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 MARCH 31, 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 MAY 10, 2000 THERE WERE 10,377,578 SHARES OF COMMON STOCK, $.01 PAR VALUE
PER SHARE, OUTSTANDING.
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
TABLE OF CONTENTS
PAGE
----
PART I. FINANCIAL INFORMATION:
Item 1. Consolidated Condensed Financial Statements
- Consolidated Condensed Balance Sheets as of
March 31, 2000 and December 31, 1999 3
- Consolidated Condensed Statements of Income for the
Three Months Ended March 31, 2000 and 1999 5
- Consolidated Condensed Statements of Cash Flows for the
Three Months Ended March 31, 2000 and 1999 6
- Notes to Consolidated Condensed Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Cautionary Statements 14
Item 3. Quantitative and Qualitative Disclosures about Market
Risk 18
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
2
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
ASSETS
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
----------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,368,520 $ 8,444,259
Accounts receivables, less reserves of
approximately $983,000 at March 31, 2000
and $1,134,000 at December 31, 1999 6,033,712 4,743,130
Other receivables 1,789,701 1,420,154
Inventories 167,949 262,760
Prepaid expenses 793,320 382,291
----------- --------------
Total current assets 15,153,202 15,252,594
----------- --------------
PROPERTY AND EQUIPMENT, AT COST:
Computer equipment and software 6,083,928 5,529,795
Property and equipment under capital lease 918,042 918,042
Furniture and fixtures 1,174,139 1,105,128
Leasehold improvements 644,473 626,534
----------- --------------
8,820,582 8,179,499
Less - Accumulated depreciation and amortization 7,047,793 6,865,495
----------- --------------
1,772,789 1,314,004
OTHER ASSETS 399,105 425,922
----------- --------------
$17,325,096 $ 16,992,520
=========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements.
3
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------- --------------
CURRENT LIABILITIES:
<S> <C> <C>
Current portion of capital lease obligations
and equipment financing $ 471,277 $ 383,537
Accounts payable 3,649,359 2,362,150
Accrued expenses and other current liabilities 2,476,548 2,742,141
Deferred revenue 2,890,454 2,722,052
------------- --------------
Total current liabilities 9,487,638 8,209,880
------------- --------------
Capital Lease Obligations and Equipment Financing,
Less current portion 139,874 148,442
------------- --------------
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 - 10,177,178 shares
at March 31, 2000 and 9,931,990 shares at
December 31, 1999 101,772 99,320
Additional paid-in capital 31,494,909 30,834,687
Accumulated deficit (23,830,818) (22,213,919)
Cumulative translation adjustment (68,279) (85,890)
Total stockholders' equity 7,697,584 8,634,198
------------- --------------
$ 17,325,096 $ 16,992,520
============= ==============
</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 INCOME
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
---------------------------
2000 1999
------------ -------------
REVENUES:
<S> <C> <C>
Software licenses $ 5,957,106 $ 5,276,947
Services and other 1,864,308 1,262,427
------------ -------------
Total net revenues 7,821,414 6,539,374
------------ -------------
COST OF REVENUES:
Software licenses 1,036,425 805,352
Services and other 1,326,776 389,441
------------ -------------
Total cost of revenues 2,363,201 1,194,793
------------ -------------
Gross profit 5,458,213 5,344,581
------------ -------------
OPERATING EXPENSES:
Sales and marketing 4,453,024 2,815,576
Research and development-Gross 2,936,168 2,226,529
Less Funded research (1,305,424) (1,038,954)
------------ -------------
Research and development, net 1,630,744 1,187,575
General and administrative 1,033,425 735,379
------------ -------------
Total operating expenses 7,117,193 4,738,530
------------ -------------
INCOME (LOSS) FROM OPERATIONS (1,658,980) 606,051
Interest Income, net 57,932 41,440
------------ -------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES (1,601,048) 647,491
Provision for Income Taxes 15,851 10,080
------------ -------------
NET INCOME (LOSS) $(1,616,899) $ 637,411
============ =============
BASIC NET INCOME (LOSS) PER SHARE $ (.16) $ 0.07
============ =============
DILUTED NET INCOME (LOSS) PER SHARE $ (.16) $ 0.06
============ =============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 10,065,767 9,687,055
============ =============
WEIGHTED AVERAGE SHARES OUTSTANDING ASSUMING DILUTION 10,065,767 10,869,334
============ =============
</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 CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
----------------------------
2000 1999
------------ --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $(1,616,899) $ 637,411
Adjustments to reconcile net income (loss) to net
cash used in operating activities -
Depreciation and amortization 208,141 219,252
Changes in assets & liabilities-
Accounts receivables (1,290,582) (558,360)
Other receivables (369,547) 15,839
Inventories 94,811 119,735
Prepaid expenses (231,924) (201,273)
Accounts payable 1,287,209 (495,144)
Accrued expenses (265,593) (446,027)
Deferred revenue 168,402 232,619
------------ --------------
Net cash used in operating activities (2,015,982) (475,948)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (641,083) (88,228)
Decrease (Increase) in other assets 973 8,568
------------ --------------
Net cash used in investing activities (640,110) (79,660)
------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations and equipment financing (204,428) (142,300)
Borrowings on capital lease obligations and equipment financing 104,495 51,676
Proceeds from exercise of stock options and
Employee Stock Purchase Plan 662,674 728,312
------------ --------------
Net cash provided by financing activities 562,741 637,688
Effect of exchange rate changes on cash and cash equivalents 17,612 (1,099)
------------ --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS (2,075,739) 80,981
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,444,259 5,706,657
------------ --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,368,520 $ 5,787,638
============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated condensed
financial statements
6
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(CONTINUED)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------
2000 1999
------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest $20,347 $16,668
======= =======
Income taxes $ 6,824 $16,368
======= =======
The accompanying notes are an integral part of these consolidated condensed
financial statements.
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 fiscal year ended December 31,
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 period
ended March 31, 2000 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, 1999
have been reclassified to conform to the presentation for the quarter ended
March 31, 2000.
3. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
<S> <C> <C>
Materials and supplies $ 53,321 $ 82,444
Finished goods 114,628 180,316
-------- --------
$167,949 $262,760
-------- --------
</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:
THREE MONTHS ENDED
MARCH 31,
----------------------
2000 1999
---------- ----------
Weighted average shares
outstanding 10,065,767 9,687,055
Effect of dilutive securities -- 1,182,279
---------- ----------
Weighted average shares
outstanding assuming dilution 10,065,767 10,869,334
========== ==========
The following securities were not included in computing diluted earnings per
share because their effect would be antidilutive:
THREE MONTHS ENDED
MARCH 31,
==================
2000 1999
========= =======
Antidilutive securities 1,654,292 156,036
--------- -------
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
MARCH 31,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Net income (loss) $(1,616,899) $ 637,411
Cumulative translation adjustment 17,612 (1,099)
------------ ------------
Comprehensive income $ 1,599,287 $ 636,312
------------ ------------
</TABLE>
5. SEGMENT REPORTING
The Company's continuing operations are classified in three primary business
segments: (1) Engineering and Education Software Products Division, (2) Data
Analysis Software Products Division and (3) FreeScholarships.com. Summarized
financial information by business segment for continuing operations is as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------------------
(in thousands)
<S> <C> <C>
Segment revenues:
Engineering and Education Software Products $ 4,249 $ 3,704
Data Analysis Software Products 3,537 2,835
FreeScholarsips.com 35 --
--------- --------
Total net revenues $ 7,821 $ 6,539
--------- --------
Segment income (loss):
Engineering and Education Software Products $ 305 $ 169
Data Analysis Software Products 634 468
FreeScholarships.com (2,556) --
--------- --------
Total net income (loss) $( 1,617) $ 637
--------- --------
</TABLE>
10
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
7. NEW ACCOUNTING STANDARDS
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 on July 1, 2000 but
covers certain events having occurred after December 15, 1998. To the extent
that events covered by this interpretation occur during the period 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
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.
11
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 Compared with the Three Months Ended March 31,
1999.
RESULTS OF OPERATIONS
Total net revenues increased 19.6% from $6,539,000 for the three months ended
March 31, 1999 to $7,821,000 for the three months ended March 31, 2000. The
increase in total net revenues was primarily attributable to an increase in both
license and service revenue generated from the Data Analysis Software Products
Division and to a lesser extent, to an increase in revenue from the Engineering
and Education Software Products Division. FreeScholarships.com generated its
first revenues during the three months ended March 31, 2000, totaling $35,000,
from advertising on its website. The FreeScholarsips.com website commenced
operations in February 2000.
Worldwide Data Analysis Software Products Division license and service revenue
increased 24.8% from $2,835,000 for the three months ended March 31, 1999 to
$3,537,000 for the three months ended March 31, 2000, and increased as a
percentage of total net revenues from 43.4% to 45.2%. The increase in Data
Analysis Software Products Division revenue was primarily attributable to an
increase in service revenues, which include maintenance, training and
consulting. The increase in both service and license revenues was directly
attributable to the June 1999 release of S-Plus 2000.
Worldwide Engineering and Education Software Products Division revenues
increased 14.7% from $3,704,000 for the three months ended March 31, 1999 to
$4,249,000 for the three months ended March 31, 2000, and decreased as a
percentage of total net revenues from 56.6% to 54.3%. The increase in
Engineering and Education Software Products Division revenues is due to
increased sales of the Study Works product line and Mathcad product suites.
Total international revenues attributable to sales of all Company product lines
increased 24.0% from $1,875,000 for the three months ended March 31, 1999 to
$2,325,000 for the three months ended March 31, 2000, and increased as a
percentage of total revenues from 28.7% to 29.7%.
Total cost of revenues increased 97.7% from $1,195,000 for the three months
ended March 31, 1999 to $2,363,000 for the three months ended March 31, 2000,
and increased as a percentage of total revenues from 18.3% to 30.2%. The
increase in total cost of revenues as a percentage of total revenues was
primarily attributable to web hosting and content costs, internet connection
charges, equipment depreciation, compensation, and scholarship awards, all
associated with FreeScholarships.com.
Sales and marketing expenses increased 58.1% from $2,816,000 for the three
months ended March 31, 1999 to $4,453,000 for the three months ended March 31,
2000, and increased as a percentage of total revenues from 43.1% to 56.9%. The
increase in overall sales and marketing expenses was primarily attributable to
an increase in variable marketing expenditures associated with the launch of the
FreeScholarships.com website.
Net research and development expenses increased from $1,188,000 for the three
months ended March 31, 1999 to $1,631,000 for the three months ended March 31,
2000, and increased as a percentage of total revenues from 18.2% to 20.8%. The
overall increase in net research and development expenses was primarily
attributable to FreeScholarships.com and increased investments in the Mathcad
and S-Plus product lines, and was partially offset by the increase in research
funding. Funded research increased 25.6% from $1,039,000 in the first three
months ended March 31, 1999 to $1,305,000.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
for the three months ended March 31, 2000. The increase in funded research is
attributable to an increase in awarded contracts and the related increase in
personnel to fulfill those contracts.
General and administrative expenses increased 40.5% from $735,000 in the three
months ended March 31, 1999 to $1,033,000 in the three months ended March 31,
2000, and increased as a percentage of total revenues from 11.2% to 13.2%. The
increase in overall general and administrative expenses was due primarily to
increased temporary staffing and consulting fees associated with
FreeScholarships.com, increased compensation and temporary staffing costs
associated with both of the software products divisions, increased insurance
costs, and increased foreign currency transaction losses.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents, totaling $6,369,000 at March 31, 2000, decreased
$2,076,000 during the three months ended March 31, 2000, from $8,444,000 at
December 31, 1999. The negative cash flow resulted primarily from cash used in
operations of $2,016,000, purchases of property and equipment of $641,000 and
payments of capital lease obligations and equipment financing of $204,000,
partially offset by proceeds generated by exercise of stock options and stock
purchases under the employee stock option and stock purchase plans of $663,000,
and borrowings of capital lease obligations and equipment financing of $104,000.
The Company's financial reserves are represented by cash and cash equivalents
of $6,369,000 as of March 31, 2000. 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 based on
certain profitability covenants. Borrowings are secured by a first security
interest on substantially all of the Company's assets and bear interest at the
bank's prime rate 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
that expires on June 30, 2000. As of March 31, 2000, the Company was in
compliance or had received a waiver for all covenants and could borrow up to
$2,000,000. There were no amounts outstanding under this line at March 31,
2000.
Based on its present plans for the near term investment in FreeScholarships.com,
the Company believes its financial reserves and cash flows from future
operations may not be sufficient to meet its liquidity requirements for the
next twelve months. Therefore, the Company anticipates attempting to conclude
one or more financing transactions, which could include sales of selected
assets, bank borrowings or sales of stock in either or both of the Company or
one or more of its operating units. However, if such sources of financing are
not available for any reason the Company has the ability to reduce its planned
investment in FreeScholarships.com 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 such
financing will be available at all or on terms acceptable to the Company.
13
<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, the activities of
competitors, and the anticipated losses incurred by FreeScholarships.com.
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 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 FreeScholarships.com, an internet venture that launched its
associated website in February, 2000, and courses related to the use of its core
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
14
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENTS
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.
THE COMPANY MAY HAVE TO FIND OUTSIDE PARTNERS OR SOURCES OF FUNDING FOR
FREESCHOLARSHIPS.COM. The Company may require partners or other sources of
outside funding to continue the funding of FreeScholarships.com. Although the
Company is currently reviewing various funding strategies, the Company has no
agreements with external sources in place to assist the Company in funding
FreeScholarships.com beyond September 30, 2000. There can be no assurance that
any partnering or funding opportunities will be available on terms and
conditions acceptable to the Company.
INTERNET-RELATED RISKS. The Company's online store, its online courses available
through the World Wide Web, such as its S-PLUS Knowledge Discovery Series, and
its wholly-owned subsidiary, FreeScholarships.com, 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 or attract and retain users to
FreeScholarships.com. 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
FreeScholarships.com web servers. If these servers fail for an extended period
of time, registered users of and visitors to FreeScholarships.com may turn to
other web sites and the FreeScholarships brand may be damaged.
PRIVACY. Visitors to the Company's online store and the FreeScholarships.com
web site are asked for certain personally identifying information, which is then
used to ship products, award scholarships and 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, the online courses or
FreeScholarships.com, 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, FreeScholarships.com 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
FreeScholarships.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.
15
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENTS
CHANGES IN LOCAL, STATE OR FEDERAL LAW RELATED TO THE OPERATION OF A SWEEPSTAKES
COULD ADVERSELY AFFECT THE COMPANY'S ABILITY TO CONTINUE THE CURRENT
FREESCHOLARSHIPS.COM BUSINESS MODEL. FreeScholarships.com currently awards its
scholarships based on a widely-accepted sweepstakes model. If one or more
localities or states decide to change its laws related to sweepstakes or online
sweepstakes, or if federal laws, including tax laws, are enacted that regulate
sweepstakes or that change the tax laws under which FreeScholarships.com is able
to award scholarships, FreeScholarships.com may have to change its business
model. There can be no assurance that any such change in the FreeScholarships
business model required by changes in local, state or federal laws would not
damage FreeScholarships.com
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
addition, the Company has a new investment in FreeScholarships.com. 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 salesforce. 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 29.7% and 28.7% of the Company's total revenues in
the three months ended March 31, 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 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
16
<PAGE>
MATHSOFT, INC. AND SUBSIDIARIES
CAUTIONARY STATEMENTS
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 including the Company's new
internet venture, FreeScholarships.com. 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.
17
<PAGE>
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
operates a subsidiary in the United Kingdom which incurs expenses denominated in
its local currency. However, the Company believes that 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 and the Company's available line of credit requires
interest payments calculated at variable rates. 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.
18
<PAGE>
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 January 10,
2000 reporting results for the three-months ended December 31,
1999.
The Company filed a Current Report on Form 8-K dated April 12,
2000 reporting fiscal first quarter results.
19
<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: May 12, 2000 By /s/ Charles J. Digate
--------------------------------------
Charles J. Digate
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Dated: May 12, 2000 By /s/ Dermot P. O'Grady
---------------------------
Dermot P. O'Grady
Corporate Controller
(Principal Financial and Accounting Officer)
20
<PAGE>
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