SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-1004
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 30, 1998
COMMISSION FILE NUMBER 0-020992
MATHSOFT, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2842217
(State or other jurisdiction (I.R.S. Employer Identification
Number)
of incorporation or organization)
101 MAIN STREET
CAMBRIDGE, MASSACHUSETTS 02142-1521
(Address, including zip code, of registrant's principal executive offices)
(617) 577-1017
(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 AT LEAST THE PAST 90 DAYS.
YES X NO ________
---------
AS OF NOVEMBER 9, 1998 THERE WERE 9,315,707 SHARES OF COMMON STOCK, $.01 PAR
VALUE PER SHARE, OUTSTANDING.
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION:
Item 1. Consolidated Condensed Financial Statements
- - Consolidated Condensed Balance Sheets as of
September 30, 1998 and December 31, 1997 3
- - Consolidated Condensed Statements of Operations for the
Three and Nine Month Periods Ended September 30, 1998
and 1997 5
- Consolidated Condensed Statements of Cash Flows for the
Nine Month Periods Ended September 30, 1998 and 1997 6
- Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Cautionary Statements 18
</TABLE>
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<CAPTION>
<S> <C>
PART II. OTHER INFORMATION:
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
</TABLE>
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
-------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,669,309 $ 4,133,541
Accounts receivable, less reserves of
approximately $1,149,000 at September 30, 1998
and $1,598,000 at December 31, 1997 3,320,600 2,527,973
Other receivables 1,331,503 944,361
Inventories 211,705 255,205
Prepaid expenses 409,105 233,714
Total current assets 9,942,222 8,094,794
-------------- -------------
PROPERTY AND EQUIPMENT, AT COST:
Computer equipment and software 4,238,372 4,609,382
Property and equipment under capital lease 1,340,004 615,910
Furniture and fixtures 1,024,095 1,012,763
Leasehold improvements 624,658 626,890
-------------- -------------
7,227,129 6,864,945
Less - Accumulated depreciation and amortization 5,841,774 5,315,979
-------------- -------------
1,385,355 1,548,966
OTHER ASSETS 560,481 168,390
$ 11,888,058 $ 9,812,150
============== =============
<FN>
The accompanying notes are an integral part of these consolidated condensed financial
statements.
</TABLE>
3
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MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
<S> <C> <C>
1998 1997
CURRENT LIABILITIES:
Current portion of capital lease obligations $ 601,680 $ 374,089
Accounts payable 2,091,412 2,243,290
Accrued expenses and other liabilities 2,169,412 2,236,655
Deferred revenue 1,776,524 1,389,042
--------------- --------------
Total current liabilities 6,639,028 6,243,076
--------------- --------------
CAPITAL LEASE OBLIGATIONS, LESS CURRENT PORTION 254,306 73,751
--------------- --------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value -
Authorized - 1,000,000 shares
Issued and outstanding-none - -
Common stock, $.01 par value-
Authorized - 20,000,000 shares
Issued and outstanding - 9,307,807 shares
at September 30, 1998 and 9,108,616
shares at December 31, 1997 93,078 91,086
Additional paid-in capital 29,677,581 29,339,752
Accumulated deficit (24,675,468) (25,887,525)
Cumulative translation adjustment (100,467) (47,990)
--------------- --------------
Total stockholders' equity 4,994,724 3,495,323
--------------- --------------
$ 11,888,058 $ 9,812,150
=============== ==============
<FN>
The accompanying notes are an integral part of these consolidated condensed financial
statements.
</TABLE>
4
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997 1998 1997
----------------- ----------------- ---------- ------------------
<S> <C> <C> <C> <C>
REVENUES:
Software licenses $ 5,287,939 $ 5,432,088 14,491,398 $ 12,345,599
Services and other 941,206 922,870 2,662,849 2,208,893
----------------- ----------------- ---------- ------------------
Total revenues 6,229,145 6,354,958 17,154,247 14,554,492
----------------- ----------------- ---------- ------------------
COST OF REVENUES:
Software licenses 754,665 984,678 2,060,469 2,530,011
Services and other 311,240 316,273 949,654 734,063
----------------- ----------------- ---------- ------------------
Total cost of revenues 1,065,905 1,300,951 3,010,123 3,264,074
----------------- ----------------- ---------- ------------------
Gross profit 5,163,240 5,054,007 14,144,124 11,290,418
----------------- ----------------- ---------- ------------------
OPERATING EXPENSES:
Sales and marketing 2,624,591 2,621,963 7,453,609 7,865,695
Research and development 1,240,101 1,401,826 3,594,533 4,166,809
General and administrative 733,734 679,224 1,936,162 2,170,396
----------------- ----------------- ---------- ------------------
Total operating expenses 4,598,426 4,703,013 12,984,304 14,202,900
----------------- ----------------- ---------- ------------------
INCOME (LOSS) FROM OPERATIONS 564,814 350,994 1,159,820 (2,912,482)
INTEREST INCOME, NET 15,014 8,842 61,827 67,790
----------------- ----------------- ---------- ------------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 579,828 359,836 1,221,647 (2,844,692)
PROVISION FOR INCOME TAXES 9,589 10,035 9,590 38,905
----------------- ----------------- ---------- ------------------
NET INCOME (LOSS) $ 570,239 $ 349,801 1,212,057 $ (2,883,597)
================= ================= ========== ==================
BASIC NET INCOME (LOSS) PER SHARE $ 0.06 $ 0.04 0.13 $ (0.32)
================= ================= ========== ==================
DILUTED NET INCOME (LOSS) PER SHARE $ 0.06 $ 0.04 0.12 $ (0.32)
================= ================= ========== ==================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - BASIC 9,281,958 9,023,775 9,219,825 9,012,239
================= ================= ========== ==================
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING - DILUTED 9,938,991 9,791,346 9,893,607 9,012,239
================= ================= ========== ==================
<FN>
The accompanying notes are an integral part of these consolidated condensed financial statements.
</TABLE>
5
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------ ------------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,212,057 $(2,883,597)
Adjustments to reconcile net income (loss) to net
cash used in operating activities -
Depreciation and amortization 781,975 936,418
Compensation associated with issuance of options - 10,000
Changes in assets & liabilities-
Accounts receivables (792,627) (563,589)
Other receivables (387,142) -
Inventories 43,500 266,270
Prepaid expenses (175,391) 76,390
Accounts payable (151,876) (298,514)
Accrued expenses (67,245) 611,731
Deferred revenue 387,482 485,768
------------ ------------
Net cash provided by (used in) operating activities 850,733 (1,359,123)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (506,849) (514,372)
Increase in other assets (503,606) (42,574)
------------ ------------
Net cash used in investing activities (1,010,455) (556,946)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations and short-term debt (444,564) (199,330)
Proceeds from capital lease obligations and short-term debt 852,710 649,838
Proceeds from exercise of stock options and
Employee Stock Purchase Plan 339,821 208,607
------------ ------------
Net cash provided by financing activities 747,967 659,115
Effect of exchange rate changes on cash and cash equivalents (52,477) 48,286
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 535,768 (1,208,668)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,133,541 3,916,098
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,669,309 $ 2,707,430
============ ============
<FN>
The accompanying notes are an integral part of these consolidated condensed financial
statements.
</TABLE>
6
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1998 1997
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<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $60,409 $23,229
======= =======
Income taxes $16,368 $10,511
======= =======
The accompanying notes are an integral part of these consolidated condensed financial statements.
</TABLE>
7
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements have been
prepared by MathSoft, Inc. ("MathSoft" or the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission 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 consolidated
financial statements and notes thereto for the transition period from July 1,
1997 to December 31, 1997. The accompanying consolidated condensed financial
statements reflect all adjustments (consisting solely of normal, recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods presented. The results of
operations for the three and nine-month periods ended September 30, 1998 are not
necessarily indicative of the results to be expected for the full fiscal year.
2. RECLASSIFICATION OF AMOUNTS
Certain amounts in prior period comparative financial statements have been
reclassified to conform to the current year presentation.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
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SEPTEMBER 30, DECEMBER 31,
1998 1997
<S> <C> <C>
Materials and supplies $ 178,622 $ 44,786
Finished goods 33,083 210,419
-------------- -------------
$ 211,705 $ 255,205
-------------- -------------
</TABLE>
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
4. BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE
In March 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. SFAS No.
128 establishes standards for computing and presenting earnings per share. This
statement is effective for fiscal years ending after December 15, 1997. Net
income (loss) per share has been restated for all periods presented to conform
with SFAS No. 128.
<TABLE>
<CAPTION>
THREE-MONTH PERIODS NINE-MONTH PERIODS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
<S> <C> <C> <C> <C>
1998 1997 1998 1997
Net income (loss) $ 570,239 $ 349,801 $1,212,057 $(2,883,597)
========== ============ ========== ===========
Weighted average
common shares
outstanding - Basic 9,281,958 9,023,775 9,219,825 9,012,239
Effect of dilutive securities,
stock options 657,033 767,571 673,782 -
---------- ------------ -------- -------
Weighted average
common shares 9,938,991 9,791,346 9,893,607 9,012,239
outstanding - Diluted
========== ============ ========== ===========
Basic net income (loss)
per share $ 0.06 $ 0.04 $ 0.13 $(0.32)
========== ============ ======== =======
Diluted net income (loss)
per share $ 0.06 $ 0.04 $ 0.12 $(0.32)
========== ============ ======== =======
</TABLE>
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The following securities were not included in computing diluted earnings per
share because their effect would be antidilutive:
<TABLE>
<CAPTION>
THREE-MONTH PERIODS NINE-MONTH PERIODS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
<S> <C> <C> <C> <C>
1998 1997 1998 1997
Antidilutive securities-
Stock options 512,486 484,986 306,086 2,018,011
-------- -------- -------- ----------
Average exercise price of
antidilutive securities $ 3.83 $ 4.10 $ 4.90 $ 2.91
======== ======== ======== ==========
</TABLE>
5. COMPREHENSIVE INCOME (LOSS)
In July 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components in a full set of general purpose financial statements,
in order to measure all changes in stockholders equity of an enterprise that
result from transactions and other economic events of the period other than
transactions with stockholders. Comprehensive income, as defined by SFAS No.
130, is the total of net income and all other nonowner changes in equity. This
statement is effective for fiscal years beginning after December 15, 1997, and
accordingly the Company adopted it in its first fiscal quarter of 1998.
Total Comprehensive Income (Loss) is as follows:
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THREE-MONTH PERIODS NINE-MONTH PERIODS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
<S> <C> <C> <C> <C>
1998 1997 1998 1997
Net income (loss) $ 570,239 $ 349,801 $1,212,057 $(2,883,597)
----------- ------------ ---------- ------------
Cumulative translation
Adjustment (18,403) 36,569 (52,477) 48,286
----------- ------------ ----------- ----------
Comprehensive income
(loss) $ 551,836 $ 386,370 $1,159,580 $(2,835,311)
=========== ============ =========== ============
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<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
6. RECENTLY ISSUED ACCOUNTING STANDARD
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. SFAS No. 131 requires certain financial and
supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. Reportable segments, as defined by
this statement, correspond to the way management organizes units and evaluates
performance internally, and may be based upon products, geography, legal entity,
management structure or a combination of these methods. SFAS No. 131 is
applicable only to public, for-profit entities and is effective for years
beginning after December 15, 1997. It need not be applied to interim statements
in the initial year of application and accordingly it is not being applied
herein. The Company intends to comply with SFAS No. 131 in its year-ended
December 31, 1998 financial statements.
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Month Period Ended September 30, 1997 Compared with the Three Month Period
ended September 30, 1998
RESULTS OF OPERATIONS
Total revenues decreased 2.0% from $6,355,000 for the three months ended
September 30, 1997 ("1997 quarter") to $6,229,000 for the three months ended
September 30, 1998 ("1998 quarter"). The decrease in total revenues was
primarily attributable to a decrease in upgrade revenue generated by the
Company's core product, Mathcad for Windows, as the new release occurred later
in the calendar year in 1998 than in 1997. Mathcad 8 was released in September
of 1998 versus a June 1997 release of Mathcad 7.
Worldwide S-PLUS license and maintenance revenue increased 10.9% from $1,610,000
in the 1997 quarter to $1,785,000 in the 1998 quarter, and increased as a
percentage of total revenues from 25.3% to 28.7%, respectively. The increase in
revenue is attributable to both the September 1997 release of S-PLUS 4.0 and the
May 1998 release of S-PLUS 4.5. Prior to the September 1997 release the product
line had reached its fourth year of life without a major new release. Worldwide
Mathcad product line sales decreased 5.3% from $4,277,000 in the 1997 quarter to
$4,052,000 in the 1998 quarter, and decreased as a percentage of total revenue
from 67.3% to 65.1%, respectively. The decrease in sales was due to Mathcad 8
being released in September of 1998 versus a June 1997 release of Mathcad 7.
Total international revenues attributable to sales of all Company product lines
remained consistent at $1,542,000 for the 1998 quarter compared to $1,500,000
for the 1997, but increased as a percentage of total revenues from 23.6% to
24.8%, respectively.
Total cost of revenues decreased 18.1% from $1,301,000 for the 1997 quarter
compared to $1,066,000 for the 1998 quarter, and decreased as a percentage of
total revenues from 20.5% to 17.1%, respectively. The decrease in total cost of
revenues as a percentage of total revenues was primarily attributable to
switching from diskette to CD media with the release of Mathcad 7 for Windows,
thereby decreasing direct material costs on a per unit basis.
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Sales and marketing expenses remained relatively flat at $2,625,000 for the 1998
quarter compared to $2,622,000 for the 1997 quarter, but increased as a
percentage of total revenues from 41.3% to 42.1%, respectively. The relative
consistency with prior period expenses is due to management efforts to control
costs.
Research and development expenses decreased 11.6% from $1,402,000 in the 1997
quarter to $1,240,000 in the 1998 quarter, and decreased as a percentage of
total revenues from 22.1% to 19.9%, respectively. The decrease in overall
research and development expenses was due to a decrease in consulting costs
associated with development initiatives in the Company's Data Analysis Products
Division, and decreased translation fees due to a September 1998 release of
Mathcad versus a June 1997 release, offset by increased salaries expense related
to the launch of Mathcad 8.
General and administrative expenses increased 8.1% from $679,000 in the 1997
quarter to $734,000 in the 1998 quarter, and decreased as a percentage of total
revenues from 10.7% to 11.8%, respectively. The increase in overall general and
administrative expenses was due primarily to increased headcount as well as
professional fees related to the acquisition of an UK distributor in June 1998.
Nine Month Period Ended September 30, 1997 Compared with the Nine Month Period
ended September 30, 1998
RESULTS OF OPERATIONS
Total revenues increased 17.9% from $14,554,000 for the nine months ended
September 30, 1997 to $17,154,000 for the nine months ended September 30, 1998.
The increase in total revenues was primarily attributable to a worldwide
increase in both new license and upgrade revenue generated by the Company's core
product, Mathcad 7 (released in June of 1997) and Mathcad 8 (released in
September of 1998) for Windows as well as new license and maintenance revenue
generated from its S-PLUS 4.0 product released in September 1997 and S-PLUS 4.5
released in May 1998.
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Worldwide Mathcad product line sales increased 14.2% from $9,447,000 for the
nine month period ended September 30, 1997 to $10,786,000 for the nine month
period ended September 30, 1998, but decreased as a percentage of total revenue
from 64.9% to 62.9%, respectively. Worldwide S-PLUS license and maintenance
revenue increased 26.3% from $4,243,000 for the nine month period ended
September 30, 1997 to $5,359,000 for the nine month period ended September
30,1998, and increased as a percentage of total revenues from 29.2% to 31.2%,
respectively. Total international revenues attributable to sales of all Company
product lines increased 5.4% from $4,335,000 in the nine month period ended
September 30, 1997 to $4,570,000 for the nine month period ended September 30,
1998, and decreased as a percentage of total revenues from 29.8% to 26.6%,
respectively.
Total cost of revenues decreased 7.8% from $3,264,000 for the nine month period
ended September 30, 1997 to $3,010,000 for the nine month period ended September
30, 1998 and decreased as a percentage of total revenues from 22.4% to 17.5%,
respectively. The decrease in total cost of revenues as a percentage of total
revenues was primarily attributable to switching from diskette to CD media with
the release of Mathcad 7 for Windows, thereby decreasing direct material costs
on a per unit basis. To a lesser degree, fixed costs, such as licensing costs
for the "S" language used in the S-PLUS product line and the amortization of
purchased technology, decreased as a percentage of total revenues due to an
overall higher revenue base in the nine-month period ended September 30, 1998.
Sales and marketing expenses decreased 5.2% from $7,866,000 in the nine month
period ended September 30, 1997 to $7,454,000 in the nine month period ended
September 30, 1998, and decreased as a percentage of total revenues from 54.0%
to 43.5%, respectively. The decrease in overall sales and marketing expenses
was primarily attributable to a decrease in salaries and variable marketing
expenditures, as the nine month period ended September 30, 1997 had increased
expenditures related to the launch of StatServer, S-PLUS 4.0 and Mathcad 7 as
well as increased S-PLUS sales expenditures to support direct sales into this
expanded product line.
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Research and development expenses decreased 13.7% from $4,167,000 in the nine
months ended September 30, 1997 to $3,595,000 in the nine months ended September
30, 1998, and decreased as a percentage of total revenues from 28.6% to 21.0%,
respectively. The decrease in overall research and development expenses was due
to a decrease in consulting costs associated with development initiatives in the
Company's Data Analysis Products Division and decreased translation fees due to
a September 1998 release of Mathcad versus a June 1997 release, offset by
increased salaries expense related to the launch of Mathcad 8.
General and administrative expenses decreased 10.8% from $2,170,000 in the nine
month period ended September 30, 1997 to $1,936,000 in the nine month period
ended September 30, 1998, and decreased as a percentage of total revenues from
14.9% to 11.3%, respectively. The decrease in overall general and
administrative expenses was due primarily to decreased foreign exchange losses.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, totaling $4,669,000 at September 30, 1998, increased
$536,000 during the nine-month period ended September 30, 1998 from $4,134,000
at December 31, 1997. The increase in cash resulted primarily from net cash
provided by operating activities of $851,000, net proceeds generated by
equipment financing transactions and stock option exercises and Employee Stock
Purchase Plan of $408,000 and $340,000, respectively, offset by net cash used in
investing activities of $1,010,000. Investing activities consisted primarily of
purchases of property and equipment of $507,000, purchase of UK distributor of
$387,000 and purchased technology of $100,000.
The Company's financial reserves are represented by cash and cash equivalents of
$4,669,000 as of September 30, 1998. The Company also has a line of credit
agreement with a commercial bank. Borrowings under the line are limited to the
lesser of 65% of eligible domestic accounts receivable or $1,000,000 based on
certain profitability covenants. Borrowings are secured by a first security
interest on substantially all of the Company's assets and bear interest at the
bank's prime rate (8.25% at September 30, 1998) plus 1%. The line of credit
contains certain restrictive covenants, including minimum amounts of
profitability, equity, leverage and liquidity, all as defined in the agreement,
and expires on December 31, 1998. There were no amounts outstanding under this
line at September 30, 1998.
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
The Company believes its financial reserves and cash flows from future
operations will be sufficient to meet its liquidity requirements for at least
the next twelve months. The foregoing statement is forward-looking and involves
risks and uncertainties, many of which are outside the Company's control. The
Company's actual experience may differ materially from that discussed above.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Cautionary Statements" as well as future events that have
the effect of reducing the Company's available cash balances, such as
unanticipated operating losses or capital expenditures or cash expenditures
related to possible future acquisitions. The Company may be presented from time
to time with acquisition opportunities which require additional external
financing, and the Company may from time to time seek to obtain additional funds
from public or private issuances of equity or debt securities. There can be no
assurance that any such financing will be available at all or on terms
acceptable to the Company.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. MathSoft is in the process of evaluating and correcting the Year
2000 compliance of its proprietary products and services and third party
equipment and software that it uses, as well as its non-information technology
systems, such as building security, voice mail and other systems.
The Company's Year 2000 compliance efforts will consist of the following phases:
(i) identification of all software products, information technology systems and
non-information technology systems; (ii) assessment of repair or replacement
requirements; (iii) repair or replacement; (iv) testing; (v) implementation; and
(vi) creation of contingency plans in the even of Year 2000 failures. The
Company has substantially completed phases (i) and (ii) and has begun phases
(iii) and (iv) of its Year 2000 efforts. The Company expects to complete its
Year 2000 compliance efforts by the end of June 1999.
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 COMPLIANCE (CONTINUED)
To date, the Company has not incurred any material expenditure in connection
with identifying or evaluating Year 2000 compliance issues. Preliminary
estimates regarding expected costs to MathSoft for evaluating and correcting
Year 2000 issues are in the range of $300,000 to $750,000, but there can be no
assurance that the costs will not exceed such amounts. The Company's
expectations regarding Year 2000 remediation efforts will evolve as it continues
to analyze and correct its systems. The Company has not yet developed a formal
Year 2000-specific contingency plan. The Company expects that a formal Year
2000 contingency plan will evolve as it completes its Year 2000 compliance
efforts. Failure by the Company to resolve Year 2000 issues with respect to its
products and services could have a material adverse effect on the Company's
business, results of operation and financial condition. Furthermore, failure of
third-party equipment or software to operate properly with regards to the year
2000 and thereafter could require MathSoft to incur significant unanticipated
expenses to remedy any problems.
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENTS
In addition to the other information in this report, the following cautionary
statements should be considered carefully in evaluating the Company and its
business. Information provided by the Company from time to time may contain
certain "forward-looking" information, as that term is defined by (i) the
Private Securities Litigation Reform Act of 1995 (the "Act") and (ii) in
releases made by the Securities and Exchange Commission (the "SEC"). These
cautionary statements are being made pursuant to the provisions of the Act and
with the intention of obtaining the benefits of the "safe harbor" provisions of
the Act.
VARIABILITY OF QUARTERLY OPERATING RESULTS. The Company's quarterly operating
results may vary significantly from quarter to quarter, depending upon factors
such as the introduction and market acceptance of new products and new versions
of existing products, the ability to reduce expenses, and the activities of
competitors. Because a high percentage of the Company's expenses are relatively
fixed in the near term, minor variations in the timing of orders and shipments
can cause significant variations in quarterly operating results. The Company
operates with little or no backlog and has no long-term contracts, and
substantially all of its product revenues in each quarter result from software
licenses issued in that quarter, and the Company's ability to accurately
forecast future revenues and income for any period is necessarily limited. Any
forward-looking information provided from time to time by the Company represents
only management's then-best current estimate of future results or trends, and
actual results may differ materially from those contained in the Company's
estimates.
POTENTIAL VOLATILITY OF STOCK PRICE. There has been significant volatility in
the market price of securities of technology companies. The Company believes
factors such as announcements of new products by the Company or its competitors,
quarterly fluctuations in the Company's financial results or other software
companies' financial results, shortfalls in the Company's actual financial
results compared to results previously forecasted by stock market analysts, and
general conditions in the software industry and conditions in the financial
markets could cause the market price of the Common Stock to fluctuate
substantially. These market fluctuations may adversely affect the price of the
Company's Common Stock.
RISKS ASSOCIATED WITH ACQUISITIONS. The Company has made a number of
acquisitions and will continue to review future acquisition opportunities. No
assurances can be given that acquisition candidates will continue to be
available on terms and conditions acceptable to the Company. Acquisitions
involve numerous risks, including, among other things, possible dilution to
existing shareholders, difficulties and expenses incurred in connection with the
acquisitions and the subsequent assimilation of the operations and services or
products of the acquired companies, the difficulty of operating new (albeit
related) businesses, the diversion of management's attention from other business
concerns and the potential loss of key employees of the acquired company. In
the event that the operations of an acquired business do not live up to
expectations, the Company may be required to restructure the acquired business
or
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENTS
RISKS ASSOCIATED WITH ACQUISITIONS (CONTINUED).
write-off the value of some or all of the assets of the acquired business.
There can be no assurance that any acquisition will be successfully integrated
into the Company's operations.
RISKS ASSOCIATED WITH DIVESTITURES. The Company's product offerings presently
may be divided between two principal product families - those related to its
Mathcad line addressing the calculation needs of the technical, professional and
education markets, and its S-PLUS offerings, marketed primarily to professionals
needing statistical analysis tools.
In setting strategic goals to maximize shareholder value, the Company from time
to time considers the options of divesting itself of one product family or the
other, or product lines within a given family, to concentrate its focus on the
business opportunity associated with the remaining product family or product
lines.
At the present time, the Company is not party to any agreement relating to the
sale of either of its product families or product lines within such families,
but it may elect to pursue such options at any time. If the Company were to
consummate such a sale, there can be no assurance that it would receive returns
from such sale that investors in the Company would consider attractive.
RISKS ASSOCIATED WITH DISTRIBUTION CHANNELS. The Company markets and
distributes its S-PLUS products in the U.S. through the Company's telesales and
outside sales force and internationally through third party resellers and
distributors. Mathcad products are currently marketed and distributed in the
U.S. through third party resellers and distributors, telesales and direct mail.
Internationally, the Company's Mathcad products are marketed and distributed
through third party resellers and distributors. There can be no assurance that
the Company will be able to retain its current resellers and distributors, or
expand its distribution channels by entering into arrangements with new
resellers and distributors in the Company's current markets or in new markets.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS. Sales outside North America
accounted for approximately 36.1%, 32.5% and approximately 34.0% of the
Company's total revenues in the twelve months ended June 30, 1995, 1996, and
1997, and approximately 29.5% of the Company's total revenues in the six months
ended December 31, 1997, and approximately 26.6% for the nine months ended
September 30, 1998, and may continue to represent a significant portion of the
Company's product revenues. Any decrease in sales outside North America may
have a materially adverse effect on the Company's operating results. The
Company's international business and financial performance may be affected by
fluctuations in exchange rates and by trade regulations.
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENTS
RELIANCE ON THIRD PARTY LICENSORS. Maple V, a software product licensed as a
part of the most recent version of Mathcad, contains certain copyrighted texts
licensed from third party publishers incorporated in the Company's Electronic
Books, and the S programming language, the language on which all of the
StatSci's products are based, are currently licensed from a single source or
limited source suppliers. If such licenses are discontinued, there can be no
assurance that the Company will be able to independently develop substitutes or
to obtain alternative sources or, if able to be developed or obtained as needed
in the future, that such efforts would not result in delays or reductions in
product shipments or cost increases that could have a material adverse effect on
the Company's consolidated business operations.
RAPID TECHNOLOGICAL CHANGE; COMPETITION. The technical calculation software
market is subject to rapid and substantial technological change, similar to that
affecting the software industry generally. The Company, to remain successful,
must be responsive to new developments in hardware and chip technology,
operating systems, programming technology, Internet technology and multimedia
capabilities. In addition, the Company competes against numerous other
companies, some of which have significant name recognition, as well as
substantially greater capital resources, marketing experience, research and
development staffs and production facilities than the Company. The Company's
financial results may be negatively impacted by the failure of new or existing
products to be favorably received by retailers and consumers due to price,
availability, features, other product choices or the necessity of promotions to
increase sales of the Company's products.
YEAR 2000 ISSUES. The Year 2000 issue exists because many computer systems and
applications currently use two-digit date fields to designate a year. As the
century date change occurs, date-sensitive systems will recognize the year 2000
as 1900, or not at all. This inability to recognize or properly treat the Year
2000 may cause systems to process critical financial and operational information
incorrectly. The Company utilizes software from third parties and related
technologies throughout its business that will be affected by the date change in
the year 2000. An internal study is currently under way to determine the full
scope and related costs to insure that the Company's systems continue to meet
its needs. The Company began incurring expenses in 1997 to resolve this issue.
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENTS
UNCERTAINTIES REGARDING PROTECTION OF PROPRIETARY TECHNOLOGY; UNCERTAINTIES
REGARDING PATENTS. The Company believes that while the mathematical
calculations performed by the Company's software are not proprietary, the speed
and quality of displaying the computation and the ease of use are unique to
MathSoft's products. The Company's success will depend, in part, on its ability
to protect the proprietary aspects of its products. The Company seeks to
protect these proprietary aspects of its products principally through a
combination of contract provisions and copyright, patent, trademark and trade
secret laws. There can be no assurance that the steps taken by the Company to
protect its proprietary rights will be adequate to prevent misappropriation of
its technology. Although the Company believes that its products and technology
do not infringe any existing proprietary rights of others, the use of patents to
protect software has increased and there may be pending or issued patents of
which the Company is not aware that the Company may need to license or challenge
at significant expense. There can be no assurance that any such license would
be available on acceptable terms, if at all, or that the Company would prevail
in any such challenge.
RELIANCE ON ATTRACTING AND RETAINING KEY EMPLOYEES. The Company's continued
success will depend in large part on its ability to attract and retain
highly-qualified technical, managerial, sales and marketing and other personnel.
Competition for such personnel is intense. The Company has non-competition
agreements with its key management and technical personnel. There can be no
assurance that the Company will be able to continue to attract or retain such
personnel.
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The proposed date for the 1999 Annual Meeting of stockholders of the Company is
May 7, 1999. Proposals of stockholders intended for inclusion in the proxy
statement to be furnished to all stockholders entitled to vote at the 1999
Annual Meeting must be received at the Company's principal executive offices not
later than December 3, 1998 (120 days before the mailing date for the 1999 proxy
statement). The deadline for providing timely notice to the Company of matters
that stockholders otherwise desire to introduce at the 1999 Annual Meeting is
February 19, 1999 (45 days before the mailing date for the 1999 proxy
statement). In order to curtail any controversy as to the date, on which a
proposal was received by the Company, it is suggested that proponents submit
their proposals by Certified Mail, Return Receipt Requested.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated July 22, 1998 reporting
fiscal second quarter results.
The Company filed a Current Report on Form 8-K dated October 13, 1998 reporting
fiscal third quarter results.
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
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.
<TABLE>
<CAPTION>
<S> <C>
MATHSOFT, INC.
Dated: November 13, 1998 By /s/ Charles J. Digate
-------------------------
Charles J. Digate
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 13, 1998 By /s/ Robert P. Orlando
-------------------------
Robert P. Orlando
Vice President Finance and Administration,
Chief Financial Officer, Treasurer, and Clerk
(Principal Financial and Accounting Officer)
</TABLE>
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ------------ -----------
27.1 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 4,669,309
<SECURITIES> 0
<RECEIVABLES> 3,320,600
<ALLOWANCES> 0
<INVENTORY> 211,705
<CURRENT-ASSETS> 9,942,222
<PP&E> 7,227,129
<DEPRECIATION> 5,841,774
<TOTAL-ASSETS> 11,888,058
<CURRENT-LIABILITIES> 6,639,028
<BONDS> 0
0
0
<COMMON> 93,078
<OTHER-SE> 4,901,646
<TOTAL-LIABILITY-AND-EQUITY> 11,888,058
<SALES> 14,491,398
<TOTAL-REVENUES> 17,154,247
<CGS> 2,060,469
<TOTAL-COSTS> 3,010,123
<OTHER-EXPENSES> 12,984,304
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,409
<INCOME-PRETAX> 1,221,647
<INCOME-TAX> 9,590
<INCOME-CONTINUING> 1,212,057
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,212,057
<EPS-PRIMARY> .13
<EPS-DILUTED> .12
<PAGE>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 2,707,430
<SECURITIES> 0
<RECEIVABLES> 4,193,541
<ALLOWANCES> 0
<INVENTORY> 270,989
<CURRENT-ASSETS> 7,541,332
<PP&E> 6,624,543
<DEPRECIATION> 5,087,942
<TOTAL-ASSETS> 9,255,071
<CURRENT-LIABILITIES> 6,450,710
<BONDS> 0
0
0
<COMMON> 90,361
<OTHER-SE> 2,531,512
<TOTAL-LIABILITY-AND-EQUITY> 9,255,071
<SALES> 12,345,599
<TOTAL-REVENUES> 14,554,492
<CGS> 2,530,011
<TOTAL-COSTS> 3,264,074
<OTHER-EXPENSES> 14,202,900
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,230
<INCOME-PRETAX> (2,844,692)
<INCOME-TAX> 38,905
<INCOME-CONTINUING> (2,883,597)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,883,597)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> (.32)
<PAGE>
</TABLE>
