MFLO Moldflow Corp (MM)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

Commission file number: 000-30027

 

Moldflow Corporation

(Exact name of registrant as specified in its charter)

 

 

492 OLD CONNECTICUT PATH, SUITE 401 FRAMINGHAM, MA 01701
(Address of principal executive offices) (Zip Code)

 

508-358-5848

(Registrant’s telephone number, including area code)

 

[None]

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o      No  þ

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

MOLDFLOW CORPORATION

 

FORM 10-Q
For the Quarter Ended March 31, 2008

 

TABLE OF CONTENTS

 

 

 

MOLDFLOW CORPORATION

 

 

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

MOLDFLOW CORPORATION

 

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

 

 

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

MOLDFLOW CORPORATION

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

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

MOLDFLOW CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

Moldflow Corporation (“Moldflow” or the “Company”) designs, develops, manufactures and markets computer software solutions for the design and engineering of injection-molded plastic parts. The Company’s revenues are derived from the plastics design and manufacturing industry. The Company sells its products primarily to customers in the United States, Europe, Asia and Australia. The Company’s fiscal year end is June 30.

 

The accompanying unaudited condensed consolidated financial statements include the accounts of Moldflow and its wholly-owned subsidiaries. The unaudited condensed consolidated financial statements have been prepared by the Company in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended June 30, 2007 included in the Company’s Annual Report on Form 10-K. The June 30, 2007 condensed consolidated balance sheet was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments of a normal and recurring nature necessary for a fair statement of the results for the interim periods. The results of operations for the three- and nine-month periods ended March 31, 2008 are not necessarily indicative of the results to be expected for any future period or the full fiscal year.

 

On June 30, 2007, the Company completed the sale of substantially all of the assets of its Manufacturing Solutions (“MS”) division, including its Altanium, Shotscope and Celltrack product lines. The Moldflow Plastics Xpert (“MPX”) software product, which had been previously part of the MS division, was retained by the Company as this software-focused product line was more closely aligned with its core Design Analysis Solutions (“DAS”) business. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company is reporting the MS division as a discontinued operation in the consolidated financial statements for all periods presented. See Note 2 to the unaudited condensed consolidated financial statements, Discontinued Operations , for further discussion of the MS division divestiture. Unless indicated otherwise, both current and historical amounts provided throughout this Form 10-Q relate solely to the Company’s continuing operations.

 

 

On June 30, 2007, the Company completed the sale of its MS division to Husky Injection Molding Systems Ltd. (the “Buyer”) for $7.0 million in cash. The purchase price was subject to a post-closing net asset value adjustment to reflect the fair value of the assets and liabilities acquired at the date of closing. At June 30, 2007, the Company estimated that these post-closing adjustments would result in additional proceeds of $744,000. In the first quarter of fiscal 2008, the Company and the Buyer agreed to a final post-closing adjustment of $584,000, resulting in an adjusted total purchase price of $7.6 million. The difference between the estimated and actual adjustment, inclusive of associated legal costs, was recorded as an additional loss on the disposal of the discontinued operation.

 

The Company received $6.0 million of the purchase price in July 2007 and $584,000 in October 2007. Pursuant to the sale agreement, the remaining $1.0 million of the adjusted purchase price was placed in escrow. The Company expects the escrow to settle within the next twelve months and has recorded the balance as a current asset on its unaudited condensed consolidated balance sheet as of March 31, 2008.

 

 

Share-Based Compensation:

 

Effective July 1, 2005, the Company adopted the provisions of SFAS No. 123(R), “Share-Based Payment,” which establishes accounting for equity instruments exchanged for employee and director services. Under the provisions of SFAS No. 123(R), share-based compensation cost is measured at the grant date, based on the

 

MOLDFLOW CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

calculated fair value of the award, and is recognized as an expense over the requisite service period, which generally is the vesting period of the equity grant.

 

The following table presents share-based compensation expenses for the Company’s continuing operations included in its unaudited condensed consolidated statement of operations:

 

 

The Company estimates the fair value of stock options using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Company’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Company’s expected annual dividend yield. Pre-vesting forfeiture rates for purposes of determining share-based compensation expense for stock options, restricted stock and restricted stock units for the three- and nine-month periods ended March 31, 2008 and March 31, 2007 were estimated to be 7.0% and 8.6%, respectively. The Company believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company’s stock options granted during the three-and nine-month periods ended March 31, 2008 and March 31, 2007. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

 

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

 

 

 

 

MOLDFLOW CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

Stock Plans

 

In August 1997, the Company adopted the 1997 Equity Incentive Plan (the “1997 Plan”), which provided for the grant of incentive stock options, non-qualified stock options, stock awards and stock purchase rights for the purchase of up to 931,303 shares of the Company’s common stock by officers, employees, consultants and directors of the Company. In April 1999, the number of shares available under the 1997 Plan was increased to 1,537,158 shares. The Board of Directors is responsible for administration of the 1997 Plan. The Company no longer issues shares under the 1997 Plan.

 

On January 20, 2000, the Board of Directors approved the Moldflow Corporation 2000 Stock Option and Incentive Plan (the “2000 Plan”), which, as amended, provides for the grant of incentive stock options, stock awards and stock purchase rights for the purchase of up to 4,145,729 shares of common stock by officers, employees, consultants and directors of the Company. The number of shares issuable under the 2000 Plan is also increased as of each June 30 and December 31 by a number of shares equal to 20% of the shares issued by the Company during such six-month period. The Board determines the term of each option, the option exercise price, the number of shares for which each option is granted and the rate at which each option is exercisable. Incentive stock options may be granted to any officer or employee at an exercise price per share of not less than the fair value per common share on the date of the grant (not less than 110% of fair value in the case of holders of more than 10% of the Company’s voting stock) and with a term not to exceed ten years from the date of the grant (five years for incentive stock options granted to holders of more than 10% of the Company’s voting stock). Non-qualified stock options may be granted to any officer, employee, consultant or director at an exercise price per share of not less than the par value per share. As of March 31, 2008, there were 941,045 shares available for future grant under the 2000 Plan.

 

The following sections, Stock Options, Restricted Stock, and Restricted Stock Units, summarize activity under the Company’s stock plans. Share data for the nine months ended March 31, 2008 includes activity for both the Company’s continuing and discontinued operations.

 

Stock Options:

 

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

 

 

MOLDFLOW CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

The following table summarizes information about outstanding stock options as of March 31, 2008:

 

 

The Company recorded share-based compensation expense from continuing operations related to stock options of $245,000 and $220,000 for the three-month periods ended March 31, 2008 and March 31, 2007, respectively. The Company recorded share-based compensation expense from continuing operations related to stock options of $776,000 and $704,000 for the nine-month periods ended March 31, 2008 and March 31, 2007, respectively. The intrinsic value of options exercised in the nine-month period ended March 31, 2008 was $2.5 million and the intrinsic value of options that vested during the period was $855,000. The total compensation cost from continuing operations not yet recognized as of March 31, 2008 related to unvested stock option awards was $1.7 million, which will be recognized over a weighted-average period of 1.9 years. Vested share options outstanding and exercisable were 838,997 as of March 31, 2008 with an intrinsic value of $3.7 million and a weighted average remaining contractual life of 2.2 years.

 

Restricted Stock:

 

The following table summarizes restricted stock award activity under the 2000 Plan during the periods presented:

 

 

The shares of restricted stock have been issued at no cost to the recipients. The restricted stock vests annually over a three-year period. The fair value of the restricted stock is expensed ratably over the vesting period. The Company recorded share-based compensation expense from continuing operations related to restricted stock of $344,000 and $192,000 for the three-month periods ended March 31, 2008 and March 31, 2007, respectively. The Company recorded share-based compensation expense from continuing operations related to restricted stock of $920,000 and $505,000 for the nine-month periods ended March 31, 2008 and March 31, 2007, respectively. As of March 31, 2008, the total compensation cost from continuing operations not yet recognized related to unvested restricted stock awards was $2.2 million, which will be recognized over a weighted-average period of 2.0 years.

 

MOLDFLOW CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

For U.S. employees, vested restricted stock awards were net-share settled such that the Company withheld shares with a value equivalent to employees’ minimum statutory obligation for the applicable income and other employment taxes, and remitted the cash to the appropriate taxing authorities. The shares are valued based on the Company’s closing price of the restricted stock on their vesting dates. During the three-month period ended March 31, 2008, no shares were withheld and recorded to treasury stock in order to pay for employees’ tax obligations. In the nine-month period ended March 31, 2008, total shares withheld of 17,564 were recorded to treasury stock and the payment for employees’ tax obligations related to these shares was approximately $311,000, while an additional 3,291 shares were withheld as a result of restricted stock surrendered for withholding taxes in a prior period. The payment for employees’ tax obligations related to the these shares was approximately $72,000. In addition, the Company also reclassified 6,641 shares and 19,703 shares from common stock to treasury as these shares were also withheld in prior periods for employee’s tax obligations on restricted stock and stock options, respectively. The tax obligations related to these 26,344 shares was $146,000.

 

Restricted Stock Units:

 

 

Each restricted stock unit vests annually over a three-year period. Vesting of the restricted stock units automatically accelerates upon a change of control of the Company. Vested restricted stock units are paid out in common stock upon the earlier of a termination of services by the recipient or a change of control of the Company. Restricted stock units do not have voting rights until such time as the restricted stock units are paid out in shares. These post-vesting restrictions were reflected in the discount rate and thus considered in the determination of the fair value of the restricted stock units. Two approaches are considered in estimating the discount rate: empirical studies related to transactions involving restricted shares and the level of discount implied by the Black-Scholes valuation model. The fair value of the restricted stock unit was $11.65 at the date of grant, approximately 30% less than the intrinsic value of $16.64. The fair value of the restricted stock units is expensed ratably over the vesting period.

 

The Company recorded share-based compensation expense related to restricted stock units of $34,000 and $16,000 for the three-month periods ended March 31, 2008 and March 31, 2007, respectively. The Company recorded share-based compensation expense related to restricted stock units of $82,000 and $23,000 in the nine-month periods ended March 31, 2008 and March 31, 2007, respectively. As of March 31, 2008, the total compensation cost not yet recognized related to unvested restricted stock units was $327,000, which will be recognized as an expense to continuing operations over a weighted-average period of 2.3 years.

 

MOLDFLOW CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

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

 

 

Weighted average common stock equivalents related to stock options of 559,283 and 530,844 shares were outstanding for the three-month periods ended March 31, 2008 and March 31, 2007, respectively, but were not included in the calculation of diluted net income per share from continuing operations as their inclusion would be anti-dilutive.

 

Weighted average common stock equivalents related to stock options of 186,441 and 557,511 shares were outstanding for the nine-month periods ended March 31, 2008 and March 31, 2007, respectively, but were not included in the calculation of diluted net income per share from continuing operations as their inclusion would be anti-dilutive.

 

Under the provisions of SFAS No. 28, “Earnings per Share,” when there is income from continuing operations and the Company reports a discontinued operation, the Company computes diluted net loss per common share from discontinued operations using the same number of potentially dilutive securities applied in computing diluted net income per common share from continuing operations, even though this would have an anti-dilutive effect.

 

MOLDFLOW CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

The Company maintains a hedging program designed to reduce the exposure to changes in currency exchange rates. As of March 31, 2008, hedging instruments with notional amounts of $5.9 million, $8.8 million and $5.1 million were outstanding to exchange Euros, Japanese yen and Australian dollars, respectively. The fair value of the Euro and Australian instruments, as derived from dealer quotations, was $304,000 and was recorded as a component of other current assets. The fair value of the Japanese instruments, as derived from dealer quotations, was a liability of $553,000 and was recorded as a component of other current liabilities. During the three- and nine-month periods ended March 31, 2008, net unrealized losses of $251,000, and $207,000, respectively, were included in accumulated other comprehensive income. During the three- and nine-month periods ended March 31, 2008, a loss of $90,000 and a loss of $77,000, respectively, were recorded as a component of other income on the effective portion of options that were settled. As of March 31, 2008, there was no gain or loss recognized on the ineffective portion of these options.

 

As of March 31, 2007, hedging instruments with notional amounts of $2.7 million, $1.9 million and $1.5 million were outstanding to exchange Euros, Japanese yen and Australian dollars, respectively. The fair value of these instruments, as derived from dealer quotations, was $171,000 and was recorded as a component of other current assets. During the three- and nine-month periods ended March 31, 2007, net unrealized losses of $42,000, and net unrealized gains of $59,000, respectively, were included in accumulated other comprehensive income. During the three- and nine-month periods ended March 31, 2007, gains of $58,000 and $106,000, respectively, were recorded as components of other income on the effective portion of options that were settled. As of March 31, 2007, there was no gain or loss recognized on the ineffective portion of these options.

 

The Company held no derivatives during the nine-month period ended March 31, 2008 or March 31, 2007 for non-hedging purposes.

 

 

Intangible assets acquired in the Company’s business combinations have been fully amortized except for goodwill. The total carrying value of goodwill of the Company’s continuing operations at both March 31, 2008 and June 30, 2007 was $6.5 million.

 

 

Costs associated with the development of computer software and related products are expensed prior to establishing technological feasibility, as defined by SFAS No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise Marketed,” and capitalized thereafter until the product is available for general release to customers. Eligible development costs of $264,000 and $257,000 were capitalized in the three-month periods ended March 31, 2008 and March 31, 2007, respectively. Eligible development costs of $602,000 and $340,000 were capitalized in the nine-month periods ended March 31, 2008 and March 31, 2007, respectively. All such costs have been included in other non-current assets in the Company’s unaudited condensed consolidated balance sheet and are being amortized to cost of product revenue over their estimated useful lives, which range from three to five years. A summary of capitalized software development costs follows:

 

 

MOLDFLOW CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

 

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

 

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

 

 

 

The Company has reviewed the provisions of SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information,” with respect to the criteria necessary to evaluate the number of operating segments that exist within the Company. Based on this review, the Company has concluded that it operates as a single segment. The Company licenses and sells its products to customers throughout the world. Sales and marketing operations outside the United States are conducted principally through the Company’s foreign sales subsidiaries in Europe and Asia.

 

The Company had no customers from which it derived more than 10% of the total revenue for the fiscal periods presented.

 

 

Provision for Income Tax

 

The Company is subject to income tax in numerous jurisdictions and at various rates worldwide, and the use of estimates is required in determining the provision for income taxes.

 

For the three- and nine-month periods ended March 31, 2008, the Company recorded a tax provision of $2.8 million and $4.1 million, on income from continuing operations before income tax of $2.9 million and $9.6 million, resulting in an effective income tax rate of 95% and 43%, respectively. For the three months ended March 31, 2008, the difference between the effective rate of 95% and the U.S. federal statutory rate of 34% was primarily due to a $1.8 million tax expense recorded in connection with the Company’s proposed settlement of its tax audit in Australia (see “Tax Audit Australia” below). For the nine-month period ended March 31, 2008, the difference between the effective tax rate of 43% and the U.S. federal statutory income tax rate of 34% was primarily due to tax expense recorded in connection with the aforementioned proposed settlement, which was partially reduced by taxes incurred in certain foreign jurisdictions at rates lower than those enacted in the U.S. and also

 

MOLDFLOW CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

reduced by the effect of a one-time tax benefit of $169,000 arising from the lapse of the applicable statute of limitations related to potential audits.

 

For the three- and nine-month periods ended March 31, 2007, the Company recorded tax provisions of $638,000 and $1.1 million, respectively, on income from continuing operations before tax of $3.4 million and $7.7 million, respectively, resulting in effective income tax rates of 19% and 14%, respectively. For the three months ended March 31, 2007, the difference between the effective tax rate of 19% and the U.S. federal statutory income tax rate of 34% was primarily due to taxes incurred in certain foreign jurisdictions at rates lower than those enacted in the U.S. For the nine months ended March 31, 2007, the difference between the effective tax rate of 14% and the U.S. federal statutory income tax rate of 34% was primarily due to a one-time benefit of $562,000 occurring in the first quarter of fiscal 2007, which resulted from a revised estimate of the Company’s tax liabilities related to certain tax positions of one of the Company’s foreign subsidiaries and taxes payable in certain foreign jurisdictions at rates lower than those enacted in the U.S.

 

Valuation Allowance

 

The Company has established a valuation allowance against net deferred tax assets, consisting principally of net operating losses and foreign tax credit carryforwards and temporary differences in certain jurisdictions, including the United States, because it believes that it is more likely than not that the tax assets in those jurisdictions will not be realized prior to their expiration. At March 31, 2008, the Company had total deferred tax assets of $625,000, which were net of the tax asset valuation allowance of $3.6 million and deferred tax liabilities of $519,000. Realization of the net deferred tax assets is dependent on the Company’s ability to generate future taxable income in the related tax jurisdictions. Management believes that sufficient taxable income will be earned in the future to realize these assets.

 

FASB Interpretation No. 48

 

The Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”) on July 1, 2007. FIN 48 provides a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns. Upon adoption, the Company recorded $289,000 of tax liabilities primarily related to estimated interest and penalties associated with previously recorded reserves. This amount was recorded as an increase to other long-term liabilities and a decrease to retained earnings on the Company’s condensed consolidated balance sheet. At the date of adoption, the Company had $184,000 of accrued interest and penalties included in other liabilities on its condensed consolidated balance sheet. It is the Company’s policy to recognize interest and penalties related to unrecognized tax benefits as income tax expense in its consolidated statement of income.

 

As of March 31, 2008, the Company had $1.1 million of accrued interest and penalties, $845,000 of which are related to the Company’s settlement position with the Australian Tax Office (see “Tax Audit Australia” below). As of March 31, 2008, the Company has recognized $882,000 of interests and penalties in the condensed consolidated statement of operations.

 

Unrecognized tax benefits represent tax positions for which reserves have been established. On the date of adoption, the Company’s unrecognized tax benefits totaled $1.7 million. As of March 31, 2008, the Company’s unrecognized tax benefits totaled $3.2 million, of which $2.1 million, if recognized, would favorably affect the Company’s effective tax rate in any future period. The Company has not identified an uncertain tax position under FIN 48 for which it is reasonably possible that the total amount of such uncertain tax benefits will increase or decrease as a result of a settlement within the next twelve months.

 

In the normal course of business, the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Australia, France, Japan, Germany, Ireland and the U.S. As a result, the

 

MOLDFLOW CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Company files numerous consolidated and separate income tax returns in both domestic and international jurisdictions. Depending on the jurisdiction, the Company’s tax years 2002 through 2008 are still open to examination. With the exception of Australia, the Company is no longer subject to tax examinations for years before 2002 in its major jurisdictions.

 

Tax Audit Australia

 

In the first quarter of fiscal 2005, one of the Company’s Australian subsidiaries became subject to an audit by the Australian Tax Office (“ATO”). The amount of tax assessed to date by the ATO, including penalties and interest, is approximately A$7.9 million (currently valued at $7.2 million). Payments of A$3.9 million (currently valued at $3.6 million) have been made to date with respect to these assessed amounts. The A$7.9 million of assessed taxes represents the Company’s maximum potential exposure, but does not reflect the potential tax benefits of such payments, which might serve to mitigate the net expense that would be reflected in the Company’s results of operations.

 

In November 2005, the Company received a notice of assessment from the ATO related to its 2001 tax year, which assessed a tax due in an amount of A$1.8 million (currently valued at $1.6 million). Subsequently, the Company was issued penalty and interest charges totaling A$1.4 million (currently valued at $1.3 million) related to the tax assessment for the 2001 year. In order to limit the interest that may accrue on these amounts from the date of assessment through the ultimate resolution of this matter, the Company paid A$907,000 (currently valued at $829,000), approximately 50% of the income tax assessment for 2001, to the ATO in December 2005. In April 2006, the Company paid 50% of the penalty and interest charges totaling A$708,000 (currently valued at $647,000) related to the tax assessment for the 2001 year. The ATO has agreed to defer any action to recover the remaining assessed tax amount outstanding and that no portion of the remaining interest and penalty charge for the 2001 tax year needs to be paid pending the resolution of the dispute.

 

In May 2006, the Company received a notice of assessment for tax, interest and penalties related to its 1994 and 1995 tax years totaling approximately A$4.5 million (currently valued at $4.1 million). In order to limit the interest that may accrue on these amounts from the date of assessment through the ultimate resolution of this matter, in June 2006, the Company paid approximately A$1.1 million (currently valued at $1.0 million) to the ATO, which represented 50% of the outstanding interest assessments for the 1994 and 1995 years and A$1.1 million (currently valued at $1.0 million), which represented 50% of the outstanding tax and penalty assessments for the 1994 and 1995 years. The tax authority has agreed to defer any action to recover the remaining assessed tax amount outstanding and that no portion of the remaining interest and penalties for 1994 and 1995 need to be paid pending the resolution of the dispute. All payments to the ATO were recorded as current assets.

 

While Company believes that its positions on its tax returns have merit, since November 2007, the Company has undertaken settlement discussions with the ATO. During this time, various settlement offers have been proposed by both parties to the dispute. These settlement offers and settlement discussions have been conducted on a “without prejudice” basis to avoid impacting the Company’s ability to maintain its position or arguments in the event that the matter is disputed in court. The settlement offers to the ATO were based on the Company’s view that its position is correct and will ultimately be sustained. During the third fiscal quarter, negotiations with the ATO progressed to a point where the Company concluded that as of March 31, 2008, it is more likely than not that a mutually agreeable settlement could be reached with the ATO. Accordingly, under FIN 48, an accrual for $2.3 million has been recorded related to this potential settlement. This accrual was recorded as a reduction to the carrying value of the payments made to the ATO described above. After this reduction, the remaining balance of payments included as current assets on the Company’s condensed consolidated balance sheet was $1.1 million as of March 31, 2008. Of this reduction, $1.8 million was recorded as tax expense in the three-month period ended March 31, 2008 and $457,000 was recorded as a deferred tax asset, as it related to the timing of tax deductions. Negotiations are ongoing and any actual settlement with the ATO could result in a further accrual being recorded or the current accrual being reduced in future fiscal periods.

 

MOLDFLOW CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

11.  Contingencies, Commitments and Guarantor Arrangements

 

In the normal course of business, the Company indemnifies third parties and enters into commitments and guarantees (“Agreements”) under which it may be required to make payments. These Agreements include indemnities to the following parties: lessors in connection with facility leases; customers in relation to their performance of services subcontracted to other providers; vendors in connection with guarantees of Company employee expenses; and former employees in connection with their prior services as director or officer of the Company or its subsidiary companies. In addition, the Company may be responsible for the performance under credit facilities of the Company’s subsidiaries and for indemnity obligations in connection with the sale of business assets. The duration of these Agreements varies, and in certain cases, is indefinite. Furthermore, the majority of these Agreements do not limit the Company’s maximum potential payment exposure. However, the Company has never incurred material costs to settle claims or defend lawsuits related to these Agreements and their estimated fair value is minimal. Accordingly, as of March 31, 2008, no liabilities have been recorded.

 

The Company generally warrants that its products will perform in all material respects in accordance with its standard published specifications in effect at the time of delivery of the products to the customer for a period of 90 days to two years from the date of shipment or any longer period that may be required by local law. The Company records a liability based upon its history of claims against the contractual warranty provisions. Historically, payments made under these provisions have been insignificant.

 

 

On May 17, 2006, the Company’s Board of Directors established a stock repurchase program under which the Company was authorized to repurchase up to 600,000 shares of its outstanding common stock. On November 1, 2007, the Company’s Board of Directors extended the Company’s stock repurchase program to allow for the repurchase of up to one million additional shares of its outstanding common stock. No shares were repurchased under the program for the nine-month period ended March 31, 2008.

 

As of March 31, 2008, the Company held 647,199 shares as treasury stock.

 

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“FAS No. 161”). FAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under FAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. FAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. FAS No. 161 encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently evaluating the timing of adoption of FAS No. 161 and the impact that adoption might have on its financial position and its results of operations.

 

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” (“FAS No. 141(R)”) FAS No. 141(R) changes the accounting for business combinations by requiring that an acquiring entity measure and recognize identifiable assets acquired and liabilities assumed at the acquisition date fair value with limited exceptions. The changes include the treatment of acquisition-related transaction costs, the valuation of any noncontrolling interest at acquisition date fair value, the recording of acquired contingent liabilities at acquisition date fair value and the subsequent re-measurement of such liabilities after acquisition date, the recognition of capitalized in-process research and development, the accounting for acquisition-related restructuring cost accruals

 

MOLDFLOW CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

subsequent to acquisition date, and the recognition of changes in the acquirer’s income tax valuation allowance. FAS No. 141(R) is effective for business combination transactions for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 (our fiscal year 2010 on July 1, 2009) with early adoption prohibited. Upon adoption of this standard, there will be no impact to the Company’s results of operations and financial condition for acquisitions previously completed. The adoption of this standard will impact any acquisitions completed after July 1, 2009.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“FAS No. 159”). FAS No. 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. FAS No. 159 is effective for fiscal years beginning after November 15, 2007, and early adoption of FAS No. 159 is allowed under certain circumstances. The Company is currently evaluating the timing of adoption of FAS No. 159 and the impact that adoption might have on its financial position and its results of operations.

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“FAS No. 157”) which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in generally accepted accounting principles in the U.S. (“GAAP”) and expands disclosure related to the use of fair value measures in financial statements. FAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. In February 2008, FASB Staff Position (“FSP”) No. FAS 157-1 amended FAS No. 157 to exclude SFAS No. 13, “Accounting for Leases” (“FAS No. 13”) and other accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under FAS No. 13. The exclusion did not apply to assets acquired and liabilities assumed in a business combination that are required to be measured at fair value under FAS No. 141 or FAS No. 141R, regardless of whether those assets and liabilities are related to leases. In addition, in February 2008, FSP No. FAS 157-2 delayed the effective date of FAS No. 157, for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the timing of adoption of FAS No. 157 and the impact the adoption might have on its financial position and its results of operations.

 

 

On May 1, 2008, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Autodesk, Inc., a Delaware corporation (“Autodesk”), and Switch Acquisition Corporation, a Delaware corporation and a wholly-owned subsidiary of Autodesk (the “Purchaser”), pursuant to which, among other things, the Purchaser will commence a cash tender offer (the “Offer”) to acquire all the outstanding shares of the Company’s common stock, par value $0.01 per share (“Company Common Stock”), at a price of $22.00 per share, net to the selling stockholders in cash, without interest (the “Offer Price”). The Offer will remain open for 20 business days from commencement, subject to possible extension on the terms set forth in the Merger Agreement. Pursuant to the Merger Agreement, after the consummation of the Offer, and subject to the satisfaction or waiver of certain conditions set forth in the Merger Agreement, the Purchaser will merge with and into the Company (the “Merger”) and the Company will become a wholly-owned subsidiary of Autodesk (the “Surviving Corporation”). At the effective time of the Merger, each issued and outstanding share of Company Common Stock (“Shares”) (other than Shares owned by the Company, Autodesk or the Purchaser, and stockholders who have perfected their statutory rights of appraisal under Section 262 of the Delaware General Corporation Law), will be automatically converted into the right to receive an amount in cash, without interest, equal to the Offer Price.

 

The Merger Agreement includes customary representations, warranties and covenants of the Company, Autodesk and the Purchaser. The Company has agreed to operate its business in the ordinary course until the Offer is consummated. The Merger Agreement also includes customary termination provisions for both the Company and

 

MOLDFLOW CORPORATION

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Autodesk and provides that, in connection with the termination of the Merger Agreement under specified circumstances, the Company may be required to pay to Autodesk a termination fee of $7,500,000.

 

Consummation of the Offer is subject to various conditions, including (1) the valid tender of the number of Shares that would represent at least a majority of the sum of (a) all Shares outstanding as of the scheduled expiration of the Offer plus (b) all Shares issuable upon exercise of options to acquire Shares outstanding as of the scheduled expiration of the Offer which are vested as of the scheduled expiration of the Offer or would vest within 90 days thereafter, plus (c) all Shares issuable upon securities convertible into, or exchangeable for, Shares outstanding at the then scheduled expiration of the Offer or within 90 days thereafter, (2) the expiration or termination of applicable waiting periods under the United States Hart-Scott-Rodino Antitrust Improvements Act of 1976 and (3) and other required regulatory approvals and customary closing conditions.

 

We begin Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) with a review of our overall strategy to give the reader a view of the goals of our business and the direction in which our business and products are moving. This is followed by a discussion of the Critical Accounting Policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. Following that, we discuss the results of our continuing operations for the three- and nine-month periods ended March 31, 2008 compared to the three- and nine-month periods ended March 31, 2007. We then provide an analysis of changes in our balance sheet and cash flows, and discuss our financial commitments in the sections entitled “Liquidity and Capital Resources” and “Off-Balance Sheet Financing Arrangements.”

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements contained in this report include, but are not limited to, statements concerning growth opportunities for our business, taxes, working capital and capital expenditure requirements, inflation, international operations and share-based compensation expenses. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate,” and “continue” or similar words. You should read statements that contain these words carefully because they discuss our future expectations, contain projections of our future results of operations or of our financial condition, or state other “forward-looking” information.

 

We believe that it is important to communicate our future expectations to our investors. However, there may be events in the future that we are not able to accurately predict or control that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed as a result of various factors, including those factors described in our most recent Annual Report on Form 10-K, Part I, Item 1A. “Risk Factors” and additional risk factors related to the proposed acquisition of Moldflow by Autodesk (see below) included in Part II, Item 1A of this Form 10-Q. Readers should not place undue reliance on our forward-looking statements. We do not undertake any obligation to update any of our forward-looking statements to reflect events occurring after the date of this report.

 

On May 1, 2008, we entered into an Agreement and Plan of Merger with Autodesk, Inc., (“Autodesk”), and Switch Acquisition Corporation, a wholly-owned subsidiary of Autodesk, pursuant to which, among other things, Autodesk will commence a cash tender offer to acquire all the outstanding shares of our common stock, par value $0.01 per share at a price of $22.00 per share, net to the selling stockholders in cash, without interest. See Note 14, Subsequent Events, to the unaudited condensed consolidated financial statements.

 

Corporate Strategy Overview

 

Our goal is to be the leading global provider of software optimization solutions for the design and manufacture of plastic parts. We help companies manufacture less expensive and more reliable products by increasing the effectiveness of their product and mold design process as well as improving efficiencies across their entire design-through-manufacture process.

 

We believe that our key competitive strength is our extensive domain knowledge in the fields of materials science and characterization, numerical methods and predictive modeling through simulation and analysis, coupled with our expertise in packaging and delivering this knowledge to our customers in easy-to-use software applications. We develop software products internally and through cooperative research relationships with a number of public and private educational and research organizations around the world. In addition, some of our products are developed by commercial contractors. Because of the strong body of intellectual property and knowledge that we have created over the course of thirty years in serving the product design, engineering and manufacturing markets, we have become the leading provider of highly sophisticated predictive software applications for the plastics design, engineering and manufacturing communities. Our growth strategy is derived from these strengths.

We continue to increase the business value of our products for our customers by improving the performance and functionality of our products with each new release, and developing products addressing specific vertical market needs in each of our target market segments. In the design phase, for example, we provide applications that address the process of microchip encapsulation, a process which is involved in the manufacture of semiconductors.

 

Expanding our geographic coverage is a key element of our growth strategy. We believe that the rapidly growing economies in China, India, Eastern Europe, South America and other developing regions present significant longer-term growth opportunities for our business. Our ability to conduct research and development at various locations throughout the world allows us to optimize product development and lower costs. International development, however, also involves significant costs and challenges, including whether we can adequately protect our intellectual property and derive significant revenue in areas where laws regarding intellectual property are not in place or not effectively enforced.

 

A significant part of our growth strategy is directed toward increasing customer loyalty and further developing opportunities within our large installed customer base. We generally receive approximately 65% to 75% of our overall revenue from existing customers. We deliver product releases on a regular basis which incorporate significant functional improvements to ensure that our customers have access to the latest technological developments. We focus on customer satisfaction through programs aimed at involving our customers in the future direction of our products, enhancing their ease of use and user experience, and providing multiple points of contact within the Company to ensure that their needs are met. These efforts encourage our existing customers to both renew their annual maintenance contracts and purchase additional licenses.

 

Our uses of cash include capital expenditures to support our operations and product development, investments in growth initiatives, and repurchases of our outstanding common stock. We have also used cash to acquire other companies or strategic assets. We continue to evaluate merger and acquisition opportunities to the extent they support our strategy and growth objectives.

 

Discontinued Operations

 

On June 30, 2007, we completed the sale of our Manufacturing Solutions (“MS”) division to Husky Injection Molding Systems Ltd. (the “Buyer”) for $7.0 million in cash. The purchase price was subject to a post-closing net asset value adjustment to reflect the fair value of the assets and liabilities acquired at the date of closing. At June 30, 2007, we estimated that these post-closing adjustments would result in additional proceeds of $744,000. In the first quarter of fiscal 2008, we agreed with the Buyer to a final post-closing adjustment of $584,000, resulting in an adjusted total purchase price of $7.6 million. The difference between the estimated adjustment and the actual adjustment, inclusive of associated legal costs, was recorded as an additional loss on the disposal of the discontinued operation in the three months ended September 30, 2007.

 

We received $6.0 million of the purchase price in July 2007 and $584,000 in October 2007. Pursuant to the sale agreement, the remaining $1.0 million of the adjusted purchase price was placed in escrow. We expect the escrow to settle within the next twelve months and have recorded its balance as a current asset on our unaudited condensed consolidated balance sheet as of March 31, 2008.

 

In accordance with Statement of Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we are reporting the MS division as a discontinued operation in these unaudited condensed consolidated financial statements for all periods presented.

 

Critical Accounting Policies and Significant Judgments and Estimates

 

Our unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). In connection with the preparation of these financial statements, we make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, and expenses and the related disclosures.

 

A critical accounting policy is one that is both material to the presentation of our financial statements and requires us to make difficult, subjective or complex judgments for uncertain matters that could have a material effect on our financial condition and results of operations. Our critical accounting policies include: Revenue Recognition,

Asset Valuation Allowances, Acquisition Accounting, Impairment Accounting (including the accounting treatment of discontinued operations), Income Tax Accounting, Capitalization of Software Development Costs, Share-based Compensation, and Restructuring. Management has reviewed these policies and related disclosures with the Audit Committee of our Board of Directors. We have revised our critical accounting policy related to income tax accounting as described below. For a detailed explanation of the judgments included in our other critical accounting policies refer to our Annual Report on Form 10-K for the year ended June 30, 2007.

 

Income Tax Accounting

 

SFAS No. 109, “Accounting for Income Taxes,” establishes financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity’s financial statements or tax returns. Significant judgment is required in assessing the future tax consequences of events that have been recognized in our financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations or cash flows.

 

We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”) on July 1, 2007. FIN 48 provides a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of uncertain tax positions taken or expected to be taken in income tax returns.

 

Under FIN 48, we first determine whether a tax authority would “more likely than not” sustain our tax position if it were to audit the position with full knowledge of all the relevant facts and other information. For those tax positions that meet this threshold, we measure the amount of tax benefit based on the largest amount of tax benefit that the enterprise has a greater than 50% chance of realizing in a final settlement with the relevant authority. Those tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more likely than not standard, or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations. We maintain a cumulative risk portfolio relating to all our uncertainties in income taxes in order to perform this analysis, but the evaluation of our tax position in connection with FIN 48 requires significant judgment and estimation in part because, in certain cases, tax law is subject to varied interpretation, and whether a tax position will ultimately be sustained may be uncertain. The actual outcome of our tax positions, if significantly different from our estimates, could materially impact the financial statements.

 

In addition, our effective tax rate estimates may be materially impacted by the amount of income taxes associated with our foreign earnings, which are typically taxed at rates different from that of the United States (“U.S.”) federal statutory tax rate, as well as the timing and extent of the realization of deferred tax assets, changes in tax law and potential acquisitions. Further, our tax rates may fluctuate within a fiscal year, including from quarter to quarter, due to items arising from discrete events, including settlement of tax audits and assessments, acquisitions of other companies, and changes in GAAP or other events.

 

Overview of Results of Continuing Operations for the Three- and Nine-Month Periods Ended March 31, 2008:

 

 

 

 

Results of Continuing Operations

 

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

 

Revenue

 

 

Our product revenue primarily represents license fees for our packaged software application products. Typically, our customers pay an up-front, one-time fee for our products. The amount of the fee depends upon the number and type of software modules licensed and the number of the customer’s employees or other users who can access the software product simultaneously. In addition, we receive royalty payments from developers of other software products related to the bundling of our software with their design software programs. We record these royalty payments and shipping and handling fees related to delivery of our products as components of product revenue, none of which have been significant to date.

 

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

 

The following tables sets forth our revenue by geography for the three- and nine- month periods ended March 31, 2008 and March 31, 2007.