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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, 2000
Commission file number 0-020992
MATHSOFT, INC.
--------------
(now d/b/a INSIGHTFUL CORPORATION)
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-2842217
------------- ----------------
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification)
1700 WESTLAKE AVE. N. #500 98109-3044
SEATTLE, WASHINGTON ----------
- --------------------------------------- (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code (206) 283-8802
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. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant was approximately $11,754,119 as of March 23, 2001 (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, 2001 was 10,726,806.
Documents incorporated by reference in Part III of this 10-K: Proxy
Statement for Registrant's 2001 Annual Meeting of Shareholders.
PART I
ITEM 1. BUSINESS.
General
MathSoft, Inc. is now doing business as Insightful Corporation
("Insightful" or the "Company").
The Company was originally incorporated in Massachusetts in October 1984
under the name Engineering Specific Products Corp. and changed its name to
MathSoft, Inc. in January 1986. Following the closing of its internet
business FreeScholarships.com in September 2000 and the sale of its
Engineering and Education Products Division in January 2001, MathSoft, Inc.
will now do business as Insightful Corporation (NASDAQ: IFUL). The
Company's principal executive offices are located at 1700 Westlake Ave. N,
Suite 500, Seattle, Washington 98109, and its telephone number is (206)
283-8802.
As of December 31, 1999 the company operated three divisions consisting of
its Data Analysis Products Division (DADP), Engineering and Education
Products Division (EEPD), and FreeScholarships.com (FSC). In September
2000, the Company discontinued operations of its internet business FSC. In
October 2000, the Company signed a letter of intent to sell the operations
of its technical calculation software business, EEPD, to a third party.
Consistent with this letter of intent, the Company sold the EEPD division
on January 23, 2001. Accordingly the Company has recorded the operations of
FSC and EEPD as discontinued operations. The accompanying consolidated
financial statements and selected data contain certain accounts which have
been reclassified to reflect these dispositions.
The Company's continuing operations and primary focus are to provide
software and consulting solutions for statistical analysis, data mining,
and analytic Customer-Relations-Management (CRM). The Company's principal
location has shifted to Seattle, Washington, where the Data Analysis
Products Division ("DAPD") is located. This business was acquired by
Mathsoft in June 1993 through the acquisition of substantially all the
assets of Statistical Sciences, Inc. The Company's current solutions
facilitate mining, analyzing, viewing, and predicting critical information
for faster, intelligent, and more efficient management decisions.
The market for analytic applications is expanding rapidly according to
industry sources. The company's solutions serve a variety of industries
including financial institutions, pharmaceutical, biotechnology,
telecommunications, GIS, government agencies and others.
The Company's goals are to become a leading provider in its market domain
by expanding :
- Its user base from primarily technical specialists to mainstream
business users.
- Its products from desktop applications to server applications
- Its data scale from moderate size to large scale
- Its market from primarily domestic to worldwide coverage
S-Plus is a registered trademark of the Company. Insightful, StatServer and
FreeScholarships are trademarks of the Company. All other trademarks are
the property of their respective owners.
2
Products
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, 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 one of 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 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 StatServer. 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 , Internet Explorer
or Powerbuilder 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.
3
MARKETING AND SALES
The Company's market for Statistical Analysis, Data Mining and Analytic CRM
is serving a variety of industries including Financial Institutions,
Biotechnology, Pharmaceutical, Telecommunications and other industries. The
Company's solutions are used in a variety of functions including research,
engineering, production, marketing, finance, and investments.
The Company reaches domestic customers of its products and consulting
services 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 telesales and the direct sales
force.
Internationally, the Company reaches customers of its products and
consulting services primarily through a network of resellers and
distributors. In the United Kingdom, the Company utilizes its direct sales
force to sell directly to end-users.
CUSTOMER TECHNICAL SUPPORT
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.
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.
The Company subcontracts with a third party vendor, located in Salem,
Oregon, to manufacture all of its S-PLUS product line updates. The Company
warehouses inventory, 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.
4
PRODUCT DEVELOPMENT
Insightful's software products research and development organization 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.
Insightful's development team consists of experts in software engineering,
quality assurance, mathematics, statistics, engineering and documentation.
In software engineering, Insightful's professional staff has expertise in
computer graphics, compiler design, user interface design and advanced
Windows and Internet technologies.
During the fiscal years ended December 31, 2000, 1999 and 1998, net
research and development costs charged to operations were $2,310,000,
$1,669,000, and $2,301,000, respectively. The Company did not capitalize
any software research and development costs during the twelve months ended
December 31, 2000 as software research and development costs incurred
between technological feasibility and general release were not material.
COMPETITION
The market for data analysis software products is highly competitive. The
Company considers its principal competition to include statistical software
products from such companies as SAS and SPSS, and alternative data analysis
programming languages, specifically "R". The Company also faces competition
from companies providing competing software solutions, such as spreadsheets
(Excel from Microsoft) and mathematical calculation tools (Matlab from The
MathWorks). The Company may also face new competition from potential
entrants into the 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 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 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.
INTELLECTUAL PROPERTY RIGHTS AND LICENSES
Insightful's software is proprietary and the Company attempts to protect it
with copyrights, patents, 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
Insightful, 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, Insightful 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. However, in
those areas where the Company has no patent protection, judicial
enforcement of copyright laws may be uncertain.
5
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.
EMPLOYEES
As of December 31, 2000, the Company's continuing operations employed
approximately 140 regular full-time and part-time employees, of whom 15
were outside the United States. As necessary, the Company supplements its
regular employees with temporary and contract personnel in its continuing
operations. As of December 31, 2000, the Company employed 8 temporary and
contract personnel in its continuing operations, of whom one was located
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, and
the activities of competitors. Because a high percentage of the Company's
expenses are relatively fixed in the near term, minor variations in the
timing of orders and shipments can cause significant variations in
quarterly operating results. The Company operates with little or no backlog
and has no long-term contracts. Substantially all of its product revenues
in each quarter result from software licenses issued in that quarter making
the Company's ability to accurately forecast future revenues and income for
any period necessarily limited. Any forward-looking information provided
from time to time by the Company represents only management's then-best
current estimate of future results or trends, and actual results may differ
materially from those contained in the Company's estimates.
Potential Volatility of Stock Price. There has been significant volatility
in the market price of securities of technology companies. The Company
believes factors such as announcements of new products by the Company or
its competitors, quarterly fluctuations in the Company's financial results
or other software companies' financial results, shortfalls in the Company's
actual financial results compared to results previously forecasted by stock
market analysts, and general conditions in the software 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.
6
Risks Associated with Acquisitions. The Company has made a number of
acquisitions and will continue to review future acquisition opportunities.
No assurances can be given that acquisition candidates will continue to be
available on terms and conditions acceptable to the Company. Acquisitions
involve numerous risks, including, among other things, possible dilution to
existing shareholders, difficulties and expenses incurred in connection
with the acquisitions and the subsequent assimilation of the operations and
services or products of the acquired companies, the difficulty of operating
new (albeit related) businesses, the diversion of management's attention
from other business concerns and the potential loss of key employees of the
acquired company. In the event that the operations of an acquired business
do not live up to expectations, the Company may be required to restructure
the acquired business or write-off the value of some or all of the assets
of the acquired business. There can be no assurance that any acquisition
will be successfully integrated into the Company's operations.
Limited Operating History in the Internet Market. Historically, the
Company's revenues have come from licenses related to the Company's core
product families. Although the Company anticipates that the majority of its
revenue will continue to come from licenses related to its core product
families, these moves toward increased focus on the Internet have required,
and will continue to require, changes in personnel and business processes.
Internet-Related Risks. The Company's online store and its online courses
available through the World Wide Web, such as its S-PLUS Knowledge
Discovery Series, rely on the continued growth of the Internet. The Company
expects that continued consumer concerns regarding security, reliability,
privacy, ease of use, and the changing regulatory environment will affect
the development of the Company's products and services connected with the
Internet.
Security. If the Company's web site security fails, it may damage the
Company's ability to sell products through its online store. In addition,
the Company may be liable if security on its web sites is breached and the
Company is the victim of credit card fraud.
Privacy. Visitors to the Company's online store are asked for certain
personally identifying information, which is then used to ship products,
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 and the online courses,
find it difficult to use the Company's products and services, the Company's
revenues could decrease and its brands could be damaged.
Changing Regulatory Environment. Laws and regulation regarding the internet
are becoming more common. Changes in laws regarding privacy, internet
access taxes or other areas may require the Company to change the way it
does business over the Internet. 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.
Risks Associated with Divestitures. Following the sale of the Company's
EEPD unit in January of 2001, the Company is now functioning with fewer
employees while at the same time concentrating on a single market. The lack
of diversification of product lines may make the Company more subject to
market fluctuations.
7
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. 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 24% of the Company's total revenues in the
fiscal year ended December 31, 2000, and approximately 26% and 28% of the
Company's total revenues in the fiscal years ended December 31, 1999, and
1998, 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. The S programming language, the language
on which all of the Company's products are based, and other software
licenses incorporated in the Company's products are currently licensed from
a single source or limited source suppliers. If such licenses are
discontinued, there can be no assurance that the Company will be able to
independently develop substitutes or to obtain alternative sources or, if
able to be developed or obtained as needed in the future, that such efforts
would not result in delays or reductions in product shipments or cost
increases that could have a material adverse effect on the Company's
consolidated business operations.
Rapid Technological Change; Competition. The data analysis 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.
Moreover, the Company has recently encountered competition from an open
source data analysis programming language called "R" which is freely
available and provides a number of the features and functions of the
Company's technology. The Company's financial results may be negatively
impacted by the failure of new or existing products to be favorably
received by retailers and consumers due to price, availability, features,
other product choices or the necessity of promotions to increase sales of
the Company's products.
Uncertainties Regarding Protection of Proprietary Technology; Uncertainties
Regarding Patents. The Company'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 Pacific Northwest area of
the United States and in Europe is intense. The Company has non-competition
agreements with its key management and technical personnel. There can be no
assurance that the Company will be able to continue to attract or retain
such personnel.
Risks Associated with New Products or Services. The Company's future
revenue growth rate and earnings performance depend on a number of factors,
including the continued success of its existing products and service
offerings and the development of one or more new products or services.
These investments may adversely affect the Company's quarterly and annual
financial results until such time that they begin to return a profit.
Furthermore, there can be no assurance that these investments will ever
achieve the desired financial results.
8
ITEM 2. PROPERTIES.
The Company leases 26,804 square feet of office space at 1700 Westlake
Avenue North, Seattle, Washington. This lease expires in September 2004. A
third party vendor provides warehousing services to meet the Company's
needs. 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 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.
9
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock (Nasdaq: IFUL) is quoted on 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 SmallCap Market for
the periods indicated. These prices do not include retail markups,
markdowns or commissions.
HIGH LOW
-------- -------
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
FISCAL YEAR ENDED DECEMBER 31, 2000:
First Quarter 8 23/32 4
Second Quarter 5 2/32 2
Third Quarter 2 29/32 1 3/4
Fourth Quarter 2 1/4 1 1/4
As of March 23, 2001, the number of stockholders of record of Common Stock
was approximately 198.
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.
10
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. The Company closed its Internet
division in September 2000 and sold its EEPD division in the first quarter of
2001. All selected data has been restated to reflect the discontinuance of both
of those operations, however none of the data reflects the $ 7 million cash
received or the $ 3.5 to $4.0 million estimated gain on the sale of EEPD in the
first quarter of 2001.
FISCAL FISCAL FISCAL
YEAR YEAR YEAR YEAR ENDED
ENDED ENDED ENDED DEC. 31, FISCAL YEARS
DEC. 31, DEC. 31, DEC. 31, 1997 TRANSITION ENDED JUNE 30,
(in thousands, except per share data) 2000 1999 1998 (UNAUDITED) PERIOD (1) 1997 1996
- ------------------------------------------------- -------- ------- -------- ------------ ----------- -------- -------
Total revenues $15,246 $12,212 $ 8,843 $ 7,277 $ 4,248 $ 5,828 $6,135
Gross profit 10,739 8,935 6,462 5,083 2,979 4,022 4,551
Net Income (loss) from continuing operations 1,307 875 (591) (2,827) (750) (3,390) (261)
Net income (loss) (6,000) 1,453 2,220 (2,129) 1,105 (4,300) 1,076
Basic net income (loss) per share - continuing
operations 0.12 0.09 (0.06) (0.31) (0.08) (0.38) (0.03)
Diluted net income (loss) per share - continuing
operations 0.12 0.08 (0.06) (0.31) (0.08) (0.38) (0.03)
Basic net income (loss) per share (0.57) 0.15 0.24 (0.24) 0.12 (0.49) 0.13
Diluted net income (loss) per share (0.54) 0.14 0.24 (0.24) 0.12 (0.49) 0.13
Total assets 10,506 13,911 10,561 7,361 7,361 8,786 8,329
Long-term obligations, 39 90 86 32 32 79 1
less current portion
Stockholders equity 3,875 8,634 6,051 3,495 3,495 2,168 6,759
(1) The Company changed its fiscal year end from June 30 to December 31 in 1997.
The Transition Period represents the six month period from July 1, 1997
through December 31, 1997.
11
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
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 years ended December 31, 2000, 1999 and
1998, and the percentage changes in those items for the fiscal
years ended December 31, 2000, 1999, and 1998.
-------------Percentage Change-------------
Fiscal
---Percentage of Total Revenues--- Fiscal Fiscal Year Ended
Year Ended Year Ended Dec 31, 1998
Fiscal Fiscal Fiscal Dec 31, 2000 Dec 31, 1999 compared to
Year Ended Year Ended Year Ended compared to compared to Year Ended
Dec 31, Dec 31, Dec 31, Year Ended Year Ended Dec 31, 1997
2000 1999 1998 Dec 31, 1999 Dec 31, 1998 (unaudited)
----------------------------------------------------------------------------------
Revenues:
Software licenses 44.7% 53.3% 58.4% 4.7% 25.9% 18.3%
Services and other 55.3% 46.7% 41.6% 47.8% 55.3% 26.3%
----------------------------------------------------------------------------------
Total revenues 100.0% 100.0% 100.0% 24.8% 38.1% 21.5%
Cost of Revenues:
Software licenses 10.4% 12.6% 12.7% 1.8% 37.9% 11.2%
Services and other 19.2% 14.2% 14.2% 69.6% 37.4% 6.2%
----------------------------------------------------------------------------------
Total cost of revenues 29.6% 26.9% 26.9% 37.6% 37.6% 8.5%
Gross profit 70.4% 73.1% 73.1% 20.2% 38.3% 27.1%
Operating Expenses:
Sales and marketing 31.9% 33.0% 34.7% 20.5% 31.4% -3.2%
Research and development, gross 45.8% 51.1% 58.0% 12.1% 21.5% 6.8%
Less Funded Research -30.7% -37.4% -32.0% 2.4% 61.3% 46.3%
----------------------------------------------------------------------------------
Research and development, net 15.1% 13.7% 26.0% 38.4% -27.5% -19.8%
General and administrative 15.8% 19.5% 20.6% 0.6% 31.4% -6.8%
----------------------------------------------------------------------------------
Total operating expenses 62.8% 66.2% 81.3% 18.3% 12.6% -10.1%
Income (loss) from operations 7.6% 6.9% -8.2% 37.8% 216.5% -75.1%
Interest income (expense), net 1.4% 1.2% 1.5% 44.4% 8.3% 68.4%
----------------------------------------------------------------------------------
Income (loss) before provision
for income taxes 9.0% 8.2% -6.7% 38.8% 266.9% -79.1%
Provision for income taxes 0.4% 0.9% 0.0% -41.2% 0.0% 0.0%
----------------------------------------------------------------------------------
Net Income (loss) from continuing operations 8.6% 7.3% -6.7% 49.2% 247.7% -79.1%
----------------------------------------------------------------------------------
Discontinued Operations:
Net Income (loss) from discontinued operations -47.9% 4.7% 31.8% -1364.0% -79.4% 302.9%
----------------------------------------------------------------------------------
Net income (loss) -39.4% 11.9% 25.1% -512.9% -34.5% -204.3%
==================================================================================
12
Twelve Months Ended December 31, 2000 Compared to the Twelve Months Ended
December 31, 1999
Total revenues increased 24.8%, from $12,212,000 for the twelve months
ended December 31, 1999 to $15,246,000 for the twelve months ended December
31, 2000. The increase in total revenues was primarily attributable to
worldwide new license and service revenue generated by the Company's S-PLUS
product line.
The increase in S-PLUS product line revenue was primarily attributable to
an increase in service revenues, which included maintenance, training, and
consulting. S-PLUS license revenue was $6,505,000 and $6,811,000 for the
twelve months ended 1999 and 2000, respectively. S-PLUS service revenue was
$5,707,000 and $8,435,000 for the twelve months ended 1999 and 2000,
respectively. The increase in both service and license revenues was
directly attributable to the June 1999 release of S-PLUS 2000 and increased
headcount additions to the consulting department.
International revenues increased 15.0%, from $3,196,000 in 1999 to
$3,676,000 in 2000, respectively.
Total cost of revenues increased 37.6%, from $3,277,000 for the twelve
months ended December 31, 1999 to $4,507,000 for the twelve months ended
December 31, 2000, respectively. The increase in total cost of revenues as
a percentage of total revenues was primarily attributable to a 24.8%
increase in sales as well as a product mix shift toward lower margin
products such as consulting due to its service component.
Sales and marketing expenses increased 20.5%, from $4,033,000 for the
twelve-months ended December 31, 1999 to $4,861,000 for the twelve months
ended December 31, 2000. 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.
Net research and development expenses increased 38.4%, from $1,669,000 for
the twelve months ended December 31, 1999 to $2,310,000 for the twelve
months ended December 31, 2000, and increased as a percentage of total
revenues from 13.7% to 15.1%, respectively. The overall increase in net
research and development expenses was primarily attributable to increased
investment in the S-Plus product lines, and offset partially by the
increase in research funding. Funded research increased 2.4%, from
$4,567,000 for the twelve months ended December 31, 1999 to $4,678,000 for
the twelve months ended December 31, 2000. The increase in funded research
is attributable to an increase in awarded contracts and the related
increase in personnel costs to fulfill those contracts. The Company's Data
Analysis Products Division research department's headcount remained
consistent at 46 as of December 31, 1999 and 2000, respectively.
General and administrative expenses increased slightly, from $2,388,000 for
the twelve months ended December 31, 1999 to $2,402,000 for the twelve
months ended December 31, 2000, and decreased as a percentage of total
revenues from 19.5% to 15.8%, respectively.
Net income from continuing operations for the twelve months ended December
31, 2000 was $1,307,000 compared to $875,000 for the twelve months ended
December 31, 1999. Fiscal year 2000 reflected solid profit growth in the
Company's core products, particularly its consulting services.
Net income for the twelve months ended December 31, 2000 was a loss of
$6,000,000 compared to a profit of $1,453,000 for the twelve months ended
December 31, 1999. Fiscal year 2000 reflected profit growth in the
Company's continuing operations, substantially offset by the significant
loss of $7,306,000 from discontinued operations primarily attributable to
the Company's internet business, FreeScholarships.com.
13
Twelve Months Ended December 31, 1999 Compared to the Twelve Months Ended
December 31, 1998
Worldwide S-PLUS license and service revenue increased 38.1%, from
$8,843,000 for the twelve months ended December 31, 1998 to $12,212,000 for
the twelve months ended December 31, 1999. 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 $3,678,000 and $5,706,000
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.
Total international revenues increased 28.1%, from $2,495,000 in 1998 to
$3,196,000 in 1999, and decreased as a percentage of total revenues from
28.2% to 26.2%, respectively.
Total cost of revenues increased 37.6%, from $2,380,000 for the twelve
months ended December 31, 1998 to $3,277,000 for the twelve months ended
December 31, 1999, corresponding with the 38.1% growth in revenue and
decreased slightly as a percentage of total revenues from 26.9% to 26.8%,
respectively.
Sales and marketing expenses increased 31.4%, from $3,069,000 for the
twelve-months ended December 31, 1998 to $4,033,000 for the twelve months
ended December 31, 1999, and decreased slightly as a percentage of total
revenues from 34.7% to 33.0%, 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.
Net research and development expenses decreased 27.5%, from $2,301,000 for
the twelve months ended December 31, 1998 to $1,669,000 for the twelve
months ended December 31, 1999, and decreased as a percentage of total
revenues from 26.0% to 13.7%, respectively. The overall decrease in net
research and development expenses was primarily attributable to an 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.
General and administrative expenses increased 31.4%, from $1,817,000 for
the twelve months ended December 31, 1998 to $2,388,000 for the twelve
months ended December 31, 1999, and decreased slightly as a percentage of
total revenues from 20.6% to 19.5%, respectively. The increase in overall
general and administrative expenses was primarily attributable to increased
compensation costs, higher facilities costs, and increases in other
miscellaneous expenses.
Net income from continuing operations for the twelve months ended December
31, 1999 consisted of a profit of $875,000 compared to a loss of $591,000
for the twelve months ended December 31, 1998. Fiscal year 1999 reflected
profit growth in the Company's core products.
Net income for the twelve months ended December 31, 1999 was $578,000
compared to $2,812,000 for the twelve months ended December 31, 1998.
Fiscal Year 1999 reflected profit growth in the Company's core products
offset by the reduced profits from discontinued operations. Net income from
discontinued operations was $578,000 in 1999 compared to $2,812,000 in
1998. The reduction was primarily attributable to losses incurred by the
Company's internet business, FreeScholarships.com. FreeScholarships.com's
net loss totaled $1,842,000 in 1999.
14
Liquidity and Capital Resources
Cash and cash equivalents, totaling $3,745,000 at December 31, 2000,
decreased $3,468,000 during the fiscal year ended December 31, 2000, from
$7,213,000 at December 31, 1999. The cash and cash equivalents as of
December 31, 2000 does not include the $7 million of cash received on
January 23, 2001 arising out of the sale of the Company's EEPD unit. The
negative cash flow for the year 2000 resulted primarily from cash used by
discontinued operations of $6,198,000, purchases of property and equipment
of $635,000, and payments on capital lease obligations of $307,000 which
were offset by cash provided by continuing operations of $2,558,000 and net
proceeds from the exercise of stock options of $1,148,000.
The Company generated $2,558,000 in cash from operating activities during
the fiscal year ended December 31, 2000. The cash generated by operating
activities was primarily attributable to net income of approximately
$1,307,000, 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 $624,000 in investing activities
primarily due to the purchase of property and equipment. The Company
provided $841,000 in financing activities primarily from the net proceeds
generated from the exercise of stock options offset by payments on capital
lease obligations.
The Company's financial reserves are represented by cash and cash
equivalents as of December 31, 2000.
As of December 31, 2000 the Company had net operating loss carryforwards of
$17.8 million and research and development credit carryforwards of $4.2
million. The net operating loss and credit carryforwards will expire at
various dates through 2020, 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.
Based on its closing of FreeScholarships.com in the third quarter of 2000
and its sale of its Engineering and Education Products Division for $7
million cash in the first quarter of 2001, the Company believes its
financial reserves and cash flows from future operations will be sufficient
to meet its liquidity requirements for at least the next twelve months. The
cash activity described above excludes the cash generated from the sale of
its Engineering and Education Products Division since it occurred in the
first quarter of 2001. This transaction is a significant subsequent event
and is directly attributable to the Company having a $9.8 million dollar
cash balance as of March 23, 2001. 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, 2000
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.
15
Recent Accounting Pronouncements
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions Involving Stock Compensation-an Interpretation of APB
Opinion No. 25. This interpretation provides guidance on the application of
APB Opinion No. 25, Accounting for Stock Issued to Employees, including (i)
the definition of an employee, (ii) the criteria for determining whether a
plan qualifies as a noncompensatory plan, (iii) the accounting consequence
of various modifications to the terms of a previously fixed stock option or
award and (iv) the accounting for an exchange of stock compensation awards
in a business combination. The interpretation is effective July 1, 2000 and
the effects of applying the interpretation are recognized on a prospective
basis. The adoption of this interpretation did not have a material impact
on the Company's results of operations or financial condition.
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, a
replacement of SFAS No. 125. This statement provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. The statement provides consistent standards
for distinguishing transfers of financial assets that are sales from
transfers that are secured borrowings. The statement is effective for
transfers and servicing of financial assets and extinguishments of
liabilities occurring after March 31, 2001. The statement is effective for
recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for fiscal years ending after
December 15, 2000. The Company does not expect the adoption of SFAS No. 140
to have a material impact on the results of its operations or financial
position.
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. 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.
16
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.
17
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, 2000. 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, 2000. 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, 2000. 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, 2000. Such information is incorporated here by reference.
18
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, 2000, 1999 and 1998
Consolidated Statements of Operations for the years ended December 31,
2000, 1999 and 1998.
Consolidated Statements of Stockholders' Equity for the for the years
ended December 31, 1998, 1999 and 2000.
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998. Notes to Consolidated Financial Statements
2. Exhibits.
--------
3.1 Third Restated Articles of Organization of the Company (filed as
Exhibit 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 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 Promissory Note made by Charles J. Digate in favor of MathSoft,
Inc., dated as of June 20, 2000 (filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000
and incorporated herein by reference)
10.6 Pledge Agreement between Charles J. Digate and MathSoft, Inc.,
dated as of June 20, 2000 (filed as Exhibit 10.2 to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000 and
incorporated herein by reference)
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated October 20, 2000
reporting fiscal third quarter results.
19
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, 2001 By: /s/ Shawn F. Javid
---------------------
Shawn F. Javid
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, 2001 /s/ Charles J. Digate
----------------------------
Charles J. Digate
Chairman
March 30, 2001 /s/ Shawn F. Javid
----------------------------
Shawn F. Javid
President and Chief Executive
Officer
March 30, 2001 /s/ Dermot P. O'Grady
----------------------------
Dermot P. O'Grady
Senior Vice President Finance
and Administration, Chief
Financial Officer,
Treasurer and Clerk
(Principal Financial and
Accounting Officer)
March 30, 2001 /s/ Arthur H. Reidel
----------------------------
Arthur H. Reidel
Director
March 30, 2001 /s/ Christopher S. Covington
----------------------------
Christopher S. Covington
Director
March 30, 2001 /s/ Mark Ozur
----------------------------
Mark Ozur
Director
March 30, 2001 /s/ Samuel R. Meshberg
----------------------------
Samuel R. Meshberg
Director
20
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1 Third Restated Articles of Organization of the Company (filed as
Exhibit 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 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 Promissory Note made by Charles J. Digate in favor of MathSoft,
Inc., dated as of June 20, 2000 (filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q for the quarter ended June 30, 2000
and incorporated herein by reference)
10.6 Pledge Agreement between Charles J. Digate and MathSoft, Inc.,
dated as of June 20, 2000 (filed as Exhibit 10.2 to the Quarterly
Report on Form 10-Q for the quarter ended June 30, 2000 and
incorporated herein by reference)
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP
22
INSIGHTFUL CORPORATION AND SUBSIDIARIES
(FORMERLY MATHSOFT, INC.)
Financial Statements
as of December 31, 2000 and 1999
Together with Auditors' Report
Index
Page
Report of Independent Public Accountants F-1
Consolidated Balance Sheets as of December 31, 2000
and 1999 F-2
Consolidated Statements of Operations for the Years
ended December 31, 2000, 1999 and 1998 F-3
Consolidated Statements of Stockholders' Equity for the
Years ended December 31, 2000, 1999 and 1998 F-4
Consolidated Statements of Cash Flows for the Years
ended December 31, 2000, 1999 and 1998 F-5
Notes to Consolidated Financial Statements F-6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Insightful Corporation:
We have audited the accompanying consolidated balance sheets of MathSoft, Inc. a
Massachusetts corporation presently doing business as Insightful Corporation and
subsidiaries as of December 31, 2000 and 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2000. 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 Insightful
Corporation and subsidiaries as of December 31, 2000 and 1999 and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 23, 2001
F-1
ASSETS DECEMBER 31,
2000 1999
Current Assets:
Cash and cash equivalents $ 3,745,112 $ 7,213,035
Accounts and other receivables, less reserves of $381,750 and $223,781 at
December 31, 2000 and 1999, respectively 3,978,510 3,253,620
Inventories 70,380 77,907
Prepaid expenses 126,993 140,872
------------- -------------
Total current assets 7,920,995 10,685,434
------------- -------------
Property and Equipment, at cost:
Computer equipment and software 2,639,896 1,979,353
Furniture and fixtures 391,486 337,454
Property and equipment under capital lease 478,165 478,165
Leasehold improvements 90,161 1,876
------------- -------------
3,599,708 2,796,848
Less-Accumulated depreciation and amortization 2,507,000 2,238,744
------------- -------------
1,092,708 558,104
Net Assets of Discontinued Operations 1,290,570 2,398,898
Other Assets 201,688 268,950
------------- -------------
$ 10,505,961 $ 13,911,386
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligations and equipment financings $ 149,911 $ 237,496
Accounts payable 1,179,711 552,161
Accrued expenses and other current liabilities 2,220,413 1,864,370
Deferred revenue 3,042,461 2,532,969
------------- -------------
Total current liabilities 6,592,496 5,186,996
------------- -------------
Capital Lease Obligations and Equipment Financings, less current portion 38,798 90,192
------------- -------------
Commitments (Note 5)
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-10,695,895 and 9,931,990, shares at
December 31, 2000 and 1999, respectively 106,959 99,320
Additional paid-in capital 32,524,604 30,834,687
Accumulated deficit (28,213,510) (22,213,919)
Subscription receivable (550,000) -
Cumulative translation adjustment 6,614 (85,890)
------------- -------------
Total stockholders' equity 3,874,667 8,634,198
------------- -------------
$ 10,505,961 $ 13,911,386
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
F-2
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
---- YEARS ENDED DECEMBER 31, ----
2000 1999 1998
Revenues:
Software licenses $ 6,811,427 $ 6,505,452 $ 5,164,798
Services and other 8,435,051 5,706,397 3,677,861
------------ ------------ ------------
Total revenues 15,246,478 12,211,849 8,842,659
------------ ------------ ------------
Cost of Revenues:
Software licenses 1,575,004 1,547,189 1,122,419
Services and other 2,932,261 1,729,319 1,257,983
------------ ------------ ------------
Total cost of revenues 4,507,265 3,276,508 2,380,402
------------ ------------ ------------
Gross profit 10,739,213 8,935,341 6,462,257
------------ ------------ ------------
Operating Expenses:
Sales and marketing 4,861,103 4,032,840 3,069,313
Research and development-Gross 6,988,239 6,236,116 5,132,078
Less-Funded research (Note 2(f)) (4,678,059) (4,567,094) (2,831,339)
------------ ------------ ------------
Research and development, net 2,310,180 1,669,022 2,300,739
General and administrative 2,401,700 2,387,989 1,816,769
------------ ------------ ------------
Total operating expenses 9,572,983 8,089,851 7,186,821
------------ ------------ ------------
Income (loss) from continuing operations 1,166,230 845,490 (724,564)
Interest and Other Income 237,655 176,751 168,217
Interest Expense 30,116 32,569 35,094
------------ ------------ ------------
Income (loss) before provision for income taxes 1,373,769 989,672 (591,441)
Provision for Income Taxes 67,216 114,270 -
------------ ------------ ------------
Net income (loss) from continuing operations 1,306,553 875,402 (591,441)
Discontinued Operations:
Income (loss) from discontinued operations,
net of applicable income taxes (Note 1) (7,306,144) 578,076 2,811,569
------------ ------------ ------------
Net income (loss) $(5,999,591) $ 1,453,478 $ 2,220,128
============ ============ ============
Basic Net Income (Loss) per Share-Continuing operations $ 0.12 $ 0.09 $ (0.06)
============ ============ ============
Diluted Net Income (Loss) per Share-Continuing operations $ 0.12 $ 0.08 $ (0.06)
============ ============ ============
Basic Net Income (Loss) per Share-Discontinued operations $ (0.70) $ 0.06 $ 0.30
============ ============ ============
Diluted Net Income (Loss) per Share-Discontinued operations $ (0.66) $ 0.06 $ 0.30
============ ============ ============
Basic Net Income (Loss) per Share $ (0.57) $ 0.15 $ 0.24
============ ============ ============
Diluted Net Income (Loss) per Share $ (0.54) $ 0.14 $ 0.24
============ ============ ============
Weighted Average Number of Common Shares Outstanding 10,458,208 9,769,772 9,244,307
============ ============ ============
Weighted Average Common Shares Outstanding Assuming
Dilution 11,027,860 10,493,724 9,244,307
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-3
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
COMMON STOCK ADDITIONAL CUMULATIVE TOTAL
NUMBER OF $0.01 PAR PAID-IN ACCUMULATED SUBSCRIPTION TRANSLATION STOCKHOLDERS'
SHARES VALUE CAPITAL DEFICIT RECEIVABLE ADJUSTMENT EQUITY
Balance, December 31, 1997 9,108,616 $ 91,086 $29,339,752 $(25,887,525) $ - $ (47,990) $ 3,495,323
Exercise of stock options 215,791 2,158 366,612 - - - 368,770
and Employee Stock
Purchase Plan
Net income - - - 2,220,128 - - 2,220,128
Translation adjustment - - - - - (33,714) (33,714)
Comprehensive income - - - - - - -
---------- --------- ----------- ------------- -------------- ------------- ---------------
Balance, December 31, 1998 9,324,407 93,244 29,706,364 (23,667,397) - (81,704) 6,050,507
Exercise of stock options 607,583 6,076 1,128,323 - - - 1,134,399
and Employee Stock
Purchase Plan
Net income - - - 1,453,478 - - 1,453,478
Translation adjustment - - - - - (4,186) (4,186)
Comprehensive income - - - - - - -
---------- --------- ----------- ------------- -------------- ------------- ---------------
Balance, December 31, 1999 9,931,990 99,320 30,834,687 (22,213,919) - (85,890) 8,634,198
Exercise of stock options 763,905 7,639 1,689,917 - (550,000) - 1,147,556
and Employee Stock
Purchase Plan
Net loss - - - (5,999,591) - - (5,999,591)
Translation adjustment - - - - - 92,504 92,504
Comprehensive loss - - - - - - -
---------- --------- ----------- ------------- -------------- ------------- ---------------
Balance, December 31, 2000 10,695,895 $ 106,959 $32,524,604 $(28,213,510) $ (550,000) $ 6,614 $ 3,874,667
========== ========= =========== ============= ============== ============= ===============
COMPREHENSIVE
INCOME (LOSS)
Balance, December 31, 1997 $ -
Exercise of stock options -
and Employee Stock
Purchase Plan
Net income 2,220,128
Translation adjustment (33,714)
---------------
Comprehensive income 2,186,414
---------------
Balance, December 31, 1998 -
Exercise of stock options -
and Employee Stock
Purchase Plan
Net income 1,453,478
Translation adjustment (4,186)
---------------
Comprehensive income 1,449,292
---------------
Balance, December 31, 1999 -
Exercise of stock options -
and Employee Stock
Purchase Plan
Net loss (5,999,591)
Translation adjustment 92,504
---------------
Comprehensive loss (5,907,087)
---------------
Balance, December 31, 2000
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
2000 1999 1998
Cash Flows from Operating Activities:
Net income (loss) $(5,999,591) $1,453,478 $2,220,128
Less-Net Income (loss) from discontinued operations (7,306,144) 578,076 2,811,569
------------ ----------- -----------
Net income (loss) from continuing operations 1,306,553 875,402 (591,441)
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by operating activities-
Depreciation and amortization 324,914 622,353 375,397
Currency translation adjustment 136,504 20,733 (39,587)
Changes in current assets and liabilities
Accounts and other receivables (724,890) (515,953) (715,365)
Inventories 7,526 2,431 (18,640)
Prepaid expenses 13,879 (40,540) (23,143)
Accounts payable 627,550 (65,793) (132,160)
Accrued expenses and other current liabilities 356,041 206,597 109,634
Deferred revenue 509,491 646,436 497,491
------------ ----------- -----------
Net cash provided by (used in) continuing operating 2,557,568 1,751,666 (537,814)
------------ ----------- -----------
activities
Cash Flows from Investing Activities:
Purchases of property and equipment (635,072) (129,551) (12,433)
Decrease (Increase) in other assets 10,605 (99,214) (228,928)
------------ ----------- -----------
Net cash used in investing activities (624,467) (228,765) (241,361)
------------ ----------- -----------
Cash Flows from Financing Activities:
Payments on capital lease obligations and equipment
financings (306,764) (333,608) (127,232)
Proceeds from exercise of stock options, and
Employee Stock Purchase Plan 1,147,556 1,134,399 368,770
------------ ----------- -----------
Net cash provided by financing activities 840,792 800,791 241,538
------------ ----------- -----------
Effect of Exchange Rate Changes on Cash and Cash (44,000) (24,919) 5,873
------------ ----------- -----------
Equivalents
Net cash (used in) provided by discontinued operations (6,197,816) (792,395) 2,104,880
------------ ----------- -----------
Net(Decrease) Increase in Cash and Cash Equivalents (3,467,923) 1,506,378 1,573,116
Cash and Cash Equivalents, beginning of period 7,213,035 5,706,657 4,133,541
------------ ----------- -----------
Cash and Cash Equivalents, end of period $ 3,745,112 $7,213,035 $5,706,657
============ =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for-
Interest $ 28,192 $ 32,569 $ 34,465
============ =========== ===========
Income taxes $ 67,216 $ 80,505 $ 5,000
============ =========== ===========
Supplemental Disclosure of Noncash Investing and Financing Activities:
Capital leases $ 167,788 $ 266,255 $ 169,519
============ =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
(1) OPERATIONS
MathSoft, Inc., presently doing business as Insightful Corporation (the
Company) provides software and consulting solutions for statistical
analysis, data mining and analytic Customer Relations Management (CRM).
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.
On June 1, 1999, the Company incorporated FreeScholarships.com, Inc. (FSC)
as a wholly owned subsidiary. FSC was originated as an Internet company
which provided information and assistance to a broad consumer market
focused on funding the costs of education.
During the third quarter of 2000, the Company discontinued operations of
FSC, which began Web operations in February 2000. Operating losses from the
discontinued operation were $9,000,623 and $1,841,762 for the years ended
December 31, 2000 and 1999, respectively. In connection with this
discontinuation, the Company recorded a $1.9 million charge for various
costs related to closing this operation. This charge is included in the net
loss for 2000. During the fourth quarter $850,000 of this charge was
reversed as a result of certain favorable negotiations in winding-up its
operations.
In October 2000, the Company signed a letter of intent to sell the
operations of the Company's Engineering and Education Products Division
(EEPD) to a third party. Consistent with this letter of intent, on January
23, 2001, the Company sold all of the outstanding stock of its wholly-owned
subsidiary, Mathsoft Engineering & Education, Inc. (MEEI), to Mathsoft
Corporate Holdings, Inc. As a result of this transaction, the Company has
recorded the operations of EEPD as discontinued operations during the
fourth quarter of 2000, which is reflected in the accompanying consolidated
financial statements. The net gain for this transaction will be reported
during the first quarter of 2001 within discontinued operations and is
presently expected to range between $3.5 and $4.0 million.
The accompanying consolidated financial statements contain certain accounts
that have been reclassified in each of the periods presented to reflect
these dispositions. Reported revenue, costs and expenses exclude the
operating results of FSC and EEPD. The results of FSC and EEPD are
presented on a net basis in the consolidated statements of operations as
(loss) income from operations of discontinued operations. Operating (loss)
income from operations of discontinued operations were $(7,306,144) and
$578,076 for the years ended December 31, 2000 and 1999, respectively.
F-6
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
Net assets from discontinued operations in the accompanying balance sheets
include the discontinued operations of FSC and EEPD as of December 31, 2000
and 1999. Components are as follows:
DECEMBER 31,
2000 1999
Cash and cash equivalents $ - $ 1,231,224
Accounts receivable, net 3,666,998 2,909,664
Net property and equipment 529,273 755,900
Other assets 501,826 583,242
Accounts payable (1,650,590) (1,809,989)
Other current liabilities (1,695,508) (1,212,893)
Long-term liabilities (61,429) (58,250)
-------------- ------------
Total $ 1,290,570 $ 2,398,898
============== ============
(2) SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements comprise those of
MathSoft and its wholly owned subsidiaries: Statistical Sciences, Inc.
(StatSci), Mathsoft Engineering & Education, Inc. (MEEI), TriMetrix, Inc.,
acroScience Corporation and FSC (collectively, the Company). All material
intercompany accounts and transactions have been eliminated in
consolidation.
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) REVENUE RECOGNITION
The Company records revenue in accordance with Statement of Position
(SOP) No. 97-2, Software Revenue Recognition. License revenue,
including license renewals, consists principally of revenue earned
under fixed-term and perpetual software license agreements and is
generally recognized upon shipment of the software if collection of
the resulting receivable is probable, the fee is fixed or
determinable, and vendor-specific objective evidence exists for all
undelivered elements to allow allocation of the total fee to all
delivered and undelivered elements of the arrangement. Revenues under
such arrangements, which may include several different software
products and services sold together, are allocated to each element
based on the residual method in accordance with SOP 98-9, Software
Revenue Recognition, with Respect to Certain Transactions. Under the
residual method, the fair value of the undelivered elements is
deferred and subsequently recognized when earned. The Company has
established sufficient vendor specific objective evidence for
professional services, training and maintenance and support services.
F-7
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
Accordingly, software license revenue is recognized under the residual
method in arrangements in which software is licensed with professional
services, training and maintenance and support services.
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 and consulting 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.
(b) 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 $3,745,000 and $7,213,000 as of December 31, 2000 and
1999, respectively, and consisted primarily of investments in
commercial paper.
(c) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist entirely of raw materials.
(d) 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.
(e) 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,
2000, 1999 and 1998, the Company expensed all research and development
costs, as those costs incurred from technological feasibility (defined
as a working model) to general release were not material.
F-8
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
(f) FUNDED RESEARCH
Funded Research amounts represent funding received primarily from
federal government agencies for work performed by the Company's
research and development department under cost-sharing arrangements.
These amounts are recognized as the work is performed and are recorded
as an offset against the Company's total research and development
costs.
(g) 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:
--- YEARS ENDED DECEMBER 31, ---
2000 1999 1998
Weighted average common
shares outstanding 10,458,208 9,769,772 9,244,307
Effect of dilutive stock options 569,652 723,952 -
---------- ---------- ----------
Weighted average common
shares outstanding assuming
dilution 11,027,860 10,493,724 9,244,307
========== ========== ==========
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:
-- YEARS ENDED DECEMBER 31, --
2000 1999 1998
Antidilutive stock
options 1,659,804 349,116 255,586
========= ======= =======
(h) 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 losses are recognized currently in the
statements of operations included in general and administrative
expense and were approximately $109,000, $9,000 and $8,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
F-9
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
(i) OTHER ASSETS
Other assets, consisting primarily of purchased technology, long-term
deposits and capitalized legal patent fees, totaled $201,688 and
$268,950, net of accumulated amortization of $127,698 and $71,030 as
of December 31, 2000 and 1999, respectively.
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, 2000.
(j) 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.
During the years ended December 31, 2000, 1999 and 1998, the Company
did not have any one customer that accounted for greater than 10% of
net revenues. As of December 31, 2000, 1999 and 1998, the Company did
not have any one customer that accounted for 10% of accounts
receivable.
(k) 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.
(l) 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.
F-10
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
(m) DERIVATIVES
SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133-An
Amendment 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. As the
Company does not currently engage in derivatives or hedging
transactions, there is no impact to the Company's results of
operations, financial position or cash flows upon the adoption of SFAS
No. 133.
(n) RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation-an Interpretation of APB Opinion No. 25. This
interpretation provides guidance on the application of APB Opinion No.
25, Accounting for Stock Issued to Employees. The interpretation is
effective July 1, 2000. Its adoption did not have a material impact on
the Company's results of operations or financial condition.
In September 2000, the FASB issued SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of SFAS No. 125. This statement provides
accounting and reporting standards for transfers and servicing of
financial assets and extinguishments of liabilities. The Company does
not expect the adoption of SFAS No. 140 to have a material impact on
the results of its operations or financial position.
(3) 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.
F-11
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
The provisions for income taxes consist of the following:
--- YEARS ENDED DECEMBER 31, ---
2000 1999 1998
Current tax expense-
Foreign $ 69,000 $ 273,000 $ 23,000
Deferred tax expense
(benefit)-
Federal (2,829,000) (70,000) 387,000
State (499,000) (12,000) 68,000
------------ ---------- ---------
(3,328,000) (82,000) 455,000
Change in valuation reserve (3,328,000) (82,000) 455,000
------------ ---------- ---------
Less-Amounts attributable
to discontinued operations (2,000) (159,000) (23,000)
------------ ---------- ---------
Total $ 67,000 $ 114,000 $ -
============ ========== =========
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
YEARS ENDED DECEMBER 31,
2000 1999 1998
Income tax provision at federal
statutory rate 34.0% 34.0% (34.0)%
Increase (decrease) in tax
resulting from-
State tax provision 6.0 6.0 (6.0)
Foreign tax provision 0.5 11.5 0.0
Other permanent items 1.0 1.0 1.0
Change in valuation reserve (42.0) (41.0) 39.0
------ ------ -------
(0.5)% 11.5% 0.0%
====== ====== =======
F-12
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
The significant components of the deferred tax assets and liabilities are
as follows:
DECEMBER 31,
2000 1999
Net operating loss carryforward $ 7,102,000 $ 5,113,000
Research and development credit carryforwards 1,696,000 1,320,000
Temporary differences 2,084,000 1,121,000
------------- ------------
10,882,000 7,554,000
Valuation allowance (10,882,000) (7,554,000)
------------- ------------
Net deferred tax asset $ - $ -
============= ============
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.
At December 31, 2000, the Company has available net operating loss
carryforwards of approximately $17,775,000 and tax credit carryforwards of
approximately $4,240,000. 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,
2020. 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.
(4) EQUIPMENT FINANCING
During 2000, the Company entered into several financing arrangements for
the purchase of fixed assets totaling $167,788, 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 10.9% to 11.3%.
F-13
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
Future minimum payments as of December 31, 2000 under these financing
arrangements and capital leases are as follows:
Year ending December 31,
2001 $163,417
2002 40,553
--------
Total minimum lease payments 203,970
Less-Amount representing interest 15,261
--------
Present value of minimum payments 188,709
Less-Current portion of capital lease obligations and
equipment financings 149,911
--------
$ 38,798
========
(5) COMMITMENTS
The Company has operating leases for its various facilities 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 future lease payments under the Company's operating lease arrangements,
exclusive of operating costs and net of sublease revenue through October
2005 are approximately as follows:
OPERATING
LEASES
Year ending December 31,
2001 $ 717,000
2002 731,000
2003 755,000
2004 605,000
2005 93,000
----------
Total future lease payments $2,901,000
==========
Rental expense under the Company's operating leases was approximately
$693,000, $506,000 and $427,000 for the years ended December 31, 2000,1999
and 1998, respectively.
F-14
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
(6) 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. A total of 4,650,000 shares may be
issued under the 1992 Plan. 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, 2000 the Company had 666,135
options available for future grant under the 1992 Plan.
The Company also 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, 2000, the Company had
230,416 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, 2000, the Company had 165,000 options available for future grant
under the 1996 Non-Officer Plan.
As of December 31, 2000, a total of 6,157,556 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.
F-15
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
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 2000, 1999 and 1998,
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. There were no grants to nonemployees for the years ended
December 31, 2000, 1999 and 1998.
The assumptions used and the weighted average information are as
follows:
--- YEARS ENDED DECEMBER 31, ---
2000 1999 1998
Risk-free interest rates 5.28%-6.73% 5.10%-6.33% 4.53%-5.67%
Expected dividend yield None None None
Expected lives 7 years 7 years 5 years
Expected volatility 101% 119% 77%
Weighted average grant-date fair
value of options granted
during the period $ 2.99 $ 2.83 $ 1.67
Weighted average remaining
contractual life of
options outstanding 6.35 years 7.06 years 7.16 years
The effect of applying SFAS No. 123 would be as follows:
--- YEARS ENDED DECEMBER 31, ---
2000 1999 1998
Net income (loss) as reported $ (5,999,591) $1,453,478 $2,220,132
============= ========== ==========
Pro forma net income (loss) $(10,007,726) $ (85,385) $1,331,541
============= ========== ==========
Basic income (loss) per share as
reported $ (0.57) $ 0.15 $ 0.24
============= ========== ==========
Diluted net income (loss) per
share as reported $ (0.54) $ 0.14 $ 0.24
============= ========== ==========
Pro forma basic net income
(loss) per share $ (0.96) $ (0.01) $ 0.14
============= ========== ==========
Pro forma diluted net income
(loss) per share $ (0.96) $ (0.01) $ 0.13
============= ========== ==========
F-16
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
The Company's stock option activity for all plans is as follows:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
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
Granted 1,286,900 3.30
Exercised (706,517) 2.17
Canceled (715,574) 3.31
---------- --------
Outstanding at December 31, 2000 2,859,877 $ 2.81
========== ========
Exercisable at December 31, 2000 1,317,302 $ 2.79
========== ========
Exercisable at December 31, 1999 1,732,446 $ 2.44
========== ========
Exercisable at December 31, 1998 1,847,454 $ 2.21
========== ========
F-17
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
The following table summarizes information about stock options
outstanding and exercisable at December 31, 2000:
--- OPTIONS OUTSTANDING --- --- OPTIONS EXERCISABLE ---
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF REMAINING WEIGHTED NUMBER OF REMAINING WEIGHTED
RANGE OF OPTIONS CONTRACTUAL AVERAGE OPTIONS CONTRACTUAL AVERAGE
OPTION PRICES OUTSTANDING LIFE OPTION PRICE EXERCISABLE LIFE OPTION PRICE
1.00-2.06 609,517 8.79 years $ 1.56 118,677 4.65 years $ 1.16
2.25-4.00 1,691,110 4.93 years 2.62 1,040,500 3.47 years 2.62
4.44-6.13 559,250 7.96 years 4.71 158,125 5.91 years 5.20
----------- -----------
2,859,877 6.35 years $ 2.81 1,317,302 3.88 years $ 2.79
=========== ============= =========== ============
(b) FREESCHOLARSHIPS.COM OPTION ACTIVITY
FreeScholarships.com adopted a Stock Option and Incentive Plan during
1999 (the 1999 Plan) whereby the Board of Directors could grant
incentive stock options (ISOs), nonqualified stock options and awards
of common stock to eligible employees and others, as defined. The Plan
and all outstanding options were cancelled in connection with the
discontinuance of the operations of FreeScholarships.com.
(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, 2000, 1999 and 1998, the Company issued
57,088, 66,335 and 54,513 shares under the Plan, respectively. As of
December 31, 2000, 156,390 shares remain for future purchase.
(d) SUBSCRIPTION RECEIVABLE
On June 20, 2000, the Company loaned $550,000 on a full recourse basis
to its CEO for the exercise of common stock options. The note bears
interest of 8% in the first two years, and the prime rate in years
thereafter (9.5% at December 31, 2000). The principal and any accrued
but unpaid interest is payable on demand at any time after June 19,
2002, or earlier upon the occurrence of certain specific events. The
Company has recorded the note receivable as a reduction in
stockholders equity in the accompanying consolidated financial
statements.
F-18
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
(7) GEOGRAPHIC DATA
Revenues by geographic area based on customer location were as follows:
--- YEARS ENDED DECEMBER 31, ---
GEOGRAPHIC AREA 2000 1999 1998
United States and Canada $11,359,799 $ 8,775,406 $6,118,505
United Kingdom 1,232,086 1,061,707 910,993
Japan 603,671 615,324 547,819
France 274,207 228,073 196,898
Germany 211,961 223,801 131,448
Other 1,564,754 1,307,538 936,996
----------- ----------- ----------
$15,246,478 $12,211,849 $8,842,659
=========== =========== ==========
(8) SEGMENT REPORTING
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, requires certain financial and supplementary information to be
disclosed on an annual and interim basis for each reportable segment of an
enterprise. The Company believes that it operates in one business segment
based on the way management makes their operating decisions and assesses
performance. Accordingly, the Company's measure of performance is based on
software license revenues and services and other revenues and the related
cost of revenues which are reported in the accompanying consolidated
statements of operations. Accordingly, no additional disclosure is
required.
(9) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
DECEMBER 31,
2000 1999
Accrued payroll and payroll-related items $ 690,100 $ 879,993
Accrued vacation 324,568 226,640
Accrued royalties 386,184 229,706
Other accrued expenses 819,561 528,031
---------- ----------
$2,220,413 $1,864,370
========== ==========
(10) LINE OF CREDIT
The Company had a line of credit with a bank, collateralized by
substantially all of the Company's assets. Borrowings were limited to the
lesser of 80% of eligible domestic accounts receivable, as defined, or
$2,000,000. The line of credit expired during 2000.
F-19
INSIGHTFUL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2000
(11) VALUATION AND QUALIFYING ACCOUNTS
A rollforward of the allowance for doubtful accounts and allowance for
sales returns for the years ended December 31, 2000, 1999 and 1998 is as
follows:
BALANCE, CHARGED TO
BEGINNING OF COSTS AND BALANCE, END
PERIOD EXPENSES DEDUCTIONS OF PERIOD
Year Ended December 31, 2000:
Allowance for doubtful accounts $ 28,252 $ 83,840 $ - $ 112,092
Allowance for sales returns 195,529 74,129 - 269,658
------------- ----------- ------------- ----------
Total reserve for accounts $ 223,781 $ 157,969 $ - $ 381,750
receivable ============= =========== ============= ==========
Year Ended December 31, 1999:
Allowance for doubtful accounts $ 46,670 $ - $ 18,418 $ 28,252
Allowance for sales returns 193,386 2,143 - 195,529
------------- ----------- ------------- ----------
Total reserve for accounts $ 240,056 $ 2,143 $ 18,418 $ 223,781
receivable ============= =========== ============= ==========
Year Ended December 31, 1998:
Allowance for doubtful accounts $ 61,800 $ - $ 15,130 $ 46,670
Allowance for sales returns 153,016 66,444 26,074 193,386
------------- ----------- ------------- ----------
Total reserve for accounts $ 214,816 $ 66,444 $ 41,204 $ 240,056
receivable ============= =========== ============= ==========
(12) Unaudited Quarterly Data 2000
--------------------------------------------------
Q1 Q2 Q3 Q4
----------- ----------- ----------- -----------
Revenue $3,537,000 $3,659,000 $4,212,000 $3,838,000
Net Income from continuing operations 425,000 294,000 395,000 192,000
Basic Net Income (Loss) per Share - Continuing operations 0.04 0.03 0.04 0.02
Diluted Net Income (Loss) per Share - Continuing operations 0.04 0.03 0.04 0.02
Net Income (loss) (1,616,000) (2,493,000) (3,520,000) 1,629,000
Basic Net Income (Loss) per Share (0.16) (0.24) (0.33) 0.15
Diluted Net Income (Loss) per Share (0.14) (0.23) (0.33) 0.15
1999
--------------------------------------------------
Q1 Q2 Q3 Q4
----------- ----------- ----------- -----------
Revenue $2,826,000 $2,880,000 $3,197,000 $3,309,000
Net Income from continuing operations 303,000 245,000 356,000 (29,000)
Basic Net Income (Loss) per Share - Continuing operations 0.03 0.03 0.04 (0.00)
Diluted Net Income (Loss) per Share - Continuing operations 0.03 0.02 0.04 (0.00)
Net Income (loss) 637,000 389,000 241,000 186,000
Basic Net Income (Loss) per Share 0.07 0.04 0.02 0.02
Diluted Net Income (Loss) per Share 0.06 0.04 0.02 0.02
The above data has been restated to reflect the operations of EEPD and FSC as discontinued operations.
F-20