. There were no
realized gains and losses for the three and six months ended December 31, 1999.
As of June 30, 1999 and December 31, 1999, the unamortized investment premium
and unrealized holding gains and losses were insignificant.
(4) Software License Installments
The Company offers extended payment terms to some of its customers. For
software license contracts of 15 years, the related financing period is
generally 5 years. For software installment contracts of 3 to 5 years, the
payments are generally spread 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 consists of the following (in thousands):
June 30, December 31,
1999 1999
------- ----------
Furniture, fixtures and office equipment $ 939 $ 1,022
Computer equipment 7,803 10,843
Leasehold improvements 1,153 1,691
------ ------
9,895 13,556
Less accumulated depreciation and amortization (3,856) (5,125)
------ ------
Property and equipment, net $ 6,039 $ 8,431
======= =======
Depreciation and amortization expense on property and equipment,
including capital leases, was $266,000, $530,000, $637,000 and $1.2 million for
the three and six months ended December 31, 1998 and 1999, respectively. At June
30, 1999 and December 31, 1999 there was $214,000 of equipment under capital
leases included in property and equipment with accumulated depreciation of
$104,000 and $120,000 respectively.
(6) Non-Current Investments
In June 1999, the Company invested $1,501,000 in Home Account Network
("HAN"), a privately-held, Web-based information technology company whose
products are being designed to enable financial services companies to deliver
financial products and services via the Internet. This is an investment in
preferred stock, which automatically converts into common stock if and when HAN
completes an initial public offering. The Company has and will continue to
regularly review the assumptions underlying the operating performance and cash
flow forecasts of HAN to assess the investment's recoverability. Although HAN
has revenues, it has operated at a loss. There are no assurances that HAN will
complete its development efforts or ultimately offer products that are
commercially acceptable, achieve profitability or that its existing cash
balances and cash flows from future operations will be sufficient to meet its
working capital requirements. HAN continues to consume cash as it executes it
business plan. As of December 31, 1999, these circumstances have indicated that
this investment is permanently impaired, therefore a $821,000 and $1.4 million
impairment loss have been recorded for the three and six months ended December
31, 1999. The current value of the investment was calculated based upon the
Company's pro-rata portion of HAN's cash balance at December 31, 1999.
<PAGE>
(7) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in
thousands):
June 30, December 31,
1999 1999
------- -------
Accounts payable $ 2,179 $ 1,039
Compensation and related benefits 5,897 5,097
Royalties payable 1,358 1,268
Other 4,458 3,734
------- -------
$13,892 $11,138
======= =======
(8) Stock Incentive Plan
In January, February and March 1998 the Company granted 350,000 370,000
and 53,000 stock options, respectively, under the 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. The Company subsequently determined that these options were granted
at exercise prices below the fair market value of $14.00 per share, the low end
of the range of per share prices for the Company's initial public offering
("IPO") in April 1998. As a result, the Company recognized compensation expense
of $343,000, $666,000, $167,000 and $333,000 for the three and six months ended
December 31, 1998 and 1999, respectively. There is approximately $214,000,
$264,000, $134,000 and $37,000 of expense relating to these 1998 option grants
to be recognized in fiscal years 2000, 2001, 2002 and 2003, respectively,
subject to adjustments for option holder terminations.
(9) Comprehensive Income
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" requires the disclosure of 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 for the three and six months ended December 31, 1998 and
1999 is as follows:
Three months ended Six months ended
December 31, December 31,
1998 1999 1998 1999
------------------ ----------------
Net Income (loss) $1,729 $(2,524) $2,620 $(5,367)
Unrealized marketable
securities gain (loss) - (18) - (11)
Unrealized translation
gain (loss) (184) (54) (45) 262
------------------- ----------------
Comprehensive Income $1,545 $(2,596) $2,575 $(5,116)
=================== ================
<PAGE>
(10) Commitments and Contingencies
In compliance with the lease of the corporate headquarters, the
Company's landlord holds a letter of credit with Silicon Valley Bank for
$275,000. This letter of credit is secured by a certificate of deposit.
(11) Sale of INFOPAC-Tapesaver
In January 1999, the Company sold the INFOPAC-TapeSaver product to a
third party for approximately $3.0 million. Under the terms of the sale, the
buyer assumed responsibility for maintenance support for all existing TapeSaver
licenses. As a result of this arrangement, the Company will recognize $3.0
million of license revenue as the buyer makes payments over the next five years,
and has recognized approximately $1.0 million of maintenance revenue through
December 31, 1999. For the three and six months ended December 31, 1999, the
Company recognized $322,000 and $479,000 of license revenue and $122,000 and
$302,000 of maintenance revenue related to this arrangement, respectively.
Future license revenue is expected to be $112,500 each quarter thereafter for
the remaining four year term of the contract. All maintenance revenue has been
recognized.
(12) Subsequent Events
In January 2000, the Company provided approximately a $150,000 bridge
loan to HAN. The Company invested in HAN in June 1999. See footnote 6 for
further information. The Company anticipates it may provide up to an additional
$350,000 in financing in the third quarter of fiscal 2000 to support HAN's cash
requirements.
In January 2000, the Company invested $500,000 in Flooz.com, a startup
Internet company. Flooz is online gift currency that can be sent to a recipient
over the Internet. The flooz gift currency can be redeemed by the recipient at
Flooz.com participating merchants. This is an investment in preferred stock,
which converts into common stock if and when Flooz.com completes an initial
public offering.
<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
Mobius's operating results and changes in financial position. This section
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes. Please note that references in this section to "last
year's quarter" and "this quarter" refer to the Company's fiscal quarters ended
December 31, 1998 and 1999, respectively. Mobius's quarterly revenues and
operating results have varied substantially from quarter to quarter in the past,
and are likely to continue to do so in the future. 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 at the end of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations in this Form 10-Q.
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 the Company's
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
Mobius's goods and services, and technological advances and competitive factors
in the markets in which Mobius competes. These risks and uncertainties are
described in detail from time to time in the Company's filings with the
Securities and Exchange Commission, including the "Factors Affecting Future
Performance" included in the Company's Management's Discussion and Analysis of
Financial Condition and Results of Operations in this Form 10-Q. Mobius accepts
no obligation to update these forward-looking statements and does not intend to
do so.
Overview
Mobius is a leading provider of software products designed to provide
network- and Web-based access to present and distribute large volumes of diverse
enterprise information. Major financial services, healthcare, manufacturing,
retail and telecommunications companies and governmental entities use the
Company's products to record transactions, facilitate customer service, billing
and other mission-critical functions.
<PAGE>
Results of Operations
The following table sets forth certain items from the Company's
Consolidated Statement of Income as a percentage of total revenues for the
fiscal years indicated:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1998 1999 1998 1999
----- ----- ---- ----
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Software license revenues 69.4% 50.6% 67.2% 49.4%
Maintenance and other revenues 30.6 49.4 32.8 50.6
----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
Costs of revenues:
Software license revenues 1.2 2.1 1.6 1.8
Maintenance and other revenues 6.2 9.4 7.1 10.7
----- ----- ----- -----
Total costs of revenues 7.4 11.5 8.7 12.5
----- ----- ----- -----
Gross profit 92.6 88.5 91.3 87.5
Operating expenses:
Sales and marketing 50.7 69.6 51.8 71.1
Research and development 14.2 22.6 15.1 22.4
General and administrative 12.2 20.7 11.4 21.4
Stock compensation expense 1.8 1.2 1.9 1.2
----- ----- ----- -----
Total operating expenses 78.9 114.1 80.2 116.1
----- ----- ----- -----
Income (loss) from operations 13.7 (25.6) 11.1 (28.6)
License and other interest income 4.0 5.3 4.1 5.4
Interest expense -- -- -- --
Foreign currency transaction(losses)gains (0.3) -- (0.3) 0.1
Investment impairment -- (5.7) -- (5.1)
----- ----- ----- -----
Income (loss) before income taxes 17.4 (26.0) 14.9 (28.2)
Provision (benefit) for income taxes 8.3 (8.4) 7.4 (8.8)
----- ----- ----- -----
Net income (loss) 9.1% (17.6)% 7.5% (19.4)%
===== ===== ===== =====
</TABLE>
Three Months Ended December 31, 1998 Compared to
Three Months Ended December 31, 1999
Revenues.
o Total revenues decreased 24.9% from $19.1 million in last year's quarter to
$14.3 million this quarter. Domestic revenues decreased 28.4% from $17.1
million in last year's quarter to $12.2 million this quarter. International
revenues increased 4.9% from $2.0 million in last year's quarter to $2.1
million this quarter. The Company believes total revenues decreased
primarily due to Year 2000 issues which resulted in the deferral of
purchase decisions by the Company's customers. The Company anticipates
continued softness in license revenues for the next two to three quarters.
Mobius believes that the overall market demand for the Company's products
remains strong.
o Software license revenues decreased 45.3% from $13.2 million in last year's
quarter to $7.3 million this quarter. This decrease was primarily
attributable to decreased sales of licenses. Mobius believes that Year 2000
issues significantly affected the purchasing patterns of its customers and
potential customers. Many companies expended significant resources to
correct or modify their current software systems for Year 2000 compliance.
These expenditures have resulted in reduced funds available to purchase
software products such as those that Mobius offers.
o Maintenance and other revenues increased 21.1% from $5.9 million in last
year's quarter to $7.0 million this quarter. This increase in maintenance
and other revenue was primarily attributable to the growth in the amount of
licensed software covered by maintenance agreements and to a lesser extent,
increases in the maintenance fees charged by the Company. Other revenues
for both quarters were not significant.
Costs of Revenues.
o Cost of license revenues consist primarily of the cost of royalties and
sublicense fees. The costs of software license revenues increased 31.5%
from $232,000 in last year's quarter to $305,000 this quarter, representing
1.8% and 4.2% respectively, of software license revenues in those quarters.
The costs of software license revenue increased from last year's quarter to
this quarter primarily due to increased license revenues from products that
require royalty payments.
o Costs of maintenance and other revenues consist primarily of customer
support staff costs. The costs of maintenance and other revenues increased
14.1% from $1.2 million in last year's quarter to $1.3 million this
quarter, representing 20.1% and 18.9% respectively, of maintenance and
other revenues in those quarters. The increases in costs of maintenance and
other revenues were 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 Mobius's products, including
salaries, commissions, performance based bonuses and travel and
entertainment costs. Sales and marketing costs also include the cost of
branch sales offices, marketing, promotional materials and advertising.
These expenses increased 2.8% from $9.7 million in last year's quarter to
$10.0 million this quarter, representing 50.7% and 69.6%, respectively, of
total revenues in those quarters. Sales and marketing expenses have
increased primarily because of spending for the Company's new subsidiary,
Click-n-Done.com, and increased personnel related costs for marketing,
partially offset by a decrease in sales commissions due to decreased sales
of software licenses.
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 20.0% from $2.7 million in last year's quarter to $3.2 million
this quarter, representing 14.2% and 22.6%, respectively, of total revenues
in those quarters. The increases in research and development expenses were
primarily attributable to increased staffing and personnel-related costs
for technical staff to develop new products, including those for
Click-n-Done.com.
o General and administrative expenses consist of personnel costs related to
general management, accounting, human resources, network services,
administration and associated overhead costs, as well as fees for
professional services. General and administrative expenses increased 27.8%
from $2.3 million in last year's quarter to $3.0 million this quarter,
representing 12.2% and 20.7%, respectively, of total revenues in those
quarters. The increase was primarily attributable to additional personnel
costs, depreciation of improvements made to the Company's infrastructure
and the costs to administer the Company's new subsidiary, Click-n-Done.com.
<PAGE>
o Stock compensation expense was the result of issuing options in 1998 that
were deemed to be below market value. Stock compensation expense decreased
51.3% from $343,000 in last year's quarter to $167,000 this quarter. This
expense will continue to decrease as it is amortized over the option
holder's vesting periods, subject to adjustments for option holder
terminations. See footnote 8 in the consolidated financial statements for
further information.
License and other interest income; interest expense; foreign currency
transaction gains (losses). License and other interest income was $766,000 and
$759,000 in last year's quarter and this quarter, respectively. During both
quarters interest expense was insignificant. Foreign currency transaction losses
were $60,000 in last year's quarter and foreign currency transaction gains were
$2,000 this quarter. These losses and gains are the result of foreign currency
fluctuations in the foreign jurisdictions where the Company does business.
Investment Impairment. In June 1999, the Company invested $1,501,000 in
Home Account Network ("HAN"), a privately-held, Web-based information technology
company whose products are being designed to enable financial services companies
to deliver financial products and services via the Internet. This is an
investment in preferred stock, which automatically converts into common stock if
and when HAN completes an initial public offering. The Company has and will
continue to regularly review the assumptions underlying the operating
performance and cash flow forecasts of HAN to assess the investment's
recoverability. Although HAN has revenues, it has operated at a loss. There are
no assurances that HAN will complete its development efforts or ultimately offer
products that are commercially acceptable, achieve profitability or that its
existing cash balances and cash flows from future operations will be sufficient
to meet its working capital requirements. HAN continues to consume cash as it
executes it business plan. As of December 31, 1999, these circumstances have
indicated that this investment is permanently impaired, therefore a $821,000
impairment loss has been recorded for the three months ended December 31, 1999.
The current value of the investment was calculated based upon the Company's
pro-rata portion of HAN's cash balance at December 31, 1999. In January 2000,
the Company provided approximately a $150,000 bridge loan to HAN. The Company
anticipates it may provide up to an additional $350,000 in financing in the
third quarter of fiscal 2000 to support HAN's cash requirements.
Provision for Income Taxes. The provision for income taxes was $1.6
million in last year's quarter compared to a tax benefit of $1.2 million in this
quarter. The provision (benefit) for taxes as a percentage of income (loss)
before taxes was 48.0% and (32.3)% for last year's quarter and this quarter,
respectively. The change in the effective tax rate from last year's quarter to
this quarter primarily reflects a statutory tax benefit for the loss in the
United States offset by limitations on the tax benefit which can be taken in
this quarter from losses in the Company's foreign subsidiaries.
Six Months Ended December 31, 1998 Compared to
Six Months Ended December 31, 1999
Revenues.
o Total revenues decreased 20.5% from $34.9 million in the first six months
of fiscal 1999 to $27.7 million in the first six months of fiscal 2000.
Domestic revenues decreased 23.3% from $29.6 million in the first six
months of fiscal 1999 to $22.7 million in the first six months of fiscal
2000. International revenues decreased 4.9% from $5.3 million in the first
six months of fiscal 1999 to $5.0 million in the first six months of fiscal
2000. The Company believes total revenues decreased primarily due to Year
2000 issues that resulted in the deferral of purchase decisions by the
Company's customers. The Company anticipates continued softness in license
revenues for the next two to three quarters. Mobius believes that the
overall market demand for the Company's products remains strong.
<PAGE>
o Software license revenues decreased 41.6% from $23.4 million in the first
six months of fiscal 1999 to $13.7 million in the first six months of
fiscal 2000. This decrease was primarily attributable to decreased sales of
licenses. Mobius believes that Year 2000 issues significantly affected the
purchasing patterns of its customers and potential customers. Many
companies have expended significant resources to correct or modify their
current software systems for Year 2000 compliance. These expenditures have
resulted in reduced funds available to purchase software products such as
those that Mobius offers.
o Maintenance and other revenues increased 22.8% from $11.5 million in the
first six months of fiscal 1999 to $14.0 million in the first six months of
fiscal 2000. This increase in maintenance and other revenue was primarily
attributable to the growth in the amount of licensed software covered by
maintenance agreements and to a lesser extent, increases in the maintenance
fees charged by the Company. Other revenues for both six month periods were
not significant.
Costs of Revenues.
o Cost of license revenues consist primarily of the cost of royalties and
sublicense fees. The costs of software license revenues decreased 9.8% from
$543,000 in the first six months of fiscal 1999 to $490,000 in the first
six months of fiscal 2000, representing 2.3% and 3.6% respectively, of
software license revenues in those six month periods. The costs of software
license revenue decreased from the first six months of fiscal 1999 to the
first six months of fiscal 2000 primarily due to increased license revenues
from products that were developed exclusively by the Company and therefore
do not require royalty payments.
o Costs of maintenance and other revenues consist primarily of customer
support staff costs. The costs of maintenance and other revenues increased
20.0% from $2.5 million in the first six months of fiscal 1999 to $3.0
million in the first six months of fiscal 2000, representing 21.7% and
21.2% respectively, of maintenance and other revenues in those six month
periods. The increases in costs of maintenance and other revenues were
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 Mobius's products, including
salaries, commissions, performance based bonuses and travel and
entertainment costs. Sales and marketing costs also include the cost of
branch sales offices, marketing, promotional materials and advertising.
These expenses increased 9.3% from $18.0 million in the first six months of
fiscal 1999 to $19.7 million in the first six months of fiscal 2000,
representing 51.8% and 71.1%, respectively, of total revenues in those six
month periods. Sales and marketing expenses have increased primarily
because of spending for the Company's new subsidiary, Click-n-Done.com, and
increased personnel related costs for marketing, partially offset by a
decrease in sales commissions due to decreased sales of software licenses.
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 17.6% from $5.3 million in the first six months of fiscal 1999 to
$6.2 million in the first six months of fiscal 2000, representing 15.1% and
22.4%, respectively, of total revenues in those six month periods. The
increases in research and development expenses were primarily attributable
to increased staffing and personnel-related costs for technical staff to
develop new products, including Click-n-Done.com.
<PAGE>
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 49.1% from $4.0 million in
the first six months of fiscal 1999 to $5.9 million in the first six months
of fiscal 2000, representing 11.4% and 21.4%, respectively, of total
revenues in those six month periods. The increase was primarily
attributable to additional personnel costs, depreciation of improvements
made to the Company's infrastructure and the costs to administer the
Company's new subsidiary, Click-n-Done.com.
o Stock compensation expense was the result of issuing options in 1998 that
were deemed to be below market value. Stock compensation expense decreased
50.0% from $666,000 in the first six months of fiscal 1999 to $333,000 in
the first six months of fiscal 2000. This expense will continue to decrease
as this expense is amortized over the option holder's vesting periods,
subject to adjustments for option holder terminations. See footnote 8 in
the consolidated financial statements for further information.
License and other interest income; interest expense; foreign currency
transaction gains (losses). License and other interest income was $1.4 million
and $1.5 million in the first six months of fiscal 1999 and in the first six
months of fiscal 2000, respectively. During both six month periods interest
expense was insignificant. Foreign currency transaction losses were $93,000 in
the first six months of fiscal 1999 and foreign currency transaction gains were
$48,000 in the first six months of fiscal 2000. These losses and gains are the
result of foreign currency fluctuations in the foreign jurisdictions where the
Company does business.
Investment Impairment. In June 1999, the Company invested $1,501,000 in
HAN, a privately-held, Web-based information technology company whose products
are being designed to enable financial services companies to deliver financial
products and services via the Internet. The Company has and will continue to
regularly review the assumptions underlying the operating performance and cash
flow forecasts of HAN to assess the investment's recoverability. As of December
31, 1999, these circumstances have indicated that this investment is permanently
impaired, therefore a $1.4 million impairment loss has been recorded for the six
months ended December 31, 1999. See footnote 6 and 12 to the consolidated
financial statements for further information.
Provision for Income Taxes. The provision for income taxes was $2.6
million in the first six months of fiscal 1999 compared to a tax benefit of $2.4
million in the first six months of fiscal 2000. The provision (benefit) for
taxes as a percentage of income (loss) before taxes was 49.6% and (31.3)% for
the first six months of fiscal 1999 and in the first six months of fiscal 2000,
respectively. The change in the effective tax rate from the first six months of
fiscal 1999 to the first six months of fiscal 2000 primarily reflects a
statutory tax benefit for the loss in the United States offset by limitations on
the tax benefit which can be taken in the first six months of fiscal 2000 from
losses in the Company's foreign subsidiaries.
<PAGE>
Liquidity and Capital Resources
Since its inception, Mobius has funded its operations principally
through cash flows from operating activities and, to a lesser extent, bank
financings. In April 1998, the Company completed its initial public offering,
which generated net proceeds of $33.0 million. As of December 31, 1999, Mobius
had cash and cash equivalents of $32.5 million, a decrease of $1.0 million from
the $33.5 million held at June 30, 1999. In addition, Mobius had marketable
securities of $9.4 million and $9.8 million as of June 30, 1999 and December 31,
1999, respectively.
Net cash provided by operating activities was $3.0 million in the first
six months of fiscal 1999 and $2.6 million in the first six months of fiscal
2000. Mobius's primary sources of cash during the first six months of fiscal
2000 were decreased accounts receivable and decreased software license
installments. These sources were offset by a net loss and decreases in accounts
payable and accrued expenses. Net software license installments decreased 11.5%
from $23.4 million at June 30, 1999 to $20.7 million at December 31, 1999. Net
accounts receivable decreased 42.9% from $12.6 million at June 30, 1999 to $7.2
million at December 31, 1999. Deferred maintenance revenue remained stable at
$16.7 million at June 30, 1999 and December 31, 1999.
Accounts receivable reserves are primarily calculated by identifying
problem accounts and in recognition that some customers decide to cancel
maintenance arrangements upon their anniversary but do not always notify Mobius
in sufficient time to prevent some portion of the annual maintenance billings to
be recognized. Mobius also has a small reserve to absorb losses based upon
historical experience that may result from current receivables. Mobius
specifically identifies problem accounts by the age of the receivable and
through discussions with the customer and Mobius sales representatives. Based on
that information, Mobius exercises its best judgment as to what portion of the
accounts receivable balance requires a reserve. At June 30, 1999 and December
31, 1999 approximately 83% and 74% of the total accounts receivable reserve
balances related to specific accounts, respectively. To the extent that an
account for which a specific reserve was provided is subsequently collected,
Mobius reduces the reserves in the period of collection.
Software license installment reserves have consistently been determined
as a percentage of software license installments to provide for potential
bankruptcies and contractual disputes. At June 30, 1999 and December 31,1999,
software license installments were approximately $24,200,000 and $21,495,000 of
which 85% and 82% were customer balances greater than $100,000, respectively.
Customer balances for software license installments tend to be large due to the
selling price of Mobius' products.
Software license installment and accounts receivable reserves have
decreased 6.2% from $1.7 million at June 30, 1999 to $1.6 million at December
31, 1999. The decrease in these reserves is attributable to favorable collection
experience during the first six months of fiscal 2000 and management's overall
assessment of specific accounts.
Cash used in investing activities, consisting of capital expenditures to
purchase computer equipment and complete leasehold improvements, was $943,000
and $3.6 million in the first six months of fiscal 1999 and in the first six
months of fiscal 2000, respectively. In addition, in the first six months of
fiscal 2000, $500,000 of marketable securities were purchased. The Company has
undertaken significant projects in fiscal 2000, including the installation of an
automated sales force computer system, implementation of a new accounting system
and expansion of the Rye headquarters therefore capital expenditures are
expected to increase in future quarters.
Cash provided by financing activities was $87,000 in the first six
months of fiscal 1999 and $189,000 in the first six months of fiscal 2000,
primarily due to cash received from the exercise of stock options and the
employee stock purchase plan.
In December 1999, Mobius announced its new suite of Internet-based bill and
presentment products, from it's subsidiary Click-n-Done.com. Click-n-Done.com's
products are designed to seamlessly and securely retrieve, consolidate, and
archive bills and statements on a consumer or business' desktop, while
preserving the bill or statement issuers total control of their one-to-one
relationship with their customer. Mobius's expenses for Click-n-Done.com were
approximately $1.5 million and $2.2 million in this quarter and in the first six
months of fiscal 2000, respectively. Mobius anticipates that it will continue to
incur additional costs related to the this consumer focused Internet opportunity
for at least the next year.
The Company believes that its existing cash balances and cash flows
expected from future operations will be sufficient to meet the Company's capital
requirements for at least 12 months. In compliance with the lease of the
Company's corporate headquarters in Rye, NY, the 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, the Company sold the INFOPAC-TapeSaver product to a
third party for approximately $3.0 million. Under the terms of the sale, the
buyer assumed responsibility for maintenance support for all existing TapeSaver
licenses. As a result of this arrangement, the Company will recognize $3.0
million of license revenue as the buyer makes payments over the next five years,
and has recognized approximately $1.0 million of maintenance revenue through
December 31, 1999. For the three and six months ended December 31, 1999, the
Company recognized $322,000 and $479,000 of license revenue and $122,000 and
$302,000 of maintenance revenue related to this arrangement, respectively.
Future license revenue is expected to be $112,500 each quarter thereafter for
the remaining four year term of the contract. All maintenance revenue has been
recognized.
In January 2000, the Company invested $500,000 in Flooz.com, a startup
Internet company. Flooz is online gift currency that can be sent to a recipient
over the Internet. The flooz gift currency can be redeemed by the recipient at
Flooz.com participating merchants. This is an investment in preferred stock,
which converts into common stock if and when Flooz.com completes an initial
public offering.
<PAGE>
FACTORS AFFECTING FUTURE PERFORMANCE
Fluctuations in Period to Period Results; Seasonality; Uncertainty of
Future Operating Results
Mobius's 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 Mobius's
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 Mobius's quarterly operating results. Many of Mobius's
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 Mobius will be successful in closing large license
transactions within the fiscal period in which they are budgeted, if at all.
Mobius's business has experienced and is expected to continue to
experience significant seasonality, with revenues typically peaking primarily in
the fourth (June) fiscal quarter and to a lesser extent in the second (December)
fiscal quarter. These fluctuations are caused primarily by customer purchasing
patterns and Mobius'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.
Due to all of the foregoing factors and other factors described below,
revenues for any period are subject to significant variation, and Mobius
believes that period-to-period comparisons of its operating results are not
necessarily meaningful. Such comparisons may not be reliable indicators of
future performance.
Technological Change
The market for Mobius's 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 Mobius's existing products obsolete and unmarketable. Mobius's
future success will depend in part on its ability to enhance existing products,
to develop and introduce new products to meet diverse and evolving customer
requirements, and to 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 Mobius will be successful in developing and
marketing product enhancements or that new products will respond to
technological change or evolving industry standards, or that Mobius 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 Mobius may introduce will
achieve market acceptance.
<PAGE>
Product Concentration
To date, a substantial portion of Mobius's revenues have been
attributable to the licensing of its ViewDirect and DocumentDirect software and
the provision of related maintenance services. Mobius currently expects 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 its business,
operating results and financial condition.
Competition
The market for Mobius's products is intensely competitive, subject to
rapid change and significantly affected by new product introductions and other
market activities of industry participants. The Company believes that 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. Mobius currently
encounters direct competition from a number of public and private companies
including Computer Associates International, Computron Software, Inc., FileNet
Corporation, International Business Machines Corp., Quest Software, Inc. 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 Mobius's
business, operating results and financial condition.
<PAGE>
International Sales and Operations
Mobius believes that its revenues and future operating results will
depend in part on its ability to increase sales in international markets. As a
group, the Company's international subsidiaries have not achieved budgeted sales
and have been unprofitable to date, and Mobius expects achieving profitability
will require significant management attention and financial resources. There can
be no assurance that Mobius will be able to maintain or increase international
market demand for its products or hire additional qualified personnel who will
successfully be able to market its products internationally. Mobius's
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 Mobius's future international
revenues and, consequently, on its business, operating results and financial
condition.
An increase in the value of the U.S. dollar relative to foreign
currencies could make Mobius's products more expensive, and, therefore,
potentially less competitive in those markets. Although Mobius does 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
the Company maintains operations, its net assets that are denominated in such
foreign currencies will be devalued, resulting in a foreign currency translation
loss. For more information on its international operations, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Item 2 of this Form 10-Q.
Expansion of Indirect Channels
To date, sales through indirect sales channels have not been
significant although Mobius intends to invest resources to develop these
channels. Mobius's ability to achieve revenue growth in the future will be
affected by its success in expanding existing and establishing additional
relationships with strategic partners. Mobius expects to receive lower unit
prices when selling through indirect channels; therefore, if Mobius is
successful in selling products through indirect channels, its gross margins as a
percentage of revenue will decrease.
Extended Payment Risk
Terms of sale are a competitive factor in Mobius's markets. Mobius
offers extended payment terms to some of its 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 Mobius has established reserves against
possible future bad debts and believes 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 Mobius's business,
operating results and financial condition.
<PAGE>
Protection of Intellectual Property
Mobius's success is heavily dependent upon its confidential and proprietary
intellectual property. Mobius has no patents covering any aspect of its software
products and it has one patent application pending. Mobius relies primarily on a
combination of confidentiality agreements, copyright, trademark and trade secret
laws and confidentiality procedures to protect its proprietary rights. Trade
secret and copyright laws afford only limited protection. Despite Mobius's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of its products or obtain and use information that Mobius regards
as proprietary. In addition, the laws of some foreign countries do not protect
its proprietary rights to as great an extent as do the laws of the United
States. There can be no assurance that its means of attempting to protect
Mobius's proprietary rights will be adequate or that its competitors will not
independently develop similar or competitive technology.
Mobius's products are generally provided to customers in object code
format only. However, Mobius enters into arrangements with its 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 its software products.
Notwithstanding such provision, the delivery of source code to customers may
increase the likelihood of misappropriation or other misuse of its intellectual
property.
Mobius is not aware that any of its products infringe on 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 its business,
operating results and financial condition.
Dependence on Licensed Technology
Mobius relies on certain software and other information that it
licenses from third parties, including software that is used to perform certain
functions in its products. Although Mobius believes 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 its sales unless
and until the Company can replace the functionality provided by these products.
In addition, Mobius is 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 Mobius would be able to
replace the functionality provided by the third party software currently offered
in conjunction with its products in the event that such software becomes
obsolete or incompatible with future versions of its 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
its 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 Mobius conducts extensive product testing, Mobius has in the
past discovered software defects in certain of its new products and enhancements
after their introduction. Mobius could in the future lose, or delay recognition
of, revenues as a result of software errors or defects. Mobius believes that its
customers and potential customers are highly sensitive to defects in the
Company's software. Although Mobius's 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 Mobius's reputation, or increased service and
warranty costs, any of which could have a material adverse effect on its
business, operating results and financial condition.
Mobius's license agreements with its customers typically contain
provisions designed to limit its exposure to potential product liability claims.
However, it is possible that the limitation of liability provisions contained in
its license agreements may not be effective under the laws of certain
jurisdictions. Although Mobius has 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 the Company will not be subject to
such claims in the future. Mobius does not maintain product liability insurance.
A successful product liability claim brought against Mobius could have a
material adverse effect on its business, operating results and financial
condition.
<PAGE>
Management of Growth; Dependence on Senior Management and Other Key Employees
Mobius's ability to effectively manage its future growth, if any, will
require it to continue to improve the Company's operational, financial and
management controls, accounting and reporting systems, and other internal
processes. There can be no assurance that Mobius will be able to make such
improvements in an efficient or timely manner or that any such improvements will
be sufficient to manage its growth, if any. If Mobius is unable to manage growth
effectively, its business, operating results and financial condition would be
materially adversely affected.
Mobius's success depends to a significant extent upon its 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, the Company believes that its future success will also
depend to a significant extent upon its ability to attract, train and retain
highly skilled technical, management, sales and marketing personnel. Competition
for such personnel is intense, and Mobius expects that such competition will
continue for the foreseeable future. Mobius has 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
Mobius's business, operating results and financial condition.
Click-n-Done.com Related Factors
On December 9, 1999, Mobius announced the formation of a new subsidiary
called Click-n-Done.com and its intended release of a new consumer and
business-focused suite of Internet-based bill presentment and payment system.
Click-n-Done.com's products are designed to seamlessly and securely retrieve,
consolidate, and archive bills and statements on a consumer or business desktop,
while preserving the bill or statement issuer's control of their one-to-one
relationship with their customer. Mobius's expenses for Click-n-Done.com were
approximately $1.5 million and $2.2 million in this quarter and in the first six
months of fiscal 2000, respectively. Mobius anticipates that it will continue to
incur additional costs related to this business for at least the next year. The
following factors may affect Click-n-Done.com's future performance, and as a
result, the future performance of Mobius on a consolidated basis.
<PAGE>
Mobius May Not Successfully Implement The Click-n-Done.com Business Plan.
The Click-n-Done.com business model is still in development. Mobius is
subject to expenses and difficulties associated with implementing the
Click-n-Done.com business plan that are not typically encountered by more mature
companies since the Click-n-Done.com products are Internet-based. The risks
associated with implementing the Click-n-Done.com business plan relate to:
o establishing and building out the operations infrastructure;
o implementing and expanding the sales structure and marketing programs;
o increasing and developing brand awareness;
o providing services to customers that are reliable and
cost-effective;
o responding to technological development or service offerings by
competitors; and
o attracting and retaining qualified personnel.
If Mobius is not successful in implementing the Click-n-Done.com
business plan, Mobius' future financial or operating results could suffer.
Mobius Has Incurred Significant Expenses for Click-n-Done.com and Mobius Expects
These Expenses to Increase in the Foreseeable Future.
Mobius has incurred significant expenses relating to Click-n-Done.com
in the six months since Click-n-Done.com's inception and anticipates that it
will continue to incur significant expenses for Click-n-Done.com's sales and
marketing, technology, customer support and personnel. As a result of Mobius
Click-n-Done.com expansion plans, Mobius expects Click-n-Done.com's expenses on
a quarterly and annual basis to increase in the foreseeable future. Mobius
cannot assure you that Click-n-Done.com will achieve or sustain revenue or
profitability on either a quarterly or an annual basis.
Click-n-Done.com May Need Additional Funds Which, If Available, Could Result in
Dilution of Mobius's Equity Interest in Click-n-Done.com or an Increase in
Click-n-Done.com's Interest Expense. If These Funds Are Not Available,
Click-n-Done.com's Business Could Be Hurt.
To date, Mobius has provided the working capital for Click-n-Done.com's
operations. Click-n-Done.com may need to raise additional funds through public
or private debt or equity financings in order to:
o fully implement its business model;
o take advantage of unanticipated opportunities or acquisitions of
complementary assets, technologies or businesses;
o develop new products; or
o respond to competitive pressures.
If additional funds become necessary, additional financing may not be
available on terms favorable to Click-n-Done.com, or available at all. If
adequate funds are not available or are not available on acceptable terms when
needed, Click-n-Done.com's business could be hurt. If additional funds are
raised through the issuance of equity securities, Mobius's percentage ownership
in Click-n-Done.com may be reduced, and the new equity securities may have
rights, preferences or privileges senior to those of Mobius. If additional funds
are raised through the issuance of debt securities, these securities would have
some rights, preferences and privileges senior to those of Mobius, and the terms
of this debt could impose restrictions on Click-n-Done.com's operations and
result in significant interest expense.
<PAGE>
If Widespread Internet Adoption Does Not Continue, or If the Internet Cannot
Accommodate Continued Growth, Click-n-Done.com's Business Will Be Harmed.
Acceptance of Click-n-Done.com's products depends upon continued
adoption of the Internet for commerce. As is typical in the case of an emerging
industry characterized by rapidly changing technology, evolving industry
standards and frequent new product and service introductions, demand for and
acceptance of recently introduced e-commerce enabling products and services are
subject to a high level of uncertainty. To the extent that businesses or
consumers do not consider the Internet a viable commercial medium,
Click-n-Done.com's customer base may not grow. In addition, critical issues
concerning the commercial use of the Internet remain unresolved and may affect
the growth of Internet use. The adoption of the Internet for commerce,
communications and access to content, particularly by those who have
historically relied upon alternative methods, generally requires understanding
and acceptance of a new way of conducting business and exchanging information.
In particular, companies and consumers maybe reluctant or slow to adopt a new,
Internet-based bill payment system that may render existing practices obsolete.
If the use of the Internet fails to develop or develops more slowly than
expected, our business may be seriously harmed.
To the extent that there is an increase in Internet use, an increase in
frequency of use or an increase in the required bandwidth of users, the Internet
infrastructure may not be able to support the demands placed upon it. In
addition, the Internet could lose its viability as a commercial medium due to
delays in development or adoption of new standards or protocols required to
handle increased levels of Internet activity. Changes in, or insufficient
availability of, telecommunications or similar services to support the Internet
also could result in slower response times and could adversely impact use of the
Internet generally. If the Internet infrastructure, standards, protocols or
complementary products, services or facilities do not effectively support any
growth in Internet usage that may occur, our business may be seriously harmed.
The Expected Continued Growth in the Market for Click-n-Done.com's Products and
Services May Not Materialize or May Materialize in a Manner Mobius Has Not
Anticipated.
Click-n-Done.com's market is new and rapidly evolving. Whether, and the
manner in which, the market for Click-n-Done.com's products and services will
continue to grow is uncertain. The market for its products and services may be
inhibited for a number of reasons, including:
o the reluctance of businesses to adopt the Click-n-Done.com business model
o alternative, competitive models for services similar to
Click-n-Done.com's services
o Click-n-Done.com's failure to successfully market its products and
services to new customers; and
o Click-n-Done.com inability to maintain and strengthen its brand awareness.
<PAGE>
Concerns about Transaction Security on the Internet May Hinder
Click-n-Done.com's Business.
A significant barrier to electronic commerce and communications is the
secure transmission of private information over public networks.
Click-n-Done.com relies on encryption and authentication technology some of
which it has developed and some of which may be licensed from third parties to
provide the required security and authentication to ensure the privacy of
Internet transactions. Advances in computer capabilities, new discoveries in the
field of cryptography or other events or developments may result in a compromise
or breach of the algorithms Click-n-Done.com uses to protect customer
transaction data. Any breaches in security could cause a significant decrease in
the use of Click-n-Done.com's software or Web site, which would materially harm
its business.
Anyone who can circumvent Click-n-Done.com's security measures could
misappropriate proprietary information or cause interruptions in
Click-n-Done.com's or its operations. Click-n-Done.com could be required to
expend significant capital and other resources to protect against the threat of
security breaches or to alleviate problems caused by these breaches. Consumer
concerns about the security of electronic commerce and user privacy may also
inhibit the growth of the Internet as a means of conducting commercial
transactions. To the extent that Click-n-Done.com's activities or the activities
of third party contractors involve storing and transmitting proprietary
information, such as credit card numbers, security breaches could expose us to a
risk of loss or litigation and possible liability. Click-n-Done.com's security
measures may not effectively prevent security breaches, and its failure to
prevent security breaches could significantly disrupt its operations.
The Internet Industry Is Characterized by Rapid Technological Change.
Rapid technological developments, evolving industry standards and user
demands, and frequent new product introductions and enhancements characterize
the market for Internet products and services. These market characteristics are
exacerbated by the emerging nature of the market and the fact that many
companies are expected to introduce new Internet products and services in the
near future. Click-n-Done.com future success will depend on its ability to
continually improve its product offerings and services.
<PAGE>
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Mobius investment portfolio is subject to interest rate sensitivity. The
primary objective of Mobius's investment activities is to preserve principal,
while at the same time maximizing the interest income, without significantly
increasing risk. Some of the marketable securities that Mobius has invested in
may be subject to market rate interest risk. This means a change in prevailing
interest rates may cause the market value of the security to fluctuate. For
example, if Mobius holds a security that was issued with a fixed interest rate
at the then-prevailing rates and the prevailing interest rates later rise, the
market value of the marketable security will probably decline. At December 31,
1999, Mobius primarily held debt securities.
Mobius may be subject to foreign currency fluctuations in relation to
accounts receivable and accounts payable that may be denominated in a foreign
currency other than the functional currency in certain foreign jurisdictions. To
the extent that such foreign currency transactions are negatively or positively
effected by foreign currency fluctuations, foreign currency transaction losses
or gains would be recognized.
<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
$33.0 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
10.1 Lease Modification Agreement dated July 12, 1999 by and between
Old Boston Post Road Associates LLC and the Registrant
27 Financial Data Schedule (EDGAR only)
* 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: February 14, 2000
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
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
10.1 Lease Modification Agreement dated July 12, 1999 by and
between Old Boston Post Road Associates LLC and the Registrant
27 Financial Data Schedule (EDGAR only)
* 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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains Summary Financial Information extracted
from the Balance Sheet and Income Statement for the six months
ended December 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
<CURRENCY> USD
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-1-1999
<PERIOD-END> DEC-30-1999
<EXCHANGE-RATE> 1.0
<CASH> 32,518
<SECURITIES> 9,772
<RECEIVABLES> 7,977
<ALLOWANCES> 764
<INVENTORY> 0
<CURRENT-ASSETS> 60,942
<PP&E> 13,556
<DEPRECIATION> 5,125
<TOTAL-ASSETS> 81,043
<CURRENT-LIABILITIES> 27,574
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 47,001
<TOTAL-LIABILITY-AND-EQUITY> 81,043
<SALES> 27,728
<TOTAL-REVENUES> 27,728
<CGS> 3,464
<TOTAL-COSTS> 19,719
<OTHER-EXPENSES> 12,475
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> (7,811)
<INCOME-TAX> (2,444)
<INCOME-CONTINUING> (5,367)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,367)
<EPS-BASIC> (0.30)
<EPS-DILUTED> (0.30)
</TABLE>
LEASE MODIFICATION AGREEMENT
THIS LEASE MODIFICATION AGREEMENT (this "Agreement") dated this 12th
day of July, 1999 by and between OLD POST ROAD ASSOCIATES, LLC, a New York
limited liability company, having an address at c/o Alfred Weissman Real Estate,
Inc., 1 Larkin Plaza, Yonkers, New York 10701 ("Landlord") and MOBIUS MANAGEMENT
SYSTEMS, INC., a Delaware corporation, having an address at 120 Old Post Road,
Rye, New York ("Tenant").
WITNESSETH
WHEREAS, Landlord and Tenant entered into that certain Lease dated as
of December 4, 1997, as modified by that certain letter dated March 5, 1998
correcting the name of the Landlord and the mailing address of the Demised
Premises (collectively, the "Lease") pursuant to which Tenant leased from
Landlord that certain office building known as and by street address 120 Old
Post Road, Rye, New York (the "Building") and all of the land and improvments
thereon owned or groundleased by Landlord as more particularly described in
Exhibit A attached to and made a part of the Lease (the "Real Property"),
including, in addition, any other parcels of land or improvements or facilities
serving the Demised Premises and made available by easement, agreement or
otherwise (together the Real Property and the Building are herein referred to as
the "Demised Premises"); and
WHEREAS, Tenant has requested Landlord's approval for the making of
certain structural Alterations to the Demised Premises such that the Building
would be expanded by the addition thereto of a third floor containing
approximately 26,800 rentable square feet of space for Tenant's occupancy (the
"Additional Space") together with certain related site and off-site
improvements; and
WHEREAS, Landlord agrees that Tenant may construct the Additional Space
and Landlord agrees to consent thereto upon the terms and conditions set forth
in this Agreement; and
WHEREAS, in order to set forth the terms, covenants and conditions
pursuant to which the Additional Space shall be constructed and occupied by
Tenant, Landlord and Tenant desire to modify the Lease as provided in this
Agreement; and
WHEREAS, all terms which are capitalized in this Agreement, but not
defined herein, shall have the meanings given to such terms in the Lease.
NOW, THEREFORE, in consideration of One Dollar ($1.00) and the mutual
covenants contained in this Agreement and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
Landlord and Tenant hereby agree as follows:
Section 1. Construction of Additional Space.
(a) General. The foregoing recitals are hereby incorporated herein. In
connection with the construction of the Additional Space, Landlord has obtained
the Approvals (as defined below), and will attempt to obtain the Architectural
Review Approval, Building Permit and Lender Approval (as such terms are defined
below). In addition, Landlord arranged for the preparation of the Final Plans
and Specifications (as defined below). Tenant will enter into the Construction
Contract (as defined below). With respect to the construction of the Additional
Space and related site and off-site improvements, Article 15 of the Lease shall
be of no force or effect.
(b) Zoning Approvals. Attached hereto as Exhibit A is a site plan (the "Site
Plan") showing the Additional Space together with certain site and off-site
improvements related thereto (including, without limitation, additional parking
for 90 automobiles) and which has been submitted by Landlord on behalf of
Landlord and Tenant to the applicable City of Rye planning and zoning
authorities and which has been approved by such authorities (the "Approvals"),
subject (i) to a final approval (the "Architectural Review Approval") of the
City of Rye Architectural Review Board (the "Review Board") of the Final Plans
and Specifications (as hereinafter defined); and (ii) to obtaining a building
permit allowing construction of the Additional Space to commence (the "Building
Permit"). Landlord promptly shall submit the Final Plans and Specifications to
the appropriate authorities in order to obtain the Architectural Review Approval
and the Building Permit. Landlord and Tenant anticipate making such submission
on or before June 22, 1999. After such submission, Landlord shall make diligent
efforts to obtain the Architectural Review Approval and the Building Permit in
accordance with the schedule previously submitted by Landlord to Tenant,
including, without limitation, attending public or private meetings with the
appropriate officials and filing any necessary additional documents. Landlord
shall request that the Review Board schedule discussion of the Final Plans and
Specification on the agenda of the earliest possible public meeting of the
Review Board after the submission. Tenant shall cooperate with Landlord and the
Review Board (at no additional material cost to Tenant) in connection with all
such submissions and the attempt to obtain the Architectural Review Approval and
the Building Permit, including, without limitation, attending and participating
in public and private meetings. If Landlord has not obtained the Architectural
Review Approval and the Building Permit (if the Architectural Review Approval or
the Building Permit are obtained, subject only to deminimus changes to the Final
Plans and Specifications, the same shall be deemed obtained and Landlord shall
have such deminimus changes made to the Final Plans and Specifications) on or
before September 21, 1999, then either Landlord or Tenant may terminate this
Agreement by written notice to the other in which event this Agreement shall be
deemed null and void and of no force or effect; provided, however, such
termination shall have no effect on the Lease, which shall remain in full force
and effect as if this Agreement had never been executed; provided, further,
however, that Landlord shall not have the right to terminate this Agreement
unless Landlord concludes, in its reasonable judgment, that either (or both) of
the Architectural Review Approval or the Building Permit are not likely to be
obtained or the Architectural Review Approval or the Building Permit are likely
to be obtained, but only after incurring additional costs which are more than
deminimus or only upon certain required conditions or changes which will cause
an increase in costs to construct the Additional Space that is more than
deminimus. If the Architectural Review Board approves the Final Plans and
Specifications subject to changes thereto which are more than deminimus, or if
issuance of the Building Permit is subject to conditions, the cost of which to
satisfy is more than deminimus, Landlord's right to terminate this Agreement
shall be subject to nullification by Tenant, if Tenant, within ten (10) business
days of Landlord's termination, shall agree in writing to pay any additional
cost associated with such requested changes. If neither party terminates this
Agreement, then Landlord shall continue diligently to pursue the Building Permit
and the Architectural Review Approval.
(c) Plans and Specifications. Attached hereto as Exhibit B is a schedule of the
final plans and specifications (the "Final Plans and Specifications"), subject
to any revision which may be required by the applicable authorities in order to
obtain the Architectural Review Approval and the Building Permit, prepared for
Landlord and Tenant by Dennis Noskin & Associates as the architect (the
"Architect"), for the construction of the Additional Space, including, without
limitation, all of the related site and off-site improvements. Landlord
acknowledges that Tenant has retained the services, at Tenant's sole cost and
expense and not as a part of the Cost of Construction (as defined below), of a
structural engineer to review on Tenant's behalf the Final Plans and
Specifications. In the event that such engineer shall request changes to the
Final Plans and Specifications, Landlord agrees to consider such changes and to
discuss the need for such changes with Tenant's engineer. However, Landlord
shall be under no obligation to have the Final Plans and Specifications revised
based upon such request or such discussions. The cost of the preparation of the
Final Plans and Specifications shall be included as a line item in the Budget
(as defined below). Neither the approval by Landlord of the Final Plans and
Specifications or any other plans, specifications, drawings or other items
associated with the Additional Space shall constitute any warranty or covenant
by Landlord to Tenant, except for any warranty or covenant expressly set forth
in this Agreement, of the adequacy of the design for Tenant's intended use of
the Additional Space. Tenant agrees to, and does hereby, assume full and
complete responsibility to ensure that the floor plans and general layout of the
Additional Space as shown on the Final Plans and Specifications are adequate to
fully meet the needs and requirements of Tenant's intended operations of its
business within the Additional Space. Landlord acknowledges that the
Construction Contract (as defined below) permits Tenant to make certain changes
to the Plans and Specifications, as "Change Orders" to the work. Tenant shall be
permitted to make such changes, provided that Tenant shall be responsible for
the actual additional costs relating thereto as set forth in the Construction
Contract.
(d) Budget. Attached hereto as Exhibit C is a budget (the "Budget"), broken out
by line item category, showing an aggregate cost equal to Three Million
Twenty-five Thousand Four Hundred and 00/100 Dollars ($3,025,400.00) (the "Cost
of Construction") required to complete construction of the Additional Space and
the related site and off-site improvements shown on the Final Plans and
Specifications. The Budget shall be used as a basis for the making of Advances
(as defined below). Notwithstanding the foregoing, Landlord and Tenant agree
that the following items shown on the Final Plans and Specifications are "extra"
items requested by Tenant and that the cost of such items is in addition to the
Cost of Construction and shall be at the sole cost and expense of Tenant: (i)
the front stairway, (ii) the four (4) shower stalls and all necessary plumbing,
tile work and accessories thereto and (iii) the men's and women's lockers
associated with the showers. The cost of such items shall be added to the
Construction Account and shall be subject to Advances as provided herein and in
the Construction Contract. Landlord has agreed to pay the fees of certain
professionals, including without limitation the Architect, retained in
connection with obtaining the Approvals, the Architectural Review Approval and
the Building Permit and with completing the Additional Space. Pursuant to the
terms of the Construction Contract, General Contractor has agreed to reimburse
Landlord for such fees in the event that the actual cost to construct the
Additional Space is less than the Cost of Construction. Landlord acknowledges
that whether or not funds are available from General Contractor for such
reimbursement, Landlord shall pay all such fees.
(e) General Contract. Simultaneously with the execution of this Agreement,
Tenant shall enter into a contract (the "Construction Contract") for a
stipulated sum equal to the Cost of Construction with Alfred Weissman Real
Estate, Inc. ("General Contractor") pursuant to which General Contractor shall
act as general contractor in connection with the construction of the Additional
Space (including, without limitation, all related site and off-site
improvements) in accordance with the Final Plans and Specifications. Tenant
acknowledges that General Contractor is affiliated with Landlord, but in no way
is General Contractor a partner or joint venturer with Landlord. As used herein,
the term "General Contractor" shall include such qualified substitute general
contractor as may be retained by Tenant in the event of a default by General
Contractor under, and as provided in, the Construction Contract, and Landlord
hereby consents to Tenant's right to make such substitution.
(f) Establishment of Construction Account. In order to ensure Landlord that
Tenant shall have funds available in order to pay the Cost of Construction,
Tenant shall establish a separate bank account (the "Construction Account"), at
a financial institution reasonably acceptable to Landlord and Tenant, into
which, simultaneously with its execution of this Agreement, Tenant shall deposit
a sum equal to the Cost of Construction less the Previously Advanced Fees (as
defined below). Upon execution of this Agreement, Tenant shall provide to
Landlord evidence of the establishment of such account and from time to time,
upon request, evidence of the balance maintained therein. The Construction
Account shall be established, and the funds therein shall be held in trust, for
the sole purpose of paying for the costs of construction of the Additional
Space. Tenant shall not make, nor permit, withdrawals from the Construction
Account except in accordance with the terms and conditions of this Agreement. In
the event this Agreement is terminated because Landlord does not obtain any of
the Architectural Review Approval, the Building Permit, the Lender Approval or
the SNDA (as defined below), then Landlord shall release all of Landlord's
rights in the Construction Account.
(g) Withdrawals from Construction Account. The construction of the Additional
Space shall be at the sole cost and expense of Tenant up to the Cost of
Construction plus additional costs that Tenant is expressly responsible for
paying (e.g. Change Orders, the aforementioned stairway). Tenant shall make
advances (each an "Advance" and collectively, "Advances") within ten (10)
Business Days after receipt of a request for an Advance, out of the Construction
Account, for actual work in place and materials delivered to the Property, and
in accordance with the applicable request for Advance and the following further
conditions:
(i) Tenant shall not be required to make Advances more frequently than
twice per month;
(ii) requests for Advances shall have been received by Tenant not less than
ten (10) Business Days prior to the date such Advance is requested to be made;
(iii) all requests for an Advance shall be made on the form attached hereto
as Exhibit E, together with reasonable evidence (e.g. invoices and payroll if
applicable) that the amounts requested are due and shall be subject to the
reasonable review and approval (including, without limitation, site visits to
inspect such work, the cost of which shall equal $500 per Advance and are part
of the Cost of Construction and will be paid out of the Construction Account at
the time of the applicable Advance) of an engineer or inspector selected by
Tenant both as to the work completed, materials delivered and the amounts
requested therefor and shall be further subject to the 10% retainage and 5%
retainage set forth in the Construction Contract.
(iv) a certification from the General Contractor and the Architect, that
the work to which such request for Advance relates has been completed in a good
and workmanlike manner in accordance with the Final Plans and Specifications and
all applicable codes and that the balance of the funds remaining in the
Construction Account after making such Advance are reasonably expected to be
sufficient to complete the Additional Space and related site and off-site
improvements and that there remains in each line item which is the subject of
such Advance an amount which is reasonably expected to be sufficient to complete
the work contemplated by such line item;
(v) copies of unconditional lien waivers or releases for all previous
Advances from the applicable mechanics;
(vi) with respect to the final Advance, the Certificate of Occupancy (as
hereinafter defined) has been issued and the work is complete in all respects;
and
(vii) with respect to the final Advance, evidence that no mechanic's or
materialmen's liens or other liens have been filed against the Demised Premises
in connection with the construction of the Additional Space and that the
Architect has delivered a certificate in form reasonably acceptable to Tenant
that the Additional Space and related improvements are complete. Notwithstanding
anything to the contrary contained in this Agreement, Tenant has previously
advanced the following sums (the "Previously Advanced Fees"): (i) $75,000 to
establish the escrow required by the City of Rye in connection with the proposed
traffic light (ii) $39,000 for Building Permit fees, and (iii) $19,000 for
certain other fees. Such amounts shall be reimbursed to Tenant in the event this
Agreement is terminated as a result of a failure to obtain either the
Architectural Review Approval, the Building Permit, the Lender Approval or the
SNDA.
(h) Depreciation. During the term of the Lease, Tenant alone shall be
entitled to claim depreciation on the Additional Space for all taxation
purposes.
Section 2. Definitions. The definitions contained in Article 1 of the Lease
are hereby modified as follows:
(a) Additional Space Completion Date: The date on which a temporary or
permanent certificate of occupancy is issued by the City of Rye permitting
Tenant to occupy the Additional Space for the conduct of its business (the
"Certificate of Occupancy").
(b) Building: The office building known as and by street address 120 Old Post
Road, Rye, New York, including, without limitation, when substantially
completed, the Additional Space.
(c) Tenant Delay: A Tenant Delay shall include a delay in the completion of the
Additional Space as a result of an event described in Section 3.3 of the Lease
(except, Landlord acknowledges that all plans and specifications have been
timely submitted). All references to Landlord's Work in such Section 3.3, in
addition, shall be references to the Additional Space.
Section 3. Term. On the Additional Space Completion Date, the Term of the Lease
automatically will be extended such that the Expiration Date shall be 11:59 p.m.
on the day before the tenth (10th) anniversary of the Additional Space
Completion Date, or upon such earlier date as the Term shall be canceled or
terminated pursuant to any of the conditions or covenants of the Lease, or
pursuant to law.
Section 4. Rent. In Section 2.3(a) of the Lease, the reference to Lease Year
6-10 is amended to refer to Lease Year 6-Expiration Date. Commencing on the
Additional Space Completion Date, in addition to the Fixed Rent currently
specified in Section 2.3(a) of the Lease, Tenant shall pay, throughout the
balance of the Term (subject to adjustment during any renewal periods as
provided below), Fixed Rent in respect of the Additional Space equal to
$50,000.00 per annum, payable in equal monthly installments of $4,166.67.
Landlord and Tenant acknowledge that the Fixed Rent payable in respect of the
Additional Space (but, not the Fixed Rent or Additional Rent payable in respect
of the remainder of the Demised Premises) is subject to certain rights of
abatement and offset in favor of Tenant as set forth in that certain Landlord's
Undertaking and Indemnity Agreement of even date herewith.
Section 5. Additional Rent. With respect to the Additional Space, it is the
intent of Landlord and Tenant that the Fixed Rent shall be a net rent to
Landlord, except as specifically set forth herein. Therefore, the Real Estate
Tax Base and the Base Operating Year shall remain as set forth in the Lease.
Tenant shall continue to pay all increases in Real Estate Taxes over the Real
Estate Tax Base and all Operating Expenses over the Operating Expenses for the
Base Operating Year whether or not same are applicable to the Additional Space
or to the premises initially demised to Tenant under the Lease.
Section 6. Subordination. Prior to, and as a condition of, any withdrawal of any
amount from the Construction Account and in any event no later than September
21, 1999, Landlord shall obtain from its current lender a subordination,
nondisturbance and attornment agreement, (the "SNDA") covering the terms and
conditions of this Agreement and Tenant's occupancy of the Additional Space in
form and substance reasonably acceptable to Tenant and Landlord shall cause such
agreements to be recorded in the County clerk's Office in Westchester County.
Together with Landlord's request for the Lender Approval (as hereinafter
defined) Landlord shall submit to such lender the form of subordination,
non-disturbance and attornment agreement attached hereto as Exhibit D, which
form will be used as the basis of negotiation with such lender. Landlord and
Tenant shall execute and deliver same promptly upon receipt thereof by such
lender to the extent reasonably acceptable to each of them.
Section 7. Assignment and Subletting. Notwithstanding anything to the contrary
contained in Sections 6.1(a), 6.4, 6.6 and 6.8 of the Lease, in respect of the
Additional Space, the following terms and conditions shall apply:
(a) No Consent Required. Tenant shall have the right to sublet the Additional
Space without the consent of Landlord, provided, however, Tenant shall give
Landlord written notice of such subletting no less than ten (10) business days
prior to the effective date thereof. Any sublease of all or any portion of the
Additional Space shall comply with the terms and conditions of Sections 6.5 and
6.7 of the Lease. Notwithstanding any such sublease, Tenant shall remain fully
liable for the payment of Fixed Rent or Additional Rent due or to become due
pursuant to the Lease and this Agreement and for the performance of all
obligations, covenants, agreements, terms and conditions contained in the Lease
and this Agreement.
(b) Consideration. In the case of a sublease of the Additional Space, Tenant
shall pay to Landlord as Additional Rent, fifty percent (50%) of any rent,
additional charge or other consideration paid by the subtenant which is in
excess of the sum of (i) an amount equal to the Fixed Rent and Additional Rent
that Tenant then currently pays, calculated on a per square foot basis, for the
portion of the Demised Premises located on the first and second floor of the
Building, plus (ii) Tenant's reasonable out-of-pocket costs and expenses
incurred in connection with such sublease, including, without limitation,
commissions, legal fees and construction expenses. For example, assume that (i)
Tenant pays Fixed Rent and Additional Rent on each of the first two floors at
the aggregate rate of $25.00 per rentable square foot, (ii) that Tenant
subleases the third floor for an aggregate rental of $30.00 per square foot, and
(iii) that Tenant incurred no costs in connection with such sublet. In such
event Tenant would receive $27.50 per rentable square foot of such rent (i.e.
$25 plus 50% of $30-$25) and Landlord would receive $2.50 (50% of $30-$25) per
rentable square foot. The sums payable under this Section shall be paid to
Landlord as and when paid by the subtenant to Tenant. In the event Tenant
subleases the Additional Space along with all or a portion of the remainder of
the Demised Premises in one or more subleases to one entity or more than one
entity, each of which are affiliates of one another, then for the purposes of
calculating the amount due to Landlord under this subsection (b) and under
Section 6.8(b) of the Lease, the aggregate consideration paid under such
sublease(s) shall be applied, on a per square foot basis, equally over the
entire space subleased.
Section 8. Memorandum. The provisions of Section 7.2 of the Lease shall
specifically apply to this Agreement.
Section 9. Casualty. Notwithstanding anything to the contrary contained in the
Lease (including, without limitation Section 10.2 thereof), in the event of a
casualty of all or any portion of the Demised Premises (except a casualty during
the Second Option Period, as defined below), including, without limitation a
casualty during construction of the Additional Space, Landlord shall repair or
rebuild the Demised Premises as provided in Section 10.1 of the Lease. With
respect to any casualty during the Second Option Period, the provisions of
Article 10 of the Lease shall apply as though not modified by this Agreement.
Section 10. Condemnation. Notwithstanding anything to the contrary contained in
the Lease, in the event that a condemnation of all or a portion of the Demised
Premises results in the termination of the Lease pursuant to the terms of
Sections 12.1 or 12.2 thereof, then, notwithstanding Section 12.3 thereof to the
contrary, any award for such condemnation shall be paid as follows:
(a) first, to any Superior Mortgagee in accordance with the terms of any
Superior Mortgage;
(b) second, to Landlord and Tenant, equally, until Tenant receives an
amount equal to the then unamortized cost of the construction of the Additional
Space paid for by Tenant (amortized on a straight line basis over the initial
ten (10) year Term); and
(c) third, the balance to Landlord.
Notwithstanding anything to the contrary contained in Section 12.2 of the Lease,
Landlord shall not exercise its termination right thereunder unless the award
payable in connection with such condemnation is sufficient to fully fund
subsections (a) and (b) above.
Section 11. Repairs. Subject to Landlord's right, if any, to be reimbursed for
Operating Expenses pursuant to the Lease and as stated in Section 5 above,
Landlord shall be responsible for all repairs to the structural elements
(including, without limitation, the Building roof) and building systems in the
Additional Space.
Section 12. Security. Landlord shall make written request, and thereafter shall
make a good faith attempt, for a release by the current Superior Mortgagee, of
the Letter of Credit (the "Letter of Credit") currently in effect as security
for the Tenant's obligations under the Lease and being held by such Superior
Mortgagee. In the event that such Superior Mortgagee shall deny such request,
for any reason, then the letter of Credit shall remain in effect as security for
Tenant's performance of its obligations under the Lease as set forth in the
Lease.
Section 13. Parking. As part of the construction of the Additional Space, the
General Contractor shall construct the parking spaces and other site
improvements shown on the Site Plan. Landlord will coordinate with General
Contractor to ensure that construction of an additional temporary parking area,
sufficient for the parking of 45 automobiles, is completed as a portion of the
first phase of construction and is available for Tenant's use as soon as
reasonably practicable after construction commences.
Section 14. Options.
(a) Existing Option. At any time that Tenant exercises the Option, Tenant
shall be deemed to have renewed the Lease with respect to the Additional Space
for the Option Period (i.e. the Term of the Lease shall be extended for the
entire Demised Premises).
(i) Throughout the Option Period, Fixed Rent payable in respect of the
Additional Space shall equal the following:
Option Year Rate Per Per Annum Fixed Rent Per Month
Square Foot Fixed Rent
1 $5.00 $134,000 $11,166.67
2 5.30 142,040 11,836.67
3 5.62 150,616 12,551.33
4 5.96 159,728 13,310.67
5 6.32 169,376 14,114.67
(b) Second Option.
(i) Provided Tenant is not in default (beyond applicable notice and grace
periods) pursuant to any of the terms and conditions of the Lease, and further
provided that Tenant has exercised the Option, Tenant shall have the further
option (the "Second Option") to renew the Lease as to the entire Demised
Premises for an additional five (5) year period (the "Second Option Period") for
the period commencing on the date following the last date of the Option Period
upon the terms and conditions contained in the Lease, except, as provided in
this Agreement. To exercise the Second Option, Tenant shall give Landlord notice
(the "Second Option Extension Notice") of the intent to exercise said Second
Option not less than nine (9) months prior to the date on which the Second
Option Period will commence. The Second Option Extension Notice shall be given
as provided in Article 29 in the Lease. In the event Tenant shall exercise the
Second Option, the Lease will terminate in its entirety at the end of the Second
Option Period and Tenant will have no further options to extend the Lease.
(ii) The Fixed Rent for the Second Option shall be determined as follows:
(A) Landlord and Tenant will have until the date which is eight (8) months
prior to the last day of the Option Period within which to agree on the
then-fair market rental value of the Demised Premises, as defined in subsection
(C) below. If they agree on the Fixed Rent within such period, they will amend
the Lease by stating the Fixed Rent.
(B) If Landlord and Tenant are unable to agree on the Fixed Rent for the
Second Option Period within such time, then, the Fixed Rent for the Second
Option Period will be 90% of the then-fair market rental value of the Demised
Premises as determined in accordance with subsection (D) hereof.
(C) The "then-fair market rental value of the Demised Premises" means what
a landlord under no compulsion to lease the Demised Premises and a tenant under
no compulsion to lease the Demised Premises would determine as Fixed Rent
(including initial monthly rent and rental increases) for the Second Option
Period, as of the commencement of the Second Option Period, taking into
consideration the uses permitted under the Lease, the quality, size, design and
location of the Demised Premises, and the rent for comparable buildings located
in the vicinity of Westchester County, New York and the fact that the Base
Operating Year and the Real Estate Tax Base shall not change.
(D) Within thirty (30) days after the expiration of the thirty (30) day
period set forth in subsection (B) above, Landlord and Tenant shall each appoint
one licensed real estate appraiser, and the two appraisers so appointed shall
jointly attempt to determine and agree upon the then fair market rental value of
the Demised Premises. If they are unable to agree, then each appraiser so
appointed shall set one value, and notify the other appraiser, of the value set
by him or her, concurrently with such appraiser's receipt of the value set by
the other appraiser. The two appraisers then shall, together, select a third
licensed appraiser (or if the two appraisers cannot agree upon such third
appraiser, then such third appraiser shall be selected pursuant to arbitration
as provided under Article 30 of the Lease), who shall choose one of the two
values set by the first two appraisers as the fair market rental value of the
Demises Premises, after reviewing the reports of the first two appraisers
appointed by the parties, and after doing such independent research as he/she
deems appropriate.
Section 15. Miscellaneous.
(a) Lease Ratified. Except as expressly modified by this Agreement, the Lease
remains unmodified and is hereby ratified and confirmed and remains in full
force and effect. Any reference to the Lease whether in the Lease or otherwise,
shall mean the Lease as modified by this Agreement.
(b) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
(c) Headings. All section headings used in this Agreement are for convenience
only and in no way define, limit or describe the scope or intent of this
Agreement, nor in any way affect the terms of this Agreement.
(d) Lender Consent Required. This Agreement and the obligations and rights
contained herein are subject to and contingent upon Landlord obtaining (i) the
written consent to this Agreement of the current Superior Mortgagee (the "Lender
Approval") and (ii) the SNDA, executed by Lender and Landlord in recordable
form. Promptly after the execution hereof, Landlord shall submit this Agreement
to such Superior Mortgagee for consent and Landlord thereafter shall diligently
and in good faith pursue same. In the event that such Superior Mortgagee refuses
to grant such Lender Approval or provide the SNDA and if a Termination Notice
(as defined below) is given, this Agreement shall be null and void and of no
force or effect; provided however, in such event the Lease shall remain in full
fore and effect as if this Agreement had never been executed. If Landlord and
Tenant have not received the Lender Approval and SNDA on or before September 21,
1999, then either Landlord or Tenant shall have the right to terminate this
Agreement by giving written notice (the "Termination Notice") (provided,
however, only Tenant shall have the right to give a Termination Notice if the
Lender Approval is received, but Lender does not provide the SNDA) thereof to
the other party. No withdrawal may be made from the Construction Account until
the Lender Approval and SNDA (unless the requirement for the SNDA is waived by
Tenant) are received.
(e) Brokers. Landlord and Tenant each covenant that they have not dealt with any
real estate broker or finder with respect to this Agreement other than
Insignia/Rostenberg Doern ("Insignia") and Cushman & Wakefield ("C&W"). Any
commission relating to this Agreement which may be payable to Insignia or C&W
(either directly or through an agreement between C&W and Insignia) pursuant to
the separate agreement (the "Broker Agreement") between Landlord and Insignia at
or about the time that the Lease was executed, shall be paid by Landlord. Tenant
acknowledges that any fees or commissions due and payable to C&W by reason of
any new arrangement or agreement between C&W and Tenant shall be paid by Tenant.
Each party shall hold the other party harmless from all damages, claims,
liabilities or expenses, including reasonable and actual attorneys' fees
(through all levels of proceedings), resulting from any claims that may be
asserted against the other party by any real estate broker or finder with whom
the indemnifying party either has or is purported to have dealt including the
parties stated above.
(f) Insurance. At the time that the Additional Space is Substantially Complete,
Landlord will increase any limits in respect of the insurance required to be
carried by Landlord under Section 11.1 of the Lease to an amount which insures
the then full replacement cost of the Building.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
TENANT: MOBIUS MANAGEMENT SYSTEMS, INC.
By: /s/ E. Kevin Dahill
Name: E. Kevin Dahill
Title: Chief Financial Officer
LANDLORD: OLD POST ROAD ASSOCIATES, LLC
By: /s/ Alfred Weissman
Name: Alfred Weissman
Title: Managing Member
<PAGE>
EXHIBIT A
SITE PLAN
<PAGE>
EXHIBIT B
SCHEDULE OF
FINAL PLANS AND SPECIFICATIONS
1. construction documents and specifications prepared by Landscape
Architectural Design Associates, PC dated June 1, 1999 (drawings L1 though L9)
2. construction documents prepared by TRC Raymond Key Associates dated June
15, 1999 (drawings L10 and L11)
3. Block and Lot Sheet 146.13
4. base bid parking drainage drawings (L3 and L10) and
5. site specifications
6. Architectural Drawings C1, C2, A-2.0A, A-2.0, A-21, A-2.2, A-2.3, A-2.4,
A-2.5, A-2.6, A-3.0, A-3.1, A-5.0, A-5.1, A-5.2, A-5.3, A-6.0, A-6.1, and A-6.2
7. Structural Drawings S-1 and S-2
8. Mechanical Drawings M-1, M-2, M-3, and M-4
9. Plumbing Drawings P-1, and P-2
10. Electrical Drawings E-1, E-2 and E-3
11. Mechanical Specifications and Addendum #1 prepared by CIMA Group.
<PAGE>
EXHIBIT C
BUDGET
<PAGE>
EXHIBIT D
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT
<PAGE>
EXHIBIT E
FORM
<PAGE>
