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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
________________
 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended: September 25, 2004 Commission File Number: 000-30027    Moldflow Corporation (Exact name of
registrant as specified in its charter)
 Delaware
    
    04-3406763(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 430 Boston Post Road, Wayland, MA 01778(Address of principal executive offices, including zip code) (508) 358-5848(Registrants telephone number, including area code)    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o There
were 10,665,660 shares of our common stock, par value $0.01,
outstanding on November 1, 2004.




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MOLDFLOW CORPORATION FORM 10-Q
For the Quarter Ended September 25, 2004 TABLE OF CONTENTS PageNumberPART I. FINANCIAL INFORMATIONItem 1. Unaudited Financial Statements:Condensed Consolidated Balance Sheet as of September 25, 2004 and June 30, 2004
    
    
    2Condensed Consolidated Statement of Income for the three months ended September 25, 2004 and September 27, 2003
    
    
    3Condensed Consolidated Statement of Cash Flows for the three months ended September 25, 2004 and September 27, 2003
    
    
    4Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4. Controls and Procedures
    
    
    34PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 6. Exhibits
    
    
    35Signatures
    
    
    36Ex-10.50 Form of Incentive Stock Option Agreement (Executive Officers)Ex-10.51 Form of Non-Qualified Stock Option Agreement (Executive Officers)Ex-10.52 Form of Non-Qualified Stock Option Agreement (Non-Employee Directors)Ex-31.1 Section 302 Certification of CEOEx-31.2 Section 302 Certification of CFOEx-32.1 Section 906 Certification of CEOEx-32.2 Section 906 Certification of CFO
 1




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PART I. FINANCIAL INFORMATION 
 Item 1.Unaudited Financial Statements MOLDFLOW CORPORATION 
 CONDENSED CONSOLIDATED BALANCE SHEET September 25,
    
    June 30,2004
    
    2004(In thousands)(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    38,879
    
    
    $
    35,987Marketable securities
    
    
    13,943
    
    
    
    15,665Accounts receivable, net
    
    
    8,180
    
    
    
    8,578Inventories
    
    
    1,389
    
    
    
    1,246Prepaid expenses
    
    
    3,049
    
    
    
    3,442Other current assets
    
    
    2,279
    
    
    
    2,063Total current assets
    
    
    67,719
    
    
    
    66,981Fixed assets, net
    
    
    3,759
    
    
    
    3,502Acquired intangible assets, net
    
    
    1,871
    
    
    
    1,986Goodwill
    
    
    18,634
    
    
    
    18,625Other assets
    
    
    3,539
    
    
    
    3,264Total assets
    
    $
    95,522
    
    
    $
    94,358LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,702
    
    
    $
    3,251Accrued expenses
    
    
    9,868
    
    
    
    9,653Deferred revenue
    
    
    8,937
    
    
    
    10,013Total current liabilities
    
    
    21,507
    
    
    
    22,917Deferred revenue
    
    
    520
    
    
    
    605Other long-term liabilities
    
    
    1,236
    
    
    
    1,257Total liabilities
    
    
    23,263
    
    
    
    24,779Stockholders equity:Common stock
    
    
    107
    
    
    
    106Additional paid-in capital
    
    
    67,818
    
    
    
    67,554Retained earnings (accumulated deficit)
    
    
    283
    
    
    
    (1,462
    )Accumulated other comprehensive income
    
    
    4,051
    
    
    
    3,381Total stockholders equity
    
    
    72,259
    
    
    
    69,579Total liabilities and stockholders equity
    
    $
    95,522
    
    
    $
    94,358
 The accompanying notes are an integral part of the condensed consolidated financial statements. 2




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MOLDFLOW CORPORATION 
 CONDENSED CONSOLIDATED STATEMENT OF INCOME Three Months EndedSeptember 25,
    
    September 27,2004
    
    2003(In thousands, except per share data)(Unaudited)Revenue:Product
    
    $
    7,927
    
    
    $
    4,354Services
    
    
    6,055
    
    
    
    5,157Total revenue
    
    
    13,982
    
    
    
    9,511Costs and expenses:Cost of product revenue
    
    
    1,841
    
    
    
    638Cost of services revenue
    
    
    1,295
    
    
    
    629Research and development
    
    
    1,645
    
    
    
    1,593Selling and marketing
    
    
    4,695
    
    
    
    4,186General and administrative
    
    
    2,510
    
    
    
    1,914Amortization of acquired intangible assets
    
    
    79
    
    
    
    111Total costs and expenses
    

    
    12,065
    
    
    
    9,071Income from operations
    
    
    1,917
    
    
    
    440Interest income
    
    
    346
    
    
    
    268Other income (loss), net
    
    
    (58
    )
    
    
    (43
    )Income before income taxes
    
    
    2,205
    
    
    
    665Provision for income taxes
    
    
    460
    
    
    
    248Net income
    
    $
    1,745
    
    
    $
    417Net income per common share:Basic
    
    $
    0.16
    
    
    $
    0.04Diluted
    
    $
    0.15
    
    
    $
    0.04Shares used in computing net income per common share:Basic
    
    
    10,628
    
    
    
    10,049Diluted
    
    
    11,362
    
    
    
    10,580
 The accompanying notes are an integral part of the condensed consolidated financial statements. 3




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MOLDFLOW CORPORATION 
 CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Three Months EndedSeptember 25,
    
    September 27,2004
    
    2003(In thousands)(Unaudited)Cash flows from operating activities:Net income
    
    $
    1,745
    
    
    $
    417Adjustments to reconcile net income to net cash provided by operating activities:Depreciation of fixed assets
    
    
    322
    
    
    
    346Amortization of acquired intangible assets
    
    
    115
    
    
    
    111Amortization of other intangible assets
    
    
    153
    
    
    
    63Provisions for doubtful accounts
    
    
    46
    
    
    
    41Foreign exchange losses
    
    
    58
    
    
    
    38Other non-cash charges to income
    
    
    
    
    
    
    2Changes in operating assets and liabilities:Accounts receivable
    
    
    377
    
    
    
    1,203Inventories, prepaid expenses, and other current assets
    
    
    46
    
    
    
    (186
    )Other assets
    
    
    (79
    )
    
    
    540Accounts payable
    
    
    (570
    )
    
    
    (147
    )Accrued expenses and other liabilities
    
    
    117
    
    
    
    (768
    )Deferred revenue
    
    
    (1,158
    )
    
    
    (1,373
    )Net cash provided by operating activities
    
    
    1,172
    
    
    
    287Cash flows from investing activities:Purchases of fixed assets
    
    
    (527
    )
    
    
    (310
    )Capitalization of software development costs
    
    
    (201
    )
    
    
    Sales and maturities of marketable securities
    
    
    1,722
    
    
    
    1,889Net cash provided by investing activities
    
    
    994
    
    
    
    1,579Cash flows from financing activities:Issuance of common stock
    
    
    265
    
    
    
    169Net cash provided by financing activities
    
    
    265
    
    
    
    169Effect of exchange rate changes on cash and cash equivalents
    
    
    461
    
    
    
    370Net increase in cash and cash equivalents
    
    
    2,892
    
    
    
    2,405Cash and cash equivalents, beginning of period
    
    
    35,987
    
    
    
    38,320Cash and cash equivalents, end of period
    
    $
    38,879
    
    

    $
    40,725
 The accompanying notes are an integral part of the condensed consolidated financial statements. 4




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MOLDFLOW CORPORATION 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS 1. Basis of Presentation and Nature of Business Moldflow Corporation (Moldflow or the Company) designs, develops,
manufactures and markets computer software applications and hardware for the
design, engineering and manufacture of injection-molded plastic parts and, as
such, revenues are derived primarily from the plastics design and manufacturing
industry. The Company sells its products primarily to customers in the United
States, Europe, Asia and Australia. The accompanying unaudited condensed consolidated financial statements
include the accounts of Moldflow Corporation and its wholly-owned subsidiaries.
The 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, 2004 included in the Companys Annual
Report on Form 10-K. The June 30, 2004 condensed consolidated balance sheet was
derived from the Companys audited consolidated financial statements. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments, consisting only of those of a
normal recurring nature, necessary for a fair presentation of results for the
interim periods presented. The results of operations for the three-month period
ended September 25, 2004 are not necessarily indicative of the results to be
expected for any future period or the full fiscal year. Certain prior year
amounts in the condensed consolidated statement of cash flows have been
reclassified to conform to the fiscal 2005 presentation. The Companys fiscal year end is June 30. During the fiscal year, the
Company follows a schedule in which each interim quarterly period ends on the
Saturday of the thirteenth week of the reporting period. 2. Stock Plans and Stock-based Employee Compensation A summary of the Companys stock option activity follows: Three Months EndedSeptember 25, 2004
    
    September 27, 2003Weighted Average
    
    
    
    
    
    Weighted AverageShares
    
    Exercise Price
    
    Shares
    
    Exercise PriceOutstanding at beginning of period
    
    
    2,634,157
    
    
    $
    9.77
    
    
    
    2,433,206
    
    
    $
    9.33Granted
    
    
    237,400
    
    
    
    10.96
    
    
    
    392,980
    
    
    
    6.95Exercised
    
    
    (39,233
    )
    
    
    3.73
    
    
    
    (17,073
    )
    
    
    2.07Canceled
    
    
    (5,808
    )
    
    
    14.30
    
    
    
    (23,314
    )
    
    
    13.44Outstanding at end of period
    
    
    2,826,516
    
    
    $
    9.94
    
    
    
    2,785,799
    
    
    $
    9.31Options exercisable at end of period
    
    
    1,757,327
    
    
    
    
    
    
    
    1,220,703Weighted average fair value of
options granted
    
    
    
    
    
    $
    7.31
    
    
    
    
    
    
    $
    6.79Options available for future grant
    
    
    974,091
    
    
    
    
    
    
    
    1,168,157
 5




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MOLDFLOW CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

No compensation cost has been recognized for employee stock-based awards
for the three months ended September 25, 2004 and September 27, 2003. Had
compensation cost been determined based on the fair value at the grant dates,
the Companys net income would have been the pro forma amounts indicated in the
table below. Three Months EndedSeptember 25,
    
    September 27,2004
    
    2003(In thousands, except per sharedata)Net income as reported
    
    $
    1,745
    
    
    $
    417Less:Total stock-based employee compensation
expense determined under fair value
based method for all awards, net of
related tax effects
    
    
    (941
    )
    
    
    (972
    )Pro forma net income (loss)
    
    $
    804
    
    
    $
    (555
    )Net income (loss) per share:Basic  as reported
    
    $
    0.16
    
    
    $
    0.04Basic  pro forma
    
    $
    0.08
    
    
    $
    (0.06
    )Diluted  as reported
    
    $
    0.15
    
    
    $
    0.04Diluted  pro forma
    
    $
    0.07
    
    
    $
    (0.06
    )
 The fair value of each option grant was estimated on the grant date using
the Black-Scholes option-pricing model with the following assumptions: Three Months EndedSeptember 25,
    
    September 27,2004
    
    2003Dividend yield
    
    
    
    
    
    
    Volatility
    
    
    84.1
    %
    
    
    89.6
    %Risk-free interest rate
    
    
    3.5
    %
    
    
    3.0
    %Expected option life (in years)
    
    
    4.4
    
    
    
    4.7
 3. Net Income Per Common Share The following table presents the calculation for both basic and diluted
net income per common share: Three Months EndedSeptember 25,
    
    September 27,2004
    
    2003(In thousands,except per share data)Net income
    
    $
    1,745
    
    
    $
    417Weighted average shares used in computing
net income per common share  basic
    
    
    10,628
    
    
    
    10,049Effect of dilutive securities:Stock options
    
    
    734
    
    
    
    531Weighted average shares used in computing
net income per common share  diluted
    
    
    11,362
    
    
    
    10,580Net income per common share  basic
    
    $
    0.16
    
    
    $
    0.04Net income per common share  diluted
    
    $
    0.15
    
    
    $
    0.04
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MOLDFLOW CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued)

4. Derivative Financial Instruments and Hedging Activities The Company has established a hedging program designed to reduce the
exposure to changes in currency exchange rates. At September 25, 2004, currency options and collars designated as hedging
instruments with notional amounts of $3.1 million, $4.3 million and $3.3
million to exchange Euros, Japanese yen and Australian dollars for U.S.
dollars, respectively, were outstanding. The fair values of these instruments,
as derived from dealer quotations, were recorded as components of other current
assets or other current liabilities, depending on their valuation. At September
25, 2004, instruments with fair values of $166,000 were recorded as components
of other current assets. Net unrealized gains on these instruments of $41,000
were included in accumulated other comprehensive income. The Company expects
these instruments to affect earnings over the next nine months. During the
three months ended September 25, 2004 a net charge of $16,000 was recorded as
a component of other income and expense, comprised of $24,000 of
premiums paid for new instruments, net of $8,000 of gains on the effective portion of options that
were settled. At September 27, 2003, currency options and collars designated as hedging
instruments with notional amounts of $1.5 million, $4.5 million and $1.8
million to exchange Euros, Japanese yen and Australian dollars for U.S.
dollars, respectively, were outstanding. At September 27, 2003, the total fair
values of all currency options and collars held by the Company of $157,000 and
$268,000 were recorded as components of other current assets and other current
liabilities, respectively. Net unrealized losses on options and collars that
qualified as hedging instruments of $95,000 were included in accumulated other
comprehensive income. During the three months ended September 27, 2003, net
losses of $80,000 were recorded as components of other income and expense on
the effective portion of options that were settled. For the three months ended
September 27, 2003, an unrealized loss of $21,000 was recognized on the
ineffective portion of the options and collars dedesignated as hedging
instruments. 5. Acquired Intangible Assets Intangible assets acquired in the Companys business combinations include
goodwill, customer base, developed technology, customer order backlog and
non-compete agreements. All of the Companys acquired intangible assets, except
for goodwill, are subject to amortization over their estimated useful lives. No
significant residual value is estimated for these intangible assets. A portion
of this amortization is included as a component of the Companys cost of
product revenue on the condensed consolidated statement of income. A portion of
the acquired intangible assets is recorded in the accounts of a French
subsidiary of the Company and, as such, is subject to translation at the
currency exchange rates in effect at the balance sheet date. The components of acquired intangible assets are as follows: September 25, 2004
    
    June 30, 2004Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    NetCarrying
    
    Accumulated
    
    Carrying
    
    Carrying
    
    Accumulated
    
    CarryingAmount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    Amount(In thousands)Acquired intangible assets:Customer base
    
    $
    987
    
    
    $
    (268
    )
    
    $
    719
    
    
    $
    987
    
    
    $
    (226
    )
    
    $
    761Developed technology
    
    
    1,675
    
    
    
    (759
    )
    
    
    916
    
    
    
    1,675
    
    
    
    (724
    )
    
    
    951Customer order backlog
    
    
    40
    
    
    
    (40
    )
    
    
    
    
    
    
    40
    
    
    
    (33
    )
    
    
    7Non-compete agreements
    
    
    1,411
    
    
    
    (1,175
    )
    
    
    236
    
    
    
    1,411
    
    
    
    (1,144
    )
    
    
    267Total
    
    $
    4,113
    
    
    $
    (2,242
    )
    
    $
    1,871
    
    
    $
    4,113
    
    
    $
    (2,127
    )
    
    $
    1,986
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MOLDFLOW CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued) Acquired intangible asset amortization for three months ended September
25, 2004 and September 27, 2003 was $115,000 and $111,000, respectively. The
following table summarizes the expected remaining amortization of acquired
intangible assets as of September 25, 2004: ExpectedAmortizationFiscal
Year
    
    Expense(In thousands)2005 (remainder)
    
    $
    3162006
    
    
    3462007
    
    
    3142008
    
    
    2982009
    
    
    246Thereafter
    
    
    351Total future amortization expense
    
    $
    1,871
 6. Inventories Inventories consisted of the following: September 25,
    
    June 30,2004
    
    2004(In thousands)Raw materials
    
    $
    863
    
    
    $
    708Finished goods
    
    
    526
    
    
    
    538$
    1,389
    
    
    $
    1,246
 7. Software Development Costs Costs associated with the development of computer software and related
products are expensed prior to establishing technological feasibility, as
defined by Statement of Financial Accounting Standards (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 $201,000 were
capitalized in the three months ended September 25, 2004. Development costs
eligible for capitalization in the three months ended September 27, 2003 were
not significant. All such costs have been included in other non-current assets
in the Companys 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: September 25,
    
    June 30,2004
    
    2004(In thousands)Gross carrying amount
    
    $
    2,328
    
    
    $
    2,127Less  accumulated amortization
    
    
    (610
    )
    
    
    (503
    )Net carrying amount
    
    $
    1,718
    
    
    $
    1,624
 8. Comprehensive Income Comprehensive income is comprised of net income and other comprehensive
income and losses. Other comprehensive income includes certain changes in
equity that are excluded from net income, such as cumulative 8




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MOLDFLOW CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued) 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: Three Months EndedSeptember 25,
    
    September 27,2004
    
    2003(In thousands)Net income
    
    $
    1,745
    
    
    $
    417Other comprehensive income:Changes in fair value of marketable securities, net of related tax effect
    
    
    11
    
    
    
    (93
    )Changes in value of financial instruments designated as hedges, net of
related tax effect
    
    
    35
    
    
    
    (121
    )Foreign currency translation adjustment
    
    
    624
    
    
    
    381Other comprehensive income
    
    
    670
    
    
    
    167Comprehensive income
    
    $
    2,415
    
    
    $
    584
 9. Restructuring Plans January 2004 Plan In January 2004, the Company initiated a corporate restructuring plan (the
January 2004 plan) related to its January 2004 acquisition of American MSI
Corporation (AMSI). The January 2004 plan included the termination of three
employees from sales and management positions in the United States and Italy.
As a result of the January 2004 plan, the Company recorded charges and related
accruals of $508,000 in its third fiscal quarter of 2004. These charges were
recorded as restructuring costs in the Companys consolidated statement of
operations. All significant activities under the January 2004 plan were
completed as of March 27, 2004, except for cash payments of the remaining
liabilities. The following table presents activity against the restructuring liability
during the three months ended September 25, 2004 and the remaining liability at
the period end included in accrued expenses in the Companys condensed
consolidated balance sheet: EmployeeSeveranceCosts(In thousands)Balance at June 30, 2004
    
    $
    205Cash payments
    
    
    (81
    )Balance at September 25, 2004
    
    $
    124
 April 2002 Plan In April 2002, the Company enacted a corporate restructuring plan (the
April 2002 plan) to resize the Company and to reduce overhead costs. The
April 2002 plan included the involuntary termination of 37 employees, the
closing of certain leased offices and the reduction in size of other leased
offices. All significant activities under the April 2002 plan
are complete, except for cash payments of the remaining liabilities. As
a result of the April 2002 plan, the Company recorded pre-tax charges and
related accruals in fiscal 2002 of $1.3 million. The remaining accrual
balances as of September 25, 2004 relate to long-term contractual obligations
from facility commitments that will be paid over five years. 9




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MOLDFLOW CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued) The following table presents activity against the restructuring liability
during the three months ended September 25, 2004 and the remaining liability at
the period end included in accrued expenses in the Companys condensed
consolidated balance sheet: LeaseTerminationCosts(In thousands)Balance at June 30, 2004
    
    $
    546Cash payments
    
    
    (26
    )Foreign exchange impact and other adjustments
    
    
    (2
    )Balance at September 25, 2004
    
    $
    518
 10. Credit Facilities In January 2004, the Company completed the renewal of its unsecured $5.0
million working capital credit facility with a domestic bank. The terms of the
facility, which expires December 2, 2004, are substantially the same as those
of the previous facility. The available borrowing base of the facility is
subject to a calculation that is based upon eligible accounts receivable.
Advances may be in the form of loans, letters of credit, foreign exchange
contracts or other cash management lines. Loans against the facility bear
interest at the banks prime rate. The facility includes certain restrictive
covenants, all of which the Company was in compliance with as of September 25,
2004. These covenants include certain liquidity and profitability measures and
restrictions that limit the ability of the Company to merge, acquire or sell
certain assets without prior approval from the bank. As of September 25, 2004,
the Company had employed $865,000 of the available borrowing base through
outstanding foreign exchange contracts and letters of credit. These advances do
not incur interest charges. As of September 25, 2004, there were no loans
advanced against the facility and the remaining available borrowing base was
$4.1 million. Certain subsidiaries of the Company have established unsecured credit
facilities with two separate financial institutions primarily for the purposes
of establishing foreign exchange contracts. Advances against these facilities
bear interest at the institutions published rates plus 2% per annum and are
guaranteed by the Company. There were no advances against these facilities as
of September 25, 2004. Certain subsidiaries of the Company have established other credit
facilities, totaling $223,000 at September 25, 2004, with two separate
financial institutions for general working capital requirements and foreign
exchange facilities. Advances against these facilities bear interest at the
institutions published rates, plus 1.5% per annum. Advances against one of
these facilities are secured by a $107,000 term deposit and the assets of an
Australian subsidiary of the Company. There were no advances against these
facilities as of September 25, 2004. 11. Segment and Geographic Information Segment Information The Company operates in one industry  computer software and hardware
products for the plastics part and mold design and manufacturing industry.
Until the end of fiscal 2004, the Company was managed and operated as one
business unit with two product lines. A single management team that reported to
the chief operating decision maker comprehensively managed the entire business. In its third fiscal quarter of fiscal 2004, the Company announced a plan
to reorganize into two separate business units: the Design Analysis Solutions
unit and the Manufacturing Solutions unit. The reorganization was substantially
complete at the end of fiscal 2004, resulting in two reportable segments
as defined by SFAS No. 131, Disclosure about Segments of an Enterprise and
Related Information. Under this revised organizational structure, there are 10




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MOLDFLOW CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued) significant functions, and therefore costs, that are considered corporate
expenses and are not allocated to the reportable segments for the purposes of
assessing performance and making operating decisions. These unallocated
corporate expenses include certain marketing, development and general and
administrative costs. Allocated expenses include direct costs associated with
selling, supporting, developing and marketing the products and services sold by
each reporting unit, as well as amortization of acquired intangible assets. The
basis of allocation of all such revenues, costs and expenses includes
significant judgment and estimation. Asset information by reportable segment is not reported as the Company
does not accumulate such information internally. The Company had no customers
from which it derived more than 10% of the total revenue of either reporting
unit for the fiscal periods presented. Three Months EndedSeptember 25,
    
    September 27,2004
    
    2003(In thousands)Revenue:Product revenue:Design Analysis Solutions
    
    $
    5,218
    
    
    $
    3,426Manufacturing Solutions
    
    
    2,709
    
    
    
    928Total product revenue
    
    
    7,927
    
    
    
    4,354Services revenue:Design Analysis Solutions
    
    
    5,413
    
    
    
    4,842Manufacturing Solutions
    
    
    642
    
    
    
    315Total services revenue
    
    
    6,055
    
    
    
    5,157Total revenue:Design Analysis Solutions
    
    
    10,631
    
    
    
    8,268Manufacturing Solutions
    
    
    3,351
    
    
    
    1,243Total revenue
    
    $
    13,982
    
    
    $
    9,511Costs and expenses:Design Analysis Solutions
    
    $
    4,263
    
    
    $
    4,489Manufacturing Solutions
    
    
    3,774
    
    
    
    2,084Unallocated
    
    
    4,028
    
    
    
    2,498Total costs and expenses
    
    $
    12,065
    
    
    $
    9,071Segment income (loss) from operations:Design Analysis Solutions
    
    $
    6,368
    
    
    $
    3,779Manufacturing Solutions
    
    
    (423
    )
    
    
    (841
    )Unallocated
    
    
    (4,028
    )
    
    
    (2,498
    )Total income from operations
    
    $
    1,917
    
    
    $
    440
 11




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##### Table of Contents



MOLDFLOW CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued) Geographic Information 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s research and development centers are located in Australia,
the United States, France and the United Kingdom. Geographic information
regarding the Companys operations was as follows: Three Months EndedSeptember 25,
    
    September 27,2004
    
    2003(In thousands)Revenue:Asia/Australia
    
    $
    4,625
    
    
    $
    3,769Americas
    
    
    5,043
    
    
    
    2,342Europe
    
    
    4,314
    
    
    
    3,400Total
    
    $
    13,982
    
    
    $
    9,511Percentage of total revenue:Asia/Australia
    
    
    33
    %
    
    
    40
    %Americas
    
    
    36
    
    
    
    25Europe
    
    
    31
    
    
    
    35Total
    
    
    100
    %
    
    
    100
    %
 Revenue from unaffiliated customers in Japan for the three months ended
September 25, 2004 and September 27, 2003 was $2.9 million and $2.4 million
(21% and 25% of total revenue), respectively. Substantially all of the revenue
in the Americas region is derived from the United States. September 25,
    
    June 30,2004
    
    2004(In thousands)Fixed assets, net:Asia/Australia
    
    $
    1,936
    
    
    $
    1,675Americas
    
    
    1,244
    
    
    
    1,262Europe
    
    
    579
    
    
    
    565Total consolidated
    
    $
    3,759
    
    
    $
    3,502
 All of the net fixed assets included in the Americas are located in the
United States. 12. Contingencies, Commitments and Guarantor Arrangements The following is a summary of agreements and provisions the Company has
determined are within the scope of Financial Accounting Standards Board
Interpretation (FIN) No. 45 Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others an interpretation of FASB Statements No. 5, 57, and 107 and rescission
of FASB Interpretation No. 34. In the normal course of business, the Company has indemnified third
parties and has commitments and guarantees under which it may be required to
make payments in certain circumstances. These indemnities, commitments and
guarantees include indemnities to various lessors in connection with facility
leases; indemnities to customers related to performance of services
subcontracted to other providers; indemnities to vendors that guarantee
expenses incurred by employees of the Company and indemnities and guarantees to
financial institutions related to sales of the Companys equity securities and
performance under credit facilities of the Companys subsidiaries. The duration
of these indemnities, commitments and guarantees varies, and in certain cases,
is indefinite. The majority of these indemnities, commitments and guarantees do
not provide for any limitation of the maximum potential future payments the
Company could be obligated to make. The Company has never incurred material
costs to settle claims or defend lawsuits related to these indemnities,
commitments and guarantees. As a result, the estimated fair value of these
agreements is minimal. Accordingly, no liabilities have been recorded for these
agreements as of September 25, 2004. 12




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MOLDFLOW CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS  (Continued) 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
from
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. The following
table presents changes to the accrued warranty liability: Three Months EndedSeptember 25,
    
    September 27,2004
    
    2003(In thousands)Balance at beginning of period
    
    $
    254
    
    
    $
    42Additions
    
    
    55
    
    
    
    Settlements
    
    
    (15
    )
    
    
    Balance at end of period
    
    $
    294
    
    
    $
    42
 Lease Commitments The Company leases certain of its office space, autos and equipment under
noncancelable operating leases, which expire at various dates through 2012. At
September 25, 2004, the Company had no outstanding capital lease obligations.
Future minimum operating lease commitments as of September 25, 2004 were as
follows: OperatingFiscal Year
    
    Leases(In thousands)2005 (remainder)
    
    $
    2,0362006
    
    
    1,6662007
    
    
    8852008
    
    
    6092009
    
    
    603Thereafter
    
    
    1,182$
    6,981
 Future minimum operating lease commitments include the full cash
commitment for a leased facility in the United Kingdom. The Companys April
2002 restructuring plan included a reduction in the use of this facility,
resulting in a charge of $606,000 at that time. Purchase Commitments The Company has various contractual obligations for the purchase of goods
or services that are enforceable and legally binding on the part of the
Company. Future purchase commitments as of September 25, 2004 were as follows: PurchaseFiscal Year
    
    Commitments(In thousands)2005 (remainder)
    
    $
    1,3912006
    
    
    258$
    1,649
 13




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##### Table of Contents



Item 2.Managements Discussion and Analysis of Financial Condition and
Results of Operations We begin Managements Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) with a review of our overall strategy and the
strategy for our two business units 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, beginning on
page 17, we discuss our Results of Operations for the three months ended
September 25, 2004 compared to the three months ended September 27, 2003. 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, Contractual Obligations 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. 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 and 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 Risk Factors
and Important Factors That May Affect Future Results beginning
on page 27.
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. Business Overview Our goal is to be the worlds leading provider of software and hardware
solutions for the optimization and automation of plastics-focused manufacturing
by offering customers a broad range of solutions to improve the way they design
and produce parts and molds through powerful and robust technology-based
products and services. Our focus is to help customers manufacture cheaper and
more reliable plastic products by increasing the effectiveness of their designs
and their manufacturing operations and improving efficiencies across the 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 and hardware 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 twenty-six years in serving the plastics design and
manufacturing market, we have become the leading provider of highly
sophisticated predictive software applications for the plastics design
engineering and manufacturing communities. Plastics are pervasive throughout a broad range of vertical industry
applications including the automotive, electronics, packaging, medical products
and consumer goods industries. These industries are generally large and
growing. Because the supply chains that support the design and production of
plastic parts in these industries are often fragmented and comprised of
multiple companies in various geographies around the globe, we have developed a
wide range of applications that can be used by participants at all stages of
the plastics value chain to optimize their 14




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##### Table of Contents



process and reduce their costs. Our strategy is to deliver our deep domain
expertise in plastics packaged in software and system solutions that address
the specific issues of the participants in each of these stages and increase
our penetration of these industries by making our products available through a
combination of direct and independent sales representatives, resellers and
engineering consultants around the globe. For the design of plastic parts and molds, our strategy is to provide
products which enable analysis-driven design, in the earliest stages of product
development, by making analysis technology more integral to the design process.
In doing so, we seek to make our technology available to a wider audience of
potential users in mainstream design markets, including those engineers who are
not specialists in plastics design. By building upon our existing technology
categories, we bring powerful solutions which are easy to learn and use,
providing low cost of deployment and rapid return on investment. For manufacturers of plastic parts, our strategy is to offer a range of
products which address the needs for optimizing and automating the set-up,
temperature, flow, control and monitoring of the primary equipment and other
process elements in the manufacturing process. Our solutions include
applications which provide real-time business performance management
information that enables companies to manage their manufacturing operations
throughout the production process. Because of our extensive knowledge of the
material properties of plastics and the physics involved in the process of
converting raw plastic to finished goods, we can assist companies to obtain
higher production yields, reduced cycle times, improved process reliability and
better part quality. Our growth strategy derives from these strengths. We continue to increase
the business value of our design analysis solutions and manufacturing solutions for our
customers in a number of ways. We improve the performance and functionality of
existing products with each new release. We develop products addressing
specific vertical market needs in each of the target market segments of our
business. In the design phase, for example, we provide applications which
address the process of microchip encapsulation, a process which is involved in
the manufacture of semiconductors. In the manufacturing phase, we offer
solutions to the die cast market, a conversion process that is similar to the
plastics manufacturing process. Expanding our geographic coverage is a key element of our growth strategy.
We believe that the rapidly growing economies in China and other developing
countries 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 based upon building on the
customer loyalty that we have achieved and the large installed base that we
have built. We receive approximately 60% to 70% of our overall revenue from
repeat customers. We deliver product releases on a regular and timely basis
which incorporate significant functionality improvements to ensure that our
customers have access to the latest technology 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. We believe that increases in our efficiency and productivity will allow us
to increase investment in our growth initiatives while improving our
profitability. We are managing our business with a goal to achieve annual
operating margins in the 16% to 22% target range by the second half of fiscal
year 2005. This goal is based upon current generally accepted accounting
principles and makes no attempt to consider the effect of future changes to
those principles. In the longer term, we will continue to balance operating
margin targets with revenue growth opportunities. Our uses of cash include capital expenditures to support our operations
and our product development, mergers and acquisitions, and investments in
growth initiatives. We continue to evaluate merger and acquisition
opportunities to the extent they support our strategy and our growth
objectives. 15




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##### Table of Contents



Design Analysis Solutions The Design Analysis Solutions business unit serves the product, part and
mold tooling design market. Our strategy is to provide powerful and
sophisticated solutions that enable our customers to optimize the design of
parts and molds in order to reduce the time to market, improve the reliability
of the production process, improve part quality and lower the cost of
manufacture for parts once in production. Our primary offerings are our Moldflow Plastics Advisers (MPA) for part
and mold design optimization and our Moldflow Plastics Insight (MPI) for
in-depth simulation for part and mold design validation and optimization. Manufacturing Solutions The Manufacturing Solutions business unit serves the plastics-focused
discrete manufacturing sector. Our strategy is to provide powerful integrated
solutions that enable our customers to optimize and automate the set-up of an
injection molding machine, monitor and control the injection molding process,
control the temperature and flow of plastic into the mold and monitor and
report on the process and production at both the machine and plant-wide level.
These products enable customers to improve the reliability of their production
process, improve their production yield and efficiency and reduce their costs
of production by reducing material usage and cycle times. Our primary offerings are our Moldflow Plastics Xpert for process set-up,
optimization and control, our Shotscope process monitoring and control
application, our Altanium system for temperature and process control and our
Celltrack product, formerly known as MMS/Production Monitoring, for monitoring
and reporting on the operations across the factory floor. Our Manufacturing
Solutions products are an integration of our internally developed Moldflow
Plastics Xpert product with Shotscope, Celltrack and Altanium, all of which
were initially developed by companies we have acquired. We sell our products and services internationally through our direct sales
operations in 14 countries. We also sell through a network of distributors and
value-added resellers and through distribution arrangements with developers of
other design software products. Critical Accounting Policies and Significant Judgments and Estimates The preparation of consolidated financial statements requires estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. On
an on-going basis, management evaluates its estimates and judgments, including
those related to revenue recognition, bad debts, inventories, income taxes,
warranty obligations, intangible assets, and contingencies and litigation. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates. The accounting policies that we believe are most critical to fully
understand our consolidated financial statements include: revenue recognition,
asset valuation allowances, acquisition accounting, impairment of acquired
intangible assets, goodwill and other long-lived assets, income tax accounting,
restructuring charges, hedge accounting, capitalization of software development
costs and stock option accounting. For a more detailed explanation of the
judgments included in these areas, refer to the Companys Annual Report on Form
10-K for the year ended June 30, 2004. 16




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##### Table of Contents



Overview of Results of Operations for the Three Months Ended September 25, 2004 Financial highlights included:  
    
    growth in revenues to $14.0 million in the first quarter of 2005 from
$9.5 million in the first quarter of 2004,  
    
    growth in earnings to $0.15 per diluted share in the first quarter of
2005 from $0.04 per diluted share in the first quarter of 2004, and  
    
    cash generated from operations of $1.2 million in the fiscal quarter,
compared to $287,000 in the same quarter of the previous year. Summary of operating performance: Three Months
    
    
    
    
    
    Three MonthsEnded
    
    As a %
    
    Ended
    
    As a %September 25,
    
    of
    
    September 27,
    
    of2004
    
    Revenue
    
    2003
    
    Revenue(In thousands, except for
percentage data)Revenue
    
    $
    13,982
    
    
    
    100
    %
    
    $
    9,511
    
    
    
    100
    %Cost of revenue
    
    
    3,136
    
    
    
    22
    
    
    
    1,267
    
    
    
    13Operating expenses,
including
amortization of
acquired intangibles
    
    
    8,929
    
    
    
    64
    
    
    
    7,804
    
    
    
    82Income from operations
    
    $
    1,917
    
    
    
    14
    %
    
    $
    440
    
    
    
    5
    %
 Our total revenue was 47% higher in the three months ended September 25,
2004 as compared to the three months ended September 27, 2003, primarily as a
result of growth in our Design Analysis Solutions product sales in our European
and our Asia/Australia regions and also due to sales of hot runner process
controllers, the main product of American MSI Corporation (AMSI), a company
which we acquired in January 2004. In the first quarter of fiscal 2005, the
value of the U.S. dollar relative to the currencies of some of the other
countries in which we conduct business was weaker than that of the first
quarter of fiscal 2004. Had currency exchange rates for the first
quarter of fiscal 2005 been the same as the first
quarter of fiscal 2004, our total revenue in the three months ended September
25, 2004 would have increased 41% from the three months ended September 27,
2003. Our operating expenses, including amortization of acquired intangible
assets, increased $1.1 million in the three months ended September 25, 2004 but
declined as a percentage of revenue as compared to the three months ended
September 27, 2003. The dollar increase is due primarily to higher variable
costs based on current sales performance as well as costs of personnel added in
our acquisition of AMSI. Our operating margins are very sensitive to changes in
revenue, given the relatively fixed nature of most of our operating expenses, which consist
primarily of employee-related expenditures, facilities costs and depreciation
and amortization expense. In future periods, employee-related expenditures will
increase substantially when we are required to record compensation expense
related to employee stock option grants. In the three months ended September 25, 2004, we generated $1.2 million of
cash from our operating activities as compared to $287,000 in the three months
ended September 27, 2003. We finished the quarter with $52.8 million of cash
and marketable securities, compared to $51.7 million of cash and marketable
securities as of June 30, 2004. We have no long-term debt. Results of Operations The following table sets forth statement of income data for the periods
indicated as a percentage of total revenue: Three Months EndedSeptember 25,
    
    September 27,2004
    
    2003Revenue:Product
    
    
    57
    %
    
    
    46
    %Services
    
    
    43
    
    
    
    54Total revenue
    
    
    100
    %
    
    
    100
    %Costs and expenses:Cost of product revenue
    
    
    13
    %
    
    
    7
    %Cost of services revenue
    
    
    9
    
    
    
    6Research and development
    
    
    12
    
    
    
    17
 17




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##### Table of Contents



Three Months EndedSeptember 25,
    
    September 27,2004
    
    2003Selling and marketing
    
    
    33
    
    
    
    44General and administrative
    
    
    18
    
    
    
    20Amortization of acquired intangible assets
    
    
    1
    
    
    
    1Total costs and expenses
    
    
    86
    
    
    
    95Income from operations
    
    
    14
    
    
    
    5Interest income
    
    
    2
    
    
    
    3Other income (loss), net
    
    
    0
    
    
    
    (1
    )Income before income taxes
    
    
    16
    
    
    
    7Provision for income taxes
    
    
    3
    
    
    
    3Net income
    
    
    13
    %
    
    
    4
    %
 Revenue We generate revenue from three principal sources:  
    
    license fees for our packaged software,  
    
    product fees for our collaborative manufacturing management systems
and hot runner process controllers, and  
    
    services revenue derived from maintenance and support related to our
products, consulting, implementation, training and material testing. Total revenue increased 47%, or $4.5 million, to $14.0 million for the
three months ended September 25, 2004, from $9.5 million for the three months
ended September 27, 2003. On a constant currency basis, which excludes the
impact of changes in foreign exchange rates from those of the previous year,
total revenue increased approximately 41%. The following table sets forth our total revenue for the three month
periods ended September 25, 2004 and September 27, 2003: Three Months EndedSeptember 25,
    
    September 27,2004
    
    2003(In thousands)Revenue:Product
    
    $
    7,927
    
    
    $
    4,354Services
    
    
    6,055
    
    
    
    5,157Total
    
    $
    13,982
    
    
    $
    9,511
 The following table sets forth our total revenue by geographic region for
the three month periods ended September 25, 2004 and September 27, 2003: Three Months EndedSeptember 25,
    
    September 27,2004
    
    2003(In thousands, except for
percentage data)Revenue:Asia/Australia
    
    $
    4,625
    
    
    $
    3,769Americas
    
    
    5,043
    
    
    
    2,342Europe
    
    
    4,314
    
    
    
    3,400Total
    
    $
    13,982
    
    
    $
    9,511Percentage of total revenue:Asia/Australia
    
    
    33
    %
    
    
    40
    %Americas
    
    
    36
    
    
    
    25Europe
    
    
    31
    
    
    
    35Total
    
    
    100
    %
    
    
    100
    %
 18




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##### Table of Contents



Product revenue The following table sets forth our product revenue by product group and
geography for the three month periods ended September 25, 2004 and September
27, 2003: Increase(Decrease)ComparedThree Months

    
    to Prior
    
    Three MonthsEndedSeptember 25,
    
    Year
    
    EndedSeptember 27,2004
    
    $
    
    %
    
    2003(in thousands, except
for percentage data)Asia/Australia product revenue:Design Analysis Solutions
    
    $
    2,732
    
    
    $
    574
    
    
    
    27
    %
    
    $
    2,158Manufacturing Solutions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    2,732
    
    
    
    574
    
    
    
    27
    
    
    
    2,158Americas product revenue:Design Analysis Solutions
    
    
    864
    
    
    
    268
    
    
    
    45
    
    
    
    596Manufacturing Solutions
    
    
    2,428
    
    
    
    2,123
    
    
    
    696
    
    
    
    305Total
    
    
    3,292
    
    
    
    2,391
    
    
    
    265
    
    
    
    901Europe product revenue:Design Analysis Solutions
    
    
    1,622
    
    
    
    950
    
    
    
    141
    
    
    
    672Manufacturing Solutions
    
    
    281
    
    
    
    (342
    )
    
    
    (55
    )
    
    
    623Total
    
    
    1,903
    
    
    
    608
    
    
    
    47
    
    
    
    1,295Total product revenue:Design Analysis Solutions
    
    
    5,218
    
    
    
    1,792
    
    
    
    52
    
    
    
    3,426Manufacturing Solutions
    
    
    2,709
    
    
    
    1,781
    
    
    
    192
    
    
    
    928Total
    
    $
    7,927
    
    
    $
    3,573
    
    
    
    82
    %
    
    $
    4,354Percentage of total product
revenue:Design Analysis Solutions
    
    
    66
    %
    
    
    
    
    
    
    
    
    
    
    79
    %Manufacturing Solutions
    
    
    34
    
    
    
    
    
    
    
    
    
    
    
    21Total
    
    
    100
    %
    
    
    
    
    
    
    
    
    
    
    100
    %
 Our product revenue includes both license fees for our packaged software
application products and product fees for our manufacturing management systems
and hot runner process controllers. Typically, our customers pay an up-front,
one-time fee for our products. For our packaged software applications, 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. Our MPA product is subject to the terms of a
click-wrapped software license agreement that is included as part of each
customers installation process. For sales of our other packaged software
products, we generally require a signed license agreement. For our
manufacturing management and hot runner process controllers, the amount of the
fee depends upon the number and type of software modules licensed with the
system, if any, and the systems hardware components. We generally require a
signed license agreement for sales of our manufacturing management systems that
have significant application software functionality. In addition, we receive
royalty payments from developers of other software products related to the
bundling of our software with 19




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their design software programs. We record these payments as revenue as
well, but such amounts have not been significant to date. In the three months ended September 25, 2004, our product revenue
increased by $3.6 million, or 82%, to $7.9 million, from $4.4 million in
September 27, 2003. This increase was due to the impact of our
acquisition of AMSI, the introduction of new Design Analysis Solutions products and our
extended distribution capabilities, which allowed us to reach a broader segment
of the mid-range design market. We added approximately 90 new customers in the first quarter of fiscal
2005, compared to approximately 100 new customers in the same period of fiscal
2004. Sales to new customers represented 32% of total product revenue in the
three months ended September 25, 2004, compared to 25% of total product revenue
in the three months ended September 27, 2003. We believe that this increase is
a result of a number of factors, including the release of new products that
appeal to a wider range of potential customers and the impact of annual trade
shows and user groups that generate new customer leads. Pricing of individual products within our product families can vary
greatly, and the mix of products sold during a given period can significantly
impact our average selling price per seat. As such, we do not believe that an
average selling price per seat provides a meaningful measure of our business. Design Analysis Solutions Product Revenue Product revenue from our Design Analysis Solutions (DAS) increased by
$1.8 million, or 52%, to $5.2 million in the three months ended September 25,
2004 when compared to the three months ended September 27, 2003, due mostly to
strong sales results in Germany, France, Japan and Korea. We believe that this strong
sales growth is the result of a number of factors, including new
product introductions and economic recovery
in certain of our key markets. Within the last nine months, we released MPA version 7.0 and MPI version
5.0, both of which introduce new complementary add-on modules to our previous
products. We believe that these releases have increased the appeal of the
products to a broader base of engineers, resulting in increased sales of these
product families relative to the first quarter of fiscal 2004. In
addition, over the last two quarters, we introduced new software
applications that are integrated into third party products and designed
to expand our product offerings into additional market segments. We
believe that those releases increased our Design Analysis Solutions
product revenue. We
sold 118 seats of DAS products in the three months ended September 25,
2004, compared to 134 seats of these products in the three months ended
September 27, 2003. Manufacturing Solutions Product Revenue Product revenue from our Manufacturing Solutions (MS) products increased
by $1.8 million, or 192%, to $2.7 million in the three months ended September
25, 2004 compared to $928,000 in the three months ended September 27, 2003.
This increase was due primarily to sales of hot runner process controllers, a
product line that was acquired in our January 2004 acquisition of AMSI. We
sold 180 seats of our MS products in the three months ended September
25, 2004 compared to 90 seats of MS products in the three months ended
September 27, 2003. Services Revenue We derive revenue 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 and implementation services, training of customers employees,
material testing services and repairs. Services revenue accounted for approximately 43% of our total revenue in
the three months ended September 25, 2004, compared to 54% of our total revenue
in the three months ended September 27, 2003. Revenues derived from 20




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services increased by 17% in the first quarter of fiscal 2005. This
increase was primarily from the sale of maintenance contracts, which was the
result of growth in our installed customer base arising from software license
sales made during the reporting period and in prior years. In the three months
ended September 25, 2004, services revenue from the DAS business unit was $5.4
million and services revenue from the MS business unit was $642,000. Cost of Revenue Increase(Decrease)ComparedThree Months
    
    to Prior
    
    Three MonthsEndedSeptember 25,
    
    Fiscal Year
    
    EndedSeptember 27,2004
    
    $
    
    %
    
    2003(In thousands, except for percentage data)Cost of revenue:Product
    
    $
    1,841
    
    
    $
    1,203
    
    
    
    189
    %
    
    $
    638Services
    
    
    1,295
    
    
    
    666
    
    
    
    106
    
    
    
    629$
    3,136
    
    
    $
    1,869
    
    
    
    148
    %
    
    $
    1,267As a percentage of total revenue
    
    
    22
    %
    
    
    
    
    
    
    
    
    
    
    13
    %
 Cost of Product Revenue Cost of product revenue consists primarily of the costs associated with
hardware components for our Manufacturing Solutions products, compact discs and
related packaging material, duplication and shipping costs and the salaries of
our distribution personnel. In some cases, we pay royalties to third parties
for usage-based licenses of their products that are embedded in our products.
Product royalties are expensed when the related obligation arises, which is
generally upon the license of our products, and are included in cost of product
revenue. Also included in cost of product revenue is amortization expense
related to capitalized software development costs and amortization expense
related to intangible assets acquired in our acquisition of AMSI. Our cost of product revenue was $1.8 million in the three months ended
September 25, 2004, compared to $638,000 in the three months ended September
27, 2003. This change was due principally to increased personnel costs and
direct material costs. In our acquisition of AMSI, we added 16 distribution
personnel, resulting in an additional $320,000 of compensation and other
employee costs when compared to the previous year. Direct material increased
almost $800,000 from the prior year, a result of sales of hot runner process
controllers, a product line that has a higher cost of material than that of our
other products. Amortization expense included in cost of product
revenue increased
approximately $80,000 compared to the same period of the prior year, due to
newly capitalized software development costs and intangible technology assets
acquired in our acquisition of AMSI. Cost of Services Revenue Cost of services revenue consists primarily of salary, fringe benefit and
facility related costs of our maintenance and support, consulting and training
activities and of our material testing laboratories, and is expensed when
incurred. Additionally, from time to time, we engage outside consultants to
meet peaks in customer demand for consulting and implementation services. Our cost of services revenue was $1.3 million in the three months ended
September 25, 2004, compared to $629,000 in the three months ended September
27, 2003. The significant increase in these expenses was due primarily to the
impact of an organizational change and redirection of our technical sales staff
from research and development and sales functions to our post-sales and
implementation groups, the costs of which are included in cost of services
revenue. 21




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Research and Development Increase(Decrease)Compared toThree Months
    
    Prior Fiscal
    
    Three MonthsEnded
September 25,
    
    Year
    
    Ended
September 27,2004
    
    $
    
    %
    
    2003(In thousands, except for percentage data)Research and development
    
    $
    1,645
    
    
    $
    52
    
    
    
    3
    %
    
    $
    1,593As a percentage of total revenue
    
    
    12
    %
    
    
    
    
    
    
    
    
    
    
    17
    %
 We employ a staff to develop new products and enhance our existing
products. Product development expenditures, which include salaries, benefits,
travel, payments to universities and other research institutions and facilities
costs, are generally charged to operations as incurred. However, SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed, requires the capitalization of certain software development costs
subsequent to the establishment of technological feasibility up to the point
the product is available for general release to customers. In accordance with SFAS No. 86, research and development costs of
$201,000 were capitalized in the three months ended September 25, 2004.
Similar costs were insignificant in the three months ended September 27, 2003.
All such capitalized costs are being amortized to cost of product revenue over
the estimated economic life of the related products, which range from three to
five years. As we plan to release several new products and enhancements over
the remainder of the fiscal year, we expect to capitalize a similar
amount of software
development costs in each of the remaining quarters of fiscal 2005. Net of amounts capitalized for software development, our research and
development expenses were $1.6 million in the three months ended September 25,
2004, compared to $1.6 million in the three months ended September 27, 2003.
The increase was primarily attributable to a $52,000 increase
in  third-party research programs. Selling and Marketing Increase(Decrease)Compared toThree Months
    
    Prior Fiscal
    
    Three MonthsEnded
September 25,
    
    Year
    
    Ended
September 27,2004
    
    $
    
    %
    
    2003(In thousands, except for percentage data)Selling and marketing
    
    $
    4,695
    
    
    $
    509
    
    
    
    12
    %
    
    $
    4,186As a percentage of total revenue
    
    
    33
    %
    
    
    
    
    
    
    
    
    
    
    44
    %
 We sell our products primarily through our direct sales force and indirect
distribution channels. Selling and marketing expenses consist primarily of
salaries, commissions paid to our sales staff and third-party manufacturers
representatives, employee benefits costs, sales office facility rental and
related costs, travel and promotional events such as trade shows, advertising,
print and web-based collateral materials, and public relations programs. Our selling and marketing expenses were $4.7 million in the three months
ended September 25, 2004, compared to $4.2 million in the three months ended
September 27, 2003. The increase from the previous year was primarily a result
of a $550,000 increase in employee compensation costs, a result of staff added
in the acquisition of AMSI as 22




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well as commissions paid on increased revenues, a $140,000 increase in
marketing promotional activities and a $170,000 increase in third-party
commissions related to hot runner process controller sales. These increases
were offset, in part, by the impact of our redirection in late fiscal 2004 of
sales resources to customer support and implementation activities, the cost of
which is included in cost of services revenue. This organizational change
reduced our selling and marketing expenses by $450,000 as compared to the
previous fiscal year and increased cost of services revenue by a corresponding
amount. General and Administrative Increase(Decrease)Compared toThree Months
    
    Prior Fiscal
    
    Three MonthsEnded
September 25,
    
    Year
    
    Ended
September 27,2004
    
    $
    
    %
    
    2003(In thousands, except for percentage data)General and administrative
    
    $
    2,510
    
    
    $
    596
    
    
    
    31
    %
    
    $
    1,914As a percentage of total revenue
    
    
    18
    %
    
    
    
    
    
    
    
    
    
    
    20
    %
 General and administrative expenses include compensation, legal, audit,
tax consulting, regulatory compliance, insurance and other costs of our
executive management, finance, information technology, human resources and
administrative support activities. Our general and administrative expenses were $2.5 million in the three
months ended September 25, 2004, compared to $1.9 million in the three months
ended September 27, 2003. The increase in general and administrative expenses
was due primarily to a $120,000 increase in compensation expense, which
included the impact of personnel added as a result of the AMSI acquisition, a
$106,000 increase in Sarbanes-Oxley compliance and preparation costs, a
$100,000 increase in employee costs, including costs associated with hiring new
staff and training, and a $70,000 increase in audit and tax service fees. Amortization of Acquired Intangible Assets Increase(Decrease)Compared toThree Months
    
    Prior Fiscal
    
    Three MonthsEnded
September 25,
    
    Year
    
    Ended
September 27,2004
    
    $
    
    %
    
    2003(In thousands, except for percentage data)Amortization of acquired intangible assets
    
    $
    79
    
    
    $
    (32
    )
    
    
    (29
    %)
    
    $
    111As a percentage of total revenue
    
    
    1
    %
    
    
    
    
    
    
    
    
    
    
    1
    %
 These costs represent the amortization of intangible assets, other than
goodwill, recorded in connection with our acquisitions. Those assets include
customer base, developed technology, customer order backlog and non-compete
agreements, which are amortized over their economic lives, ranging from six
months to seven years. Amortization of acquired intangible assets was $79,000 in the three
months ended September 25, 2004, compared to $111,000 in the three months ended
September 27, 2003. The reduction in amortization expense reflects the
completion of amortization of certain intangible assets that reached the end of
their estimated useful life. 23




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Interest Income Interest income includes interest income earned on invested cash balances.
Our interest income was $346,000 in the three months ended September 25, 2004,
which was not significantly different from that of the same period of the
previous fiscal year. Other Income (Loss), Net Other income (loss), net includes realized and unrealized gains and losses
arising from translation of foreign currency denominated asset and liability
balances, recognized gains and losses on our foreign currency hedging
instruments, and other non-operating income and expense items. Our other losses of $58,000 in the three months ended September 25, 2004
were not significantly changed since the previous fiscal year. Provision for Income Taxes Our estimated annual effective income tax rate for fiscal 2005 is 29%,
compared to 37% in fiscal 2004. In the first fiscal quarter of 2005, our
actual income tax rate was 21% on pre-tax income of $2.2 million. The
difference between the effective income tax rate of the first fiscal quarter of
2005 and the full year estimate was due to a one-time benefit of $230,000
arising from the reduction of a valuation allowance recorded against deferred
tax assets of one of our subsidiaries. We currently estimate that our income
tax rate in each of the remaining quarters of fiscal 2005 will be approximately
32%, and that this will result in the estimated effective income tax rate of
approximately 29% for the fiscal year. Our future effective tax rate may be materially impacted by the amount of
income taxes associated with our foreign earnings, which are taxed at rates
different from the U.S. federal statutory rate, as well as the timing and
extent of the realization of deferred tax assets, changes in the tax law and
potential acquisitions. Further, we believe that our tax rate may fluctuate
within a fiscal year, including from quarter to quarter, due to potential items
arising from discrete events, including settlements of claims, acquisitions of
other companies or other similar events. In the first quarter of 2005, one of our Australian subsidiaries became
subject to an audit by the local taxing authority. The significant issues
under review relate to the deductibility of certain costs and our utilization
of net operating losses to reduce taxable income in the years between fiscal
1994 and 2001 by approximately $9.8 million, which amount was subject to an
average effective tax rate of 30% over that time period. We believe the
positions taken on our tax returns have merit and will be sustained upon audit.
Accordingly, no liabilities have been recorded in our consolidated balance
sheet related to this matter. We have established a valuation allowance against net deferred tax assets,
consisting principally of net operating loss carryforwards in certain
jurisdictions including the United States, because we believe that it is more
likely than not that the tax assets in those jurisdictions will not be realized
prior to their expiration. At September 25, 2004, we had total net deferred tax
assets of $396,000, net of a tax asset valuation allowance of $1,284,000 and
deferred tax liabilities of $884,000. Realization of our net deferred tax
assets is dependent on our ability to generate future taxable income in the
related tax jurisdictions. We believe that sufficient taxable income will be
earned in the future to realize these assets. 24




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Liquidity and Capital Resources Three Months
    
    Three MonthsEnded
    
    EndedSeptember 25,
    
    September 27,2004
    
    2003(In thousands)Cash provided by operating activities
    
    $
    1,172
    
    
    $
    287Cash provided by investing activities
    
    
    994
    
    
    
    1,579Cash provided by financing activities
    
    
    265
    
    
    
    169Effect of exchange rate changes on cash and cash equivalents
    
    
    461
    
    
    
    370Net increase in cash and cash equivalents
    
    
    2,892
    
    
    
    2,405Cash and cash equivalents, beginning of period
    
    
    35,987
    
    
    
    38,320Cash and cash equivalents, end of period
    
    $
    38,879
    
    
    $
    40,725Marketable securities, end of period
    
    $
    13,943
    
    
    $
    11,932Cash, cash equivalents and marketable securities, end of period
    
    $
    52,822
    
    
    $
    52,657
 Historically, we have financed our operations and met our capital
expenditure requirements primarily through funds generated from operations,
sales of our capital stock and borrowings from lending institutions. As of
September 25, 2004, our primary sources of liquidity consisted of our total
cash and cash equivalents balance of $38.9 million, our marketable securities
balance of $13.9 million and our credit facilities. In January 2004, we renewed
our primary $5.0 million unsecured working capital credit facility. The
available borrowing base of the facility is subject to a calculation that is
based upon eligible accounts receivable. Advances may be in the form of loans,
letters of credit, foreign exchange contracts or other cash management lines.
The facility includes restrictive covenants, all of which we were in compliance
with at September 25, 2004. These covenants include liquidity and profitability
measures and restrictions that limit the ability of Moldflow to merge, acquire
or sell assets without prior approval from the bank. At September 25, 2004, we
had employed $865,000 of available borrowings through outstanding foreign
exchange contracts and letters of credit. The remaining available borrowings
were $4.1 million. In addition to our primary working capital line of credit,
we also utilize domestic and foreign banking institutions to provide liquidity
to our subsidiaries. We also have relationships with other banking institutions
in order to facilitate foreign currency and hedging transactions. As of
September 25, 2004, we had no outstanding debt. At September 25, 2004, our marketable securities consisted of corporate
bonds and U.S. government securities with maturities at date of purchase in
excess of three months. Investments in marketable securities are made in
accordance with our corporate investment policy. The primary objective of this
policy is the preservation of capital. Investments are limited to high quality
corporate debt, government securities, municipal debt securities, money market
funds and similar instruments. The policy establishes maturity limits,
liquidity requirements and concentration limits. At September 25, 2004, we were
in compliance with this internal policy. Operating activities generated $1.2 million of cash in the three months
ended September 25, 2004 and $287,000 of cash in the three months ended
September 27, 2003. In both periods, this was a result of our net income
adjusted for certain non-cash charges and expenses, such as depreciation and
amortization. Cash was also provided in both periods by reductions in accounts
receivable balances and reductions in other current assets, including prepaid
expenses. These increases were partially offset by cash used to reduce
accounts payable and accrued expenses. Many of our European and Japanese
customers renew their maintenance contracts in January and April of each year.
As such, we experience seasonal decreases in our deferred revenue in our first
and second fiscal quarters, which, in turn, reduces our cash generated from
operations. Investing activities provided $1.0 million of cash in the first quarter of
fiscal 2005 and $1.6 million in the same period of the previous year. In the
first quarter of fiscal 2005, maturities and sales of our marketable securities
generated $1.7 million of cash, offsetting $527,000 of fixed asset purchases
and $201,000 of capitalized software development costs. In fiscal 2004,
maturities and sales of our marketable securities generated $1.9 million of
cash, offsetting $310,000 of fixed asset purchases. Net cash of $265,000 and $169,000 was provided by financing activities in
the first quarter of fiscal 2005 and 2004, respectively. In both periods, this
cash was generated by exercises of stock options and proceeds received for
common stock under our Employee Stock Purchase Plan. We are authorized to repurchase up to 500,000 shares of our common stock.
We did not purchase any such shares in the first quarter of fiscal 2005 or the
first quarter of fiscal 2004. 25




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We believe that our current cash, cash equivalents, marketable securities
and available lines of credit will be sufficient to meet our anticipated cash
needs for working capital and capital expenditures for at least the next twelve
months following the date of this report. Capital expenditure requirements for
fiscal 2005 are expected to be approximately $2.0 million, primarily for the
purchase of fixed assets. We also expect to continue to capitalize costs
related to our software development activities in an annual amount similar to,
or less than, those experienced in the entire of fiscal 2004, which
totalled $856,000. Long term cash
requirements, other than normal operating expenses, are anticipated for the
continued development of new products, financing anticipated growth and the
possible acquisition of businesses, software products or technologies
complementary to our business. On a long-term basis or to complete acquisitions
in the short term, we may require additional external financing through credit
facilities, sales of additional equity or other financing vehicles. There can
be no assurance that such financing can be obtained on favorable terms, if at
all. Contractual Obligations The following table summarizes our significant financial contractual
obligations at September 25, 2004 and the effect such obligations are expected
to have on our liquidity and cash flows in future periods. This table excludes
amounts already recorded on our balance sheet as current liabilities at
September 25, 2004. Payments Due by PeriodRemainderTotal
    
    of fiscal2005
    
    Fiscal 2006
    
    Fiscal 2007
    
    Fiscal 2008
    
    Fiscal 2009
    
    Thereafter(In thousands)Operating lease obligations
    
    $
    6,981
    
    
    $
    2,036
    
    
    $
    1,666
    
    
    $
    885
    
    
    $
    609
    
    
    $
    603
    
    
    $
    1,182Purchase obligations(1)
    
    
    1,649
    
    
    
    1,391
    
    
    
    258
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    8,630
    
    
    $
    3,427
    
    
    $
    1,924
    
    
    $
    885
    
    
    $
    609
    
    
    $
    603
    
    
    $
    1,182
   (1)
    
    For the purposes of this table, contractual obligations for purchase of
goods or services are defined as agreements that are enforceable and
legally binding and that specify all significant terms, including: fixed
or minimum quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transaction. Off-Balance Sheet Financing Arrangements We do not have any special purpose entities or off-balance sheet financing
arrangements. Recent Accounting Pronouncements In
March 2004, the Financial Accounting Standards Board (FASB) issued
an Exposure Draft for a Proposed Statement of Financial Accounting
Standards, Share-Based Payment. This proposed
 Statement addresses the accounting for transactions in which a company
 receives employee services in exchange for (a) equity instruments of the company or
(b) liabilities that are based on the fair value of the companys
 equity instruments or that may be settled by the issuance of such equity instruments.
 This proposed Statement would also eliminate the ability to account for share-based
 compensation transactions using APB Opinion No. 25,
 Accounting for Stock Issued to Employees, and generally would require that such
 transactions be accounted for using a fair-value-based method. The FASB has nearly completed
 its deliberations and is expected to release a final statement by the end of our second
 quarter of fiscal 2005. During its deliberations to address the comment letters, the FASB
 has preliminarily indicated that the effective date for this statement would be for periods
 beginning after June 15, 2005, which would be the first quarter of our fiscal 2006.
 We are currently assessing the impact of this proposed Statement on our share-based
 compensation programs, however, we expect that the requirement to
expense stock options and other equity interests that have been or
will be
 granted to employees will significantly increase our operating
expenses and result in lower earnings per share. Restructuring January 2004 Plan In January 2004, we initiated a corporate restructuring plan (the January
2004 plan) related to our January 2004 acquisition of American MSI Corporation
(AMSI). The January 2004 plan included the termination of three employees
from sales and management positions in the United States and Italy. As a result
of the January 2004 plan, we recorded charges and related accruals of $508,000
in our third quarter of fiscal 2004. These charges were recorded as
restructuring costs in our consolidated statement of operations. All
significant activities under the January 2004 plan were completed as of March
27, 2004, except for cash payments of the remaining liabilities. The following table presents the restructuring charges incurred, cash paid
to settle the related obligations and the remaining liability included in
accrued expenses in our condensed consolidated balance sheet: 26




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##### Table of Contents



EmployeeSeveranceCosts(In thousands)Balance at June 30, 2004
    
    $
    205Cash payments
    
    
    (81
    )Balance at September 25, 2004
    
    $
    124
 April 2002 Plan In April 2002, we enacted a corporate restructuring plan (the April 2002
plan) to resize the company and to reduce overhead costs. The April 2002 plan
included the involuntary termination of 37 employees, the closing of certain
leased offices and the reduction in size of other leased offices. All
significant activities under the April 2002 plan are complete. As a result of
the April 2002 plan, we recorded pre-tax charges and related accruals in fiscal
2002 of $1.3 million. The remaining accrual balances as of September 27, 2003
relate to long-term contractual obligations from facility commitments that will
be paid over five years. The following table presents the balance of the
accrued restructuring charges: LeaseTerminationCosts(In thousands)Balance at June 30, 2004
    
    $
    546Cash payments
    
    
    (26
    )Foreign exchange impact and other adjustments
    
    
    (2
    )Balance at September 25, 2004
    
    $
    518
 Impact of Inflation We believe that our revenue and results of operations have not been
significantly impacted by inflation. We do not believe that our revenue and
results of operations will be significantly impacted by inflation in future
periods. Risk Factors and Important Factors That May Affect Future Results You should carefully consider the following risks and uncertainties prior
to making an investment in our common stock. These 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 model is changing as we further develop and exploit our
Manufacturing Solutions products, and our recent reorganization of our sales,
marketing and support staff along business unit lines may result in disruption
in our sales. The development and implementation of a robust set of Manufacturing
Solutions products has required that we devote significant research and
development, marketing and executive level resources to this product family.
Further expenditures of time and effort will be required in order to maximize
the potential of this set of products. In January 2004, we completed the
acquisition of AMSI, a provider of hot runner process controllers, with
products focused solely on the manufacturing market. In connection with this
acquisition, we reorganized our business into two strategically focused
business units, one focused on Design Analysis Solutions products and one on
Manufacturing Solutions products. This change in organizational structure may
lead to further disruption in our business operations, as we have split our
direct sales force into product-specific sales forces, each of which are
reporting directly to the responsible business unit leader. Our results of
operations could be adversely affected by significant delays in developing,
completing or shipping our new or enhanced Manufacturing Solutions products as
well as by delays in acceptance of these products by customers. Because these
products interact with other factory or enterprise-wide systems, we may be
required to provide additional functionality or services, which may delay the
recognition of revenue. Further, our acquisition of AMSI may delay the development and
completion of our Manufacturing 27




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##### Table of Contents



Solutions products as we seek to integrate
newly acquired technology into our product platform. Our Manufacturing
Solutions business unit is managed by the former chief executive officer and
sole stockholder of AMSI and our ability to successfully integrate and further
develop the AMSI business will be dependent on our ability to retain this
employee. A general economic slowdown, particularly in our end markets, may continue to
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, 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. We are dependent on third parties such as resellers and distributors to
distribute a substantial portion of our Manufacturing Solutions products. Following the acquisition of AMSI, we now distribute a substantial portion
of our Manufacturing Solutions products through a network of independent,
regional channel partners. In addition, we are adding more channel partners in
geographically dispersed locations in order to sell our products to new
customers. The 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 the channel partners.
Difficulties in ongoing relationships with channel partners, such as delays in
collecting accounts receivable, failure to meet performance criteria or to
promote our products as aggressively as we expect, and differences in the
handling of customer relationships could adversely affect our 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 to
support a larger installed base of our products following our acquisition of
AMSI. If the 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 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 fiscal quarter, in
many of the markets in which we sell our products,
    
    changes in the mix of products and services we provide because sales
of our Manufacturing Solutions products and our services will result in
lower gross margins and may result in a longer selling cycle, which
effect may be more significant following the acquisition of AMSI, which
will result in a higher percentage of sales coming from our
Manufacturing Solutions products as compared to our Design Analysis
Solutions products,
    
    the timing and magnitude of capital expenditures, including costs
relating to the expansion of our operations and infrastructure, and
planned program spending, such as that required for major marketing
initiatives or tradeshows, 28




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
    
    introductions of new services or enhancements by us and our
competitors and changes in our and our competitors pricing policies,
    
    our increased use of third parties such as distributors 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 that may lead to increased taxable income in certain
jurisdictions that may not yet 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,
    
    currency and exchange rate fluctuations, and
    
    timing and integration of acquisitions. 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 Manufacturing Solutions 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 final days 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 development,
introduction or marketing of new products and enhancements and result in
unexpected expenses. Our growth and profitability also 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 29




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on our ability to demonstrate the cost-effectiveness, ease of use and
technological advantages of our products over competing products. Our recent acquisition of AMSI and 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. In January 2004 we acquired American MSI Corporation, a privately held
company specializing in development and sale of hot runner process controllers
for the plastics processing industry. Further, we may engage in other
acquisitions and strategic relationships in the future. We may not be able to
identify suitable acquisition candidates, and, if we do identify suitable
candidates, we may not be able to make such acquisitions on commercially
acceptable terms, or at all. If we merge with or acquire another company
including AMSI, we will only receive the anticipated benefits if we
successfully integrate the acquired business into our existing business in a
timely and non-disruptive manner. We will have to devote a significant amount
of time, management and financial resources to do so. Even with this investment
of management and financial resources, the acquisition of AMSI or another
business 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 non-recurring charges and amortization of
significant amounts of acquired identifiable intangible assets that could
adversely affect our results of operations. The reorganization of our sales force may lead to disruption in our sales
activity. Late in fiscal 2004, we made certain changes to our overall business by
creating two separate business units focused on our two product lines. Along
with this change, we reorganized our worldwide sales force. These changes may
result in a decrease in sales productivity which would lead to a decrease in
revenue in one or both of our business units. Future restructurings of the
sales force could result in further transition issues and could adversely
impact our revenue and financial condition. 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, our
Manufacturing Solutions products require interaction with an injection molding
machine, 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,
any claim of infringement could cause us to incur substantial costs defending
against the claim, even if the claim is invalid, 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: 30




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
    
    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,
    
    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 also become known without breach of such
agreements or may be independently developed by competitors,
    
    foreign countries, including some of those in which we do business,
may reduce or limit the protection of our intellectual property rights
and software piracy, particularly in certain countries in Asia, may
result in lost revenue in those countries or to customers with worldwide
operations, and
    
    the cost of enforcing our intellectual property rights 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. 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,
    
    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 software solutions for
the design, analysis and manufacture of injection molded plastic parts. Many of
these entities have substantially greater 31




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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. 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, using both in-house and contract manufacturing facilities. 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 Manufacturing Solutions products may lead to product liability claims
against us. Our Manufacturing Solutions 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 and 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 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. These proceedings
currently include customary inquiry activities by various taxing authorities
and an ongoing audit of certain of the tax returns of our Australian subsidiary
by the Australian Tax Office. 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 historical 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. When
we are required to expense options or other equity instruments granted under our employee stock plans
as compensation, our net income and earnings per share will be significantly
reduced. In
the past, we have used stock options as a key component of our employee
compensation packages. We believe that stock options provide an incentive to
our employees to maximize long-term shareholder value and can encourage valued
employees to remain with the Company. Certain proposals related to accounting
for the grant of employee stock options and other equity
instruments as an expense are being
deliberated by the Financial Accounting Standards Board. When such proposals are
implemented, our net income and earnings per share will be negatively impacted. 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 may cause the
market price for our common stock to decline, including:  
    
    revenues and operating results failing to meet the expectations of
securities analysts or investors in any quarter,
    
    downward revisions in securities analysts estimates or changes in general market conditions, 32




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
    
    changes in our senior management personnel,
    
    distribution or sale of shares of our common stock by insiders or
affiliated persons, including the shares received by the selling
stockholder in connection with the acquisition of AMSI, a portion of
which have been registered for resale on Form S-3 and could therefore be
sold at any time,
    
    technological innovations by competitors or in competing technologies,
    
    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. 
 Item 3.Quantitative and Qualitative Disclosures about Market Risk We develop our products in research centers in Australia, the United
Kingdom, France and the United States. We sell our products globally through
our direct sales force and indirect distributor channels. As a result, our
financial
results are affected by factors such as changes in foreign currency
exchange rates, political climate and economic conditions in foreign markets.
In the future, we expect to increase our international operations in our
existing markets and in geographic locations where we do not have any
operations now. We collect amounts representing a substantial portion of our revenues and
pay amounts representing a substantial portion of our operating expenses in
foreign currencies. As a result, changes in currency exchange rates from time
to time may affect our operating results and our invested cash balances. During
2004, our consolidated cash balances were impacted favorably by the
strengthening of foreign currencies relative to the U.S. dollar, particularly
with respect to the Australian dollar. At September 25, 2004, we had $24.3
million of cash and cash equivalents invested in foreign currency accounts. Our
consolidated cash position will continue to be impacted by changes in foreign
currency exchange rates. We engage in hedging transactions designed to reduce
our exposure to changes in currency exchange rates. However, we cannot be sure
that any efforts we make to hedge our exposure to currency exchange rate
changes will be successful. Our invested cash balances are subject to interest rate risk and, as a
result, changes in interest rates from time to time may affect our operating
results. We invest our excess cash balances in highly liquid, interest bearing
instruments, including government and corporate bonds. At September 25, 2004,
the fair value and principal amounts of our bond portfolio amounted to $13.9
million, with a yield to maturity of 1.9%. Our investments are limited to high
grade corporate debt securities, government issued debt, municipal debt
securities, money market funds and similar high quality instruments. In a
declining interest rate environment, we would experience a decrease in interest
income. The opposite holds true in a rising interest rate environment. Since
January 2001, the United States Federal Reserve and European Central Bank have
significantly decreased certain benchmark interest rates, which has led to a
general decline in market interest rates. This decline in market interest rates
has resulted in a significant decrease in our interest income over the past
three years. Our interest income will continue to fluctuate based upon changes
in market interest rates and levels of cash available for investment. We do not
use derivative financial instruments in our investment portfolio to manage
interest rate risk. However, given the relatively short maturities and
investment-grade quality of our marketable securities portfolio, a sharp rise
in interest rates should not have a material adverse effect on the fair value
of these instruments. These instruments potentially expose us to credit risk;
however, we place our investments in instruments that meet high credit quality
standards, as specified in 33




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our investment policy guidelines. However, those guidelines limit the
amount of credit exposure to any one issue, issuer or type of instrument. In addition, our accounts receivable from our customers expose us to
credit risk. We believe that such credit risk is limited due to the large
number of customers comprising our accounts receivable and their broad
dispersion over geographic regions and industries. 
 Item 4.Controls and Procedures As required by Rules 13a-15 and 15d-15 under the Securities Exchange Act
of 1934, our management, including
our Chief Executive Officer and Chief Financial Officer, have
evaluated the effectiveness of
our disclosure controls and procedures as of the end of the period covered by
this report. In designing and evaluating our disclosure controls and
procedures, we and our management recognize that any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and our management necessarily was
required to apply its judgment in evaluating and implementing possible controls
and procedures. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that they believe that, as of September
25, 2004, our disclosure controls and procedures were reasonably effective to
ensure that information required to be disclosed by us in the reports we file
or submit under the Exchange Act is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commissions rules and forms. In compliance with the rules, we intend to
continue to review and document our disclosure controls and procedures,
including our internal control over financial reporting, on an ongoing basis,
and may from time to time make changes aimed at enhancing their effectiveness
and to ensure that our systems evolve with our business. There were no changes
in our internal control over financial reporting that occurred during our most
recent fiscal quarter that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting. 34




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PART II. OTHER INFORMATION 
 Item 1.Legal Proceedings From time to time, we may be involved in various claims and legal
proceedings arising in the ordinary course of business. We are not currently a
party to any such claims or proceedings, which, if decided adversely to us,
would either individually or in the aggregate have a material adverse effect on
our business, financial condition or results of operations. 
 Item 2.Unregistered Sales of Equity Securities and Use of Proceeds (c) Purchases of Equity Securities by the Issuer and Affiliated
Purchasers On September 19, 2001, the Board of Directors authorized the Company to
repurchase up to 500,000 shares of its outstanding common stock. To date, the
Company reacquired 244,165 for $1.4 million, at an average cost of $5.62 per
share. The Company did not make any purchases of its common stock during the
fiscal quarter ended September 25, 2004 
 Item 6.Exhibits (a) Exhibits: 10.50
    
    Form of Incentive Stock Option Agreement for Executive Officers
under the Moldflow Corporation 2000 Stock Option and Incentive Plan10.51
    
    Form of Non-Qualified Stock Option Agreement for Executive Officers
under the Moldflow Corporation 2000 Stock Option and Incentive Plan10.52
    
    Form of Non-Qualified Stock
Option Agreement for Non-Employee Directors
under the Moldflow Corporation 2000 Stock Option and Incentive Plan31.1
    
    Certification of CEO31.2
    
    Certification of CFO32.1
    
    Section 1350 Certification of CEO32.2
    
    Section 1350 Certification of CFO
 35




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. Moldflow CorporationBy:
    
    /s/           A. Roland ThomasA. Roland ThomasPresident and Chief Executive OfficerMoldflow CorporationBy:
    
    /s/           Suzanne E. MacCormack

          Suzanne E. MacCormack
     Executive Vice President of Finance and
Administration and Chief Financial Officer
          (Principal Financial Officer)
 Date: November 3, 2004 36