| MOLDFLOW CORP Item 1A Risk Factors You should carefully consider the following risks and uncertainties prior to making an investment in our common stock |
| The following risks and uncertainties may also cause our actual results to differ materially from those contained in or predicted by our forward-looking statements |
| Our business may be disrupted by the execution of our restructuring plans and we may not achieve the anticipated savings associated with the plans |
| In the second and fourth quarters of fiscal 2006, we announced targeted restructuring plans, including a worldwide restructuring of our MS business unit |
| We believe these actions will result in overall savings during our 2007 fiscal year compared to fiscal 2006 |
| These plans have had and may continue to have a negative effect on the productivity of the MS business unit employees |
| Further, the Company may not realize the anticipated savings from the restructuring plans during the time frames indicated |
| Even if the anticipated cost savings are achieved, the MS business unit may remain unprofitable which could have a material negative impact on our consolidated results of operations |
| We make estimates in determining our worldwide income tax provision |
| We make significant estimates in determining our worldwide income tax provision |
| These estimates are subject to many transactions, calculations and proceedings where the ultimate tax outcome is uncertain |
| Although we believe that our estimates are reasonable, the final outcome of tax matters and proceedings could be different than the estimates reflected in the income tax provision and accruals |
| Such differences could have a material impact on income tax expense and net income in the period in which such determination is made |
| In the first quarter of fiscal 2005, one of the Company’s Australian subsidiaries became subject to an audit by the Australian Tax Office (“ATO”) |
| The amount of liabilities assessed through September 2006 by the ATO, including tax penalties and interest, is approximately dlra5dtta6 million (Adlra7dtta5 million) |
| These liabilities represent the Company’s maximum potential exposure and do not include the benefits of the related tax effects of any such 7 _________________________________________________________________ [63]Table of Contents payments or tax benefits that may be available in other tax years, both of which may serve to mitigate our total expense that would be recorded in the Company’s results of operations |
| To date, payments of dlra2dtta8 million (Adlra3dtta9 million) have been made in order to limit the interest that may accrue on these amounts from the date of assessment through the ultimate resolution of these matters |
| These payments have been recorded as current assets in our balance sheet |
| We believe that the positions on our tax returns have merit and will ultimately be sustained |
| Accordingly, we have not recorded any liabilities related to these matters |
| See Provision for Income Taxes in Management’s Discussion and Analysis for additional information |
| We may continue to make cash payments with respect to these matters during fiscal 2007 |
| In the event that such audit is resolved in a manner unfavorable to Moldflow or in the event that we are required to record a liability related to these matters in our consolidated balance sheet or make further cash payments, there would likely be a material adverse impact on our results of operations |
| In addition, our effective tax rate for fiscal 2007 may be materially and adversely impacted in the event that we are required to record a liability with respect to these matters, which would have a material adverse impact on our results of operations |
| Any future mergers, acquisitions and strategic relationships may result in lost revenue caused by business disruptions and missed opportunities caused by the distraction of our management |
| We may engage in acquisitions and strategic relationships in the future |
| If we merge with or acquire another company, we may only receive the anticipated benefits if we successfully integrate the acquired business into our existing business in a timely and non-disruptive manner |
| This will require us to devote a significant amount of time, management and financial resources |
| Even with this investment of management and financial resources, the acquisition of another business or strategic relationship may not produce the revenues, earnings or business synergies that we anticipated |
| If we fail to integrate the acquired business effectively or if key employees of that business leave, the anticipated benefits of the acquisition would be jeopardized |
| The time, capital, management and other resources spent on an acquisition that fails to meet our expectations could cause our business and financial condition to be materially and adversely affected |
| In addition, acquisitions can involve charges and amortization of significant amounts of acquired identifiable intangible assets that could adversely affect our results of operations |
| A general economic slowdown, particularly in our end markets, may adversely impact our results |
| The demand for our products is largely driven by the demand for the products in our primary end markets |
| Many of these end markets, particularly the automotive, telecommunications and electronics industries, experienced severe economic declines which significantly and adversely affected our business in fiscal 2002 and 2003 |
| While general economic trends have improved in some geographic markets, a continuation of this general economic slowdown, particularly in the discrete manufacturing industry, could materially and adversely affect us by decreasing our revenue as compared to prior years, or by lowering our revenue growth |
| Our quarterly operating results are subject to significant fluctuations and, as a result, period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as indicators of future performance |
| We have experienced significant historical fluctuations in our results of operations on a quarterly basis |
| We expect to continue to experience significant fluctuations in our future quarterly results of operations due to a variety of factors, many of which are outside of our control, including: • seasonal slowdowns, in particular, in our first and, to a lesser extent, our third fiscal quarter, in many of the markets in which we sell our products, • fluctuations in overall gross margins and operating income resulting from the actual percentage of revenue derived during the quarter from our MS division, whose products have a higher cost of revenue when compared to products sold by our DAS division, • the timing and magnitude of capital expenditures, including costs relating to the expansion of our operations and infrastructure, and planned program spending required for major marketing initiatives or tradeshows, • introductions of new services or enhancements by us and our competitors and corresponding changes in pricing policies, 8 _________________________________________________________________ [64]Table of Contents • our increased use of third parties such as distributors, OEM partners and resellers which may lessen the control we have over revenue and earnings during any particular period, • the timing and magnitude of our tax expense, resulting from the globally distributed nature of our selling and research and development operations, and certain on-going tax audits or investigations by various local tax authorities that may lead to the loss of certain planned-for tax benefits, or increased taxable income in certain jurisdictions that may not be offset by losses in other tax jurisdictions, • fluctuations in our tax rate from quarter to quarter due to the impact of discrete events, including the settlement of claims, the management of audits and other inquiries, the acquisition of other companies or other events, • the impact of expensing stock-based compensation, • currency and exchange rate fluctuations, • timing and integration of acquisitions, • continuing costs of compliance with the Sarbanes-Oxley Act of 2002, and • restructuring charges taken during any fiscal year, including the restructuring charges taken in our fiscal 2006 year |
| In addition, like many software companies, we usually record a larger percentage of our quarterly revenue in the third month of the fiscal quarter |
| Also, our MS products may involve a longer selling cycle with corresponding larger order sizes, which may lead to an inability to close on orders or make shipments in the period immediately preceding the end of the fiscal quarter |
| Accordingly, our quarterly results are often difficult to predict prior to the conclusion of the quarter |
| If we experience delays in introducing new products or if our existing or new products do not achieve market acceptance, we may lose revenue |
| Our industry is characterized by: • rapid technological advances, • evolving industry standards, • changes in end-user requirements, • intense competition, • technically complex products, • frequent new product introductions, and • evolving offerings by product manufacturers |
| We believe our future success will depend, in part, on our ability to anticipate or adapt to these factors and to offer, on a timely basis, products that meet customer demands |
| For example, the introduction of new products and services embodying new technologies and the emergence of new industry standards can render our existing products obsolete |
| The development of new or enhanced products is a complex and uncertain process, requiring the anticipation of technological and market trends |
| We may experience design, manufacturing, marketing and other difficulties that could delay or prevent our release of new products and enhancements, and result in unexpected expenses |
| Our growth and profitability will depend upon our ability to expand the use and market penetration of our existing product lines as well as new products we introduce |
| Market acceptance of our products will depend, in part, on our ability to demonstrate the cost-effectiveness, ease of use and technological advantages of our products over competing products |
| 9 _________________________________________________________________ [65]Table of Contents If we determine that any of our goodwill or intangible assets are impaired, we would be required to take a charge to earnings, which could have a material adverse effect on our results of operations |
| If we determine that any of our goodwill or other intangible assets are impaired, we would be required to reduce the value of those assets or to write them off completely by taking a related charge to earnings |
| If we are required to write down or write off all or a portion of those assets, or if financial analysts or investors believe we may need to take such action in the future, our stock price and results of operations could be materially and adversely affected |
| Further restructuring or other adverse business results in our MS division may serve to reduce its value and result in the write down of certain goodwill or intangible assets associated with this division |
| The current carrying value of goodwill and intangible assets in the MS division is dlra13dtta4 million |
| Our net income and earnings per share have been and will continue to be significantly reduced as a result of the requirement that we record compensation expense for shares issued under our stock plans |
| In the past, we have used stock options and restricted stock as a key component of our employee compensation packages |
| We believe that stock options and restricted stock provide an incentive to our employees to maximize long-term shareholder value and can encourage valued employees to remain with the Company |
| Our adoption of Statement of Financial Accounting Standards (“SFAS”) Nodtta 123(R), “Shared-Based Payment,” on July 1, 2005 requires us to account for share-based compensation granted under our stock plans using a fair value-based model, such as Black-Scholes option-pricing model, on the grant date and to record the value of those grants as stock-based compensation expense |
| As a result, our net income and earnings per share have been and will continue to be significantly reduced |
| Our results may reflect a loss in future periods |
| We currently calculate share-based compensation expense using the Black-Scholes option-pricing model, which requires the input of highly subjective assumptions and does not necessarily provide a reliable measure of the fair value of our stock options |
| Assumptions used under the Black-Scholes option-pricing model that are highly subjective include the expected stock price volatility and expected life of an option |
| If we become subject to intellectual property infringement claims, we could incur significant expenses and we could be prevented from offering specific products or services |
| Our products include proprietary intellectual property |
| We may become subject to claims that we infringe on the proprietary rights of others |
| In the United States and elsewhere, a significant number of software and business method patents have been issued over the past decade and the holders of these patents have been actively seeking out potential infringers |
| In addition, many of our MS products require interaction with manufacturing equipment, the use and technology of which are subject to a wide variety of worldwide patents and other intellectual property protection |
| If any element of our products or services violates third-party proprietary rights, we might not be able to obtain licenses on commercially reasonable terms to continue offering our products or services without substantial re-engineering and any effort to undertake such re-engineering might not be successful |
| In addition, even if the claim is invalid, any claim of infringement could cause us to incur substantial costs defending against the claim and could distract our management from our business |
| Any judgment against us could require us to pay substantial damages and could also include an injunction or other court order that could prevent us from offering our products and services |
| We may lose sales if we are unable to protect important intellectual property |
| Our ability to compete effectively against other companies in our industry will depend, in part, on our ability to protect our proprietary rights in our technology |
| We may be unable to maintain the proprietary nature of our technology |
| While we have attempted to safeguard and maintain our proprietary rights, we do not know whether we have been or will be completely successful in doing so |
| We face the following risks in protecting our intellectual property: • we cannot be certain that our pending United States and foreign patent applications will result in issued patents or that the claims allowed are or will be sufficiently broad to protect our technology, 10 _________________________________________________________________ [66]Table of Contents • third parties may design around our patented technologies or seek to challenge or invalidate our patented technologies, • patents of others may have an adverse effect on our ability to do business, • the contractual provisions that we rely on, in part, to protect our trade secrets and proprietary knowledge may be breached, and we may not have adequate remedies for any breach and our trade secrets and proprietary information may be disclosed to the public, • our trade secrets may become known without breach of such agreements or may be independently developed by competitors, • foreign countries, including some of those in which we conduct business, may reduce or limit the protection of our intellectual property rights and software piracy, particularly in certain countries in Asia, may cause us to lose revenue in those countries or customers with worldwide operations, and • the cost of enforcing our intellectual property rights, including actions currently on going, may reduce our future profitability |
| Our financial condition or results of operations may be adversely affected by international business risks |
| The majority of our employees, including sales, support and research and development personnel, are located outside of the United States |
| Similarly, the majority of our revenue is derived from customers outside the United States and certain intellectual property is owned by subsidiary companies located outside the United States |
| We also manufacture certain of our products outside of the United States and have contracted with third parties to assemble certain of our MS products outside the United States |
| Conducting business outside of the United States is subject to numerous risks, including: • decreased liquidity resulting from longer accounts receivable collection cycles typical of certain foreign countries, • decreased revenue on foreign sales resulting from possible foreign currency exchange and conversion issues, • lower productivity resulting from difficulties managing our sales, support, and research and development operations across many countries, • decreased earnings based on changes in tax regulations in foreign jurisdictions or the timing of required tax payments in foreign jurisdictions that may not yet be offset by tax benefits arising from losses in other jurisdictions, • lost revenue resulting from difficulties associated with enforcing agreements and collecting receivables through foreign legal systems, • interruptions of our operations due to political and social conditions of the countries in which we do business, • lost revenue resulting from the imposition by foreign governments of trade protection measures, and • higher cost of sales resulting from import or export licensing requirements |
| We have more limited financial and other resources than many of our competitors and potential competitors and may be unable to compete successfully against them |
| We operate in a highly competitive environment and may not be able to successfully compete |
| Companies in our industry and entities in similar industries could decide to focus on the development of solutions that optimize discrete product development and manufacturing operations |
| Many of these entities have substantially greater financial, research and development, manufacturing and marketing resources than we do |
| Increased competition may result in price reductions, reduced profitability and loss of market share |
| 11 _________________________________________________________________ [67]Table of Contents Disruption of operations at our development or manufacturing facilities could interfere with our product development and production cycles |
| A significant portion of our computer equipment, source code and personnel, including critical resources dedicated to research and development, are presently located at operating facilities in Australia, the United States and Europe |
| Our manufacturing operations are performed in the United States and Ireland |
| Also, we utilize contract manufacturing facilities in the United States, Ireland and Asia |
| The occurrence of a natural disaster or other unanticipated catastrophe at any of these facilities could cause interruptions in our operations and services |
| Extensive or multiple interruptions in our operations at our development or manufacturing facilities could severely disrupt our operations |
| Our MS products may lead to product liability claims against us |
| Some of our MS products are installed directly on our customers’ injection molding machines and, in certain cases, automatically adjust the operation of these machines |
| As a result, it is possible that our customers may claim that our product interfered with the proper operation of their machines and may seek reimbursement for consequential and other damages from us |
| Although we expressly disclaim any liability for consequential or other damages in connection with our sale of these products, this disclaimer may not protect us from claims for damages from our customers |
| Furthermore, these claims may adversely affect our relationships with our customers or our reputation generally |
| In addition, our insurance coverage limits may not be adequate to protect us against any product liability claims that arise |
| This insurance is expensive and may not be available on acceptable terms, or at all |
| We are dependent on third parties such as resellers and distributors to distribute a substantial portion of our MS products |
| We now distribute a substantial portion of our MS products through a network of independent, regional channel partners |
| In addition, we are adding more channel partners and entering into OEM agreements in geographically dispersed locations in order to sell our products to new customers |
| Our channel partners sell our products to new and existing customers, expand installations within their existing customer base, offer consulting services and provide the first line of technical support |
| Consequently, we are highly dependent on the efforts of our channel partners |
| Difficulties in ongoing relationships with our channel partners, such as delays in collecting accounts receivable, failure to meet performance criteria or promote our products as aggressively as we expect, and differences in the handling of customer relationships could adversely affect our operating performance |
| Additionally, the loss of any major channel partner for any reason, including a channel partner’s decision to sell competing products rather than our products, could have a material adverse effect on us |
| Moreover, our future success will depend substantially on the ability and willingness of our channel partners to continue to dedicate the resources necessary to promote our products and support a larger installed base of our products |
| If our channel partners are unable or unwilling to do so, we may be unable to achieve revenue growth with respect to the products sold primarily through this channel |
| Our stock price is highly volatile and our stock price could experience substantial declines and our management’s attention may be diverted from more productive tasks |
| The stock market has experienced extreme price and volume fluctuations |
| In addition, the per share price of our common stock has experienced significant volatility since we have been a public company |
| Many factors that may cause the market price for our common stock to decline, include the following: • revenues and operating results failing to meet the expectations of securities analysts or investors, • downward revisions in securities analysts’ estimates or changes in general market conditions, • changes in our senior management personnel, • sale of shares of our common stock by insiders or affiliated persons, • technological innovations by competitors or in competing technologies, 12 _________________________________________________________________ [68]Table of Contents • a decrease in the demand for our common stock, • investor perception of our industry or our prospects, and • general technology or economic trends |
| In the past, companies that have experienced volatility in the market price of their stock have been the subjects of securities class action litigation |
| We may be involved in securities class action litigation in the future |
| Such litigation often results in substantial costs and a diversion of management’s attention and resources and could harm our business, financial condition and results of operations |
| Failure to comply with Section 404 of Sarbanes-Oxley Act of 2002 may have a negative impact on investor confidence |
| We have furnished a report by our management on our internal control over financial reporting with respect to fiscal 2006, as required by Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) |
| This report also contains a statement that our auditors have issued an attestation report on management’s assessment of our internal controls |
| We must continue to assess and monitor our internal control over financial reporting |
| If we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal control is effective |
| This could result in a loss of investor confidence, which would likely have a material adverse effect on our business and stock price |