| MOBIUS MANAGEMENT SYSTEMS INC ITEM 1A Risk Factors |
| 9 ITEM 1A RISK FACTORS We operate in a rapidly changing economic and technological environment that involves numerous risks and uncertainties |
| Prospective and existing investors are strongly urged to carefully consider the various cautionary statements and risks set forth in this annual report and our other public filings |
| The following section describes the material risks and uncertainties that we believe may adversely affect our business, operating results or financial condition |
| Many of these risks and uncertainties are beyond our control and are driven by factors that we cannot predict |
| Our operating results are subject to significant fluctuations and uncertainties, our business has experienced significant seasonality, and it is difficult for us to predict future revenues |
| Our quarterly revenues and operating results have varied significantly in the past and are likely to vary substantially from quarter to quarter in the future |
| Quarterly revenues and operating results are expected to fluctuate as a result of a variety of factors, including mix of products, lengthy product sales cycles, general domestic and international economic conditions, demand for our products, changes in the level of operating expenses, introductions of new products and product enhancements by us or our competitors and competitive conditions in the industry |
| Currently, we believe that external market factors are driving customers to cautiously spend on enterprise software which can result in unpredictability in the timing of orders |
| This condition may continue to impact future quarterly operating results and have an adverse effect on Mobius |
| The timing, size and nature of individual license transactions are important factors in our quarterly operating results |
| Many of our license transactions involve large dollar commitments by customers, and the sales cycles for these transactions are often lengthy and unpredictable |
| There can be no assurance that we will be successful in closing large license transactions within the fiscal period in which they are budgeted, if at all |
| Historically, our business has experienced significant seasonality, with revenues typically peaking in the fourth fiscal quarter (ending June 30) and to a lesser extent in the second fiscal quarter (ending December 31) |
| Fluctuations have historically been caused by customer purchasing patterns and our 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 |
| Changes in buying patterns, product mix and sales force incentive programs, as well as other factors discussed below, may alter these historical seasonality patterns |
| Due to all of the foregoing factors and other factors described below, revenues for any period are subject to significant variation, and we believe that period-to-period comparisons of our operating results are not necessarily meaningful and may not be reliable indicators of future performance |
| Our products have a long and unpredictable sales cycle, which could result in significant fluctuations in license revenue being recognized from quarter to quarter |
| The period between initial contact with a prospective customer or existing customer and the licensing of our software applications can range from six to more than twelve months |
| Our sales cycle involves complexity as customers consider a number of factors before committing to purchase our products |
| Factors considered by customers when evaluating our products include product benefits, cost and time of implementation, return on investment, ability to operate with existing and future computer systems and the ability to accommodate increased transaction volume and product reliability |
| Customer evaluation, purchasing and budgeting processes vary significantly from company to company |
| As a result, we spend a significant amount of time and resources informing prospective customers about our software products, which may not result in a completed transaction |
| Even if our software products have been chosen by the customer, completion of the sales transaction is subject to a number of 9 _________________________________________________________________ factors, which makes our quarterly revenues difficult to forecast |
| Particularly in the current economic environment of reduced information technology spending, it can take several months, or even quarters, for sales transactions to close |
| Generally, our sales cycles have lengthened due to increased organizational review by sales prospects and protracted contract negotiations, regardless of transaction size |
| A continued lengthening in sales cycles and our inability to predict these trends could result in lower than expected future revenues, which could have a material adverse effect on our business and operating results |
| If we are unable to keep pace with technological changes in our industry, our products may become obsolete or fail to achieve market acceptance |
| The market for our software products is characterized by a high degree of technological change, frequent new product introductions, evolving industry standards and changes in customer demands |
| The introduction of competitive products embodying new technologies and the emergence of new industry standards could render our existing products obsolete and unmarketable |
| Our future success will depend in part on our ability to enhance existing products, develop and introduce new products to meet diverse and evolving customer requirements, and keep pace with technological developments and emerging industry standards such as Web-based functionality, new operating systems, hardware platforms, user interfaces and storage media |
| Recent additions to our product portfolio include: · ABS for Spreadsheet Compliance, which allows organizations of all sizes to manage and control the lifecycle of spreadsheets while ensuring the integrity and reliability of the data within; · TCI, our solution for accessing information from any repository and making it available to any user or business application; and · new enterprise records and email management capabilities available as part of our core ViewDirect product |
| The development of new products or enhanced versions of existing products and services entails significant technical risks |
| There can be no assurance that we will be successful in developing and marketing product enhancements or that new products will respond to technological change or evolving industry standards, or that we will not experience difficulties that could delay or prevent the successful development, introduction, implementation and marketing of these products and enhancements, or that any new products and product enhancements we may introduce will achieve market acceptance |
| We rely significantly on one suite of products for our revenues |
| To date, a substantial portion of our revenues is attributable to the licensing and related maintenance service of our ViewDirect suite of products |
| We currently expect this to continue for the foreseeable future |
| As a result, factors adversely affecting the pricing of, or demand for, these products and services, such as economic downturns, competition or technological change, could have a material adverse effect on our business, operating results and financial condition |
| We face intense competition in our business, and we may be unable to compete successfully against our current and future competitors |
| The market for our products is intensely competitive, subject to rapid change and significantly affected by new product introductions and other market activities of industry participants |
| We believe that the most important competitive factors in the market for content management software are breadth of functionality, scalability, breadth of supported operating systems and content formats, vendor viability, ease of use, product reputation, quality, performance, price, sales and marketing effort and customer service |
| We currently encounter direct competition from a number of public and private companies including IBM Corp, EMC Corporation and FileNet Corporation, as well as a number of smaller competitors in niche markets |
| The acquisition, expected to close in the fourth quarter of 2006, is subject to FileNet shareholder approval, regulatory reviews 10 _________________________________________________________________ and other customary closing conditions |
| As a result of this acquisition, IBM plans to build upon the advanced content management technologies of both companies, which could have a negative impact on our competitive position |
| Some of our competitors are substantially larger than we are, have significantly greater financial, technical and marketing resources, and have a larger installed base of customers |
| Some of these 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 we are able to |
| In addition, current and potential competitors have established or may establish cooperative relationships among themselves with prospective customers |
| 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 records and content management software continues to develop and expand |
| Accordingly, it is possible that new competitors or alliances among competitors may emerge and rapidly acquire significant market share |
| Some of our competitors may also combine with, or be acquired by other parties, providing them with additional resources with which to compete |
| 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 our business, operating results and financial condition |
| There can be no assurance that we will be able to compete successfully against current or future competitors or that competitive pressures will not have a material adverse effect on our business, operating results and financial condition |
| We may be unable to maintain or expand our international operations |
| We believe that our revenues and future operating results will depend in part on our ability to increase sales in international markets |
| There can be no assurance that we will be able to maintain or increase international market demand for our products or attract and retain qualified personnel who will be able to successfully market our products internationally |
| The majority of our current international revenues are derived from the direct sales force of our wholly-owned subsidiaries |
| These subsidiaries also derive revenue in certain geographic areas through third-party agents |
| Our international sales are subject to the general risks inherent in doing business internationally, including: · unexpected changes in regulatory requirements; · tariffs and other trade barriers; · costs and difficulties of localizing products for international countries; · lack of acceptance of localized products in international countries; · longer accounts receivable payment cycles; · difficulties in managing international operations; · fluctuations in currency exchange rates; · potentially adverse tax consequences; · restrictions on the repatriation of earnings; · the burdens of complying with a wide variety of international laws; and · economic or political instability |
| Any or all of the foregoing factors may have a material adverse effect on our future international revenues, and consequently, on our business, operating results and financial condition |
| An increase in the value of the US dollar relative to foreign currencies could make our products more expensive, and, therefore, potentially less competitive in those markets |
| To the extent that the US dollar strengthens against foreign currencies in international markets in which we maintain operations, our net assets that are denominated in such foreign currencies will be devalued, resulting in a foreign currency translation loss |
| 11 _________________________________________________________________ We may be unable to successfully protect our confidential and proprietary technology, and we may be required to defend our products against infringement claims |
| Our success depends heavily on our confidential and proprietary intellectual property |
| We rely primarily on a combination of confidentiality agreements, copyright, patent, trademark and trade secret laws and confidentiality procedures to protect our proprietary rights |
| Trade secret, patent and copyright laws afford only limited protection |
| Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary |
| In addition, the laws of some countries do not protect our proprietary rights to as great an extent as do the laws of the United States |
| There can be no assurance that our means of attempting to protect our proprietary rights will be adequate or that our competitors will not independently develop similar or competitive technology |
| Our products are generally provided to customers in object code format only |
| However, we enter into arrangements with some of our customers that provide for the release of our source code to the customer upon the occurrence of certain events, such as our bankruptcy or insolvency or certain material breaches by us of the license agreement between us and our customer |
| In the event of any release of the source code pursuant to these arrangements, the customer’s license is generally limited to use of the source code to maintain, support and configure our software products |
| Notwithstanding this protection, the delivery of source code to customers may increase the likelihood of misappropriation or other misuse by third parties of our intellectual property |
| We are not aware that any of our products infringe on the proprietary rights of any third party |
| From time to time, however, a third party may claim infringement by us 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 us to enter into royalty or licensing agreements for the right to use any such third party’s proprietary rights |
| Such royalty or licensing agreements, if required, may not be available on terms acceptable to us or at all, which could have a material adverse effect on our business, operating results and financial condition |
| We offer extended payment terms to many of our customers, which could impact our cash flow |
| For software license contracts with extended payment terms, the related financing period is generally three to five years |
| As of June 30, 2006, software license installments receivable totaled dlra21dtta5 million, as compared with the June 30, 2005 balance of dlra30dtta9 million |
| We entered into an arrangement during our fiscal first quarter of 2005 that provides us with the option of selling installments receivable to General Electric Capital Corporation (“GECC”) |
| During fiscal 2005 and 2006, we sold approximately dlra2dtta7 million and dlra3dtta1 million, respectively, of installments receivable to GECC under this arrangement |
| If the level of software license revenues financed by installments receivable increases and we are unable to assign a substantial percentage of such receivables to GECC or other vendor financing firms, our cash position is likely to be adversely affected |
| We continue to monitor the level of sales that include extended payment terms to manage the use of cash associated with these sales |
| We believe that these installment contracts are enforceable, that the underlying companies provided financing have strong credit profiles, that we have a history of successfully enforcing original payment terms and that ultimate collection is probable |
| There can be no assurances, however, that customers will not default under such financing arrangements |
| A significant default could have a material adverse effect on our business, operating results and financial condition |
| 12 _________________________________________________________________ We may be unable to generate sufficient revenues from our professional services business |
| There is no assurance that we will continue to generate significant revenues in the professional services marketplace, or that the direct and indirect costs associated with operating the professional services business will not be greater than revenues generated therefrom |
| If we are unable to license the technology that we need from third parties, our sales may be negatively impacted and our products may become obsolete |
| We rely on certain software and other information that we license from third parties, including software that is used to perform certain functions in our products |
| Although we believe that there are alternatives for these products, any significant interruption in the availability of such third party software could have a material adverse impact on our sales unless and until we can replace the functionality provided by these products |
| In addition, to a certain extent, we depend upon such third parties’ abilities to enhance their current products, to develop new products on a timely and cost-effective basis and to respond to emerging industry standards and other technological changes |
| There can be no assurance that we would be able to replace the functionality provided by the third party software currently offered in conjunction with our products in the event that such software becomes obsolete or incompatible with future versions of our products or is otherwise not adequately maintained or updated |
| The absence of or any significant delay in the replacement of that functionality could have a material adverse effect on our business, operating results and financial condition |
| Our products may contain defects, and we may be required to pay damages for product liability claims |
| Software products as complex as those offered by us frequently contain defects, especially when first introduced or when new versions are released |
| Although we conduct extensive product testing, we have in the past discovered software defects in certain of our new products and enhancements after their introduction |
| In the future, we could lose, or delay recognition of, revenues as a result of software errors or defects |
| We believe that our customers and potential customers are highly sensitive to defects in our software |
| Our business has not been materially adversely affected by any such errors to date |
| There can be no assurance, however, that despite testing by us and by our current and potential customers, errors will not be found in new products or releases after commencement of commercial shipments |
| If there are errors, it could result in loss of revenue or delay in market acceptance, diversion of development resources, damage to our reputation, or increased service and warranty costs, any of which could have a material adverse effect on our business, operating results and financial condition |
| Our license agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims |
| However, it is possible that the limitation of liability provisions contained in our license agreements may not be effective under the laws of certain jurisdictions |
| Although we have not experienced any product liability claims to date, the sale and support of products by us may entail the risk of such claims, and there can be no assurance that we will not be subject to such claims in the future |
| A successful product liability claim brought against us could have a material adverse effect on our business, operating results and financial condition |
| We may be unable to successfully expand or develop relationships with strategic partners which could adversely affect our future revenue growth |
| To date, sales through indirect sales channels have not been significant although we continue to invest resources to develop these channels |
| We believe that certain of our products, including TCI, our content integration solution, and ABS for Spreadsheet Compliance, a solution that centralizes and manages the lifecycle of business-critical spreadsheets, are well positioned to be licensed through channels and we are working to initiate channel and OEM partnerships |
| In connection with this 13 _________________________________________________________________ strategy, we created a new position - Vice President of Channel Sales and Marketing - to lead this effort |
| Our revenue growth in the future may be adversely affected if we do not expand existing relationships, if we are unable to establish additional relationships with strategic partners and if the newly-hired Vice President of Channel Sales and Marketing is unsuccessful in building our channel sales program |
| We may be unable to effectively manage our future growth, if any |
| Our ability to effectively manage our future growth, if any, will require us to continue to improve our operational, financial and management controls, accounting and reporting systems, and other internal processes |
| There can be no assurance that we will be able to make such improvements in an efficient or timely manner or that any such improvements will be sufficient to manage our growth, if any |
| In addition, management has stated that part of our growth strategy is to make acquisitions of other businesses or certain assets of other businesses |
| There are no assurances that we will be able to identify attractive acquisition candidates, consummate acquisition transactions or effectively integrate an acquired business into our operations |
| If we are unable to manage growth organically or by acquisition effectively, our business, operating results or financial condition would be materially adversely affected |
| If we lose key personnel or subcontractors, then we may be unable to successfully develop our business or our research and development efforts |
| Our success depends to a significant extent upon our executive management and certain other key employees |
| The loss of the service of executive management or other key employees could have a material adverse effect on us |
| Furthermore, we believe that our future success also will depend to a significant extent upon our ability to attract, train and retain highly skilled technical, management, sales and marketing personnel |
| Competition for such personnel is intense, and we expect that such competition will continue for the foreseeable future |
| We have from time to time experienced difficulty in locating candidates with appropriate qualifications |
| The failure to attract or retain such personnel could have a material adverse effect on our business, operating results and financial condition |
| We utilize development subcontractors in India and the Ukraine |
| The loss of services of these subcontractors could have a material adverse effect on our research and development |
| Consolidation in the industries we market and sell in could adversely impact our business by eliminating a number of existing and potential customers |
| There has been and continues to be merger, acquisition and consolidation activity in the industries we market and sell in |
| This could reduce the number of our clients and potential clients |
| A smaller market for our products and services could have a material adverse effect on our business, operating results and financial condition |
| In addition, consolidation of our customer base, as well as the consolidation of customer data centers and the scaling back of obsolete customer operating systems results in non-renewals and reductions in our maintenance revenues |
| If this trend continues, it could have a material impact on the level of our maintenance revenues |
| Customer concerns about the security of transactions conducted over the Internet may hinder our product sales |
| A significant barrier to electronic commerce and communications is the secure transmission of private information over public networks |
| Our products rely on encryption and authentication technology, some of which we have 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 our products use to protect customer transaction data |
| Any breaches in security could cause a 14 _________________________________________________________________ significant decrease in the use of our products, which could undermine future product sales |
| Revised accounting pronouncements related to share-based payments have and will continue to reduce our reported earnings and could adversely affect our ability to attract and retain key personnel by reducing the share-based payments we are able to provide |
| As more fully discussed in Note 9, Stock-Based Compensation, to the accompanying Consolidated Financial Statements, effective July 1, 2005, we adopted the fair value recognition provisions of SFAS Nodtta 123(R), “Share-Based Payment,” using the modified-prospective-transition method |
| As a result of adopting SFAS Nodtta 123(R), our income before income taxes and net income for the year ended June 30, 2006, were dlra855cmam000 and dlra700cmam000 lower, respectively, than if we had continued to account for share-based compensation under APB Nodtta 25 |
| Beginning in fiscal 2007, we intend to issue a combination of stock options and restricted stock to tailor and enhance the incentive nature of such instruments and to better manage the related expense charged to earnings, as required under SFAS Nodtta 123(R) |
| The number of equity-based compensation units granted to employees as a form of non-cash compensation will be based on guidelines established by us that consider, among other factors, market trends and the level of expense that will be charged to earnings |
| Vesting of such grants will be dependent on the achievement of certain corporate financial goals |
| The issuance of new equity-based compensation, if any, would increase the negative impact of SFAS Nodtta 123(R) |
| In addition, the Nasdaq listing requirements requiring stockholder approval for all stock option plans could make it more difficult for us to adopt plans to grant options to employees in the future |
| To the extent that it becomes more difficult or costly to grant options and/or other stock-based compensation to employees, we may incur increased cash compensation costs or find it difficult to attract, retain and motivate employees, either of which could materially affect our business |
| We have incurred increased costs in response to recently enacted or proposed regulations |
| Recently enacted or proposed changes in the laws and regulations affecting public companies, including but not limited to the Sarbanes-Oxley Act of 2002 (“SOX”), have caused us to incur increased costs as we evaluate and respond to the resulting requirements |
| It is anticipated that the ongoing direct cost to comply with the SOX requirements will continue to be substantial |