UNITED STATES
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, 1999
COMMISSION FILE NUMBER 0-020992
MATHSOFT, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2842217
(State or other jurisdiction (IRS Employer Identification
of incorporation or organization) Number)
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 12, 1999 THERE WERE 9,799,915 SHARES OF COMMON STOCK, $.01 PAR
VALUE PER SHARE, OUTSTANDING.
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MATHSOFT, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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TABLE OF CONTENTS
PAGE
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<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Consolidated Condensed Financial Statements
- Consolidated Condensed Balance Sheets as of
September 30, 1999 and December 31, 1998 . . . . . . . . . . 3
- Consolidated Condensed Statements of Income for the
Three and Nine Months Ended September 30, 1999 and 1998. . . 5
- Consolidated Condensed Statements of Cash Flows for the
Nine Months Ended September 30, 1999 and 1998. . . . . . . . 6
- Notes to Consolidated Condensed Financial Statements . . . . 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . 11
PART II. OTHER INFORMATION:
Item 5. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . 23
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
EXHIBIT INDEX. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
2
<PAGE>
PART II. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
(UNAUDITED)
SEPT 30, DECEMBER 31,
1999 1998
----------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents. . . . . . . . . . . . . . $ 6,489,491 $ 5,706,657
Accounts receivable, less reserves of
approximately $1,070,000 at September 30, 1999
and $870,000 at December 31, 1998 . . . . . . . 4,937,512 4,009,195
Other receivables. . . . . . . . . . . . . . . . . . 1,396,928 1,308,892
Inventories. . . . . . . . . . . . . . . . . . . . . 170,846 374,320
Prepaid expenses . . . . . . . . . . . . . . . . . . 731,067 342,599
----------- -------------
Total current assets. . . . . . . . . . 13,725,844 11,741,663
----------- -------------
PROPERTY AND EQUIPMENT, AT COST:
Computer equipment and software. . . . . . . . . . . 5,151,063 4,765,347
Property and equipment under capital lease . . . . . 918,043 918,043
Furniture and fixtures . . . . . . . . . . . . . . . 1,088,011 1,036,313
Leasehold improvements . . . . . . . . . . . . . . . 626,534 624,658
----------- -------------
7,783,651 7,344,361
Less - Accumulated depreciation and amortization . . 6,673,334 6,082,535
----------- -------------
1,110,317 1,261,826
OTHER ASSETS. . . . . . . . . . . . . . . . . . . . . . . . 440,532 488,595
----------- -------------
$15,276,693 $ 13,492,084
=========== =============
<FN>
The accompanying notes are an integral part of these consolidated condensed financial
statements.
</TABLE>
3
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<TABLE>
<CAPTION>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
SEPT 30, DECEMBER 31,
1999 1998
------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of capital lease obligations
and equipment financing . . . . . . . . . . . $ 434,156 $ 482,004
Accounts payable . . . . . . . . . . . . . . . . . 2,019,012 2,481,154
Accrued expenses and other current liabilities . . 2,155,827 2,452,472
Deferred revenue . . . . . . . . . . . . . . . . . 2,461,375 1,886,533
------------- --------------
Total current liabilities . . . . . . 7,070,370 7,302,163
------------- --------------
Capital Lease Obligations and Equipment Financing,
Less current portion . . . . . . . . . . . . . 78,219 139,414
------------- --------------
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 - 9,799,115 shares
at September 30, 1999 and 9,324,407 shares at
December 31, 1998 . . . . . . . . . . . . . . 97,991 93,244
Additional paid-in capital . . . . . . . . . . . . 30,510,118 29,706,364
Accumulated deficit. . . . . . . . . . . . . . . . (22,400,050) (23,667,397)
Cumulative translation adjustment. . . . . . . . . (79,955) (81,704)
------------- --------------
Total stockholders' equity . . . . . . 8,128,104 6,050,507
------------- --------------
$ 15,276,693 $ 13,492,084
============= ==============
<FN>
The accompanying notes are an integral part of these consolidated condensed financial
statements.
</TABLE>
4
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<TABLE>
<CAPTION>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1999 1998 1999 1998
-------------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
REVENUES:
Software licenses. . . . . . . . . . . . . . . $ 5,454,422 $5,287,939 $ 15,841,823 $14,491,398
Services and other . . . . . . . . . . . . . . 1,530,423 941,206 4,210,810 2,662,849
-------------- ---------- -------------- -----------
Total net revenues. . . . . . . . . . . . 6,984,845 6,229,145 20,052,633 17,154,247
-------------- ---------- -------------- -----------
COST OF REVENUES:
Software licenses. . . . . . . . . . . . . . . 942,950 754,665 2,586,700 2,060,469
Services and other . . . . . . . . . . . . . . 459,873 311,240 1,279,373 949,654
-------------- ---------- -------------- -----------
Total cost of revenues. . . . . . . . . . 1,402,823 1,065,905 3,866,073 3,010,123
-------------- ---------- -------------- -----------
Gross profit. . . . . . . . . . . . . . . 5,582,022 5,163,240 16,186,560 14,144,124
-------------- ---------- -------------- -----------
OPERATING EXPENSES:
Sales and marketing. . . . . . . . . . . . . . 3,206,451 2,624,591 8,959,524 7,453,609
Research and development . . . . . . . . . . . 1,361,311 1,240,101 3,726,254 3,594,533
General and administrative . . . . . . . . . . 780,633 733,734 2,284,311 1,936,162
-------------- ---------- -------------- -----------
Total operating expenses. . . . . . . . . 5,348,395 4,598,426 14,970,089 12,984,304
-------------- ---------- -------------- -----------
INCOME FROM OPERATIONS. . . . . . . . . . 233,627 564,814 1,216,471 1,159,820
Interest Income, net. . . . . . . . . . . . . . . . . 35,714 15,014 111,455 61,827
INCOME BEFORE PROVISION FOR
INCOME TAXES. . . . . . . . . . . . . 269,341 579,828 1,327,926 1,221,647
Provision for Income Taxes. . . . . . . . . . . . . . 28,157 9,589 60,577 9,590
-------------- ---------- -------------- -----------
NET INCOME. . . . . . . . . . . . . . . . $ 241,184 $ 570,239 $ 1,267,349 $ 1,212,057
============== ========== ============== ===========
BASIC NET INCOME PER SHARE. . . . . . . . . . . . . . $ 0.02 $ 0.06 $ 0.13 $ 0.13
============== ========== ============== ===========
DILUTED NET INCOME PER SHARE. . . . . . . . . . . . . $ 0.02 $ 0.06 $ 0.12 $ 0.12
============== ========== ============== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING . . . . 9,776,138 9,281,958 9,743,123 9,219,825
============== ========== ============== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 10,129,377 9,938,991 10,497,960 9,893,607
============== ========== ============== ===========
<FN>
The accompanying notes are an integral part of these consolidated condensed financial statements.
</TABLE>
5
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<TABLE>
<CAPTION>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1999 1998
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $1,267,349 $ 1,212,057
Adjustments to reconcile net income to net
cash provided by operating activities -
Depreciation and amortization. . . . . . . . . . . . . . . . 761,894 781,975
Changes in assets & liabilities-
Accounts receivables . . . . . . . . . . . . . . . . . . (928,317) (792,627)
Other receivables. . . . . . . . . . . . . . . . . . . . (88,038) (387,142)
Inventories. . . . . . . . . . . . . . . . . . . . . . . 203,474 43,500
Prepaid expenses . . . . . . . . . . . . . . . . . . . . (245,753) (175,391)
Accounts payable . . . . . . . . . . . . . . . . . . . . (462,143) (151,876)
Accrued expenses . . . . . . . . . . . . . . . . . . . . (296,644) (67,245)
Deferred revenue . . . . . . . . . . . . . . . . . . . . 574,843 387,482
----------- ------------
Net cash used in operating activities. . . . . . . . 786,665 850,733
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . (439,291) (506,849)
Increase in other assets. . . . . . . . . . . . . . . . . . . . (123,031) (503,606)
----------- ------------
Net cash provided by investing activities . . . . . . (562,322) (1,010,455)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payables . . . . . . . . . . . . . . . . . . . (92,644) -
Payments on capital lease obligations and equipment financing . (414,370) (444,564)
Borrowings on capital lease obligations and equipment financing 255,255 852,710
Proceeds from exercise of stock options and
Employee Stock Purchase Plan. . . . . . . . . . . . . . . 808,501 339,821
----------- ------------
Net cash provided by financing activities . . . . . . 556,742 747,967
Effect of exchange rate changes on cash and cash equivalents. . . 1,749 (52,477)
----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . 782,834 535,768
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD. . . . . . . . . . 5,706,657 4,133,541
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD. . . . . . . . . . . . . $6,489,491 $ 4,669,309
=========== ============
<FN>
The accompanying notes are an integral part of these consolidated condensed financial
statements.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------
1999 1998
------- -------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest . . . . . . . . . $49,772 $60,409
======= =======
Income taxes . . . . . . . $20,000 $16,368
======= =======
<FN>
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 three-month and nine-month
periods ended September 30, 1999. 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-month and nine-month periods ended September 30, 1999
are not necessarily indicative of the results to be expected for the full fiscal
year.
2. RECLASSIFICATION OF AMOUNTS
Certain amounts in the financial statements for the year ended December 31, 1998
have been reclassified to conform to the presentation for the three and
nine-month periods ended September 30, 1999.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
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<S> <C> <C>
Materials and supplies $ 39,211 $ 98,200
Finished goods . . . . 131,635 276,120
------------- ------------
$ 170,846 $ 374,320
------------- ------------
</TABLE>
8
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
4. NET INCOME PER SHARE
The Company reports earnings per share in accordance with SFAS No. 128, Earnings
per Share. Under SFAS No. 128, basic net income per common share is computed
based on net income available to common stockholders and the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed by including the number of additional common shares that would
have been outstanding if the dilutive potential common shares had been issued.
A reconciliation of basic and diluted shares outstanding is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
1999 1998 1999 1998
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Weighted average shares
outstanding . . . . . . . 9,776,138 9,281,958 9,743,123 9,219,825
Effect of dilutive securities 353,239 657,033 754,837 673,782
---------- --------- ---------- ---------
Weighted average shares
outstanding assuming
dilution. . . . . . . . . . . 10,129,377 9,938,991 10,497,960 9,893,607
========== ========= ========== =========
</TABLE>
The following securities were not included in computing diluted earnings per
share because their effect would be antidilutive:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
1999 1998 1999 1998
--------- ------- ------- -------
<S> <C> <C> <C> <C>
Antidilutive securities 1,074,761 512,486 539,511 306,086
========= ======= ======= =======
</TABLE>
9
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
5. COMPREHENSIVE INCOME
The Company reports comprehensive income in accordance with SFAS No. 130,
Reporting Comprehensive Income. Under SFAS No. 130, comprehensive income is
computed as the total of net income and all other nonowner changes in equity.
Total Comprehensive Income is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------------
1999 1998 1999 1998
-------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Net income . . . . . . $241,184 $570,239 $1,267,349 $1,212,057
Cumulative translation
adjustment. . . 14,187 (18,403) 1,750 (52,477)
-------- --------- ---------- -----------
Comprehensive income . $255,371 $551,836 $1,269,099 $1,159,580
-------- --------- ---------- -----------
</TABLE>
6. SEGMENT REPORTING
The Company's continuing operations are classified in three primary business
segments: (1) Engineering and Education Products Division, (2) Data Analysis
Products Division and (3) FreeScholarships.com. Summarized financial
information by business segment for continuing operations is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------- ------------------
1999 1998 1999 1998
------- ------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Segment Net Revenues:
Engineering and Education
Products Division. . . . . . . $3,783 $4,051 $11,126 $10,780
Data Analysis Products Division. 3,202 2,178 8,927 6,374
FreeScholarships.com . . . . . . - - - -
------- ------- -------- --------
Total net revenues. . . . $6,985 $6,229 $20,053 $17,154
------- ------- -------- --------
Segment Income (Loss):
Engineering and Education
Products Division. . . . . . . $ 205 $ 712 $ 602 $ 1,372
Data Analysis Products Division. 509 (142) 1,338 (160)
FreeScholarships.com . . . . . . (473) - (673) -
------- ------- -------- --------
Total net income. . . . . $ 241 $ 570 $ 1,267 $ 1,212
------- ------- -------- --------
</TABLE>
The Company's third business unit, FreeScholarships.com, was formed in June 1999
and remains a development stage subsidiary with no revenues during the period.
10
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared with the Three Months Ended
September 30, 1998.
RESULTS OF OPERATIONS
Total net revenues increased 12.0%, from $6,229,000 for the three months ended
September 30, 1998 to $6,985,000 for the three months ended September 30, 1999.
Of this $756,000 increase, $1,024,000 was attributable to an increase in
worldwide Data Analysis Products Division revenue, and a decrease in revenue of
$268,000 was attributable to worldwide Engineering and Education Products
Division
Worldwide Data Analysis Products Division net revenues increased 47.0%, from
$2,178,000 in the three months ended September 30, 1998 to $3,202,000 in the
three months September 30, 1999, and increased as a percentage of total revenues
from 35.0% to 46.0%, respectively. Service revenues, which include maintenance,
training and consulting, increased $532,000, while S-PLUS new license revenues
increased $493,000. The increase in both service and license revenues was
primarily attributable to the June 1999 release of S-PLUS 2000, as well as to
the product line's stability, quality, maturing sales, and marketing model.
Worldwide Engineering and Education Products Division net revenues decreased
6.6%, from $4,051,000 for the three months ended September 30, 1998 to
$3,783,000 for the three months ended September 30, 1999, and decreased as a
percentage of total net revenues from 65.0% to 54.2%, respectively. The
decrease in revenues was primarily due to a decrease in upgrades as the Company
changed its method of distribution, from an indirect model to a direct model.
The Company's third business unit, FreeScholarships.com, was formed in June 1999
and remains a development stage subsidiary with no revenues during the period.
Total international net revenues attributable to sales of all Company product
lines increased 14.3%, from $1,542,000 in the three months ended September 30,
1998 to $1,763,000 in the three months ended September 30, 1999, and increased
as a percentage of total revenues from 24.8% to 25.2%, respectively.
11
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Total cost of revenues increased 31.6%, from $1,066,000 in the three months
ended September 30, 1998 to $1,403,000 in the three months ended September 30,
1999, and increased as a percentage of total revenues from 17.1% to 20.1%,
respectively. The increase in total cost of revenues as a percentage of total
revenues was primarily attributable to a shift toward lower margin products.
The S-PLUS product line, which generates lower margins due to its service
component, increased from 35.0% of total worldwide revenue in the three months
ended September 30, 1998 to 46.0% in the three months ended September 30, 1999.
In addition, StudyWorks, which is a lower price point product, increased as a
percentage of worldwide Mathcad sales from 11.0% in the three months ended
September 30, 1998 to 16.0% in the three months ended September 30, 1999.
Sales and marketing expenses increased 22.1%, from $2,625,000 in the three
months ended September 30, 1998 to $3,206,000 in the three months ended
September 30, 1999, and increased as a percentage of total revenues from 42.1%
to 45.9%, respectively. The increase in overall sales and marketing expenses
was primarily attributable to an increase in variable marketing expenditures and
headcount additions to the marketing department and sales force. Recruiting and
consulting fees associated with the Company's new Internet venture,
FreeScholarships.com, which was formed in June 1999, accounted for $240,000 of
the increased expenses.
Research and development expenses increased 9.8%, from $1,240,000 in the three
months ended September 30, 1998 to $1,361,000 for the three months ended
September 30, 1999, and decreased slightly from 19.9% to 19.5% of total
revenues, respectively.
General and administrative expenses increased 6.4%, from $734,000 in the three
months ended September 30,1998 to $781,000 in the three months ended September
30,1999, and increased as a percentage of total revenues from 11.8% to 11.2%,
respectively. The increase is primarily attributable to legal and professional
fees associated with the formation of FreeScholarships.com.
Nine Months Ended September 30, 1999 Compared with the Nine Months Ended
September 30, 1998.
RESULTS OF OPERATIONS
Total net revenues increased 16.9%, from $17,154,000 for the nine months ended
September 30, 1998 to $20,053,000 for the nine months ended September 30,1999.
Approximately $2.5 million of the increase, or 88.1%, is attributable the Data
Analysis Products Division. The remaining 11.9% increase is attributable to the
Engineering and Education Products Division.
12
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Worldwide Data Analysis Products Division license and service revenue increased
40.1%, from $6,374,000 in the nine months ended September 30,1998 to $8,927,000
in the nine months ended September 30, 1999, and increased as a percentage of
total net revenues from 37.2% to 44.5%, respectively. Service revenue increased
$1,429,000, while S-PLUS new license revenues increased $1,127,000. Increased
focus on pursuing consulting opportunities, the release of S-PLUS 2000 in June
1999, and price increases for both licenses and related maintenance were the
primary drivers underlying the growth in both service and license revenues. In
addition, the product line's stability and quality as well as a maturing sales
and marketing model also contributed to the increase in sales.
Worldwide Engineering and Education Products Division revenues increased 3.2%,
from $10,780,000 for the nine months ended September 30,1998 to $11,126,000 for
the nine months ended September 30,1999, and decreased as a percentage of net
revenues from 62.9% to 55.5%, respectively. The increase in revenue was
primarily due to growth in sales of StudyWorks, fueled by the release in April
1999 of StudyWorks III, the latest version of that product, and continued strong
sales of Axum 6, released in March 1999. These increases offset the decline of
42.0% in Mathcad upgrade license sales as well as flat sales of new Mathcad
licenses.
The Company's third business unit, FreeScholarships.com, was formed in June 1999
and remains a development stage subsidiary with no revenues during the period.
Total international revenues attributable to sales of all Company product lines
increased 15.7%, from $4,570,000 in the nine months ended September 30,1998 to
$5,286,000 in the nine months ended September 30,1999, and decreased as a
percentage of total revenues from 26.6% to 26.4%, respectively.
Total cost of revenues increased 28.4%, from $3,010,000 in the nine months ended
September 30,1998 to $3,866,000 in the nine months ended September 30,1999, and
increased as a percentage of total revenues from 17.5% to 19.3%, respectively.
As was the case for the three-month period ended September 30, 1999, the
increase in total cost of revenues as a percentage of total revenues was
primarily attributable to a product shift toward lower margin products. The
S-PLUS product line, which generates lower margins due to its service component,
increased from 37.0% of worldwide net revenue in the nine months ended September
30 1998 to 44.0% in of worldwide net revenue in the nine months ended September
30 1999. In addition, StudyWorks, which is a lower price point product,
increased as a percentage of Mathcad sales from 10.0% in 1998 to 16.0% in 1999.
13
<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 increased 20.2%, from $7,454,000 in the nine months
ended September 30,1998 to $8,960,000 in the nine months ended September
30,1999, and decreased slightly as a percentage of total revenues from 43.5% to
44.7%, respectively. The increase in overall sales and marketing expenses was
primarily attributable to an increase in variable marketing expenditures and
headcount additions to the marketing department and sales force. Recruiting and
consulting fees associated with FreeScholarships.com accounted for $384,000 of
the increase in expenses.
Research and development expenses increased 3.7%, from $3,595,000 in the first
nine months ended September 30,1998 to $3,727,000 for the nine months ended
September 30, 1999, and decreased as a percentage of total revenues from 21.0%
to 18.6%, respectively. FreeScholarships.com accounted for $199,000 of the
growth in expenses.
General and administrative expenses increased 18.0%, from $1,936,000 in the nine
months ended September 30, 1998 to $2,284,000 in the nine months ended September
30, 1999, and increased slightly as a percentage of total revenues from 11.3% to
11.4%, respectively. The increase in general and administrative expenses was
due primarily to increased compensation costs, legal and consulting fees.
FreeScholarships.com incurred $118,000 of general and administrative expenses
since the formation of this subsidiary in June 1999.
14
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, totaling $6,489,000 at September 30, 1999, increased
$782,000 during the nine months ended September 30,1999 from $5,707,000 at
December 31, 1998. The positive cash flow resulted primarily from proceeds
generated by financing activities such as the exercise of stock options and
stock purchases under the employee stock purchase plan totaling, $557,000, and
cash provided by operating activities of $787,000. The cash increase was offset
by investment activities totaling $562,000.
In June 1999, the Company made an initial $3.0 million investment in
FreeScholarships.com and presently anticipates that it will make a $2.0 million
follow-on investment in FreeScholarships.com. FreeScholarships.com is presently
a whollyowned subsidiary of MathSoft (exclusive of employee options to acquire
stock of FreeScholarships.com) and management anticipates that
FreeScholarships.com will incur losses for the foreseeable future. These losses
will be included in the Company's consolidated financial results of operations.
The Company's financial reserves are represented by cash and cash equivalents of
$6,489,000 as of September 30, 1999. The Company also has a line of credit
agreement with a commercial bank. Borrowings under the line are limited to the
lesser of 80.0% of eligible domestic accounts receivable, or $2,000,000.
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 plus 0.5%. The line
of credit contains certain restrictive covenants, including requirements to
achieve or maintain minimum amounts of profitability, equity, leverage and
liquidity, all as defined in the agreement, which expires on April 30, 2000. As
of September 30,1999, the Company is in compliance with the restrictive
covenants and, as of September 30, 1999, the Company can borrow up to
$2,000,000. There were no amounts outstanding under this line at September 30,
1999.
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 differences include, but are not limited to, those
discussed in "Cautionary Statements". Other future events that have the effect
of reducing the Company's available cash balances, such as the anticipated
losses of FreeScholarships.com, unanticipated operating losses or capital
expenditures, cash expenditures related to possible future acquisitions, or
investment in new products or services, may cause a material difference. 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 issuance 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.
15
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 READINESS DISCLOSURE STATEMENT
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. Current
information about the Company's product compliance is available at the MathSoft
Year 2000 Readiness Disclosure section of our website.
The Company's Year 2000 compliance efforts consist of the following six phases
and are applicable to the Company's software products, key third party customers
and suppliers, information technology systems and non-information technology
systems:
1. Identification
- A Y2K Compliance Committee was formed of a cross-section of employees
in the Company. Inventory was taken of the Company's software
products, key third party customers and suppliers, information
technology systems and non-information technology systems.
- This phase is complete.
2. Assessment of repair or replacement requirements
- Evaluation forms were created for each product sold by the company.
Every offered product was tested to ensure date code fields are able
to accept four digit fields.
- Compliance questionnaires and letters have been sent to all
significant third party customers and suppliers.
- Assessment of information technology systems and non-information
technology systems led to discovery of non-compliant items. Where
necessary, upgrades, new equipment, and new software were proposed
and budgeted for.
- This phase is complete.
16
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 READINESS DISCLOSURE STATEMENT (CONTINUED)
3. Repair and/or replacement
- Prior versions of our products that have been deemed non-compliant
have an upgrade version available to customers to enable compliance.
Current versions of product have been upgraded and are compliant.
- The Company has received responses from more than 90% of key third
party customers and suppliers. Attempts to contact those who have
not replied are being made. Any significant third party customers
and suppliers who have not responded to verification efforts will be
replaced, however 100% participation is expected. No significant
third party customers and suppliers have indicated non-compliance.
- The Company is currently upgrading and replacing systems that are not
in compliance. Systems essential to business operations have been
repaired and/or replaced. Only non-essential systems remain, and
these will be upgraded by the end of November.
- This phase is virtually complete, and will be complete by November 31.
4. Testing
- Upgrade releases of product undergo Year 2000 compliance testing
during the development phase.
- The Company has not encountered any significant third party customers
and suppliers that have indicated non-compliance.
- Testing of information technology systems and non-information
technology systems is performed on an ongoing basis as systems are
replaced and/or upgraded. All replacements and upgrades have been
successful.
- This phase is virtually complete, and will be complete by November 31.
5. Implementation
- Upgrade versions of any non-compliant products are available for
customers.
- The Company has not encountered any significant third party customers
and suppliers that have indicated non-compliance. Efforts to contact
significant third party customers and suppliers that have not
responded to inquiries continue.
- The Company's offices are currently operating with replaced product.
Operations have not suffered disruption.
- This phase is virtually complete, and will be complete by December 12.
17
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000 READINESS DISCLOSURE STATEMENT (CONTINUED)
6. Creation of contingency plans in the event of Year 2000 failures.
- The Company has not developed a Year 2000-specific contingency
planbecause all phases of compliance efforts are virtually complete.
If Year 2000 compliance issues are discovered, the Company then will
evaluate the need for contingency plans relating to such issues.
Compliance of the Company's software is in part contingent upon the compliance
of the underlying operating system of the computer on which our products run and
any other software used with or in the computer on which our products run.
Despite testing by us and by key customers and suppliers, and assurances
received from key customers and suppliers, our products, IT systems, and non-IT
systems may contain undetected errors or defects associated with Year 2000 date
functions. Known or unknown errors or defects in our products could result in
delay or loss of revenue, diversion of development resources, damage to our
reputation, or increased service and warranty costs, any of which could
materially adversely affect our business, operating results or financial
condition.
To date, the Company has not incurred more than $250,000 of expenditures in
connection with identifying, evaluating or remediating any Year 2000 compliance
issues. We have reevaluated our preliminary estimates, regarding expected costs
to MathSoft for evaluating and correcting Year 2000 issues, and believe they are
in the range of $300,000 to $350,000. Most of these costs will be capital in
nature, will have an immaterial impact on earnings per share, will be funded
through our operating cash flows, and have been contemplated in the development
of our 1999 operating plan. Although MathSoft does not anticipate any major
non-compliance issues, there can be no assurance that there will not be a delay
in, or increased costs associated with, the implementation of MathSoft's Year
2000 readiness plan. MathSoft currently believes that the greatest risk of
disruption in its business exists in the event of non-compliance by third
parties with which it has significant supplier and/or customer relationships.
Compliance questionnaires and letters have been sent to all significant third
parties. The Company has received responses from more than 90% of suppliers.
Those responding certified that their products are Year 2000 compliant. The
Company has remitted follow up letters to third parties that have not responded
to primary efforts. MathSoft's Year 2000 compliance committee has reviewed these
materials. Thus far, MathSoft's Year 2000 compliance committee does not believe
that any critical functions of the Company will be materially affected by the
non-compliance of third parties.
The Company's expectations regarding Year 2000 remediation efforts will evolve
as it continues to analyze and correct its systems. 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.
18
<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.
Substantially all of its product revenues in each quarter result from software
licenses issued in that quarter, making the Company's ability to accurately
forecast future revenues and income for any period 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.
19
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENTS
RISKS ASSOCIATED WITH FREESCHOLARSHIPS.COM AND OTHER NEW PRODUCTS OR SERVICES.
The Company's future revenue growth rate and earnings performance depend on a
number of factors, including the continued success of its existing products and
service offerings and the development of one or more new products or services,
some of which could depart from the Company's traditional business model. These
investments may adversely affect the Company's quarterly and annual financial
results until such time that they return a profit. Furthermore, there can be no
assurance that these investments will ever achieve the desired financial
results. In June 1999, the Company formed FreeScholarships.com, a new Internet
venture whose business model departs from the Company's traditional model of
licensing software products. Management anticipates that FreeScholarships.com
will incur substantial losses for the forseeable future. There can be no
assurance that FreeScholarships.com will become profitable or that the Company
will have the necessary resources to finance FreeScholarships.com's operations
in the future.
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 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 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
Engineering and Education Products Division addressing the calculation needs of
the technical, professional and education markets, and those related to its Data
Analysis Products Division 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.
20
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENTS
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 and its own sales force. Mathcad products are currently marketed
and distributed in the U.S. through third party resellers and distributors,
telesales and direct mail and electronic methods. 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 28.0% of the Company's total revenues in the fiscal
year ended December 31, 1998, and approximately 26.0% for the nine months ended
September 30, 1999, 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.
RELIANCE ON THIRD PARTY LICENSORS. (i) Maple V, a software product licensed as
a part of Mathcad, (ii) certain copyrighted texts licensed from third party
publishers incorporated in the Company's Electronic Books, and (iii) the S
programming language, the language on which all of the Data Analysis Products
Division 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. 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.
21
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENTS
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. Compliance of the Company's software is in part contingent upon the
compliance of the underlying operating system of the computer on which our
products run and any other software used with or in the computer on which our
products run. Despite testing by and assurances received from key customers and
suppliers, our products; IT systems, and non-IT systems may contain undetected
errors or defects associated with Year 2000 date functions. Known or unknown
errors or defects in our products could result in delay or loss of revenue,
diversion of development resources, damage to our reputation, or increased
service and warranty costs, any of which could materially adversely affect our
business. 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 has been performed to determine the full scope
and related costs to insure that the Company's systems continue to meet its
needs. The company is currently in the testing and implementation phases. Thus
far, no material issues have been discovered that may inhibit MathSoft's
business operations. However, there is no assurance that such companies will
not suffer a Year 2000 business disruption, which could harm MathSoft's business
and financial condition.
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.
22
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 5. 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 October 18, 1999
reporting fiscal second quarter results.
23
<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.
MATHSOFT, INC.
Dated: November 12, 1999 By: /s/ Charles J. Digate
-------------------------
Charles J. Digate
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Dated: November 12, 1999 By: /s/ Robert P. Orlando
-------------------------
Robert P. Orlando
Senior Vice President Finance
and Administration, Chief
Financial Officer, Treasurer,
and Clerk
(Principal Financial and
Accounting Officer)
24
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1 Financial Data Schedule.
25
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6489491
<SECURITIES> 0
<RECEIVABLES> 4937512
<ALLOWANCES> 0
<INVENTORY> 170846
<CURRENT-ASSETS> 13725844
<PP&E> 7783651
<DEPRECIATION> 6673334
<TOTAL-ASSETS> 15276693
<CURRENT-LIABILITIES> 7070370
<BONDS> 0
0
0
<COMMON> 97991
<OTHER-SE> 8030113
<TOTAL-LIABILITY-AND-EQUITY> 15276693
<SALES> 15841823
<TOTAL-REVENUES> 20052633
<CGS> 2586700
<TOTAL-COSTS> 3866073
<OTHER-EXPENSES> 14970089
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 111455
<INCOME-PRETAX> 1327926
<INCOME-TAX> 60577
<INCOME-CONTINUING> 1267349
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