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 JUNE 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 (I.R.S. 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 AUGUST 12, 1999 THERE WERE 9,766,461 SHARES OF COMMON STOCK, $.01 PAR
VALUE PER SHARE, OUTSTANDING.
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION:
Item 1. Consolidated Condensed Financial Statements
- Consolidated Condensed Balance Sheets as of
June 30, 1999 and December 31, 1998 3
- Consolidated Condensed Statements of Income for the
Three and Six Months Ended June 30, 1999 and 1998 5
- Consolidated Condensed Statements of Cash Flows for the
Six Months Ended June 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
Item 3. Cautionary Statements 18
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
EXHIBIT INDEX 25
2
<PAGE>
<TABLE>
<CAPTION>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
1999 1998
----------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,445,871 $ 5,706,657
Accounts receivable, less reserves of
approximately $848,000 at June 30, 1999
and $870,000 at December 31, 1998 4,446,487 4,009,195
Other receivables 1,243,734 1,308,892
Inventories 255,368 374,320
Prepaid expenses 692,569 342,599
----------- -------------
Total current assets 13,084,029 11,741,663
----------- -------------
PROPERTY AND EQUIPMENT, AT COST:
Computer equipment and software 4,986,365 4,765,347
Property and equipment under capital lease 918,042 918,043
Furniture and fixtures 1,078,893 1,036,313
Leasehold improvements 624,658 624,658
----------- -------------
7,607,958 7,344,361
Less - Accumulated depreciation and amortization 6,463,159 6,082,535
----------- -------------
1,144,799 1,261,826
OTHER ASSETS 430,581 488,595
----------- -------------
$14,659,409 $ 13,492,084
=========== =============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
JUNE 30, DECEMBER 31,
1999 1998
------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of capital lease obligations
and equipment financing $ 512,434 $ 482,004
Accounts payable 2,091,475 2,481,154
Accrued expenses and other current liabilities 1,913,056 2,452,472
Deferred revenue 2,208,175 1,886,533
------------- --------------
Total current liabilities 6,725,140 7,302,163
------------- --------------
Capital Lease Obligations and Equipment Financing,
Less current portion 139,410 139,414
------------- --------------
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 - 9,766,461 shares
at June 30, 1999 and 9,324,407 shares at
December 31, 1998 97,665 93,244
Additional paid-in capital 30,432,568 29,706,364
Accumulated deficit (22,641,233) (23,667,397)
Cumulative translation adjustment (94,141) (81,704)
------------- --------------
Total stockholders' equity 7,794,859 6,050,507
------------- --------------
$ 14,659,409 $ 13,492,084
============= ==============
The accompanying notes are an integral part of these consolidated condensed
financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------- ------------------------------------
1999 1998 1999 1998
------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Software licenses $ 5,110,605 $ 4,283,537 $ 10,387,402 $ 9,203,459
Services and other 1,417,960 939,272 2,680,387 1,721,643
------------------ ------------------ ----------------- -----------------
Total net revenues 6,528,565 5,222,809 13,067,789 10,925,102
------------------ ------------------ ----------------- -----------------
COST OF REVENUES:
Software licenses 838,398 599,804 1,643,750 1,305,804
Services and other 430,059 341,679 819,500 638,414
------------------ ------------------ ----------------- -----------------
Total cost of revenues 1,268,457 941,483 2,463,250 1,944,218
------------------ ------------------ ----------------- -----------------
Gross profit 5,260,108 4,281,326 10,604,539 8,980,884
------------------ ------------------ ----------------- -----------------
OPERATING EXPENSES:
Sales and marketing 2,937,498 2,408,063 5,753,073 4,829,017
Research and development 1,177,368 1,135,200 2,364,943 2,354,432
General and administrative 768,299 600,577 1,503,678 1,202,428
------------------ ------------------ ----------------- -----------------
Total operating expenses 4,883,165 4,143,840 9,621,694 8,385,877
------------------ ------------------ ----------------- -----------------
INCOME FROM OPERATIONS 376,943 137,486 982,845 595,007
Interest Income, net 34,301 23,282 75,741 46,812
------------------ ------------------ ----------------- -----------------
INCOME BEFORE PROVISION FOR
INCOME TAXES 411,244 160,768 1,058,586 641,819
Provision for Income Taxes 22,340 - 32,420 -
------------------ ------------------ ----------------- -----------------
NET INCOME $ 388,904 $ 160,768 $ 1,026,166 $ 641,819
================== ================== ================= =================
BASIC NET INCOME PER SHARE $ 0.04 $ 0.02 $ 0.11 $ 0.07
================== ================== ================= =================
DILUTED NET INCOME PER SHARE $ 0.04 $ 0.02 $ 0.10 $ 0.06
================== ================== ================= =================
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 9,766,175 9,247,593 9,726,615 9,188,244
================== ================== ================= =================
WEIGHTED AVERAGE SHARES OUTSTANDING
ASSUMING DILUTION 10,495,170 10,487,987 10,682,252 10,453,352
================== ================== ================= =================
The accompanying notes are an integral part of these consolidated condensed financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,026,166 $ 641,819
Adjustments to reconcile net income to net
cash used in operating activities -
Depreciation and amortization 427,138 454,944
Changes in assets & liabilities-
Accounts receivables (437,294) (417,380)
Other receivables 65,156 (406,742)
Inventories 118,952 26,277
Prepaid expenses (251,024) (226,157)
Accounts payable (389,680) (159,896)
Accrued expenses (539,414) (281,657)
Deferred revenue 321,642 73,677
----------- -----------
Net cash used in operating activities 341,642 (295,115)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (263,597) (313,288)
Decrease (Increase) in other assets 11,500 (461,367)
----------- -----------
Net cash used in investing activities (252,097) (774,655)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payables (65,036) 0
Payments on capital lease obligations and equipment financing (258,737) (262,509)
Borrowings on capital lease obligations and equipment financing 255,255 670,658
Proceeds from exercise of stock options and
Employee Stock Purchase Plan 730,624 266,062
----------- -----------
Net cash provided by financing activities 662,106 674,211
Effect of exchange rate changes on cash and cash equivalents (12,437) (34,074)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 739,214 (429,633)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,706,657 4,133,541
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $6,445,871 $3,703,908
=========== ===========
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)
SIX MONTHS ENDED
JUNE 30,
----------------
1999 1998
------- -------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $33,634 $37,896
======= =======
Income taxes $20,000 $ 5,000
======= =======
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 six-month periods
ended June 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 six-month periods ended June 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 six
month periods ended June 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>
JUNE 30, DECEMBER 31,
1999 1998
--------- -------------
<S> <C> <C>
Materials and supplies $ 60,142 $ 98,200
Finished goods . . . . 195,226 276,120
--------- -------------
$ 255,368 $ 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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares
outstanding . . . . . . . 9,766,175 9,247,593 9,726,615 9,188,244
Effect of dilutive securities 728,995 1,240,394 955,637 1,265,108
---------- ---------- ---------- ----------
Weighted average shares
outstanding assuming dilution 10,495,170 10,487,987 10,682,252 10,453,352
========== ========== ========== ==========
</TABLE>
The following securities were not included in computing diluted earnings per
share because their effect would be antidilutive:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
1999 1998 1999 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Antidilutive securities 387,736 180,786 271,886 202,886
======= ======= ======= =======
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ----------------------
1999 1998 1999 1998
--------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Net income . . . . . . $388,904 $160,768 $1,026,166 $641,819
Cumulative translation
adjustment. . . (11,338) (17,706) (12,437) (34,074)
--------- --------- ----------- ---------
Comprehensive income . $377,566 $143,062 $1,013,729 $607,745
--------- --------- ----------- ---------
</TABLE>
6. SEGMENT REPORTING
The Company's continuing operations are classified in three primary business
segments: (1) Engineering and Education Software Products Division (formerly
known as the Technical Calculation Software 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 SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
--------------- ------------------
1999 1998 1999 1998
------- ------ -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C>
Segment Revenues:
Engineering and Education
Software Products Division . $3,639 $3,076 $ 7,343 $ 6,729
Data Analysis Products Division 2,890 2,147 5,725 4,196
FreeScholarships.com. . . . . . 0 0 0 0
------- ------ -------- --------
Total net revenues . . . $6,529 $5,223 $13,068 $10,925
------- ------ -------- --------
Segment Income (Loss):
Engineering and Education
Software Products Division . $ 229 $ 98 $ 398 $ 659
Data Analysis Products Division 360 63 828 (17)
FreeScholarships.com. . . . . . (200) 0 (200) 0
------- ------ -------- --------
Total net income . . . . $ 389 $ 161 $ 1,026 $ 642
------- ------ -------- --------
</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
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared with the Three Months Ended June 30,
1998.
RESULTS OF OPERATIONS
Total net revenues increased 25% from $5,223,000 for the three months ended June
30, 1998 to $6,529,000 for the three months ended June 30, 1999. Of this $1.3
million increase, 57% was attributable to an increase in worldwide Data Analysis
Products Division revenue, and the remaining 43% was attributable to an increase
in worldwide Engineering and Education Software Products Division revenue.
Worldwide Data Analysis Products Division net revenues increased 34.7% from
$2,147,000 in the three months ended June 30, 1998 to $2,890,000 in the three
months ended June 30, 1999, and increased as a percentage of total revenues from
41.1% to 44.3%. Service revenues, which include maintenance, training and
consulting, increased $474,000, while S-PLUS new license revenues increased
$270,000. The increase in both service and license revenues was primarily
attributable to the release of S-PLUS 4.5 for Windows/NT in May of 1998 and the
release of S-PLUS 5.0 for Unix in August 1998.
Worldwide Engineering and Education Software Products Division net revenues
increased 18.3% from $3,076,000 for the three months ended June 30, 1998, to
$3,639,000 for the three months ended June 30, 1999. This Division's revenues
decreased as a percentage of total net revenues from 58.9% to 55.7%. The
increase in net 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. Continued strong sales of Axum 6, released in March 1999, also
led to the increase in net revenue.
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 22% from $1,351,000 in the three months ended June 30, 1998 to
$1,649,000 in the three months ended June 30, 1999, and decreased as a
percentage of total revenues from 25.8% 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 34.7% from $941,000 in the three months ended
June 30, 1998, to $1,268,000 in the three months ended June 30, 1999, and
increased as a percentage of total revenues from 18% to 19.4%, respectively.
The increase in total cost of revenues as a percentage of total revenues was
primarily attributable to an increase in fixed costs, such as licensing costs
for the "S" language used in the S-PLUS product line and other licensing costs
for purchased technology included in the Mathcad and StudyWorks products. In
addition, direct materials, as a percentage of revenues, increased as lower
margin products, such as StudyWorks, accounted for a greater portion of overall
revenues.
Sales and marketing expenses increased 22% from $2,408,000 in the three months
ended June 30, 1998 to $2,938,000 in the three months ended June 30, 1999, and
decreased as a percentage of total revenues from 46.1% to 44.9%, respectively.
The increase in overall sales and marketing expenses was primarily attributable
to an increase in variable marketing expenditures, headcount additions to the
marketing department and sales force, and recruitment and consulting fees
associated with the Company's new Internet venture, FreeScholarships.com, formed
in June 1999.
Research and development expenses increased slightly from $1,135,000 in the
three months ended June 30, 1998 to $1,177,000 for the three months ended June
30, 1999, and decreased as a percentage of total revenues from 21.7% to 18%,
respectively.
General and administrative expenses increased 27.8% from $601,000 in the three
months ended June 30,1998 to $768,000 in the three months ended June 30,1999,
and increased as a percentage of total revenues from 11.5% to 11.7%,
respectively. Approximately $60,000 of the increase was attributable to legal
and professional fees associated with the formation of FreeScholarships.com.
The remainder of the increase in general and administrative expenses was due
primarily to increased compensation costs, facility related increases, and
increases in other miscellaneous expenses.
Six Months Ended June 30, 1999 Compared with the Six Months Ended June 30, 1998.
RESULTS OF OPERATIONS
Total net revenues increased 19.6% from $10,925,000 for the six months ended
June 30, 1998 to $13,068,000 for the six months ended June 30,1999.
Approximately $1.5 million of the increase, or 71.5%, was attributable the Data
Analysis Products Division. The remaining 28.5% increase is attributable to the
Engineering and Education Software 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
36.5% from $4,196,000 in the six months ended June 30,1998, to $5,725,000 in the
six months ended June 30, 1999, and increased as a percentage of total net
revenues from 38.4% to 43.8%. Service revenue increased $900,000, while S-PLUS
new license revenues increased $631,000. New releases of S-PLUS for Windows/NT
in May 1998 and the Unix release in August 1998, along with price increases for
licenses and related maintenance, were the primary drivers underlying the growth
in both service and license revenues.
Worldwide Engineering and Education Software Products Division revenues
increased 9.1% from $6,729,000 for the six months ended June 30,1998 to
$7,343,000 for the six months ended June 30,1999, and decreased as a percentage
of net revenues from 61.6% to 56.2%. This increase 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. This offset the decline in Mathcad 8 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 16.4% from $3,028,000 in the six months ended June 30,1998 to
$3,524,000 in the six months ended June 30,1999, and decreased as a percentage
of total revenues from 27.7% to 26.9%, respectively.
Total cost of revenues increased 26.7% from $1,944,000 in the six months ended
June 30,1998 to $2,463,000 in the six months ended June 30,1999, and increased
as a percentage of total revenues from 17.8% to 18.8%, respectively. As was the
case for the three month period ended June 30, 1999, the increase in total cost
of revenues as a percentage of total revenues was primarily attributable to an
increase in fixed costs, such as licensing costs for the "S" language used in
the S-PLUS product line, and other licensing costs for purchased technology
included in the Mathcad and StudyWorks products. In addition, direct materials,
as a percentage of revenue, increased as lower margin products, such a
StudyWorks, accounted for a greater portion of overall sales.
Sales and marketing expenses increased 19.1% from $4,829,000 in the six months
ended June 30,1998 to $5,753,000 in the six months ended June 30,1999, and
decreased slightly as a percentage of total revenues from 44.2% to 44%,
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 also contributed to higher
expenses.
13
<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 increased slightly from $2,354,000 in the
first six months ended June 30,1998 to $2,365,000 for the six months ended June
30, 1999, and decreased as a percentage of total revenues from 21.5% to 18%,
respectively.
General and administrative expenses increased 25.1% from $1,202,000 in the six
months ended June 30, 1998 to $1,504,000 in the six months ended June 30, 1999,
and increased slightly as a percentage of total revenues from 11% to 11.5%,
respectively. The increase in general and administrative expenses was due
primarily to increased compensation costs, legal and consulting fees associated
with FreeScholarships.com, higher facilities costs, and increases in other
miscellaneous expenses.
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 $6,446,000 at June 30, 1999, increased
$739,000 during the six months ended June 30,1999, from $5,707,000 at December
31, 1998. The positive cash flow resulted primarily from proceeds generated by
the exercise of stock options and stock purchases under the employee stock
purchase plan totaling $731,000 and cash provided by operating activities of
$342,000.
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 wholly-owned 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, which 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
$6,446,000 as of June 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% 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 June
30,1999, the Company is in compliance with the restrictive covenants and, as of
June 30, 1999, the Company can borrow up to $2,000,000. There were no amounts
outstanding under this line at June 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 a difference 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 phases:
(1) Identification of all software products, information technology
systems and non-information technology systems. The Company has
completed this phase. Inventories have been developed marking
compliant and, if applicable, non-compliant items.
(2) Assessment of repair or replacement requirements. The Company
has substantially completed this phase and incorporated any costs
into the 1999 operating plan.
(3) Repair and/or replacement. The Company has begun this phase and
expects completion by September 1999.
(4) Testing. This phase is in continuous operation and should be
substantially complete by September 1999.
(5) Implementation. This phase is on an as-needed basis, and should
be substantially completed by September 1999.
(6) Creation of contingency plans in the event of Year 2000 failures.
The Company has not developed a year 2000-specific contingency
plan. If year 2000 compliance issues are discovered, the Company
then will evaluate the need for contingency plans relating to
such issues.
16
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Year 2000 Readiness Disclosure Statement (continued)
To date, the Company has not incurred more than $100,000 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 $250,000 to $550,000. 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 whom 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 70% of suppliers.
Most of 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. Third parties that could not certify that their
products are Year 2000 compliant provided additional documentation. These
materials have been reviewed by MathSoft's Year 2000 compliance committee. Thus
far, MathSoft's Year 2000 compliance committee does not believe that any
critical functions of the Company will be 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.
17
<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.
18
<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 begin to 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
Mathcad line addressing the calculation needs of the technical, professional and
education markets, and those related to 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.
19
<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 33% and approximately 34% of the Company's total
revenues in the fiscal years ended June 30, 1996 and 1997, approximately 30% of
the Company's total revenues during the Transition Period, approximately 28% of
the Company's total revenues in the fiscal year ended December 31, 1998, and
approximately 27% for the six months ended June 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 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.
20
<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. 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. Compliance questionnaires and letters have been sent to all
significant third parties. Compliance questionnaires and letters have been sent
to all significant third parties. The Company has received responses from more
than 70% of suppliers. The Company has remitted follow up letters to third
parties that have not responded to primary efforts. Most of those responding
certified that their products are Year 2000 compliant. Third parties that could
not certify that their products are Year 2000 compliant provided additional
documentation. These materials have been reviewed by MathSoft's Year 2000
committee. 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.
21
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of stockholders on May 21, 1999. At
the meeting, the Stockholders of the Company voted to:
(i) elect David D. Martin to the Board of Directors as a Class III
Director to serve for a three-year term (until the Annual Meeting
of the Stockholders in 2002) (8,379,013 shares in favor; 285,451
shares against; 0 shares abstaining; and 0 shares unvoted);
(ii) amend the Amended and Restated 1992 Stock Plan to increase the
number of shares of Common Stock available for issuance under the
plan from 3,150,000 shares to 3,900,000 shares (2,911,743 shares
in favor; 805,714 shares against; 50,120 shares abstaining; and
4,896,887 shares remaining unvoted);
(iii) amend the Employee Stock Purchase Plan to increase the number
of shares available for issuance under the plan from 200,000
shares to 450,000 shares (3,439,763 shares in favor; 278,244
shares against; 49,570 shares abstaining; and 4,896,887 shares
unvoted);
(iv) amend the 1992 Non-Employee Director Stock Option Plan to (A)
increase the annual stock option grant for one year service from
5,000 shares to 10,000 shares, (B) modify the vesting schedule so
that stock options granted under the plan shall be exercisable
from the date of grant and (C) increase the number of shares
available for issuance under the plan from 160,000 shares to
400,000 shares (2,956,921 shares in favor; 752,811 shares against;
57,845 shares abstaining; and 4,896,887 shares unvoted); and
(v) ratify the selection of Arthur Anderson LLP as auditors for the
fiscal year ending December 31, 1999 (8,568,857 shares in favor;
38,242 shares against; 57,365 shares abstaining; and 0 shares
unvoted).
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 June 11,
1999 reporting the formation of a new subsidiary,
FreeScholarships.com, an Internet venture.
The Company filed a Current Report on Form 8-K dated July
19, 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: August 12, 1999 By /s/ Charles J. Digate
----------------------------
Charles J. Digate
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Dated: August 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>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 6445871
<SECURITIES> 0
<RECEIVABLES> 4446487
<ALLOWANCES> 0
<INVENTORY> 255368
<CURRENT-ASSETS> 13084029
<PP&E> 7607958
<DEPRECIATION> 6463159
<TOTAL-ASSETS> 14659409
<CURRENT-LIABILITIES> 6725140
<BONDS> 0
<COMMON> 97665
0
0
<OTHER-SE> 7697194
<TOTAL-LIABILITY-AND-EQUITY> 14659409
<SALES> 5110605
<TOTAL-REVENUES> 6528565
<CGS> 838398
<TOTAL-COSTS> 1268457
<OTHER-EXPENSES> 4883165
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 33634
<INCOME-PRETAX> 411244
<INCOME-TAX> 22340
<INCOME-CONTINUING> 388904
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 388904
<EPS-BASIC> .04
<EPS-DILUTED> .04
</TABLE>
