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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
____________
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
- -- ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 0-020992
MATHSOFT, INC.
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(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2842217
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(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification)
101 MAIN STREET, CAMBRIDGE, MASSACHUSETTS 02142
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (617) 577-1017
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
----------------------------
(Title of class)
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 the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $52,059,025 as of March 23, 2000 (computed by
reference to the closing price of such stock on the Nasdaq SmallCap Market).
The number of shares of common stock, $.01 par value, outstanding as of March
23, 2000 was 10,167,678.
Documents incorporated by reference in Part III of this 10-K: Proxy
Statement for Registrant's 2000 Annual Meeting of Shareholders.
PART I
ITEM 1. BUSINESS.
General
MathSoft, Inc. ("MathSoft" or the "Company") develops, markets and supports
software productivity tools and services for the technical calculation and data
analysis markets comprised of technical professionals, researchers, students and
educators. In addition, the Company through its recently incorporated
wholly-owned subsidiary FreeScholarships.com, provides information and
assistance to a broad market of parents and students concerned about funding the
costs of education.
Mathcad , the Company's principal technical calculation product, was first
released in fiscal 1987 and can be used by desktop and laptop computer users to
perform calculations from the simple to the elaborate, and then document the
results. Mathcad offers technical professionals, educators, and students an
interactive, intuitive, easy-to-modify alternative to their traditional
calculation methods such as pencil and paper, scratchpads and calculators.
The market for technical calculation software includes technical professionals,
such as electrical, mechanical and civil engineers, scientists, mathematicians,
researchers, technicians and analysts, as well as educators and students who
regularly are required to perform technical calculations. These users often
refer to a wide range of published materials containing formulas or data, which
can be used in solving technical problems.
In 1992, the Company expanded its technical calculation software product line by
introducing Electronic Books as add-on products to Mathcad. These books deliver
extensive off-the-shelf technical information, such as formulas and data, which
is critical to technical problem solving. Through the use of MathSoft's
proprietary "live document interface (TM)," these books provide the Mathcad user
with on-screen access to interactive technical information. This enables a
Mathcad user to either perform calculations in the book itself or to transfer
formulas, data and results to Mathcad for instant calculation and analysis. The
Company delivers electronic versions of industry leading reference works from
nationally and internationally recognized publishers, in addition to internally
authored works. In addition, the Company licenses its Mathcad and Electronic
Book authoring technology to third party publishers for use in creating
interactive Electronic Books which are marketed and distributed by such third
party publishers as stand-alone products.
In May 1993, the Company opened an international office located in the United
Kingdom to broaden distribution of its products. For the twelve months ended
December 31, 1999, international sales of all technical calculation and data
analysis software products and services represented approximately 27% of total
revenues (refer to footnotes 6 and 7 in the accompanying financial statements).
In June 1993, the Company introduced a new product line through its wholly owned
subsidiary, Statistical Sciences, Inc., now referred to as MathSoft's Data
Analysis Products Division ("DAPD"). DAPD develops and markets advanced data
analysis software products and services based on "S," a computer language
designed for statistics applications. DAPD's principal product is S-PLUS , an
interactive computing environment that provides both a full-featured graphical
data analysis system and an object-oriented language. The Company acquired this
business on June 30, 1993 through the acquisition of substantially all of the
assets and business of Statistical Sciences, Inc., a Washington corporation.
For the twelve-months ended December 31, 1999, worldwide sales of data analysis
products and services represented approximately 43% of total revenues.
The market for data analysis software consists principally of professional
scientists, engineers, statisticians and business analysts as well as educators
and students. Data analysis products are used in such fields as biomedical
technology, quantitative financial analysis and risk assessment, environmental
science and engineering, industrial and market research, and process control.
2
In November 1995, the Company acquired TriMetrix, Inc. ("TriMetrix"). MathSoft
complemented its technical calculation product line with the addition of Axum(R)
a Windows-based technical charting and data analysis product acquired with
TriMetrix, which transforms, manipulates and sorts data sets to perform both
simple and advanced analysis. Axum has been redesigned to link seamlessly with
Mathcad and the Axum technology is now a key component of S-PLUS for Windows.
In June 1996, the Company released StudyWorks!(TM) for Math and StudyWorks! for
Science targeted specifically toward high school and non-technical college
students and educators. Both StudyWorks products offer an interactive learning
environment and assist students in both mastering math and science concepts and
creating professional looking homework and lab reports in addition to allowing
both educators and students the ability to collaborate on projects. In
September 1996, the Company announced the release of StudyWorks! Schools, an
instructional edition of the StudyWorks for Math and StudyWorks for Science
software, which offers teachers a tools-based, interactive teaching and learning
environment.
In November 1996, the Company acquired acroScience Corporation ("acroScience").
MathSoft integrated the visual modeling and programming technology acquired from
acroScience into Mathcad.
In April 1997, the Company expanded its data analysis product line by
introducing MathSoft StatServer(TM), a warehouse-independent platform for
distributing statistical analysis and graphics to business professionals and
analysts over corporate Intranets. StatServer uses the S-PLUS technology to
create deployable intelligent analytics for an organization and integrates with
existing data storage and desktop applications.
In December 1997, the Company changed its fiscal year end from June 30 to
December 31. Accordingly, the Company began a new twelve-month fiscal year on
January 1, 1998. The six-month period resulting from this change, July 1, 1997
through December 31, 1997, is referred to as the "Transition Period."
In June 1999, the Company incorporated FreeScholarships.com as a wholly-owned
subsidiary. This internet company provides information and assistance to a broad
market of parents and students concerned about funding the costs of education.
Freescholarships.com awards money to pay for tuition costs through online daily
sweepstakes that United States residents aged 13 or older can win.
The Company's goals are threefold: 1) to continue to broaden the appeal of its
software products through technical innovation and deep integration with the
world wide web; 2) to aggressively build a services business both on-line and
off-line, that leverages the Companys' software product franchises; 3) to
reinvent the company through aggressive investment in its new educationally
focused internet venture, FreeScholarships.com. The Company was incorporated in
Massachusetts in October 1984 under the name Engineering Specific Products Corp.
and changed its name to MathSoft, Inc. in January 1986. The Company's principal
executive offices are located at 101 Main Street, Cambridge, Massachusetts
02142, and its telephone number is (617) 577-1017.
3
Products
ENGINEERING AND EDUCATION SOFTWARE PRODUCTS
MathSoft publishes a range of engineering and education software products that
allow users to perform calculations and create publication-quality documents on
personal computers. Its principal product in this category, Mathcad, is to
technical professionals what spreadsheets have proven to be for business
professionals. Mathcad can be used by desktop and laptop computer users to
perform technical calculations, from the simple to the elaborate. An innovative
feature of Mathcad is its ability to allow the user to electronically access and
manipulate formulas and data available in the Company's Electronic Books and
Extension Packs. Electronic Books provide on-screen libraries of
industry-leading reference works, user guides, solution templates, and
educational materials while Extension Packs provide additional functionality for
advanced users. StudyWorks, the most recent addition to the Mathcad product
line, was designed as an integrated learning tool combining math, text, graphs
and graphics for the high school and college market. StudyWorks helps students
master math and science concepts, get better grades and create
professional-looking homework and lab reports.
Mathcad
Mathcad's broad appeal lies in its use of MathSoft's proprietary "live document
interface" technology. This permits users to calculate on a computer in much the
same way that they would on a scratchpad where equations can be written
anywhere, using real math notation, and erased, changed and moved. A scratchpad
can show a variety of expressions such as formulas, words, graphs, data,
equations and pictures. Mathcad works in a similar free-form manner by
literally turning a computer screen into a live worksheet, providing an
intuitive interface to perform a wide range of numeric or symbolic calculations,
with a distinct advantage over a real scratchpad - Mathcad calculates.
When using Mathcad, the computer screen initially appears blank, like a
scratchpad. Using the keyboard and the mouse, the user begins by placing the
cursor anywhere on the screen and then starts typing. To create a formula, the
user types keystrokes such as +, /, or * or uses a mouse to click on a symbol
palette. As the user types, Mathcad automatically formats the formulas in
standard mathematical notation and instantly calculates the results. To create a
graph, the user selects the graph symbol from the palette and defines the
parameters of the graph. As with an electronic spreadsheet, Mathcad instantly
updates results as changes to variables or formulas are made. Text may be added
anywhere. Multi-page presentation quality documents can be printed, complete
with text, graphics, tables and equations. Mathcad's free-form interactive
environment makes it ideal for formulating ideas, setting up problems and
evolving solutions and sharing both the process and the results through printed
documents, e-mail and the World Wide Web.
Mathcad is used as a calculator for simple formulas, as a more elaborate solver
for equations formally linked within a "live document," as a technical report
generator, as a live charting facility, and as a mathematical teaching
environment. Mathcad also provides an interface to online technical reference
works. Mathcad performs numeric and symbolic calculations in the real and
complex domain, solves systems of linear and non-linear equations, and performs
iterative calculations.
Add-on Products
An extension of the Mathcad product line, Electronic Books and Extension Packs
deliver information and solutions in an interactive form to Mathcad users. They
provide the user with on-screen libraries of technical data combined with
Mathcad's capacity to utilize and manipulate the raw data through its "live
document interface." This enables the user to search the book for material, use
hyperlinks to jump to related sections within the work, and calculate problems
and manipulate data using formulas and data contained in the work. A key feature
of MathSoft's Electronic Books is that the material is live and interactive,
enabling a Mathcad user to apply the formulas or data from the book either by
performing calculations in the book itself or by transferring the formulas or
data, or results, to Mathcad for calculation and analysis. Without the
Electronic Book, the user must manually key in entire formulas from published
sources before using the software to solve equations. The book may contain
reference information (e.g., the properties of various materials and standard
formulas), solutions for standard engineering problems, tutorials on selected
topics, or educational courseware. Additionally, Mathcad's "live document
interface" supports the inclusion of sound and video components.
4
In addition to internally authored works, the Company delivers electronic
versions of industry-leading reference works from nationally and internationally
recognized publishers. The agreements by which the Company licenses content for
Electronic Books from publishers typically provide for a non-exclusive license
at an agreed-upon royalty rate, and continue for a term of five to seven years
unless extended by mutual agreement.
The Company also licenses its Mathcad and Electronic Book authoring technology
to third party publishers for use in creating interactive Electronic Books which
are marketed and distributed by such third party publishers as stand-alone
products. Users are not required to use Mathcad to access these interactive
Electronic Books.
Extension Packs provide additional functionality to Mathcad in the areas of
signal processing, wavelets, image processing, and advanced optimization. Once
installed, the functions are seamlessly integrated with the Mathcad function set
allowing the user to see results immediately and explore the effects of changing
parameters in mathematical routines.
Axum
In November 1995, the Company acquired TriMetrix, Inc., a software company
located in Seattle, Washington and the developer of Axum software. Axum is a
Windows-based advanced technical graphing and data analysis software that offers
scientists and engineers in the technical professional market, including Mathcad
users, the advanced charting tools needed for creating compelling, highly visual
presentations and publication-quality documents. Users can transform,
manipulate and sort data sets to perform both simple and advanced analysis.
Axum has also been redesigned to link seamlessly with Mathcad.
StudyWorks
StudyWorks!(TM) for Math and StudyWorks!(TM) for Science, productivity software
for high school and college students and their teachers, was designed as a rich
learning environment that helps students understand math and science problems,
complete and check a variety of solutions, and print out great looking lab
reports and homework papers. Each product is a three-in-one combination of an
application, rich interactive content and two-way internet access. StudyWorks
is based on a powerful graphical calculation and document preparation tool and
includes rich multimedia encyclopedias of math and science formulas and key
concepts in algebra, geometry, earth science, chemistry, pre-calculus, physics,
calculus and statistics. Users also receive built-in links to the Company's
StudyWorks home page, which allows high school students, college students
and teachers to participate in virtual study groups and discussion forums,
pick up Homework Hints and link to related sites on the World Wide Web.
5
DATA ANALYSIS SOFTWARE PRODUCTS
S-PLUS
On June 30, 1993, the Company acquired Statistical Sciences, Inc., a software
company located in Seattle, Washington. The Company's principal product in this
category, S-PLUS, is an advanced, exploratory data analysis and statistical data
mining solution for technical and business professionals who need sophisticated
analysis and visualization capabilities. Based on the object-oriented "S"
programming language licensed from Lucent Technologies Inc., S-PLUS enables
users to perform exploratory data analysis, graphics, statistics, visualization
and mathematical computing in the Windows and UNIX environments. The primary
advantage of S-PLUS lies within the "S" Language. The "S" language is the only
modern object-oriented language created specifically for data visualization and
exploration, statistical modeling and programming with data. This interactive
language environment gives users immediate feedback at every stage of their
analysis.
Services
The Company believes that providing a high level of support to its customers is
a critical requirement for customer satisfaction and the long-term success of
the Company. The Company believes it has established a strong history of
responsiveness to customer requirements. The Company delivers this support for
its data analysis products through its maintenance, consulting and training
services.
The Company provides product updates and enhancements and customer support
services under an annual maintenance agreement offered to its customers.
Maintenance fees are based on a percentage of the current list price of the
licensed software products. The data analysis products' consulting and training
organization provides fee-based services, including implementation assistance,
project management, application extension or customization, integration with
existing customer applications and similar services to the Company's customers.
The Company offers a comprehensive series of fee-based training courses to its
customers. Courses can be taken at the Company's Seattle location, at the
customer's site, at other prearranged sites for larger customer groups, or
online via the internet.
Modules
To complement S-PLUS, the Company offers add-on modules that work with S-PLUS
and provide additional "S" language functions for specialized data analysis
purposes.
StatServer
In April 1997, the Company expanded its data analysis product line by
introducing MathSoft StatServer(TM). StatServer enables corporations to
leverage existing client/server and internet/intranet technologies and deploy
statistical expertise throughout an organization. StatServer is data warehouse-
independent and integrates seamlessly with all standard database and data
warehouse formats. The robust database support provides the tools for
advanced analysis and data visualization of the most popular relational
databases. With StatServer, basic statistical models and data visualization
capabilities are built and stored in a central server for access by non-
technical users, who can apply these analytical techniques from a single and
familiar client to understand or interpret key data sets. Using StatServer,
professionals in diverse fields such as finance, biomedicine and manufacturing
can use familiar tools such as Excel(R), Netscape(R) or Powerbuilder(R) to
access corporate data resources and perform data analysis without becoming
experts in statistics or users of statistical tools. StatServer moves
beyond the capabilities of report writers, spreadsheet applications and stand-
alone data analysis software, representing a significant advancement in
decision support and data mining technology.
6
FREESCHOLARSHIPS.COM PRODUCTS
FreeScholarships.com ("FSC") is an early stage internet company whose mission is
to assist families in meeting the rising costs of education. FSC achieves this
objective primarily by awarding scholarships to pay the costs of tuition through
online drawings. It also provides relevant information to students and families
on educational financial planning and school selection.
Visitors to the site can freely access the site's rich and varied content
without registering. Those who register can participate in daily, monthly and
quarterly drawings for scholarship awards. These awards are independent of need
or merit and are selected via a computer-generated random drawing. Registered
members can increase their chances of winning these drawings by participating in
the site's various activities or by surfing the site's content.
The Company anticipates that it will generate revenue through the sale of
advertising inventory, site sponsorships, email list rentals and a variety of
commerce-oriented activities.
In order to serve users more effectively and to extend the FreeScholarships.com
brand to new media properties, FSC has entered into strategic relationships with
business partners who offer content, technology, and distribution capabilities.
MARKETING AND SALES
Engineering and Education Software Products
The Company's market for engineering and education software products consists of
two significant groups of end users: technical professionals and academia,
including educators and students. End users within the technical professionals
group span numerous fields and include electrical, mechanical and civil
engineers, scientists, mathematicians, researchers, technicians and analysts.
The education market consists of secondary, undergraduate and graduate educators
and students in many technical disciplines. The Company's products are currently
used as tools for diverse purposes, from back-of-the-envelope calculations to
bridge design and genetic engineering.
MathSoft reaches domestic customers of Mathcad primarily through a network of
educational and commercial third party resellers and distributors. To
complement this network, the Company has a domestic telesales organization
focused on sales to the registered installed base as well as on lead generation,
prospect qualification and sales of site license agreements and network
licenses. In addition, Mathcad upgrades are primarily marketed to the Company's
registered installed base via direct mail. For the twelve months ended December
31, 1999, domestic sales through distributor and reseller channels accounted for
approximately 54% of total domestic sales of the Company's engineering and
education software products, with the balance of such sales made through either
installed base direct mail, the Company's telesales operations, electronic mail,
or the Company's webstore. One distributor, Ingram Micro, accounted for 13% of
net revenues, for each of the years ended December 31, 1999 and 1998. Ingram
Micro also accounted for 12% and 14% of net revenues in the six month period
ended December 31, 1997 and the year ended June 30, 1997, respectively. Ingram
Micro is a distributor of our products primarily to various resellers and retail
accounts, none of which comprised more than 10% of the Company's total revenues
during the periods mentioned.
Internationally, all engineering and education software products are marketed
primarily through a network of resellers and distributors. Mathcad upgrades are
marketed through distributors as well as to the registered installed base via
direct mail. For the twelve months ended December 31, 1999, international sales
through resellers and distributors accounted for substantially all international
sales of technical calculation software products.
Data Analysis Software Products
The Company's market for data analysis products consists principally of
professional and academic scientists, engineers and statisticians. The product
is used in such fields as biomedical technology, quantitative financial analysis
and risk assessment, environmental science and engineering, industrial and
market research, and process control.
7
The Company reaches domestic customers of its data analysis products both
through its domestic telesales organization and an outside sales team. Leads
are generated from advertising, public relations, seminars and tradeshows and
then pursued by the telesales organization.
Internationally, the Company reaches customers of its data analysis products
primarily through a network of resellers and distributors. In the United
Kingdom, the Company sells directly to end-users.
FreeScholarships.com
Freescholarships.com marketing and sales activities will initially focus on the
launching and marketing of the FSC's website. The marketing goals of FSC are to
attract and retain users of its online services and properties. To support user
acquisition, FSC markets its products and services through a broad array of
programs and strategies, including daily sweepstakes, broadcast advertising
campaigns, direct response e-mail, co-marketing agreements, and the Web.
CUSTOMER TECHNICAL SUPPORT
Engineering and Education Software Products
MathSoft provides technical support to its domestic customers by phone, fax,
mail and automated technical support via a telephone response system and the
Company's home page on the World Wide Web. A technical support staff of
engineers located in Cambridge provides solutions to installation and basic
usage problems as well as assistance on advanced technical and mathematical
issues. The Company provides this support free of charge to individual
end-users and offers a Premium Support Plan to its corporate customers. The
Company currently provides technical support for its Mathcad, StudyWorks and
Axum product lines and offers a variety of product add-ons.
International customers who purchase product from distributors receive first
line technical support from their respective local distributor. A technical
support staff of engineers, located in the Company's United Kingdom sales and
marketing office, is available to support the distributors.
Data Analysis Software Products
Technical support for the S-PLUS product line is provided to domestic customers
by a staff of engineers located in Seattle. Support is only available to
customers who purchase an annual maintenance and technical support plan.
International customers who purchase products from distributors receive first
line technical support from their respective local distributor. A technical
support staff of engineers, located in the Company's United Kingdom sales and
marketing office, is available to support the distributors as well as the
Company's direct customers in the United Kingdom.
FreeScholarships.com
FSC provides email and phone support to its registered and prospective members
through its own customer service organization.
MANUFACTURING AND DISTRIBUTION
The Company utilizes several third party vendors to manufacture and distribute
its products. This permits the Company to manage peak volumes customary in the
software industry and to avoid having to maintain high fixed costs while
experiencing daily fluctuations in order and customer contacts.
The Company's practice is to ship its products promptly upon receipt of orders
from its customers and, as a result, product backlog is not significant.
8
Engineering and Education Software Products
The Company subcontracts with a single independent third party vendor, located
in Wilmington, Massachusetts, to manufacture all of its engineering and
education software products and fulfill all of its domestic orders.
With the exception of Mathcad upgrade orders generated by direct mail, the
Company processes all domestic orders from its leased facilities located in
Cambridge, Massachusetts. MathSoft subcontracts the processing of all Mathcad
upgrade direct mail orders with an independent service company located in
Framingham, Massachusetts.
All international orders are processed by a third party vendor located in the
United Kingdom that also provides warehousing and fulfillment services.
Data Analysis Software Products
The Company subcontracts with a third party vendor, located in Monroe,
Washington, to manufacture all of its S-PLUS product line updates. The Company
warehouses inventory and processes and fulfills domestic orders internally out
of its Seattle office. All international orders are processed and fulfilled by
third party vendors located in the United Kingdom that also provide warehousing
and fulfillment services.
FreeScholarships.com
When FSC launches its online store, FSC anticipates it will outsource product
fulfillment to an outside vendor. FSC does not currently intend to manufacture
products directly. The Company also does not currently intend to handle the
distribution of the products it will sell in its store.
PRODUCT DEVELOPMENT
Engineering and Education Software Products and Data Analysis Software Products
MathSoft's software products research and development organization, divided
between the Company's Cambridge, Massachusetts and Seattle, Washington
locations, is responsible for software development, product documentation, and
quality assurance. Their priorities are to continue technical innovation for
power and performance and to respond to market feedback by continuing to design
products for ease-of-use.
MathSoft's development team consists of experts in software engineering, quality
assurance, mathematics, statistics, engineering and documentation. In software
engineering, MathSoft's professional staff has expertise in computer graphics,
compiler design, user interface design and advanced Windows and Internet
technologies.
FreeScholarships.com
FreeScholarships.com has used a combination of its own personnel and outside
contractors and consultants for site design, graphics design, content
development and editing, software development, quality assurance, database
administration and network management. As FreeScolarships.com develops, it
intends to hire additional employees to handle some or all of these functions.
FSC out-sources its network operations to a hosting service provider, Data
Return Inc. based in Dallas, Texas. This hosting service owns and configures the
hardware, installs and configures the software, provides Internet bandwidth and
monitors the site and its numerous components around the clock on behalf of
FSC.
During the fiscal years ended December 31, 1999 and 1998, the Transition Period,
and the fiscal year ended June 30, 1997, net research and development costs
charged to operations were $5,360,000, $4,964,000, $2,816,000, and $5,143,000,
respectively. The Company did not capitalize any software research and
development costs during the twelve months ended December 31, 1999 as software
research and development costs incurred between technological feasibility and
general release were not material.
9
COMPETITION
Engineering and Education Software Products and Data Analysis Software Products
The markets for engineering and education and data analysis software products
are highly competitive. In the engineering and education software market,
MathSoft considers its principal competition to include engineering and
education software from companies providing specialized tools, such as The
MathWorks, Waterloo Maple Software and Wolfram Research. In the data analysis
market, the Company considers its principal competition to include statistical
software products from such companies as SAS and SPSS. In both markets, the
Company faces competition from companies providing competing software solutions,
such as spreadsheets. The Company may also face new competition from potential
entrants into the engineering and education and data analysis software markets,
as well as more focused competition from companies in related markets. For
example, providers of spreadsheet programs could add to or improve the technical
calculation and data analysis functionality of their existing products. Some of
these companies may have significant name recognition, as well as substantially
greater capital resources, marketing experience, research and development
staffs, and production facilities than the Company. Although the Company
believes it has certain technological advantages over existing competitors in
the technical calculation and the data analysis software markets, maintaining
these advantages will require continued investment by the Company in research
and development. There can be no assurance that the Company will have
sufficient resources to make such investment or that the Company will be able to
make the technological advances necessary to maintain its competitive position.
FreeScholarships.com
The market for internet products and services is highly competitive. There are
no substantial barriers to entry in these markets, and the Company expects that
competition will continue to intensify. FreeScholarships.com competes with
online services and other Web site operators, some of whom may have significant
name recognition as well as substantially greater capital resources, marketing
experience and brand recognition than FSC.
INTELLECTUAL PROPERTY RIGHTS AND LICENSES
MathSoft's software is proprietary and the Company attempts to protect it with
copyrights, trade secret laws and internal nondisclosure safeguards, as well as
restrictions on copying, disclosure and transferability that are incorporated
into its software license agreements. Generally, the Company's products are not
physically copy-protected. In order to retain exclusive ownership rights to all
software developed by MathSoft, the Company licenses all software and provides
it in executable code only, with contractual restrictions on copying, disclosure
and transferability. As is customary in the industry, MathSoft licenses its
products to end-users by use of a 'shrink-wrap' license. The source code for all
of the Company's products is protected as a trade secret and as unpublished
copyrighted work. In addition, the Company has entered into nondisclosure and
inventions agreements with key employees. The Company has been granted three
patents and is aggressively pursuing patent protection. However, in those areas
where the Company has no patent protection, judicial enforcement of copyright
laws may be uncertain.
In fiscal 1994, the Company was granted a non-exclusive worldwide perpetual
license to Maple V Symbolic Algebra Software for inclusion in Mathcad and other
products in exchange for a fixed royalty payment.
The Company is a worldwide licensee until February 18, 2002 of Lucent
Technologies Inc. for the "S" programming language. Under the license, the
Company has the right to use, sublicense and support the "S" programming
language from Lucent Technologies in exchange for royalties. Any modifications,
enhancements, adaptations or derivations of the "S" programming language are the
property of the Company. After February 18, 2002, the Company, at its election,
may extend this license for five-year terms in perpetuity, provided that the
Company continues to comply with its obligations under the license. Although
termination of this license could have a material adverse effect on the
Company's operations because Lucent Technologies is the sole licensor of the "S"
programming language, the Company is not presently aware of any circumstances
which would prevent it from fulfilling its obligations under the license.
Due to the rapid pace of technological change in the software industry, the
Company believes that patent, trade secret and copyright protection are less
significant to its competitive position than factors such as the knowledge,
ability and experience of the Company's personnel, new product development,
frequent product enhancements, name recognition, and ongoing reliable product
maintenance and support.
The Company believes that its products and other proprietary rights do not
infringe the proprietary rights of third parties. There can be no assurance,
however, that third parties will not assert infringement claims in the future.
10
EMPLOYEES
As of December 31, 1999, the Company employed approximately 197 regular
full-time and part-time employees, of which 19 were outside the United States.
As necessary, the Company supplements its regular employees with temporary and
contract personnel. As of December 31, 1999, the Company employed 8 temporary
and contract personnel, of which one was outside the United States. None of the
Company's regular employees are represented by a labor union or are subject to a
collective bargaining agreement. The Company has never experienced a work
stoppage and believes that its employee relations are good.
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.
11
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
FreeScholarships.com, an internet venture, 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 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 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 between the ages of 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.
12
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 34% of the Company's total revenues in the fiscal
year ended June 30, 1997, approximately 30% of the Company's total revenues
during the Transition Period, and approximately 28% and 27% of the Company's
total revenues in the fiscal years ended December 31, 1998 and 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. Maple V, a software product licensed with or
as part of Mathcad, and 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.
13
Rapid Technological Change; Competition. The technical calculation software
market is subject to rapid and substantial technological change, similar to that
affecting the software industry generally. The Company, to remain successful,
must be responsive to new developments in hardware and chip technology,
operating systems, programming technology, Internet technology and multimedia
capabilities. In addition, the Company competes against numerous other
companies, some of which have significant name recognition, as well as
substantially greater capital resources, marketing experience, research and
development staffs and production facilities than the Company. The Company's
financial results may be negatively impacted by the failure of new or existing
products to be favorably received by retailers and consumers due to price,
availability, features, other product choices or the necessity of promotions to
increase sales of the Company's products.
Year 2000 Issues. The Year 2000 issue exists because many computer systems and
applications currently use two-digit date fields to designate a year. As the
century date change occurred, date-sensitive systems may have recognized the
year 2000 as 1900, or not at all. This inability to recognize or properly treat
the year 2000 may have caused systems to process critical financial and
operational information incorrectly. The Company utilizes software from third
parties and related technologies throughout its business that may have been
affected by the date change in the year 2000. The Company has not experienced
any problems with its computer systems related to the year 2000 issue and
is not aware of any material year 2000 problems with its clients or vendors.
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.
ITEM 2. PROPERTIES.
The Company leases 23,350 square feet of office space at 101 Main Street,
Cambridge, Massachusetts. The Company renewed its lease for the 23,350 square
feet it currently occupies on November 30, 1998 and this lease is scheduled to
terminate in October 2004. A third party vendor provides warehousing services
to meet the Company's needs. The Company also leases 26,804 square feet of
office space at 1700 Westlake Avenue North, Seattle, Washington. This lease
expires in September 2004. The Company also leases 2,931 square feet of office
space in the United Kingdom. The term of the lease for this office space was
renewed in March 2000 and is scheduled to expire in March 2005. The Company
entered into a lease in March 2000 for 8,259 square feet of office space at 275
Wyman Street, Waltham, Massachusetts in connection with its internet subsidiary
FreeScholarships.com. The term of the lease for this office space is scheduled
to expire in February 2004.
14
The Company believes that its facilities are adequate for its needs. The Company
does not consider the specific location of its offices to be material to its
business.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any legal proceedings which could have a material
adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
Not applicable.
15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock (Nasdaq: MATH) was quoted on the Nasdaq National
Market beginning on February 3, 1993. Prior to that date, there was no public
market for the Common Stock. On July 15, 1997, the Company transferred the
quotations of its Common Stock to the Nasdaq SmallCap Market. The following
table presents quarterly information on the price range of the Common Stock.
This information indicates the high and low bid prices for the Common Stock as
reported by the Nasdaq National Market and the Nasdaq SmallCap Market for the
periods indicated. These prices do not include retail markups, markdowns or
commissions.
FISCAL YEAR ENDED JUNE 30, 1997: HIGH LOW
-------- -------
First Quarter 7 5/8 4 7/8
Second Quarter 5 3/8 3 1/4
Third Quarter 5 1/8 2 3/4
Fourth Quarter 3 5/8 2 3/16
TRANSITION PERIOD:
July 1 to September 30, 1997 4 2 7/16
October 1 to December 31, 1997 4 5/8 2 3/8
FISCAL YEAR ENDED DECEMBER 31, 1998:
First Quarter 3 2 11/16
Second Quarter 4 11/32 3 13/32
Third Quarter 3 7/8 1 27/32
Fourth Quarter 3 2 1/32
FISCAL YEAR ENDED DECEMBER 31, 1999:
First Quarter 6 31/32 3 1/8
Second Quarter 4 7/16 2 7/16
Third Quarter 3 11/32 2 1/4
Fourth Quarter 6 27/32 1 31/32
As of March 23, 2000, the number of stockholders of record of Common Stock was
approximately 210.
The Company has never paid any cash dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
currently intends to retain future earnings to fund the development and growth
of its business.
16
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data set forth below has been derived from
the audited financial statements of the Company, except for the twelve months
ended December 31, 1997 which has been presented for comparison purposes only.
The information should be read in conjunction with the financial statements and
notes thereto set forth elsewhere herein.
FISCAL FISCAL YEAR ENDED
YEAR ENDED YEAR ENDED DEC. 31,
DEC. 31, DEC. 31, 1997 TRANSITION FISCAL YEARS ENDED JUNE 30,
(in thousands, except per share data) 1999 1998 (UNAUDITED) PERIOD (1) 1997 1996 1995
- ------------------------------------- ------- ------- ------------ ----------- -------- ------- --------
Total revenues $28,603 $24,447 $ 21,224 $ 13,024 $17,678 $20,767 $15,883
Gross profit 23,253 20,201 16,742 10,505 13,732 16,766 11,819
Income (loss) from operations 1,569 2,161 (2,160) 1,102 (4,394) 933 (3,635)
Net income (loss) 1,453 2,220 (2,129) 1,105 (4,300) 1,076 (3,553)
Basic net income (loss) per share 0.15 0.24 (0.24) 0.12 (0.49) 0.13 (0.50)
Diluted net income (loss) per share 0.14 0.22 (0.24) 0.11 (0.49) 0.11 (0.50)
Working capital 7,043 4,439 1,852 1,852 457 4,688 617
Total assets 16,993 13,492 9,812 9,812 8,786 11,899 8,103
Long-term obligations, 148 139 74 74 183 3 13
less current portion
Stockholders equity 8,634 6,051 3,495 3,495 2,168 6,759 2,624
(1) The Company changed its fiscal year end from June 30 to December 31. The Transition Period represents the
six month period from July 1, 1997 through December 31, 1997.
17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis should be read in conjunction with
The " Selected Consolidated Financial Data ", the Consolidated Financial
Statements and the information described in the Risk Factors included
elsewhere in this report.
RESULTS OF OPERATIONS
In December 1997, the Company changed its fiscal year end from June 30 to
December 31. Accordingly, a six-month transition period ended December 31, 1997
is included below.
As an aid to understanding the Company's operating results, the table below
indicates the percentage relationships of income and expense items included in
the Consolidated Statements of Operations for the fiscal year ended December 31,
1999 and 1998 and the twelve months ended December 31, 1997 (unaudited), the
fiscal year ended December 31, 1999 compared to the fiscal year ended June 30,
1997, the six months ended December 31, 1997 (the "Transition Period") and the
six months ended December 31, 1996, the year ended June 30, 1997 and the
percentage changes in those items for the fiscal years ended December 31, 1999,
1998, the twelve months ended December 31, 1997 (unaudited) and the fiscal year
ended June 30, 1997.
-------------------------Percentage of Total Revenues-----------------------
Six Months
Fiscal Fiscal Year Ended Ended Fiscal
Year Ended Year Ended Dec 31, Dec 31, Year Ended
Dec 31, Dec 31, 1997 Transition 1996 June 30,
1999 1998 (unaudited) Period (1) (unaudited) 1997
----------- ----------- ----------- ----------- ----------- -----------
Revenues:
Software licenses 79.4% 85.2% 85.0% 85.4% 87.2% 85.9%
Services and other 20.6% 14.8% 15.0% 14.6% 12.8% 14.1%
----------- ----------- ----------- ----------- ----------- -----------
Total revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Revenues:
Software licenses 12.5% 12.1% 16.0% 14.0% 16.7% 17.7%
Services and other 6.2% 5.3% 5.1% 5.4% 4.3% 4.6%
----------- ----------- ----------- ----------- ----------- -----------
Total cost of revenues 18.7% 17.4% 21.1% 19.3% 20.9% 22.3%
Gross profit 81.3% 82.6% 78.9% 80.7% 79.1% 77.7%
Operating Expenses:
Sales and marketing 44.8% 42.4% 49.1% 39.7% 52.8% 58.0%
Research and development, gross 34.7% 31.9% 35.4% 30.0% 36.4% 39.9%
Less Funded Research -16.0% -11.6% -9.1% -8.4% -11.3% -10.8%
----------- ----------- ----------- ----------- ----------- -----------
Research and development, net 18.7% 20.3% 26.3% 21.6% 25.1% 29.1%
General and administrative 12.3% 11.1% 13.7% 10.9% 13.1% 15.5%
----------- ----------- ----------- ----------- ----------- -----------
Total operating expenses 75.8% 73.8% 89.1% 72.2% 91.0% 102.5%
Income (loss) from operations 5.5% 8.8% -10.2% 8.5% -11.9% -24.9%
Interest income (expense), net 0.6% 0.4% 0.4% 0.2% 0.8% 0.8%
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) before provision
for income taxes 6.1% 9.3% -9.8% 8.6% -11.1% -24.1%
Provision for income taxes 1.0% 0.1% 0.2% 0.1% 0.2% 0.3%
----------- ----------- ----------- ----------- ----------- -----------
Net Income (loss) 5.1% 9.2% -10.0% 8.5% -11.3% -24.4%
=========== =========== =========== =========== =========== ===========
----------------------Percentage Change--------------------
Fiscal Transition
Fiscal Fiscal Year Ended Period (1)
Year Ended Year Ended Dec 31, 1998 compared to
Dec 31, 1999 Dec 31, 1998 compared to Six Months
compared to compared to Fiscal Ended
Year Ended Year Ended Year Ended Dec 31,
Dec 31, 1998 Dec 31, 1997 June 30, 1997 1996
------------- ------------- -------------- -----------
Revenues:
Software licenses 8.9% 15.5% 37.3% 34.6%
Services and other 63.5% 13.3% 44.4% 56.5%
------------- ------------- -------------- -----------
Total revenues 17.0% 15.2% 38.3% 37.4%
Cost of Revenues:
Software licenses 20.3% -12.8% -5.1% 15.1%
Services and other 39.2% 18.3% 56.0% 73.8%
------------- ------------- -------------- -----------
Total cost of revenues 26.0% -5.3% 7.6% 27.0%
Gross profit 15.1% 20.7% 47.1% 40.2%
Operating Expenses:
Sales and marketing 23.5% -0.5% 1.1% 3.2%
Research and development, gross 27.4% 3.7% 10.4% 13.3%
Less Funded Research 61.3% 46.3% 47.8% 1.9%
------------- ------------- -------------- -----------
Research and development, net 8.0% -11.1% -3.5% 18.4%
General and administrative 30.0% -6.7% -0.7% 14.3%
------------- ------------- -------------- -----------
Total operating expenses 20.2% -4.6% -0.5% 9.0%
Income (loss) from operations -27.4% 200.0% -149.2% 197.4%
Interest income (expense), net 96.3% 3.8% -40.9% -73.8%
------------- ------------- -------------- -----------
Income (loss) before provision
for income taxes -22.8% 207.7% -152.7% 206.9%
Provision for income taxes 1104.3% -51.1% -48.5% 20.0%
------------- ------------- -------------- -----------
Net Income (loss) -34.5% 204.2% 151.6% 203.7%
============= ============== ============= ==============
(1) The Company changed its fiscal year from June 30 to December 31.
The Transition Period represents the six month period from July 1, 1997 -
December 31, 1997.
18
Twelve Months Ended December 31, 1999 Compared to the Twelve Months Ended
December 31, 1998
Total revenues increased 17.0% , from $24,447,000 for the twelve months ended
December 31, 1998 to $28,603,000 for the twelve months ended December 31, 1999.
The increase in total revenues was primarily attributable to worldwide new
license and service revenue generated by the Company's S-PLUS product line, as
well as new license and upgrade revenue generated from the Mathcad product line.
Worldwide S-PLUS license and service revenue increased 38.1%, from $8,841,000
for the twelve months ended December 31, 1998 to $12,212,000 for the twelve
months ended December 31, 1999, and increased as a percentage of total revenues
from 36.2% to 42.7%, respectively. The increase in S-PLUS product line revenue
was primarily attributable to an increase in service revenues, which includes
maintenance, training, and consulting. S-PLUS license revenue was $5,165,000 and
$6,505,000 for the twelve months ended 1998 and 1999, respectively. S-PLUS
service revenue was $3,676,000 and $5,707,000 for the twelve months ended 1998
and 1999, respectively. The increase in both service and license revenues was
directly attributable to the June 1999 release of S-PLUS 2000 as well as to the
product line's stability, quality, maturing sales and marketing model.
Worldwide Mathcad product line revenues increased 5.0%, from $15,606,000 for the
twelve months ended December 31, 1998 to $16,391,000 for the twelve months ended
December 31, 1999, but decreased as a percentage of total revenues from 63.8% to
57.3% for the twelve months ended December 31, 1998 and 1999, respectively. The
increase in Mathcad product line revenue was due primarily to the release of
StudyWorks 3 (released in April 1999) and Mathcad Add-ons such as Axum 6
(released in March 1999). These increases were offset significantly by a
decrease in upgrades as the company changed its method of distribution from an
indirect model to a direct model.
Total international revenues, attributable to all product lines, increased
11.9%, from $6,897,000 in 1998 to $7,716,000 in 1999, and decreased as a
percentage of total revenues from 28.2% to 26.7%, respectively.
Total cost of revenues increased 26.0%, from $4,246,000 for the twelve months
ended December 31, 1998 to $5,351,000 for the twelve months ended December 31,
1999, and increased as a percentage of total revenues from 17.4% to 18.7%,
respectively. The increase in total cost of revenues as a percentage of total
revenues was primarily attributable to a product mix shift toward lower margin
products, namely the SPLUS product line due to its service component and
StudyWorks.
Sales and marketing expenses increased 23.5%, from $10,364,000 for the
twelve-months ended December 31, 1998 to $12,797,000 for the twelve months ended
December 31, 1999, and increased as a percentage of total revenues from 42.4% to
44.8%, respectively. The increase in sales and marketing expenses was
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.
FreeScholarships.com sales and marketing expenses totaled $1,095,000 in 1999.
Net research and development expenses increased 8.0%, from $4,964,000 for the
twelve months ended December 31, 1998 to $5,360,000 for the twelve months ended
December 31, 1999, and decreased as a percentage of total revenues from 20.3% to
18.7%, respectively. 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 offset partially by the
increase in research funding. Funded research increased 61.3%, from $2,831,000
for the twelve months ended December 31, 1998 to $4,567,000 for the twelve
months ended December 31, 1999. 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 research
department's headcount increased from 32 to 46 as of December 31, 1998 and 1999,
respectively. FreeScholarships.com research and development expenses totaled
$521,000 in 1999.
19
General and administrative expenses increased 30.0%, from $2,713,000 for the
twelve months ended December 31, 1998 to $3,526,000 for the twelve months ended
December 31, 1999, and increased as a percentage of total revenues from 11.1% to
12.3%, respectively. The increase in overall general and administrative expenses
was primarily attributable to increased compensation costs, legal and consulting
fees associated with Freescholarships.com, higher facilities costs, and
increases in other miscellaneous expenses. FreeScholarships.com general and
administrative expenses totaled $280,000 in 1999.
Net income for the twelve months ended December 31, 1999 was $1,453,000 compared
to $2,220,000 for the twelve months ended December 31, 1998. Fiscal Year 1999
reflected solid profit growth in the Company's core products partially offset by
the significant investment in the Company's new internet venture,
FreeScholarships.com's net loss totaled $1,842,000 in 1999.
Twelve Months Ended December 31, 1998 Compared to the Twelve Months Ended
December 31, 1997 (unaudited)
Total revenues increased 15.2% , from $21,224,000 for the twelve months ended
December 31, 1997 to $24,447,000 for the twelve months ended December 31, 1998.
The increase in total revenues was primarily attributable to worldwide new
license and upgrade revenue generated by the Company's Mathcad product line, as
well as new license and service revenue generated from the S-PLUS product line.
Worldwide Mathcad product line revenues increased 11.9%, from $13,947,000 in the
twelve months ended December 31, 1997 to $15,606,000 for the twelve months ended
December 31, 1998, but decreased as a percentage of total revenues from 65.7% to
63.8% for the twelve months ended December 31, 1997 and 1998, respectively. The
increase in Mathcad product line revenue was due primarily to the release of
Mathcad 8 (released in September 1998) and Mathcad 7 (released in June 1997).
To a lesser extent, this increase was also due to the release of StudyWorks II
in March 1998. Worldwide S-PLUS license and service revenue increased 21.5%,
from $7,277,000 for the twelve months ended December 31, 1997 to $8,841,000 for
the twelve months ended December 31, 1998, and increased as a percentage of
total revenues from 34.3% to 36.2%, respectively. The increase in S-PLUS
product line revenue was primarily attributable to the release of S-PLUS 4.5
(released in May 1998) and S-PLUS 4.0 (released in September 1997).
Total international revenues, attributable to all product lines, increased 3.2%
from $6,682,000 in 1997 to $6,897,000 in 1998, and decreased as a percentage of
total revenues from 31.5% to 28.2%, respectively.
Total cost of revenues decreased 5.3%, from $4,482,000 for the twelve months
ended December 31, 1997 to $4,246,000 for the twelve months ended December 31,
1998, and decreased as a percentage of total revenues from 21.1% to 17.4%,
respectively. The decrease in total cost of revenues as a percentage of total
revenues was primarily attributable to switching from disk to CD media with the
release of Mathcad 7 for Windows, thereby decreasing direct material costs on a
per unit basis.
Sales and marketing expenses for the twelve months ended December 31, 1997 were
$10,413,000 and remained relatively consistent as compared to $10,364,000 for
the fiscal year ended December 31, 1998, and decreased as a percentage of total
revenues from 49.1% to 42.4%, respectively.
Net research and development expenses decreased 11.1%, from $5,581,000 for the
twelve months ended December 31, 1997 to $4,964,000 during the twelve months
ended December 31, 1998, and decreased as a percentage of total revenues from
26.3% to 20.3%, respectively. The decrease in net research and development
expenses was primarily attributable to a decrease in consulting costs associated
with development initiatives in the Company's Data Analysis Products Division
and offset partially by an increase in research funding. Funded research
increased 46.3%, from $1,935,000 for the twelve months ended December 31, 1997
to $2,831,000 for the twelve months ended December 31, 1998. 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 research department's headcount increased from 24 to
32 as of December 31, 1997 and 1998, respectively.
20
General and administrative expenses decreased 6.7%, from $2,909,000 for the
twelve months ended December 31, 1997 to $2,713,000 during the twelve months
ended December 31, 1998, and decreased as a percentage of total revenues from
13.7% to 11.1%, respectively. The decrease in overall general and
administrative expenses was primarily attributable to decreases in foreign
currency transaction losses.
Net income for the twelve months ended December 31, 1998 was $2,220,000 compared
to a net loss of $2,129,000 for the twelve months ended December 31, 1997.
Improved performance from the recently refreshed Mathcad and S-PLUS product
lines, coupled with margin improvements and management control of operating
expenses contributed to this improvement in profit.
Twelve Months Ended December 31, 1998 Compared to Twelve Months Ended June 30,
1997
Total revenues increased 38.3%, from $17,678,000 for the twelve months ended
June 30, 1997 to $24,447,000 for the twelve months ended December 31, 1998.
This increase in total revenues was primarily attributable to worldwide new
license and upgrade revenue generated by the Mathcad product line as well as new
license and service revenue generated from the S-PLUS product line.
Worldwide Mathcad product line sales increased 31.7%, from $11,850,000 in the
twelve months ended June 30, 1997 to $15,606,000 during the twelve months ended
December 31, 1998, but decreased as a percentage of total revenues from 67.0% to
63.8%, respectively. The twelve months ended December 31, 1998 had increased
revenue associated with Mathcad 8 (released in September 1998) and Mathcad 7
(released in June 1997). Worldwide S-PLUS product line revenue increased 51.7%,
from $5,828,000 in the twelve months ended June 30, 1997 to $8,841,000 during
the twelve months ended December 31, 1998, and increased as a percentage of
total revenues from 33.0% to 36.2%, respectively. S-PLUS product line had
increased license and services revenue in the fiscal year ended December 31,
1998 due to the release of S-PLUS 4.5 (released in May 1998) and S-PLUS 4.0
(released in September 1997).
Total international revenues, attributable to all product lines, increased 14.6%
, from $6,017,000 in 1997 to $6,897,000 in 1998, and decreased as a percentage
of total revenues from 34.0% to 28.2%, respectively.
Total cost of revenues increased 7.6%, from $3,946,000 for the twelve months
ended June 30, 1997 to $4,246,000 during the fiscal year ended December 31,
1998, and decreased as a percentage of total revenues from 22.3% to 17.4%,
respectively. The decrease in total cost of revenues as a percentage of total
revenues was primarily attributable to switching from disk to CD media with the
release of Mathcad 7 for Windows, thereby decreasing direct material costs on a
per unit basis.
Sales and marketing expenses for the twelve-months ended June 30, 1997 were
$10,251,000 and remained relatively consistent compared to $10,364,000 for the
fiscal year ended December 31, 1998, but decreased as a percentage of total
revenues from 58.0% to 42.4%, respectively.
Net research and development expenses decreased 3.5%, from $5,143,000 for the
twelve months ended June 30, 1997 to $4,964,000 during the fiscal year ended
December 31, 1998, and decreased as a percentage of total revenues from 29.1% to
20.3%. The decrease in net research and development expenses was primarily
attributable to a decrease in consulting costs associated with development
initiatives in the Company's Data Analysis Products Division and an increase in
funded research. Funded research increased 47.8%, from $1,915,000 for the twelve
months ended June 30, 1997 to $2,831,000 for the twelve months ended December
31, 1998. 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 research department's
headcount increased from 23 to 32 as of June 30, 1997 and December 31, 1998,
respectively.
21
General and administrative expenses for the fiscal year ended June 30, 1997 were
$2,732,000 and remained consistent at $2,713,000 during the twelve months ended
December 31, 1998, and decreased as a percentage of total revenues from 15.5% to
11.1%, respectively. The consistency in expenditures and reduction as a
percentage of total revenues was due to management efforts to control costs.
Net income for the fiscal year ended December 31, 1998 was $2,220,000 compared
to net loss of $4,300,000 for the twelve months ended June 30, 1997. Improved
performance from the recently refreshed Mathcad and S-PLUS product lines coupled
with margin improvements contributed to this increase in profit.
Transition Period Ended December 31, 1997 Compared to the Six-Month Period Ended
December 31, 1996 (unaudited)
Total revenues increased 37.4%, from $9,478,000 for the six months ended
December 31, 1996 to $13,024,000 during the Transition Period. This increase in
total revenues was primarily attributable to upgrade revenue generated by the
release of Mathcad 7 for Windows in June 1997, new license revenue generated
from S-PLUS 4.0 released in September 1997, and to a lesser extent, S-PLUS
service revenue.
Mathcad for Windows generated upgrade revenue of $680,000 during the six months
ended December 31, 1996 compared to upgrade revenue of $2,677,000 during the
Transition Period, an increase as a percentage of total revenues from 7.2% to
20.6%, respectively. Prior to the release of Mathcad 7 for Windows in June
1997, the Company's last significant upgrade, Mathcad 6.0 for Windows, was
released approximately twenty-three months earlier in July 1995 and therefore
upgrade revenue was much lower in the six months ended December 31, 1996.
Worldwide S-PLUS product line revenue increased 39.4% from $2,531,000 for the
six months ended December 31, 1996 to $3,529,000 during the Transition Period,
and increased as a percentage of total revenues from 26.7% to 27.1%,
respectively. Worldwide S-PLUS service revenue increased 167.7% from $269,000
in the six months ended December 31, 1996 to $720,000 during the Transition
Period, and increased as a percentage of total revenues from 2.8% to 5.5%,
respectively. Total international revenues, attributable to all product lines,
increased 20.9% from $3,182,000 in 1996 to $3,846,000 during the Transition
Period, and decreased as a percentage of total revenues from 33.6% to 29.5%,
respectively.
Total cost of revenues for the six-month period increased 27.0%, from $1,983,000
for the six months ended December 31, 1996 to $2,519,000 during the Transition
Period, and decreased as a percentage of total revenues from 20.9% to 19.3%,
respectively. The decrease in total cost of revenues as a percentage of total
revenues was primarily attributable to switching from disk to CD media with the
release of Mathcad 7 for Windows, thereby decreasing direct material costs on a
per unit basis. To a lesser degree, fixed costs, such as licensing costs for
the "S" language used in the S-PLUS product line and the amortization of
purchased technology, decreased as a percentage of total revenues due to an
overall higher revenue base during the Transition Period. Such decreases were
partially offset by an increase in the inventory provision to adequately cover
excess inventory exposure and an increase in cost of services from $404,000 for
the six months ended December 31, 1996 to $702,000 during the Transition Period
consistent with the increase in service revenue.
Sales and marketing expenses increased 3.2%, from $5,007,000 for the six months
ended December 31, 1996 to $5,169,000 during the Transition Period, and
decreased as a percentage of total revenues from 52.8% to 39.7%, respectively.
The increase in sales and marketing expenses was primarily attributable to
expenses incurred related to the launch of Mathcad 7 for Windows and S-PLUS 4.0,
as well as an increase in S-PLUS domestic sales expenses incurred to support
direct sales of this expanding product line.
22
Net research and development expenses increased 18.4%, from $2,378,000 for the
six months ended December 31, 1996 to $2,816,000 during the Transition Period,
and decreased as a percentage of total revenues from 25.1% to 21.6%. The
increase in overall net research and development expenses was primarily
attributable to expenses related to development initiatives in the Company's
Data Analysis Products Division and additional personnel to support such
initiatives, as well as an increase in international product translation costs
for Mathcad 7 French, German and Japanese. Funded research in the Company's Data
Analysis Products Division increased 1.9%, from $1,070,000 for the six months
ended December 31, 1996 to $1,090,000 for the six months ended December 31,
1997. 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 research department's headcount
increased from 20 to 24 as of December 31, 1996 and December 31, 1997,
respectively.
General and administrative expenses increased 14.3% , from $1,241,000 for the
six months ended December 31, 1996 to $1,418,000 during the Transition Period
and decreased as a percentage of total revenues from 13.1% to 10.9%,
respectively. The increase in general and administrative expenses was primarily
attributable to costs incurred for management incentive compensation provisions
based primarily on the achievement of profitability targets, and to a lesser
extent, to fluctuations in international exchange rate transactions.
Net income for the Transition Period was $1,105,000 compared to net loss of
$1,066,000 for the six months ended December 31, 1996. Improved performance
from the refreshed Mathcad and S-PLUS product lines coupled with margin
improvements all contributed to this improvement in profit.
Liquidity and Capital Resources
Cash and cash equivalents, totaling $8,444,000 at December 31, 1999, increased
$2,737,000 during the fiscal year ended December 31, 1999, from $5,707,000 at
December 31, 1998. The positive cash flow resulted primarily from cash provided
by operating activities of $2,808,000 and proceeds from the exercise of stock
options of $1,134,000 which were offset by purchases of property, equipment and
other assets of $968,000.
The Company generated $2,808,000 in cash from operating activities during the
fiscal year ended December 31, 1999. The cash generated by operating activities
was primarily attributable to net income of approximately $1,453,000, non-cash
depreciation and amortization charges, and an increase in deferred revenue,
offset by an increase in accounts receivable. Accounts receivable and deferred
revenue increased primarily due to the growth in the Company's business. The
Company used $968,000 in investing activities primarily due to the purchase of
$835,000 of property and equipment. Proceeds generated from capital lease
obligations and equipment financing and the exercise of stock options of
$467,000 and $1,134,000, respectively, were offset by payments on capital lease
obligations and equipment financing of $699,000.
The Company's financial reserves are represented by cash and cash equivalents as
of December 31, 1999. The Company 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 or $2,000,000 based on certain profitability
covenants. Borrowings are secured by 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 minimum amounts of
profitability, equity, leverage and liquidity, all as defined in the agreement.
There were no amounts outstanding under this line at December 31, 1999. This
line expires on April 30, 2000.
As of December 31, 1999 the Company had net operating loss carryforwards of
$15.0 million and research and development credit carryforwards of $1.3 million.
The net operating loss and credit carryforwards will expire at various dates
through 2013, if not used. Under the provisions of the Internal Revenue Code,
substantial changes in the Company's ownership may limit the amount of net
operating loss carryforwards that could be utilized annually in the future to
offset taxable income. A full valuation allowance has been established in our
financial statements to reflect the uncertainty of the Company's ability to use
available tax loss carryforwards and other deferred tax assets.
23
Based on its planned investments 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 at least the next twelve
months. Therefore, the Company anticipates one or more financing transactions,
including asset sales, bank borrowings, and sale of stock in either or both of
the Company and its subsidiaries. However, if such financing is not available
the Company has the ability to reduce its planned investment in FSC to ensure it
meets 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" in
this Form 10-K for the fiscal year ended December 31, 1999 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 that 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 favorable to the
Company.
Recent Accounting Pronouncements
In June 1999, Financial Accounting Standards Board ("FASB") issued SFAS No.
137, Accounting for Derivative Instruments and Hedging Activities-Deferral of
the Effective Date of FASB Statement No. 133, which defers the effective date of
SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities,
issued in June 1998, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company does not
expect adoption of this statement to have a significant impact on its
consolidated position or operating results.
In December 1998, the AICPA issued Statement of Position 98-9, Modification of
SOP 97-2 Software Revenue Recognition With Respect to Certain Transactions. SOP
98-9 requires use of the residual method of recognition of revenues when
vendor-specific objective evidence exists for undelivered elements but does not
exist for delivered elements of a software arrangement. The Company will be
required to comply with the provisions of SOP 98-9 for transactions entered into
beginning January 1, 2000. The Company does not expect adoption of SOP 98-9
will have a material impact on its financial position or operating results.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, as amended by SAB 101(a), Revenue Recognition
in Financial Statements. SAB No. 101 is effective for the second quarter
of all fiscal periods beginning after December 15, 1999. Adoption of SAB No.
101 is not expected to have a material impact on the Company's consolidated
financial position or results of operations.
24
ITEM 7A. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 and the Index therein for a listing of the financial statements and
supplementary data as part of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to this item may be found under the caption
"Occupations of Directors and Executive Officers" appearing in the Company's
definitive proxy statement to be filed with the Securities and Exchange
Commission not later than 120 days after the close of the fiscal year ended
December 31, 1999. Such information is incorporated here by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item may be found under the caption
"Compensation and Other Information Concerning Directors and Officers" appearing
in the Company's definitive proxy statement to be filed with the Securities and
Exchange Commission not later than 120 days after the close of the fiscal year
ended December 31, 1999. Such information is incorporated here by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item may be found under the caption "Management
and Principal Holders of Voting Securities" appearing in the Company's
definitive proxy statement to be filed with the Securities and Exchange
Commission not later than 120 days after the close of the fiscal year ended
December 31, 1999. Such information is incorporated here by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item may be found under the caption "Certain
Relationships and Related Transactions" appearing in the Company's definitive
proxy statement to be filed with the Securities and Exchange Commission not
later than 120 days after the close of the fiscal year ended December 31, 1999.
Such information is incorporated here by reference.
26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report:
1. Financial Statements. The following consolidated financial statements of the Company and Independent
--------------------
Auditors Report are filed as part of this report.
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31, 1999 and 1998, the year
ended December 31, 1997 (unaudited), the six-month period ended December 31, 1997 and
for the year ended June 30, 1997
Consolidated Statements of Stockholders' Equity for the year ended June 30, 1997, the
six-month period ended December 31, 1997 and for the years ended December 31, 1998 and 1999
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998,
the year ended December 31, 1997 (unaudited), the six-month period ended December 31, 1997 and for the year
ended June 30, 1997
Notes to Consolidated Financial Statements
2. Exhibits.
---------
2.1 Asset Purchase Agreement, dated as of June 30, 1993 among the Registrant, Statistical Sciences, Inc., a
Washington corporation, and the Stockholders listed on Schedule I thereto (filed as Exhibit 2.1 to the
Registrant's Current Report on Form 8-K dated June 30, 1993 and incorporated herein by reference).
3.1 Third Restated Articles of Organization of the Company (filed as Exhibit 3.2 to Registration Statement
number 33-55658 on Form S-1 and incorporated herein by reference).
3.2 Amended and Restated By-laws of the Company (filed as Exhibit 3.2 to Annual Report on Form 10-K
for the fiscal year ended June 30, 1994, file number 0-020992, and incorporated herein by reference).
4.1 Specimen certificate representing the Common Stock (filed as Exhibit 4.1 to Registration Statement
number 33-55658 on Form S-1 and incorporated herein by reference).
4.2 Please refer to Article VI of Exhibit 3.1.
10.1 Amended and Restated 1992 Stock Plan (filed as Exhibit 10.1 to Registration Statement number 33-
55658 on Form S-1 and incorporated herein by reference).
10.2 Form of Key Officer Stock Option Agreement (filed as Exhibit 10.3 to Registration Statement number
33-55658 on Form S-1 and incorporated herein by reference).
10.3 1992 Employee Stock Purchase Plan (filed as Exhibit 10.4 to Registration Statement number 33-55658
on Form S-1 and incorporated herein by reference).
10.4 1992 Non-Employee Director Stock Option Plan (filed as Exhibit 10.5 to Registration Statement
number 33-55658 on Form S-1 and incorporated herein by reference).
27
10.5 Third Party Software Distribution Agreement, dated January 30, 1989, as amended, between the
Company, University of Waterloo, Waterloo Maple Software, Inc. et al. (filed as Exhibit 10.7 to
Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.6 Distribution Agreement, dated as of June 18, 1987, between the Company and Micro D, Inc., a
predecessor to Ingram Micro, Inc. (filed as Exhibit 10.10 to Registration Statement number 33-55658
on Form S-1 and incorporated herein by reference).
10.7 Lease Between Riverfront Office Park Joint Venture and MathSoft, Inc., dated as of August 17, 1993
(filed as Exhibit 10.11 to Annual Report on Form 10-K for the fiscal year ended June 30, 1993, file
number 0-020992, and incorporated herein by reference).
10.8 Lease Agreement with the Bartell Drug Co. (Landlord), dated as of June 22, 1990, together with
Addendum Nos. A, B, C & D of even date and as amended by Addendum No. E dated December 9,
1992 (filed as Exhibit 10.12 to Annual Report on Form 10-K for the fiscal year ended June 30, 1993,
file number 0-020992, and incorporated herein by reference).
10.9 Software License Agreement with American Telephone & Telegraph Company, effective as of April 1,
1991, as amended February 18, 1993 (filed as Exhibit 10.13 to Annual Report on Form 10-K for the
fiscal year ended June 30, 1993, file number 0-020992, and incorporated herein by reference).*
10.10 Distributor Agreement with Mathematical Systems Institute, Inc., dated August 24, 1990 (filed as
Exhibit 10.14 to Annual Report of Form 10-K for the fiscal year ended June 30, 1993, file number 0-
020992, and incorporated herein by reference).
10.11 Distributorship Agreement dated as of March 1, 1994 between the Company and 766884 Ontario Inc.,
carrying on business as Waterloo Maple Software (filed as Exhibit 10.15 to Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1994, file number 0-020992, and incorporated herein by
reference).*
10.12 Perpetual Technology License dated as of March 1, 1994, as amended by Addendum No. 1 thereto dated
as of March 25, 1994, between the Company and 766884 Ontario Inc., carrying on business as Waterloo
Maple Software (filed as Exhibit 10.16 to Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1994, file number 0-020992, and incorporated herein by reference).*
10.13 Line of Credit Agreement, dated January 11, 1996, between the Company and Fleet Bank of
Massachusetts (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 1996, file number 0-020992, and incorporated herein by reference).
10.14 Software License Agreement, dated February 18, 1996, between the Company and Lucent Technologies
Inc. (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended December 31,
1996, file number 0-020992, and incorporated herein by reference).*
10.15 Amendment to Software License Agreement, dated September 25, 1997, between the Company and
Lucent Technologies Inc.*
10.16 Executive Agreement, dated as of July 28, 1997, between the Company and Charles J. Digate (filed as
Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997, file
number 0-020992, and incorporated herein by reference).#
10.17 Option Acceleration Agreement, dated as of September 15, 1997, between the Company and Robert P.
Orlando (filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1997, file number 0-020992, and incorporated herein by reference).#
10.18 Amended and Restated Executive Agreement dated as of November 23, 1998, between the Company and
Charles J. Digate. (Filed as Exhibit 10.23 to Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 and incorporated herein by reference.)
10.19 Amendments to Agreement of Lease Between Riverfront Office Park Joint Venture and MathSoft, Inc.,
dated as of October 23, 1998 and November 30, 1998, respectively.
10.20 Amended Line of Credit Agreement dated February 24, 1999, between the Company and Fleet Bank of
Massachusetts.
10.21 Option Acceleration Agreement, dated as of September 15, 1997, between the Company and James C. Randles.
10.22 Option Acceleration Agreement, dated as of September 15, 1997, between the Company and Shawn David.
28
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
* Confidential treatment as to portions of the filed exhibit was previously granted.
# Management contract or compensatory arrangement required to be filed pursuant to Item 14(c) of Form 10-K
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated October
21, 1999 reporting fiscal third quarter results.
The Company filed a Current Report on Form 8-K dated November
29, 1999 reporting information regarding FreeScholarships.com.
29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 30, 2000 By: /s/ Charles J. Digate
--------------------------
Charles J. Digate
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
March 30, 2000 /s/ David D. Martin
--------------------
David D. Martin
March 30, 2000 /s/ Robert P. Orlando
---------------------
Robert P. Orlando
Senior Vice President Finance and Administration,
Chief Financial Officer,
Treasurer and Clerk
(Principal Financial and Accounting Officer)
Director
March 30, 2000 /s/ Walter M. Pile, Jr.
-----------------------
Walter M. Pile, Jr.
Director
March 30, 2000 /s/ June L. Rokoff
-----------------------
June L. Rokoff
Director
30
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
2.1 Asset Purchase Agreement, dated as of June 30, 1993 among the Registrant, Statistical
Sciences, Inc., a Washington corporation, and the Stockholders listed on Schedule I thereto
(filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated June 30, 1993 and
incorporated herein by reference).
3.1 Third Restated Articles of Organization of the Company (filed as Exhibit 3.2 to Registration
Statement number 33-55658 on Form S-1 and incorporated herein by reference).
3.2 Amended and Restated By-laws of the Company (filed as Exhibit 3.2 to Annual Report on
Form 10-K for the fiscal year ended June 30, 1994, file number 0-020992, and incorporated
herein by reference).
4.1 Specimen certificate representing the Common Stock (filed as Exhibit 4.1 to Registration
Statement number 33-55658 on Form S-1 and incorporated herein by reference).
4.2 Please refer to Article VI of Exhibit 3.1.
10.1 Amended and Restated 1992 Stock Plan (filed as Exhibit 10.1 to Registration Statement
number 33-55658 on Form S-1 and incorporated herein by reference).
10.2 Form of Key Officer Stock Option Agreement (filed as Exhibit 10.3 to Registration Statement
number 33-55658 on Form S-1 and incorporated herein by reference).
10.3 1992 Employee Stock Purchase Plan (filed as Exhibit 10.4 to Registration Statement number
33-55658 on Form S-1 and incorporated herein by reference).
10.4 1992 Non-Employee Director Stock Option Plan (filed as Exhibit 10.5 to Registration
Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.5 Third Party Software Distribution Agreement, dated January 30, 1989, as amended, between
the Company, University of Waterloo, Waterloo Maple Software, Inc. et al. (filed as Exhibit
10.7 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by
reference).
10.6 Distribution Agreement, dated as of June 18, 1987, between the Company and Micro D, Inc., a
predecessor to Ingram Micro, Inc. (filed as Exhibit 10.10 to Registration Statement number 33-55658
on Form S-1 and incorporated herein by reference).
10.7 Lease Between Riverfront Office Park Joint Venture and MathSoft, Inc., dated as of August 17,
1993 (filed as Exhibit 10.11 to Annual Report on Form 10-K for the fiscal year ended June 30,
1993, file number 0-020992, and incorporated herein by reference).
10.8 Lease Agreement with the Bartell Drug Co. (Landlord), dated as of June 22, 1990, together
with Addendum Nos. A, B, C & D of even date and as amended by Addendum No. E dated
December 9, 1992 (filed as Exhibit 10.12 to Annual Report on Form 10-K for the fiscal year
ended June 30, 1993, file number 0-020992, and incorporated herein by reference).
10.9 Software License Agreement with American Telephone & Telegraph Company, effective as of
April 1, 1991, as amended February 18, 1993 (filed as Exhibit 10.13 to Annual Report on
Form 10-K for the fiscal year ended June 30, 1993, file number 0-020992, and incorporated
herein by reference).*
10.10 Distributor Agreement with Mathematical Systems Institute, Inc., dated August 24, 1990 (filed
as Exhibit 10.14 to Annual Report on Form 10-K for the fiscal year ended June 30, 1993, file
number 0-020992, and incorporated herein by reference).
31
EXHIBIT NO. DESCRIPTION
10.11 Distributorship Agreement dated as of March 1, 1994 between the Company and 766884
Ontario Inc., carrying on business as Waterloo Maple Software (filed as Exhibit 10.15 to
Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994, file number 0-
020992, and incorporated herein by reference).*
10.12 Perpetual Technology License dated as of March 1, 1994, as amended by Addendum No. 1
there to dated as of March 25, 1994, between the Company and 766884 Ontario Inc., carrying
on business as Waterloo Maple Software (filed as Exhibit 10.16 to Quarterly Report on Form
10-Q for the fiscal quarter ended March 31, 1994, file number 0-020992, and incorporated
herein by reference).*
10.13 Line of Credit Agreement, dated January 11, 1996, between the Company and Fleet Bank of
Massachusetts (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1996, file number 0-020992, and incorporated herein by reference).
10.14 Software License Agreement, dated February 18, 1996, between the Company and Lucent
Technologies Inc. (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the fiscal
quarter ended December 31, 1996, file number 0-020992, and incorporated herein by
reference).*
10.15 Amendment to Software License Agreement, dated September 25, 1997, between the Company
and Lucent Technologies Inc.*
10.16 Executive Agreement, dated as of July 28, 1997, between the Company and Charles J. Digate
(filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1997, file number 0-020992, and incorporated herein by reference).
10.17 Option Acceleration Agreement, dated as of September 15, 1997, between the Company and
Robert P. Orlando (filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q for the fiscal
quarter ended September 30, 1997, file number 0-020992, and incorporated herein by
reference).
10.18 Amended and Restated Executive Agreement dated as of November 23, 1998, between the
Company and Charles J. Digate. (Filed as Exhibit 10.23 to Annual Report on Form 10-K for the
fiscal year ended December 31, 1998 and incorporated herein by reference.)
10.19 Amendments to Agreement of Lease Between Riverfront Office Park Joint Venture and
MathSoft, Inc., dated as of October 23, 1998 and November 30, 1998, respectively.
10.20 Amended Line of Credit Agreement dated February 24, 1999, between the Company and Fleet
Bank of Massachusetts.
10.21 Option Acceleration Agreement, dated as of September 15, 1997, between the Company and James C. Randles.
10.22 Option Acceleration Agreement, dated as of September 15, 1997, between the Company and Shawn David.
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
* Confidential treatment as to portions of the filed exhibit was previously
granted.
32
MATHSOFT, INC. AND SUBSIDIARIES
Index
PAGE
Report of Independent Public Accountants F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-3
Consolidated Statements of Operations for the Years ended
December 31, 1999 and 1998, the Year Ended December 31, 1997 (unaudited),
the Six-Month Period Ended December 31, 1997 and for the Year Ended
June 30, 1997 F-5
Consolidated Statements of Stockholders' Equity for the Years ended
December 31, 1999 and 1998, for the Six-Month Period Ended December 31,
1997 and for the Year Ended June 30, 1997 F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998, the Year Ended December 31, 1997 (unaudited),
the Six-Month Period Ended December 31, 1997 and for the Year Ended
June 30, 1997 F-7
Notes to Consolidated Financial Statements F-8
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To MathSoft, Inc.:
We have audited the accompanying consolidated balance sheets of MathSoft, Inc.
(a Massachusetts corporation) and subsidiaries as of December 31, 1999 and 1998
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years ended December 31, 1999 and 1998, the six-month period
ended December 31, 1997 and the year ended June 30, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MathSoft, Inc. and
subsidiaries as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998,
the six-month period ended December 31, 1997 and for the year ended June 30,
1997 in conformity with accounting principles generally accepted in the United
States.
/s/ Arthur Anderson, L.L.P.
Boston, Massachusetts
February 16, 2000
F-2
MATHSOFT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
ASSETS
DECEMBER 31,
1999 1998
Current Assets:
Cash and cash equivalents $ 8,444,259 $ 5,706,657
Accounts and other receivables, less reserves of approximately
1,134,000 and $870,000 at December 31, 1999 and 1998, respectively 6,163,284 5,318,087
Inventories 262,760 374,320
Prepaid expenses 382,291 342,599
------------ -----------
Total current assets 15,252,594 11,741,663
------------ -----------
Property and Equipment, at cost:
Computer equipment and software 5,529,795 4,786,904
Furniture and fixtures 1,105,128 1,036,313
Property and equipment under capital lease 918,042 896,486
Leasehold improvements 626,534 624,658
------------ -----------
8,179,499 7,344,361
Less-Accumulated depreciation and amortization 6,865,495 6,082,535
------------ -----------
1,314,004 1,261,826
------------ -----------
Other Assets 425,922 488,595
------------ -----------
$ 16,992,520 $13,492,084
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
MATHSOFT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31,
1999 1998
Current Liabilities:
Current portion of capital lease obligations and equipment financings $ 383,537 $ 482,004
Accounts payable 2,362,150 2,481,154
Accrued expenses and other current liabilities 2,742,141 2,452,472
Deferred revenue 2,722,052 1,886,533
-------------- -------------
Total current liabilities 8,209,880 7,302,163
-------------- -------------
Capital Lease Obligations and Equipment Financings,
less current portion 148,442 139,414
-------------- -------------
Commitments (Note 4)
Stockholders' Equity:
Preferred stock, $0.01 par value-
Authorized-1,000,000 shares
Issued and outstanding-none - -
Common stock, $0.01 par value-
Authorized-20,000,000 shares
Issued and outstanding-9,931,990 and 9,324,407, shares 99,320 93,244
at December 31, 1999 and 1998, respectively
Additional paid-in capital 30,834,687 29,706,364
Accumulated deficit (22,213,919) (23,667,397)
Cumulative translation adjustment (85,890) (81,704)
-------------- -------------
Total stockholders' equity 8,634,198 6,050,507
-------------- -------------
$ 16,992,520 $ 13,492,084
============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
MATHSOFT, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
SIX-MONTH
---------YEARS ENDED DECEMBER 31,--------- PERIOD ENDED YEAR ENDED
DECEMBER 31, JUNE 30,
1999 1998 1997 1997 1997
(Unaudited)
Revenues:
Software licenses $ 22,703,549 $ 20,839,101 $18,039,610 $11,145,569 $15,179,191
Services and other 5,899,836 3,607,670 3,183,901 1,878,408 2,498,536
---------------- -------------- ------------ ------------ ------------
Total revenues 28,603,385 24,446,771 21,223,511 13,023,977 17,677,727
---------------- -------------- ------------ ------------ ------------
Cost of Revenues:
Software licenses 3,565,472 2,963,682 3,397,952 1,817,283 3,124,158
Services and other 1,785,103 1,282,085 1,083,887 701,433 821,781
---------------- -------------- ------------ ------------ ------------
Total cost of revenues 5,350,575 4,245,767 4,481,839 2,518,716 3,945,939
---------------- -------------- ------------ ------------ ------------
Gross profit 23,252,810 20,201,004 16,741,672 10,505,261 13,731,788
---------------- -------------- ------------ ------------ ------------
Operating Expenses:
Sales and marketing 12,797,312 10,364,022 10,413,111 5,169,379 10,251,376
Research and development-
Gross 9,927,493 7,794,957 7,515,738 3,905,697 7,057,810
Less-Funded research (4,567,094) (2,831,339) (1,935,154) (1,090,096) (1,915,059)
---------------- -------------- ------------ ------------ ------------
Research and development, net 5,360,399 4,963,618 5,580,584 2,815,601 5,142,751
General and administrative 3,526,055 2,712,508 2,909,467 1,418,295 2,731,858
---------------- -------------- ------------ ------------ ------------
Total operating expenses 21,683,766 18,040,148 18,903,162 9,403,275 18,125,985
---------------- -------------- ------------ ------------ ------------
Income (loss) from
operations 1,569,044 2,160,856 (2,161,490) 1,101,986 (4,394,197)
Interest Income 231,401 168,217 120,399 49,653 153,111
Interest Expense (70,059) (86,066) (41,068) (29,270) (14,440)
---------------- -------------- ------------ ------------ ------------
Income (loss) before
provision for income
taxes 1,730,386 2,243,007 (2,082,159) 1,122,369 (4,255,526)
Provision for Income Taxes 276,908 22,879 46,655 17,785 44,452
---------------- -------------- ------------ ------------ ------------
Net income (loss) $ 1,453,478 $ 2,220,128 $(2,128,814) $ 1,104,584 $(4,299,978)
================ ============== ============ ============ ============
Basic Net Income (Loss)
per Share $ 0.15 $ 0.24 $ (0.24) $ 0.12 $ (0.49)
================ ============== ============ ============ ============
Diluted Net Income (Loss)
per Share $ 0.14 $ .22 $ (0.24) $ 0.11 $ (0.49)
================ ============== ============ ============ ============
Weighted Average Number
of Common Shares
Outstanding 9,769,772 9,244,307 9,026,376 9,068,714 8,841,170
================ ============== ============ ============ ============
Weighted Average Common
Shares Outstanding
Assuming Dilution 10,493,724 10,126,758 9,026,376 9,944,283 8,841,170
================ ============== ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
MATHSOFT, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
COMMON STOCK ADDITIONAL ACCUMULATED CUMULATIVE TOTAL COMPREHENSIVE
NUMBER OF $0.01 PAR PAID-IN DEFICIT TRANSLATION STOCKHOLDERS' NET INCOME
SHARES VALUE CAPITAL ADJUSTMENT EQUITY (LOSS)
Balance, June 30, 1996 8,579,262 $ 85,793 $ 28,158,558 $ (21,474,509) $ (11,146) $ 6,758,696 $ -
Acquisition of
acroScience Corporation 250,000 2,500 618,500 (1,217,622) - (596,622) -
Exercise of stock
options and Employee
Stock Purchase Plan 177,114 1,771 374,777 - - 376,548 -
Compensation associated
with issuance of stock
options - - 10,000 - - 10,000 -
Net loss - - - (4,299,978) - (4,299,978) (4,299,978)
Translation adjustment - - - - (80,518) (80,518) (80,518)
-------------
Comprehensive net
loss for the year
ended June 30, 1997 $ (4,380,496)
----------- ----------- ----------- -------------- ----------- -------------- =============
Balance, June 30, 1997 9,006,376 90,064 29,161,835 (26,992,109) (91,664) 2,168,126 -
Exercise of stock
options and Employee
Stock Purchase Plan 102,240 1,022 177,917 - - 178,939 -
Net income - - - 1,104,584 - 1,104,584 1,104,584
Translation adjustment - - - - 43,674 43,674 43,674
-------------
Comprehensive net
income for the six-month
period ended
December 31, 1997 $ 1,148,258
----------- ----------- ----------- -------------- ----------- -------------- =============
Balance, 9,108,616 91,086 29,339,752 (25,887,525) (47,990) 3,495,323
December 31, 1997
Exercise of stock
options and Employee
Stock Purchase Plan 215,791 2,158 366,612 - - 368,770 -
Net income - - - 2,220,128 - 2,220,128 2,220,128
Translation adjustment - - - - (33,714) (33,714) (33,714)
-------------
Comprehensive net
income for the year
ended December 31, 1998 $ 2,186,414
----------- ----------- ----------- -------------- ----------- -------------- =============
Balance, December 31, 1998 9,324,407 93,244 29,706,364 (23,667,397) (81,704) 6,050,507 -
Exercise of stock options
and Employee Stock
Purchase Plan 607,583 6,076 1,128,323 - - 1,134,399 -
Net income - - - 1,453,478 - 1,453,478 1,453,478
Translation adjustment - - - - (4,186) (4,186) (4,186)
-------------
Comprehensive net
income for the
year ended
December 31, 1999 $ 1,449,292
----------- ----------- ----------- -------------- ----------- -------------- =============
Balance, December 31, 1999 9,931,990 $ 99,320 $ 30,834,687 $ (22,213,919) $ (85,890) $ 8,634,198
============= ========== ============ ============== =========== =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
MATHSOFT, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
SIX-MONTH
PERIOD ENDED YEAR ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
1999 1998 1997 1997 1997
(Unaudited)
Cash Flows from Operating Activities:
Net income (loss) $ 1,453,478 $ 2,220,128 $(2,128,814) $1,104,584 $(4,299,978)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities-
Depreciation and amortization 978,635 1,065,421 1,166,749 648,866 1,063,503
Compensation associated with
issuance of stock options - - 10,000 - 10,000
Changes in assets and liabilities,
net of acquisitions-
Accounts and other receivables (845,199) (1,845,753) 157,618 (234,522) 643,756
Inventories 111,560 (119,115) 282,054 88,580 210,946
Prepaid expenses 103,023 (108,885) 212,048 241,811 (93,886)
Accounts payable (119,006) 237,868 (158,596) 206,543 329,822
Accrued expenses and other
current liabilities 289,671 215,813 367,039 (399,362) (252,499)
Deferred revenue 835,519 497,491 352,207 (54,202) 350,702
--------------- ------------ ------------ ----------- ------------
Net cash provided by
(used in) operating activities 2,807,681 2,162,968 260,305 1,602,298 (2,037,634)
--------------- ------------ ------------ ----------- ------------
Cash Flows from Investing Activities:
Purchases of property and equipment (835,139) (624,081) (754,775) (423,711) (780,171)
Increase in other assets (133,000) (474,405) (36,119) (15,579) (46,683)
--------------- ------------ ------------ ----------- ------------
Net cash used in
investing activities (968,139) (1,098,486) (790,894) (439,290) (826,854)
--------------- ------------ ------------ ----------- ------------
Cash Flows from Financing
Activities:
Payments on long-term debt - - - - (16,000)
Payments on capital lease obligations
and equipment financings (699,177) (641,425) (277,366) (138,901) (132,975)
Borrowings on capital lease obligations
and equipment financings 467,024 815,003 649,838 84,432 565,406
Proceeds from exercise of stock options,
warrants and Employee Stock Purchase Plan 1,134,399 368,770 320,169 178,939 376,548
--------------- ------------ ------------ ----------- ------------
Net cash provided by
financing activities 902,246 542,348 692,641 124,470 792,979
--------------- ------------ ------------ ----------- ------------
Effect of Exchange Rate Changes
on Cash and Cash Equivalents (4,186) (33,714) 55,391 43,674 (80,518)
--------------- ------------ ------------ ----------- ------------
Net Increase (Decrease) in Cash
and Cash Equivalents 2,737,602 1,573,116 217,443 1,331,152 (2,152,027)
Cash and Cash Equivalents,
beginning of period 5,706,657 4,133,541 3,916,098 2,802,389 4,954,416
--------------- ------------ ------------ ----------- ------------
Cash and Cash Equivalents, end of period $ 8,444,259 $ 5,706,657 $ 4,133,541 $4,133,541 $ 2,802,389
=============== ============ ============ =========== ============
Supplemental Disclosure of
Cash Flow Information:
Cash paid during the period
for-
Interest $ 70,059 $ 85,437 $ 41,068 $ 29,271 $ 14,439
=============== ============ ============ =========== ============
Income taxes $ 194,908 $ 10,000 $ 10,511 $ 2,981 $ 7,530
=============== ============ ============ =========== ============
Supplemental Disclosure of Noncash Investing and Financing Activities:
The Company financed $83,623 and $63,333 of equipment through capital leases in
the six-month period ended December 31, 1997 and in the year ended June 30,
1997, respectively.
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(1) Operations and Significant Accounting Policies
MathSoft, Inc. (MathSoft) was incorporated on October 12, 1984. MathSoft
develops, markets and supports software productivity tools for the technical
calculation and data analysis markets comprised of professionals, students and
educators.
On June 1, 1999, MathSoft incorporated FreeScholarships.com, Inc. (FSC) as a
wholly owned subsidiary of MathSoft. On June 11, 1999, FSC issued 3,545,455
shares of Series A Preferred Stock to MathSoft. FSC is an Internet company
providing information and assistance to a broad consumer market focused on
funding the costs of education. FSC launched its Web site during February 2000.
Accordingly, its activity through December 31, 1999 consisted primarily of
developing its business plan, developing its Web site and hiring employees.
The accompanying consolidated financial statements comprise those of MathSoft
and its wholly owned subsidiaries (collectively, the Company). All material
intercompany accounts and transactions have been eliminated in consolidation.
The Company is subject to a number of risks and uncertainties similar to those
of other companies of the same size within its industry, including, without
limitation, rapid technological change, competition and need to attract and
retain key employees.
The accompanying consolidated financial statements reflect the application of
certain accounting policies as described in this note and elsewhere in the
consolidated financial statements and notes.
(a) Change in Fiscal Year
On December 16, 1997, the Company changed its fiscal year from June 30 to
December 31. Accordingly, the Company's transition period was the six-month
period from July 1, 1997 to December 31, 1997. The unaudited consolidated
statements of operations and cash flows for the year ended December 31, 1997 are
presented for comparative purposes only. These unaudited statements, in the
opinion of management, include all adjustments (consisting only of normal and
recurring adjustments) necessary for fair presentation of results for the
period.
F-8
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
(b) Revenue Recognition
Revenue from the licensing of software products is recognized in accordance with
Statement of Position (SOP) No. 97-2, Software Revenue Recognition, as amended.
Revenues from software product license agreements are recognized upon execution
of a license agreement and delivery of the software, provided that the fee is
fixed or determinable and deemed collectible by management. If conditions for
acceptance are required subsequent to delivery, revenues are recognized upon
customer acceptance if such acceptance is not deemed to be perfunctory. The
Company provides for estimated returns and warranty costs at the time of sale.
The Company offers maintenance contracts and training on certain of its
products. Maintenance revenue is recognized ratably over the term of the related
contracts generally for one year or less. Training revenue is recognized as
services are performed. Amounts received in advance for maintenance agreements
are recorded as deferred revenue on the accompanying consolidated balance
sheets. (See Note 1(g) for Funded Research)
(c) Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates market, and
consist of short-term, highly liquid investments with original maturities of
less than three months. Cash equivalents were approximately $5,960,000 and
$4,000,000 as of December 31, 1999 and 1998, respectively, and consisted
primarily of investments in commercial paper.
(d) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market and
consist of the following:
DECEMBER 31,
1999 1998
Raw materials $ 82,444 $ 98,200
Finished goods 180,316 276,120
---------- --------
$ 262,760 $374,320
========== ========
F-9
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
(e) Depreciation and Amortization
The Company provides for depreciation and amortization by charges to operations
on a straight-line basis, in amounts estimated to allocate the cost of the
assets over their estimated useful lives, as follows:
ASSET CLASSIFICATION USEFUL LIVES
Computer equipment and software 3 years
Furniture and fixtures 3 - 5 years
Leasehold improvements Life of lease
Property and equipment under capital leases are amortized over the shorter of
the estimated useful life of three to five years or the term of the lease.
(f) Research and Development
The Company accounts for its software research and development costs in
accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to Be Sold, Leased or Otherwise
Marketed. During the years ended December 31, 1999 and 1998, the six-month
period ended December 31, 1997 and the year ended June 30, 1997, the Company
expensed all research and development costs, as those costs incurred from
technological feasibility to general release were not material.
(g) Funded Research
Funded Research amounts represent reimbursements primarily from government
agencies for work performed by the Company's research and development department
on a cost-plus basis. These amounts are recognized as the work is performed and
are recorded as an offset against the Company's total research and development
expenditures. During the fiscal years ended December 31, 1999 and 1998, the
twelve months ended December 31, 1997, the six months ended December 31, 1997
and the fiscal year ended June 30, 1997, funded research totaled approximately
$4,567,000, $2,831,000, $1,935,000, $1,090,000 and $1,915,000, respectively.
F-10
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
(h) 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 based on 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:
SIX-MONTH YEAR
PERIOD ENDED ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
1999 1998 1997 1997 1997
(Unaudited)
Weighted average common
shares outstanding 9,769,772 9,244,307 9,026,376 9,068,714 8,841,170
Effect of dilutive
stock options 723,952 882,451 - 875,569 -
---------- ---------- ----------- ------------ ---------
Weighted average common
shares outstanding
assuming dilution 10,493,724 10,126,758 9,026,376 9,944,283 8,841,170
========== ========== =========== ============ =========
The above schedule does not include shares of common stock or options to
purchase shares of common stock of FSC, the Company's wholly owned subsidiary.
The following securities were not included in computing diluted earnings per
share because their effect would be antidilutive:
SIX-MONTH YEAR
PERIOD ENDED ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
1999 1998 1997 1997 1997
(Unaudited)
Antidilutive stock options 349,116 255,586 2,872,292 1,996,723 3,001,562
======= ======= =========== ============ =========
F-11
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
(i) Foreign Currency Translation
Assets and liabilities of the Company's foreign branch are translated to U.S.
dollars using the exchange rate at each balance sheet date. Income and expense
accounts are translated using an average rate of exchange during the period.
Foreign currency translation adjustments are accumulated as a separate component
of stockholders' equity. The effect of aggregate transaction gains and losses
are recognized currently in the statements of operations. The Company recognized
transaction losses of approximately $14,000, $20,000 and $277,000 in the years
ended December 31, 1999, 1998 and December 31, 1997 (unaudited), respectively,
$75,000 in the six-month period ended December 31, 1997 and approximately
$257,000 in the year ended June 30, 1997.
(j) Other Assets
Other assets, consisting primarily of purchased technology, long-term deposits
and capitalized legal patent fees, totaled $425,922 and $488,595, net of
accumulated amortization of $194,446 and $98,415 as of December 31, 1999 and
1998, respectively. During 1998, the Company purchased a UK distributor for
approximately $382,000 and this amount is included in other assets as goodwill
net of accumulated amortization of $135,701 and is being amortized over
thirty-six months.
The Company assesses the realizability of its long-lived assets in accordance
with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. Under SFAS No. 121, the Company is
required to assess the valuation of its long-lived assets, including intangible
assets, based on the estimated cash flows to be generated by such assets. Based
on its most recent analysis, the Company believes that no material impairment of
intangible assets exists as of December 31, 1999.
(k) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company's financial instruments that subject the Company to
credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company maintains the majority of its cash balances with one
financial institution. The Company has not experienced significant losses
related to accounts receivable from any individual customers or groups of
customers in any specific industry or geographic area.
F-12
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
During the years ended December 31, 1999 and 1998 and the six-month period ended
December 31, 1997, one customer accounted for 13%, 13% and 12% of net revenues,
respectively. One customer accounted for 14% of net revenues in the year ended
June 30, 1997. As of December 31, 1999, the Company had one customer that
accounted for 15% of accounts receivable. As of December 31, 1998 the Company
had one customer that accounted for 12% of accounts receivable.
(l) Use of Estimates
The preparation of these consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
(m) Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
disclosure about fair value of financial instruments consisting of cash,
accounts receivable, equipment financing and capital leases. The estimated fair
value of these financial instruments approximates their carrying value in the
accompanying financial statements.
(n) New Accounting Standards
In June 1999, Financial Accounting Standards Board (FASB) issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities-Deferral of the
Effective Date of FASB Statement No. 133, which defers the effective date of
SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15,
2000. SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, issued in June 1998, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company does not
expect adoption of this statement to have a significant impact on its
consolidated financial position on results of operations.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin (SAB) No. 101, as amended by SAB 101(a), Revenue Recognition
in Financial Statements. SAB No. 101 is effective for the second quarter
of all fiscal periods beginning after December 15, 1999. Adoption of SAB No.
101 is not expected to have a material impact on the Company's consolidated
financial position or results of operations.
F-13
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
In December 1998 the AICPA issued Statement of Position 98-9, Modification of
SOP 97-2 Software Revenue Recognition with respect to Certain Transactions. SOP
98-9 requires use of the residual method of recognition of revenues when vendor
specific objective evidence exists for undelivered elements but does not exist
for delivered elements of a software arrangement. The Company will be required
to comply with the provision of SOP 98-9 for transactions entered into January
1, 2000. The Company does not expect adoption of SOP 98-9 will have a material
impact on its financial position or operating results.
(2) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and tax bases of assets and liabilities using currently enacted tax
rates.
The components of domestic and foreign income (loss) before the provision for
income taxes are as follows:
SIX-MONTH
PERIOD ENDED YEAR ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
1999 1998 1997 1997
Domestic $1,340,869 $1,706,031 $ 633,233 $(4,011,290)
Foreign 389,517 536,976 489,136 (244,236)
---------- ---------- ------------ ------------
$1,730,386 $2,243,007 $1,122,369 $(4,255,526)
========== ========== ============ ============
F-14
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
The provisions for income taxes consist of the following:
SIX-MONTH
PERIOD ENDED YEAR ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
1999 1998 1997 1997
Current tax expense-
Foreign $276,908 $ 22,879 $ 17,785 $ 44,452
Deferred tax (expense) benefit-
Federal 70,000 (387,000) 578,000 -
State 12,000 (68,000) 102,000 -
--------- ---------- ---------- -----------
82,000 (455,000) 680,000 -
Change in valuation reserve (82,000) 455,000 (680,000) -
--------- ---------- ---------- -----------
Total $276,908 $ 22,879 $ 17,785 $ 44,452
========= ========== ========== ===========
F-15
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
A reconciliation of the federal statutory rate to the Company's effective tax
rate is as follows:
SIX-MONTH
PERIOD ENDED YEAR ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
1999 1998 1997 1997
Income tax provision at
federal statutory rate 34.00% 34.00% 34.00% (34.00%)
Increase (decrease) in
tax resulting from-
State tax provision, net
of Federal rate 6.27 6.03 6.36 (6.18)
Other Permanent Items 0.76 0.96 1.00 0.83
Effect of Foreign Tax Rate 8.35 (7.12) (13.23) 3.00
Foreign Tax Deduction (5.44) (0.35) (0.54) (0.36)
Utilization of NOL (27.93) (32.50) (26.00) 40.27
Valuation Allowance 17.34 13.80 11.92 -
Credits (17.34) (13.80) (11.92) (2.52)
--------- ------------- ----------- ----------
16.01% 1.02% 1.59% 1.04%
========= ============= =========== ==========
The significant components of the deferred tax assets and liabilities are as
follows:
DECEMBER 31,
1999 1998
Net operating loss carryforward $ 5,113,000 $ 5,298,000
Research and development
credit carryforwards 1,320,000 1,020,000
Depreciation 454,000 362,000
Temporary differences 667,000 792,000
------------ ------------
7,554,000 7,472,000
Valuation allowance (7,554,000) (7,472,000)
------------ ------------
Net deferred tax asset $ - $ -
============ ============
F-16
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
Due to the uncertainty surrounding the realization of its deferred tax assets,
the Company has recorded a full valuation allowance against its deferred tax
assets.
During 1999, the Company has utilized approximately $545,000 of net operating
loss carryforwards and has available net operating loss carryforwards of
approximately $15,039,000 and tax credit carryforwards of approximately
$1,320,000. The net operating loss and tax credit carryforwards may be used to
offset future federal taxable income and federal income taxes, respectively,
through the year ending December 31, 2013. The Internal Revenue Code contains
provisions that limit the net operating loss and credit carryforwards available
to be used in any given year upon the occurrence of certain events, including
significant changes in ownership interests.
(3) Equipment Financing
During 1999, the Company entered into several financing arrangements for the
purchase of fixed assets totaling $467,024, all of which were equipment lease
financing arrangements. All of the financings are payable in 24 equal monthly
payments of principal plus interest ranging from 8.67% to 9.66%.
The Company has purchased equipment under financing agreements and has also
leased certain equipment under capital leases expiring through fiscal 2002.
Future minimum payments as of December 31, 1999 under these financing
arrangements and capital leases are as follows:
Year ending December 31,
2000 $414,473
2001 156,006
2002 1,396
--------
Total minimum lease payments 571,875
Less-Amount representing interest 39,896
--------
Present value of minimum payments 531,979
Less-Current portion of equipment financings and capital leases 383,537
--------
$148,442
========
F-17
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
(4) Commitments
The Company has operating leases for its Cambridge, Waltham, Seattle and
international office spaces and certain office equipment. One lease provides
for uneven payments during the lease term; however, rent expense is charged to
operations evenly over the leased period.
The approximate future lease payments under the Company's operating lease
arrangements, exclusive of operating costs and net of sublease revenue through
October 2004 are as follows:
GROSS
OPERATING
LEASES
Year ending December 31,
2000 $ 1,273,000
2001 1,220,000
2002 1,194,000
2003 1,194,000
2004 752,000
-----------
Total future lease payments $ 5,633,000
===========
Rental expense under the Company's operating leases was approximately $913,000,
$793,000 and $786,000 for the years ended December 31, 1999 and 1998 and
December 31, 1997 (unaudited), respectively, $430,000 for the six-month period
ended December 31, 1997, and approximately $723,000 for the year ended June 30,
1997.
(5) Stockholders' Equity
(a) Stock Option Plans
The Company has a stock option plan that was adopted in 1992 (the 1992 Plan)
whereby the Board of Directors may grant incentive stock options (ISOs),
nonqualified stock options, awards of common stock and authorizations to make
direct purchases of common stock to eligible employees and others, as defined.
ISOs are granted at a price not less than fair market value at the date of
grant. The options typically vest over a five-year period. At December 31,
1999 the Company had 538,499 options available for future grant under the 1992
Plan.
F-18
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
The Company has a Nonemployee Director Stock Option Plan (the 1992 Director's
Plan) pursuant to which directors who are not officers or employees of the
Company annually receive options to purchase shares of the Company's common
stock. A total of 400,000 shares of common stock may be issued under the 1992
Director's Plan. The exercise price of each option equals the fair market value
of the stock on the date of grant. The options are exercisable upon the earlier
of one year from the date of grant or the first annual meeting of stockholders,
following the date of grant at which members of the Board are elected. At
December 31, 1999, the Company had 295,416 options available for future grant
under the 1992 Director's Plan.
The Board of Directors granted Key Officer Stock Options to members of senior
management of the Company in 1992. The Key Officer Stock Options are
nonqualified, nonplan stock options exercisable for an aggregate of 907,556
shares of common stock at an exercise price of $1.08 per share, the fair market
value of the common stock on the date of grant. Each such option expires 11
years from the date of grant, subject to earlier termination if the optionee
ceases to serve the Company other than by reason of death or disability. Each
Key Officer Stock Option became exercisable upon the closing of the Company's
initial public offering.
The Company has a Non-Qualified, Non-Officer Stock Option Plan (the 1996
Non-Officer Plan) under which employees and consultants to the Company are
granted nonqualified options to purchase stock in the Company. A total of
200,000 shares of common stock may be issued under the 1996 Non-Officer Plan.
The vesting of options granted under the 1996 Non-Officer Plan is determined at
the date of grant. Each option expires 10 years from the date of grant, subject
to earlier termination if the optionee ceases to serve the Company other than by
reason of death or disability, and is not transferable. At December 31, 1999,
the Company had 46,642 options available for future grant under the 1996
Non-Officer Plan.
As of December 31, 1999, a total of 5,407,556 shares of common stock were
reserved for issuance under the 1992 Plan, the 1992 Director's Plan, the Key
Officer Stock Option Plan, and the 1996 Non-Officer Plan.
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
has adopted the disclosure-only alternative under SFAS No. 123 for employees,
which requires disclosure of the pro forma effects on earnings and earnings per
share as if SFAS No. 123 had been adopted, as well as certain other information.
The Company has computed the pro forma disclosures required under SFAS No. 123
for all stock options granted during fiscal years 1997, 1998 and 1999, and the
six months ended December 31, 1997, including the Employee Stock Purchase Plan,
using the Black-Scholes option pricing model prescribed by SFAS No. 123. For
nonemployees, SFAS No. 123 requires that the compensation expense calculated
using the Black-Scholes option pricing model be charged to the statement of
operations. The value of options awarded to nonemployees as determined under
SFAS No. 123 is not material to the results of operations for the fiscal year
ended June 30, 1997, or for the six-month period ended December 31, 1997. There
were no grants to nonemployees for the years ended December 31, 1998 and 1999.
F-19
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
The assumptions used and the weighted average information are as follows:
SIX-MONTH
PERIOD ENDED YEAR ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
1999 1998 1997 1997
Risk-free interest rates 5.10% - 6.33% 4.53% - 5.67% 5.95% - 6.61% 6.00% - 6.74%
Expected dividend yield None None None None
Expected lives 7 years 5 years 5 years 5 years
Expected volatility 119% 77% 70% 70%
Weighted average grant-
date fair value of options
granted during the period $ 2.52 $ 1.67 $ 2.50 $ 1.62
Weighted average remaining
contractual life of options
outstanding 7.06 years 7.16 years 7.76 years 5.10 years
SIX-MONTH
PERIOD ENDED YEARS ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
1999 1998 1997 1997
Net income (loss)
as reported $ 1,453,478 $ 2,220,128 $1,104,584 $(4,299,978)
============ ============= ========== ============
Pro forma net
income (loss) $ 359,323 $ 1,271,140 $ 706,565 $(4,880,616)
============ ============= ========== ============
Basic income (loss)
per share as reported $ 0.15 $ 0.24 $ 0.12 $ (0.49)
============ ============= ========== ============
Diluted net income
(loss) per share as reported $ 0.14 $ 0.22 $ 0.11 $ (0.49)
============ ============= ========== ============
Pro forma basic net
income (loss) per share $ 0.03 $ 0.14 $ 0.08 $ (0.55)
============ ============= ========== ============
Pro forma diluted net
income (loss) per share $ 0.03 $ 0.13 $ 0.07 $ (0.55)
============ ============= ========== ============
F-20
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
Because the method prescribed by SFAS No. 123 has not been applied to options
granted prior to 1995, the resulting pro forma compensation cost may not be
representative of that to be expected in the future years.
The Company's stock option activity for all plans is as follows:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
Outstanding at June 30, 1996 2,368,368 $ 3.03
Granted 1,289,514 2.74
Exercised (148,651) 1.64
Canceled (507,669) 4.28
------------ ----------------
Outstanding at June 30, 1997 3,001,562 2.33
Granted 110,900 3.42
Exercised (78,770) 1.60
Canceled (161,400) 2.35
------------ ----------------
Outstanding at December 31, 1997 2,872,292 2.39
Granted 721,150 2.67
Exercised (161,278) 1.56
Canceled (183,658) 3.30
------------ ----------------
Outstanding at December 31,1998 3,248,506 2.43
Granted 729,950 2.78
Exercised (541,248) 1.83
Canceled (442,140) 2.82
------------- ---------------
Outstanding at December 31,1999 2,995,068 $ 2.57
============= ===============
Exercisable at December 31, 1999 1,732,446 $ 2.44
============= ===============
Exercisable at December 31, 1998 1,847,454 $ 2.21
============== ==============
Exercisable at June 30, 1997 1,378,182 $ 2.04
============== ==============
F-21
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
The following table summarizes information about stock options outstanding at
December 31, 1999:
-----OPTIONS OUTSTANDING---------- --------OPTIONS EXERCISABLE--------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE WEIGHTED
NUMBER OF REMAINING AVERAGE NUMBER OF REMAINING AVERAGE
RANGE OF OPTIONS CONTRACTUAL OPTION OPTIONS CONTRACTUAL OPTION
OPTION PRICES OUTSTANDING LIFE PRICE EXERCISABLE LIFE PRICE
1.00 - 2.06 697,537 2.23 years $ 1.85 587,534 0.86 years $ 1.82
2.25 - 4.00 2,166,495 5.60 years 2.62 1,066,626 4.12 years 2.54
4.75 - 6.38 131,036 2.79 years 5.47 78,286 2.30 years 5.56
----------- -----------
2,995,068 4.70 years 2.57 1,732,446 2.94 years 2.44
=========== ===========
(b) FreeScholarships.com Option Activity
FreeScholarships.com adopted its Stock Option and Incentive Plan during 1999
(the 1999 Plan) whereby the Board of Directors may grant incentive stock options
(ISOs), nonqualified stock options and awards of common stock to eligible
employees and others, as defined. ISOs are granted at a price not less than fair
market value at the date of grant. The options typically vest over a four-year
period, beginning on the year anniversary of the date of grant. The number of
shares of Common Stock that may be issued pursuant to the 1999 Plan is 1,909,090
shares.
NUMBER OF EXERCISE
SHARES PRICE
Outstanding at December 31, 1998 - $ -
Granted 1,259,909 0.13
--------- --------
Outstanding at December 31, 1999 1,259,909 $ 0.13
========= ========
Exercisable at December 31, 1999 - -
========= ========
F-22
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
There were no grants to nonemployees for the year ended December 31, 1999. The
SFAS No. 123 assumptions used and weighted average information for the year
ended December 31, 1999 are as follows:
Risk-free interest rates 6.05%-6.33%
Expected dividend yield None
Expected lives 7 years
Expected volatility 70%
Weighted average grant-date fair value
of options granted during the period $0.09
Weighted average remaining
contractual life of options outstanding 9.47 years
Had compensation cost for FreeScholarships.com stock option plan been recorded
under SFAS No. 123 the effect on FreeScholarships.com's net loss would have been
immaterial.
(c) Employee Stock Purchase Plan
The Company has an employee stock purchase plan pursuant to which the Company
has reserved and may issue up to 450,000 shares of common stock in semiannual
offerings over a 10-year period. Shares of common stock are sold at 85% of fair
market value, as defined. During the years ended December 31, 1999 and 1998,
the Company issued 66,335 and 54,513 shares under the Plan, respectively.
During the six-month period ended December 31, 1997, the Company issued 23,470
shares under the Plan. During the year ended June 30, 1997, the Company issued
28,463, shares under the Plan.
F-23
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
(6) Geographic Data
Revenues by geographic area based on customer location were as follows (in
thousands):
SIX-MONTH
PERIOD ENDED YEAR ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
GEOGRAPHIC AREA 1999 1998 1997 1997
United States and Canada $20,829 $17,549 $ 9,177 $ 11,661
United Kingdom 2,313 1,640 977 1,675
Germany 1,217 813 625 648
Japan 737 768 442 849
Other 3,507 3,677 1,803 2,845
------- ------- ------------ ----------
$28,603 $24,447 $ 13,024 $ 17,678
======= ======= ============ ==========
(7) Segment Reporting
The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise
and Related Information, during the fourth quarter of 1998. SFAS No. 131
established standards for reporting information about operating segments in
annual financial statements and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
established standards for related disclosures about products, services and
geographic areas. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision, or decision making group, in deciding
how to allocate resources and in assessing performance. MathSoft's chief
operating decision making group consists of the Chief Executive Officer, members
of Senior Management and the Board of Directors. The operating segments are
managed separately because each represents a different market served by
specialized products, services and distribution.
MathSoft's reportable operating segments include the Engineering and Education
Software Products Division, the Data Analysis Software Products Division, and
FreeScholarships.com. Revenues for Engineering and Education Software Products
Division are derived from sales of Mathcad, Electronic Books, Axum, Extension
Packs and Study Works. Revenues from the Data Analysis Software Products
Division include S-PLUS licenses, maintenance, training and consulting, add-on
modules and StatServer. The Company did not generate revenues related to
FreeScholarships.com for the year ended December 31, 1999.
F-24
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. MathSoft evaluates performance
based on stand-alone operating segment net income (loss). Revenues are
attributed to geographic areas based on where the end customer is located (see
Note 6).
SIX-MONTH
PERIOD ENDING YEAR ENDED
YEARS ENDED DECEMBER 31, DECEMBER 31, JUNE 30,
1999 1998 1997 1997
(In thousands)
Segment Revenues-
Engineering and Education
Software Products Division $ 16,391 $ 15,604 $ 8,776 $ 11,850
Data Analysis Software
Products Division 12,212 8,843 4,248 5,828
FreeScholarships.com - - - -
-------------- -------------- ---------- -----------
Total net revenues $ 28,603 $ 24,447 $ 13,024 $ 17,678
============== ============== ========== ===========
Segment Income (Loss)-
Engineering and Education
Software Products Division $ 1,552 $ 1,973 $ 1,153 $ (2,153)
Data Analysis Software
Products Division 1,743 247 (48) (2,147)
FreeScholarships.com (1,842) - - -
-------------- -------------- ---------- -----------
Total net income (loss) $ 1,453 $ 2,220 $ 1,105 $ (4,300)
============== ============== ========== ===========
Segment Assets-
Engineering and Education
Software Products Division $ 19,641 $ 14,798 $ 12,125 $ 11,201
Data Analysis Software
Products Division 4,227 4,074 3,067 2,965
FreeScholarships.com 1,506 - - -
Eliminations (8,381) (5,380) (5,380) (5,380)
-------------- -------------- ---------- -----------
Total $ 16,993 $ 13,492 $ 9,812 $ 8,786
============== ============== ========== ===========
Segment Expenditures to
Acquire Long-Lived Assets-
Engineering and Education
Software Products Division $ 229 $ 436 $ 232 $ 440
Data Analysis Software
Products Division 450 662 207 397
FreeScholarships.com 289 - - -
-------------- -------------- ---------- -----------
Total $ 968 $ 1,098 $ 439 $ 837
============== ============== ========== ===========
Segment Interest Income-
Engineering and Education
Software Products Division $ 169 $ 168 $ 50 $ 147
Data Analysis Software
Products Division 7 - - 6
FreeScholarships.com 55 - - -
-------------- -------------- ---------- -----------
Total $ 231 $ 168 $ 50 $ 153
============== ============== ========== ===========
F-25
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
Segment Interest Expense-
Engineering and Education
Software Products Division $ 37 $ 50 $ 18 $ 11
Data Analysis Software
Products Division 33 36 11 3
FreeScholarships.com - - - -
-------------- -------------- ---------- -----------
Total $ 70 $ 86 $ 29 $ 14
============== ============== ========== ===========
Segment Income Tax Provision-
Engineering and Education
Software Products Division $ 162 $ 23 $ 18 $ 44
Data Analysis Software
Products Division 115 - - -
FreeScholarships.com - - - -
-------------- -------------- ---------- -----------
Total $ 277 $ 23 $ 18 $ 44
============== ============== ========== ===========
Segment Depreciation
and Amortization-
Engineering and Education
Software Products Division $ 465 $ 584 $ 396 $ 667
Data Analysis Software
Products Division 501 481 253 397
FreeScholarships.com 13 - - -
-------------- -------------- ---------- -----------
Total $ 979 $ 1,065 $ 649 $ 1,064
============== ============== ========== ===========
(8) Accrued Expenses
Accrued expenses and other current liabilities consist of the following:
DECEMBER 31,
1999 1998
Accrued payroll and payroll-related items $ 1,342,996 $1,196,616
Accrued vacation 419,243 440,676
Accrued royalties 272,760 178,918
Other accrued expenses 707,142 636,262
------------- ----------
$ 2,742,141 $2,452,472
============= ==========
F-26
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999
(Including Data Applicable to Unaudited Period)
(Continued)
(9) Line of Credit
The Company has a line of credit with a bank, collateralized by substantially
all of the Company's assets. Borrowings are limited to the lesser of 80% of
eligible domestic accounts receivable, as defined, or $2,000,000. Interest on
outstanding borrowings under this line is based on the bank's prime rate (8.5%
at December 31, 1999) plus 0.5%. The Company had no outstanding borrowings under
this line as of December 31, 1999. The agreement, which expires April 30, 2000,
contains covenants that, among other things, require the Company to meet certain
profitability and maximum leverage ratios and to maintain a minimum level of
tangible net worth.
(10) Valuation and Qualifying Accounts
A rollforward of the allowance for doubtful accounts and allowance for sales
returns for the years ended December 31, 1999, 1998, the six-month period ended
June 30, 1997 and the year ended June 30, 1997 are as follows:
BALANCE,
BEGINNING CHARGED TO BALANCE,
OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
Year Ended December 31, 1999:
Allowance for doubtful accounts $ 169,062 $ 72,737 $ 98,638 $ 143,161
Allowance for sales returns 700,547 290,238 - 990,785
---------- ---------- ----------- ----------
Total reserve for accounts receivable $ 869,609 $ 362,975 $ 98,638 $1,133,946
========== ========== =========== ==========
Year Ended December 31, 1998:
Allowance for doubtful accounts $ 459,820 $ 97,708 $ 388,466 $ 169,062
Allowance for sales returns 1,138,513 122,487 560,453 700,547
---------- ---------- ----------- ----------
Total reserve for accounts receivable $1,598,333 $ 220,195 $ 948,919 $ 869,609
========== ========== =========== ==========
Six-Month Period Ended December 31, 1997:
Allowance for doubtful accounts $ 410,825 $ 56,660 $ 7,665 $ 459,820
Allowance for sales returns 1,309,031 105,119 275,637 1,138,513
---------- ---------- ----------- ----------
Total reserve for accounts receivable $1,719,856 $ 161,779 $ 283,302 $1,598,333
========== ========== =========== ==========
Year Ended June 30, 1997:
Allowance for doubtful accounts $ 376,734 $ 83,297 $ 49,206 $ 410,825
Allowance for sales returns 398,944 1,306,858 396,771 1,309,031
---------- ---------- ----------- ----------
Total reserve for accounts receivable $ 775,678 $1,390,155 $ 445,977 $1,719,856
========== ========== =========== ==========
F-27