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, 2000
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
of incorporation or organization) Identification 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 13, 2000 THERE WERE 10,695,595 SHARES OF COMMON STOCK, $.01 PAR
VALUE PER SHARE, OUTSTANDING.
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION:
Item 1. Consolidated Condensed Financial Statements
- Consolidated Condensed Balance Sheets as of
September 30, 2000 (unaudited) and December 31, 1999 3
- Consolidated Condensed Statements of Operations for the
Three and Nine Months Ended September 30, 2000
and 1999 (unaudited) 5
- Consolidated Condensed Statements of Cash Flows for the
Nine Months nded September 30, 2000 and 1999 (unaudited) 7
- Notes to Consolidated Condensed Financial Statements 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Cautionary Statements 19
Item 3. Quantitative and Qualitative Disclosures about Market 23
Risk
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES 25
2
<PAGE>
<TABLE>
<CAPTION>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,406,291 $ 7,213,035
Accounts receivables, less reserves of
approximately $1,044,000 at September 30, 2000
and $1,134,000 at December 31, 1999 6,031,116 4,743,130
Other receivables 1,189,661 1,420,154
Inventories 88,417 262,760
Prepaid expenses 529,168 382,291
-------------- -------------
Total current assets 11,244,653 14,021,370
-------------- -------------
PROPERTY AND EQUIPMENT, AT COST:
Computer equipment and software 6,060,980 5,265,836
Property and equipment under capital lease 993,043 918,042
Furniture and fixtures 1,172,101 1,105,128
Leasehold improvements 653,631 626,534
-------------- -------------
8,879,755 7,915,540
Less - Accumulated depreciation 7,332,301 6,852,097
1,547,454 1,063,443
-------------- -------------
NET ASSETS FROM DISCONTINUED OPERATION (NOTE 2) - 1,181,171
OTHER ASSETS, INCLUDING INTANGIBLES, NET 537,408 400,921
-------------- -------------
$ 13,329,515 $ 16,666,905
============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
SEPTEMBER 30, DECEMBER 31,
2000 1999
--------------- --------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of capital lease obligations
and equipment financing $ 371,952 $ 383,537
Accounts payable 2,517,638 2,092,644
Accrued expenses and other current liabilities 2,595,859 2,686,032
Deferred revenue 3,211,084 2,722,052
--------------- --------------
Total current liabilities 8,696,533 7,884,265
--------------- --------------
NET LIABILITIES FROM DISCONTINUED OPERATION (NOTE 2) 2,228,408 -
Capital Lease Obligations and Equipment Financing,
Less current portion 152,503 148,442
--------------- --------------
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 - 10,695,595 shares
at September 30, 2000 and 9,931,990 shares at
December 31, 1999 106,956 99,320
Additional paid-in capital 32,524,609 30,834,687
Accumulated deficit (29,844,299) (22,213,919)
Notes receivable for stock (Note 9) (550,000) -
Cumulative translation adjustment 14,805 (85,890)
--------------- --------------
Total stockholders' equity 2,252,071 8,634,198
--------------- --------------
$ 13,329,515 $ 16,666,905
=============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
MATHSOFT INC, AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Software licenses $ 4,986,515 $ 5,454,422 $16,210,625 $15,841,823
Services and other 2,614,975 1,530,423 6,769,003 4,210,810
------------ ------------ ------------ ------------
Total revenues 7,601,490 6,984,845 22,979,628 20,052,633
------------ ------------ ------------ ------------
COST OF REVENUES:
Software licenses 866,722 942,950 2,819,401 2,586,700
Services and other 784,569 459,873 2,074,312 1,279,373
------------ ------------ ------------ ------------
Total cost of revenues 1,651,291 1,402,823 4,893,713 3,866,073
------------ ------------ ------------ ------------
Gross profit 5,950,199 5,582,022 18,085,915 16,186,560
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 3,170,982 2,966,368 9,374,724 8,576,215
Research and
development - gross 2,607,801 2,404,746 7,702,818 6,957,856
Less funded research (1,137,404) (1,242,387) (3,651,033) (3,430,916)
------------ ------------ ------------ ------------
Research and development, net 1,470,397 1,162,359 4,051,785 3,526,940
General and administrative 718,319 719,047 2,514,771 2,166,314
------------ ------------ ------------ ------------
Total operating expenses 5,359,698 4,847,774 15,941,280 14,269,469
------------ ------------ ------------ ------------
INCOME FROM CONTINUING OPERATIONS 590,501 734,248 2,144,635 1,917,091
Interest income, net 29,303 7,790 126,284 83,530
------------ ------------ ------------ ------------
INCOME BEFORE PROVISION FOR INCOME TAXES 619,804 742,038 2,270,919 2,000,621
Provision for income taxes 5,277 28,157 50,673 60,577
------------ ------------ ------------ ------------
NET INCOME FROM CONTINUING OPERATIONS 614,527 713,881 2,220,246 1,940,044
------------ ------------ ------------ ------------
Discontinued Operations
Loss from Operations of Discontinued Division (Note 2) (4,134,608) (472,697) (9,850,623) (672,695)
------------ ------------ ------------ ------------
NET (LOSS) INCOME $(3,520,081) $ 241,184 $(7,630,377) $ 1,267,349
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
MATHSOFT INC, AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Basic Net Income Per Share -
Continuing Operations $ 0.06 $ 0.07 $ 0.21 $ 0.20
============ =========== ============ ===========
Diluted Net Income Per Share -
Continuing Operations $ 0.06 $ 0.07 $ 0.20 $ 0.18
============ =========== ============ ===========
Basic Net Income (loss) Per Share $ (0.33) $ 0.02 $ (0.74) $ 0.13
============ =========== ============ ===========
Diluted Net Income (loss) Per Share $ (0.33) $ 0.02 $ (0.69) $ 0.12
============ =========== ============ ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING 10,673,222 9,776,138 10,379,078 9,743,123
============ =========== ============ ===========
WEIGHTED AVERAGE SHARES
OUTSTANDING ASSUMING DILUTION 10,760,097 10,129,377 11,115,586 10,497,960
============ =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(7,630,377) $1,267,349
Net loss from discontinued operations (9,850,623) (672,695)
------------ -----------
Net income from continuing operations 2,220,246 1,940,044
Adjustments to reconcile net income from continuing operations to net
cash (used in) provided by continuing operating activities -
Depreciation and amortization 573,462 761,894
Changes in assets & liabilities-
Accounts receivables (1,287,986) (928,317)
Other receivables 230,493 (88,038)
Inventories 174,343 203,474
Prepaid expenses 32,227 (224,087)
Accounts payable 424,994 (673,822)
Accrued expenses (90,173) (307,179)
Deferred revenue 489,032 574,843
------------ -----------
Net cash provided by continuing operating activities 2,766,638 1,258,812
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements
7
<PAGE>
<TABLE>
<CAPTION>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
September 30,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (964,215) (403,586)
Increase in other assets (229,745) (98,031)
------------ ------------
Net cash used in investing activities (1,193,960) (501,617)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on note payables (185,293) (92,644)
Payments on capital lease obligations and equipment financing (386,582) (414,370)
Borrowings on capital lease obligations and equipment financing 385,246 255,255
Proceeds from exercise of stock options and
Employee Stock Purchase Plan 1,147,556 808,501
------------ ------------
Net cash provided by financing activities 960,927 556,742
Effect of exchange rate changes on cash and cash equivalents 100,695 1,749
------------ ------------
Net cash used in discontinued operations (6,441,044) (3,377,919)
------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS (3,806,744) (2,062,233)
------------ ------------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 7,213,035 5,706,657
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,406,291 $ 3,644,424
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements
8
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(CONTINUED)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
2000 1999
---------- ----------
SEPTEMBER 30,
SUPPLEMENTAL DISCLOSURE OF NON-CASH
FINANCING
Issuance of Note Receivable for the Exercise
of 275,000 Common Stock Options $ 550,000 $ -
========== ==========
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $60,355 $49,772
======= =======
Income taxes $ 6,824 $20,000
======= =======
The accompanying notes are an integral part of these consolidated condensed
financial statements.
9
<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, 2000. 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, 2000
are not necessarily indicative of the results to be expected for the full fiscal
year.
2. DISCONTINUED OPERATION
On September 30, 2000, the Company discontinued operation of its Internet
venture FreeScholarships.com. In connection with the shutdown, the Company took
at $1.9 million charge for various costs related to exiting this venture.
The accompanying consolidated financial statements contain certain accounts that
have been reclassified in each of the periods presented to reflect this
disposition by the Company. Reported revenue, costs and expenses exclude the
operating results of the Company's FreeScholarships.com business. The results of
the Company's FreeScholarships.com business are presented on a net basis in the
consolidated condensed statements of operations as loss from operations of
discontinued division. The division began web operations in February 2000.
Operating losses from the discontinued operation were $4,135,000 and $9,851,000
for the three and nine months ended September 30, 2000, respectively, and were
$473,000 and $673,000 for the three and nine months ended September 30, 1999.
Net assets from discontinued operation in the accompanying balance sheets
represent the discontinued operation of FreeScholarships.com as of September 30,
2000 and December 31, 1999. Components are as follows:
<TABLE>
<CAPTION>
September 30,
2000 December 31, 1999
--------------- -------------------
<S> <C> <C>
Cash and cash equivalents $ 836,390 $ 1,231,224
Accounts receivable, net 82,270 -
Net property and equipment 12,747 250,561
Other assets 25,000 25,000
Accounts payable (939,905) (269,505)
Other current liabilities (2,224,316) (56,109)
Long term liabilities (20,594) -
--------------- -------------------
Total $ (2,228,408) $ 1,181,171
=============== ===================
</TABLE>
3. INVENTORIES
10
<PAGE>
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,
2000 1999
-------------- -------------
<S> <C> <C>
Materials and supplies $ 56,467 $ 82,444
Finished goods 31,950 180,316
-------------- -------------
$ 88,417 $ 262,760
-------------- -------------
</TABLE>
11
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
4. NET INCOME (LOSS) PER SHARE
The Company reports earnings per share in accordance with SFAS No. 128, Earnings
per Share. Under SFAS No. 128, basic net income (loss) per common share is
computed based on net income (loss) available to common stockholders and the
weighted average number of common shares outstanding during the period. Diluted
net income (loss) 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,
---------------------- ----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares
Outstanding 10,673,222 9,776,138 10,379,078 9,743,123
Effect of dilutive securities 86,875 353,239 736,508 754,837
---------- ---------- ---------- ----------
Weighted average shares
outstanding assuming dilution 10,760,097 10,129,377 11,115,586 10,497,960
========== ========== ========== ==========
</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,
------------------ ----------------
2000 1999 2000 1999
------- --------- ------- -------
<S> <C> <C> <C> <C>
Antidilutive securities 772,844 1,074,761 233,961 539,511
======= ========= ======= =======
</TABLE>
It has come to the Company's attention that in its press release dated October
19, 2000, the release inadvertently contained the incorrect number of weighted
average common shares outstanding assuming dilution for the nine months ended
September 30, 2000. As reported the number was 10,466,000 but the correct
number should have been 11,116,000 shares. The diluted earnings per share from
continuing operations for the nine months ended September 30, 2000 were reported
to be $.21 per share but should have been $.20 per share. The diluted net loss
per share for the nine months ended September 30, 2000 was reported to be $(.73)
per share but should have been $(.69) per share. The outstanding share balances
and earnings (loss) per share for the three months ended September 30, 2000 were
correctly reported. The basic earnings (loss) per share for the nine months
ended September 30, 2000 were also correctly reported.
12
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
5. COMPREHENSIVE INCOME
The Company reports comprehensive income (loss) in accordance with SFAS No. 130,
Reporting Comprehensive Income. Under SFAS No. 130, comprehensive income (loss)
is computed as the total of net income (loss) and all other non-owner changes in
equity.
Total comprehensive income is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------------------
2000 1999 2000 1999
------------ -------- ------------ ----------
<S> <C> <C> <C> <C>
Net income (loss) $(3,520,081) $241,184 $(7,630,377) $1,267,349
Cumulative translation
adjustment 41,663 14,187 100,695 1,750
------------ -------- ------------ ----------
Comprehensive income (loss) $(3,478,418) $255,371 $(7,529,682) $1,269,099
------------ -------- ------------ ----------
</TABLE>
6. SEGMENT REPORTING FROM CONTINUING OPERATIONS
The Company's continuing operations are classified in two primary business
segments: (1) Engineering and Education Software Products Division and (2) Data
Analysis Products Division. Summarized financial information by business
segment for continuing operations is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -----------------
2000 1999 2000 1999
--------- --------- ------- --------
<S> <C> <C> <C> <C>
(IN THOUSANDS) (IN THOUSANDS)
Segment Revenues:
Engineering and Education
Software Products Division $ 3,389 $ 3,783 $11,570 $11,126
Data Analysis Products Division 4,212 3,202 11,409 8,927
--------- --------- ------- --------
Total net revenues $ 7,601 $ 6,985 $22,979 $20,053
--------- --------- ------- --------
Segment Income:
Engineering and Education
Software Products Division $ 9 $ 205 $ 420 $ 603
Data Analysis Products Division 605 509 1,800 1,338
--------- --------- ------- --------
Total net income $ 614 $ 714 $ 2,220 $ 1,941
--------- --------- ------- --------
</TABLE>
13
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
(Unaudited)
7. RECLASSIFICATION OF AMOUNTS
Certain amounts in the financial statements for the year ended December 31, 1999
have been reclassified to conform to the presentation for the three and
nine-month periods ended September 30, 2000.
8. NEW ACCOUNTING STANDARDS
The Securities and Exchange Commission released Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition in Financial Statements, on December 3, 1999. This
bulletin provides additional guidance on the accounting for revenue recognition,
including both broad conceptual discussions as well as certain industry-specific
guidance. The guidance is effective for the quarter ending December 31, 2000.
The Company does not expect the adoption of SAB No. 101 to have a material
impact on the Company's results of operations.
In March 1999, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation-An Interpretation of APB Opinion No.
25. The interpretation clarifies the application of Opinion 25 in certain
situations, as defined. The interpretation is effective July 1, 2000 but covers
certain events that occurred after December 15, 1998 but before the effective
date of the interpretation. The effects of applying this interpretation would be
recognized on a prospective basis from the effective date. Accordingly, upon
initial application of the interpretation, (a) no adjustments would be made to
the financial statements for the periods before the effective date and (b) no
expense would be recognized for any additional compensation cost measured that
is attributable to periods before the effective date. MathSoft expects that the
adoption of this interpretation would not have any effect on the accompanying
financial statements.
9. NOTE RECEIVABLE
On June 20, 2000, the Company loaned $550,000 on a full recourse basis to its
CEO for the exercise of the Company's common stock options. The note bears
interest of 8% in the first two years, and the prime rate in years thereafter,
currently 9.5%. The Company has a security interest in up to 50% of common
shares issued upon the exercise of the underlying stock options. The principal
and any accrued but unpaid interest is payable on demand at any time after June
19, 2002, or earlier upon the occurrence of certain specific events. The
Company has recorded the note receivable as a reduction in stockholder equity in
the accompanying consolidated financial statements.
14
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The accompanying consolidated financial statements contain certain accounts that
have been reclassified in each of the periods presented to reflect the
disposition by the Company of its internet venture FreeScholarships.com.
Reported revenue, costs and expenses exclude the operating results of the
Company's FreeScholarships.com business. The results of FreeScholarships.com
are presented on a net basis in the consolidated condensed statements of
operations as loss from operations of discontinued division.
Three Months Ended September 30, 2000 compared with the Three Months Ended
September 30, 1999.
RESULTS OF OPERATIONS
Total net revenues increased 8.8% from $6,985,000 for the three months ended
September 30, 1999 to $7,601,000 for the three months ended September 30, 2000.
The increase in total net revenues was primarily attributable to an increase in
both license and service revenue generated from the Data Analysis Products
Division which was offset by a decrease in revenue from the Engineering and
Education Software Products Division.
Worldwide Data Analysis Products Division net revenues increased 31.5% from
$3,202,000 in the three months ended September 30, 1999 to $4,212,000 in the
three months ended September 30, 2000, and increased as a percentage of total
revenues from 45.8% to 55.4%. The increase was primarily attributable to
service revenues, which includes maintenance, training and consulting. The
increase in service revenues was primarily attributable to the continued
expansion of the Data Analysis Products Division's domestic consulting group.
Worldwide Engineering and Education Software Products Division net revenues
decreased 10.4% from $3,783,000 for the three months ended September 30, 1999 to
$3,389,000 for the three months ended September 30, 2000. This division's
revenues decreased as a percentage of total net revenues from 54.2% to 44.6%.
The decrease in net revenue was primarily due to a fall off in the Mathcad
distribution channel and weak international sales caused by a strong dollar.
The division's sales decrease was partially offset by 71% growth in sales of
StudyWorks.
Total international net revenues attributable to sales of all Company product
lines decreased 15.0% from $1,763,000 in the three months ended September 30,
1999 to $1,498,000 in the three months ended September 30, 2000, and decreased
as a percentage of total revenues from 25.2% to 19.7%, respectively. As noted
above, the decline is primarily due to fall off in the Mathcad distribution
channel and a strong dollar.
Total cost of revenues increased 17.7%, from $1,403,000 in the three months
ended September 30, 1999, to $1,651,000 in the three months ended September 30,
2000, and increased as a percentage of total revenues from 20.1% to 21.7%,
respectively. Direct costs as a percentage of revenues increased as lower
margin software products, such as StudyWorks, and Data Analysis Products
Division software services accounted for a greater portion of overall revenues.
Sales and marketing expenses increased 6.9% from $2,966,000 in the three months
ended September 30, 1999 to $3,171,000 in the three months ended September 30,
2000, but decreased as a percentage of total revenues from 42.5% to 41.7%,
respectively. The increase is primarily attributable to the Data Analysis
Products Division, which experienced a 23.3% increase due to advertising and
personnel costs. These costs supported that division's sales growth during the
quarter.
15
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Net research and development expenses increased 26.5% from $1,162,000 in the
three months ended September 30, 1999 to $1,470,000 for the three months ended
September 30, 2000, and increased as a percentage of total revenues from 16.6%
to 19.3%, respectively. The overall increase in net research and development
expenses was primarily attributable to increased investments in the products in
the Data Analysis Products Division, and a decrease in research funding. Funded
research decreased 8.5%, from $1,242,000 in the three months ended September 30,
1999 to $1,137,000 for the three months ended September 30, 2000. The decrease
in funded research is attributable to timing differences associated with the
expiration of fulfilled contracts and the commencement of recently awarded
contracts.
General and administrative expenses decreased slightly, from $719,000 in the
three months ended September 30,1999 to $718,000 in the three months ended
September 30, 2000, and decreased as a percentage of total revenues from 10.3%
to 9.4%, respectively.
Nine Months Ended September 30, 2000 Compared with the Nine Months Ended
September 30, 1999.
RESULTS OF OPERATIONS
Total net revenues increased 14.6%, from $20,053,000 for the nine months ended
September 30, 1999 to $22,979,000 for the nine months ended September 30, 2000.
Approximately $2.5 million of the increase, or 84.8%, was attributable to the
Data Analysis Products Division. The Engineering and Education Software
Products Division contributed to 15.2% of the increase in revenue.
Worldwide Data Analysis Products Division license and service revenue increased
27.8%, from $8,927,000 in the nine months ended September 30,1999 to $11,409,000
in the nine months ended September 30, 2000, and increased as a percentage of
total net revenues from 44.5% to 49.6%. Service revenue increased $2,308,000
while S-PLUS new license revenues increased $174,000. The release of S-PLUS
2000, created a larger customer base for the division and resulted in increased
levels of consulting, training and maintenance revenue.
Worldwide Engineering and Education Software Products Division revenues
increased 4.0%, from $11,126,000 for the nine months ended September 30,1999 to
$11,570,000 for the nine months ended September 30, 2000, and decreased as a
percentage of net revenues from 55.5% to 50.4%. This increase was primarily due
to growth in new license revenue of StudyWorks, fueled by the June 2000 release
of StudyWorks IV, the latest version of that product. This offset a decline in
new Mathcad licenses and Axum 6 upgrade licenses.
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MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
Total international revenues attributable to sales of all Company product lines
increased 3.3% from $5,287,000 in the nine months ended September 30,1999 to
$5,462,000 in the nine months ended September 30, 2000, and decreased as a
percentage of total revenues from 26.4% to 23.7%, respectively.
Total cost of revenues increased 26.6% from $3,866,000 in the nine months ended
September 30, 1999 to $4,894,000 in the nine months ended September 30, 2000,
and increased as a percentage of total revenues from 19.3% to 21.3%,
respectively. Direct costs, as a percentage of revenue, increased as lower
margin software products, such as StudyWorks, and software services, such as
consulting, accounted for a greater portion of all sales.
Sales and marketing expenses increased 9.3%, from $8,576,000 in the nine months
ended September 30, 1999 to $9,375,000 the nine months ended September 30, 2000,
and decreased as a percentage of total revenues from 42.8% to 40.8%,
respectively. The Data Analysis Products Division experienced a 23.1% increase
due to advertising and personnel costs supporting that division's year to date
sales growth.
Net research and development expenses increased 14.9%, from $3,527,000 in the
first nine months ended September 30, 1999 to $4,052,000 for the nine months
ended September 30, 2000, and remained flat as a percentage of total revenues.
The overall increase in net research and development expenses was primarily
attributable to increased investments in the product lines of the Data Analysis
Products Division, and was partially offset by the increase in research funding.
Funded research increased 6.4%, from $3,431,000 in the first nine months ended
September 30, 1999 to $3,651,000 in the first nine months ended September 30,
2000. The increase in funded research is attributable to an increase in awarded
contracts and the related increase in personnel to fulfill those contracts. The
Company's Data Analysis Products Division funded research department average
headcount increased from 34 to 41 as of September 30, 1999 and September 30,
2000 respectively.
General and administrative expenses increased 16.1%, from $2,166,000 in the nine
months ended September 30, 1999 to $2,515,000 in the nine months ended September
30, 2000, and increased as a percentage of total revenues from 10.8% to 11.0%,
respectively. The Company experienced an increase in general and administrative
expenses costs due to increased compensation costs, insurance costs, facility
related costs and unrealized foreign exchange losses.
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MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, totaling $3,406,000 at September 30, 2000, decreased
$3,807,000 during the nine months ended September 30, 2000, from $7,213,000 at
December 31, 1999. The negative cash flow resulted primarily from cash used in
discontinued operations of $6,441,000, purchases of property and equipment of
$964,000, increase in other assets relating to the StudyWorksOnline website of
$230,000, and payments on notes payable of $185,000, partially offset by cash
provided by continuing operations of $2,767,000, proceeds generated by exercise
of stock options and stock purchases under the employee stock option and stock
purchase plans of $1,148,000, and the effect of exchange rates of $101,000.
Cash and cash equivalents of $3,406,000 as of September 30, 2000 represent the
Company's financial reserves.
The Company believes its financial reserves and cash flows from future
operations will be sufficient to meet its liquidity requirements for the next
twelve months. The foregoing statement is forward-looking and involves risks
and uncertainties, many of which are outside the Company's control. The
Company's actual experience may differ materially from that discussed above.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Cautionary Statements" as well as future events that have
the effect of reducing the Company's available cash balances, such as
unanticipated operating losses or capital expenditures, cash expenditures
related to possible future acquisitions, or investment in new products or
services. The Company may be presented from time to time with acquisition
opportunities, which require additional external financing, and the Company may
from time to time seek to obtain additional funds from public or private
issuances of equity or debt securities. There can be no assurance that any
financing will be available at all or on terms acceptable to the Company.
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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, including ours. 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 and Internet industries and
conditions in the financial markets could cause the market price of the common
stock to fluctuate substantially. These market fluctuations may adversely
affect the price of the Company's common stock.
RISKS ASSOCIATED WITH ACQUISITIONS. The Company has made a number of
acquisitions and will continue to review future acquisition opportunities. No
assurances can be given that acquisition candidates will continue to be
available on terms and conditions acceptable to the Company. Acquisitions
involve numerous risks, including, among other things, possible dilution to
existing shareholders, difficulties and expenses incurred in connection with the
acquisitions and the subsequent assimilation of the operations and services or
products of the acquired companies, the difficulty of operating new (albeit
related) businesses, the diversion of management's attention from other business
concerns and the potential loss of key employees of the acquired company. In
the event that the operations of an acquired business do not live up to
expectations, the Company may be required to restructure the acquired business
or 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.
LIMITED OPERATING HISTORY IN THE INTERNET MARKET. Since 1984, the Company has
focused on development of its core software products, the Mathcad and S-PLUS
product families. In 1999, the Company broadened its focus to include the
development of courses related to the use of its core
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MATHSOFT, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENTS
software product families that are offered through the World Wide Web, such as
the S-PLUS Knowledge Discovery Series. Historically, the Company's revenues
have come from licenses related to the Company's core product families.
Although the Company anticipates that the majority of its revenue will continue
to come from licenses related to its core product families, these moves toward
increased focus on the Internet have required, and will continue to require,
changes in personnel and business processes.
INTERNET-RELATED RISKS. The Company's online store and its online courses
available through the World Wide Web, such as its S-PLUS Knowledge Discovery
Series, rely on the continued growth of the Internet. The Company expects that
continued consumer concerns regarding security, reliability, privacy, ease of
use, and the changing regulatory environment will affect the development of the
Company's products and services connected with the Internet.
SECURITY. If the Company's web site security fails, it may damage the Company's
ability to sell products through its online store. In addition, the Company may
be liable if security on its web sites is breached and the Company is the victim
of credit card fraud.
RELIABILITY. The Company uses an outside service to maintain the web servers
and an online web store. If these servers fail for an extended period of time,
visitors may turn to other web sites and the brand may be damaged.
PRIVACY. Visitors to the Company's online store are asked for certain
personally identifying information, which is then used to ship products, for
marketing and data collection. No personally identifiable information is sold
or conveyed to third parties. As attitudes regarding online privacy continue to
evolve, there can be no assurance that the Company's needs for personally
identifiable information will be in line with public attitudes or government
regulations regarding privacy.
EASE OF USE. If, for reasons such as failure of the Company's web servers,
slow modem connections or poor web site design, users of the Company's products
and services including the online store and the online courses, find it
difficult to use the Company's products and services, the Company's revenues
could decrease and its brands could be damaged.
CHANGING REGULATORY ENVIRONMENT. Laws and regulation regarding the Internet are
becoming more common. Changes in laws regarding privacy, Internet access taxes
or other areas may require the Company to change the way it does business over
the Internet. For example, the Company's Online Store aims its services and
products at persons age 13 and above. Currently, the Children's Online Privacy
Protection Act, also known as COPPA, and the regulations enacted by the Federal
Trade Commission, also known as the FTC, to enforce the COPPA, require that the
Company not collect personally identifiable data from children 12 years or
younger. If this law was changed and the minimum age level increased, it could
damage the Company's ability to attract teenage users to the
StudyWorksOnline.com web site. The laws governing the use of the Internet are
generally unsettled. There is no way to predict the ways in which existing and
new laws will apply to Internet commerce, services or products.
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MATHSOFT, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENTS
RISKS ASSOCIATED WITH DIVESTITURES. The Company's product offerings presently
may be divided between two principal software 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 software product family or
the other, or product lines within a given family, to concentrate its focus
other business opportunities. If the Company were to consummate such a sale,
there can be no assurance that it would receive returns from such sale that
investors in the Company would consider attractive.
RISKS ASSOCIATED WITH DISTRIBUTION CHANNELS. The Company markets and
distributes its S-PLUS products in the U.S. through the Company's telesales and
outside sales force and internationally through third party resellers and
distributors and its own sales-force. Mathcad products are currently marketed
and distributed in the U.S. through third party resellers and distributors,
telesales, 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 23.7% and 26.4% of the Company's total revenues in
the nine months ended September 30, 2000 and 1999, respectively, 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. Maple V, a software product licensed with or
as part of Mathcad, certain copyrighted texts licensed from third party
publishers incorporated in the Company's Electronic Books, and the S programming
language, the language on which all of the S-Plus products are based, are each
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.
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MATHSOFT, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENTS
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.
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 in the New England and northwestern areas of the
United States 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.
RISKS ASSOCIATED WITH 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. 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.
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MATHSOFT, INC. AND SUBSIDIARIES
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company develops products in the United States and sells them worldwide. As
a result, the Company's financial results could be affected by factors such as
changes in foreign currency exchange rates or weak economic conditions in
foreign markets. Since the Company's sales are currently priced in U.S. dollars
and translated into local currency amounts, a strengthening of the dollar could
make the Company's products less competitive in foreign markets. The Company
maintains an operation in the United Kingdom, which incurs expenses denominated
in its local currency. However, the Company believes that any change in the
exchange rate in the United Kingdom that affects these operating expenses will
not have a material adverse effect on its results of operations.
Interest income and expense are sensitive to changes in the general level of
U.S. interest rates, particularly since the company's investments are in
short-term instruments. Based on the nature and current levels of the Company's
investments and debt, however, the Company believes that there is no material
market risk or exposure.
The Company's general investing policy is to limit the risk of principal loss
and ensure the safety of invested funds by limiting credit and market risk. The
Company currently places its investments in highly liquid money market accounts
and short-term investments. All highly liquid investments with original
maturities of three months or less are considered to be cash equivalents.
23
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MATHSOFT, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated September 18, 2000
announcing the imminent closure of the FreeScholarships.com web site.
The Company filed a Current Report on Form 8-K dated October 19, 2000 reporting
fiscal third quarter and year-to-date results.
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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 14, 2000 By /s/ Charles J. Digate
----------------------------
Charles J. Digate
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Dated: November 14, 2000 By /s/ Dermot P. O'Grady
----------------------------
Dermot P. O'Grady
Vice President Finance and Administration,
Chief Financial Officer, Treasurer, and Clerk
(Principal Financial and Accounting Officer)
25
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