ITEM 1. BUSINESS.
General
MathSoft, Inc. ("MathSoft" or the "Company") develops, markets and supports software productivity tools for the technical calculation and data analysis markets comprised of professionals, researchers, students and educators.
Mathcad , the Company's principal technical calculation product, was first released in fiscal 1987 and can be used by desktop and laptop computer users to perform calculations from the simple to the elaborate, and then document the results. Mathcad offers technical professionals, educators, and students an interactive, intuitive, easy-to-modify alternative to their traditional calculation methods such as pencil and paper, scratchpads and calculators.
The market for technical calculation software includes technical professionals, such as electrical, mechanical and civil engineers, scientists, mathematicians, researchers, technicians and analysts, as well as educators and students who regularly are required to perform technical calculations. These users often refer to a wide range of published materials containing formulas or data, which can be used in solving technical problems.
In 1992, the Company expanded its technical calculation software product line by introducing Electronic Books as add-on products to Mathcad. These books deliver extensive off-the-shelf technical information, such as formulas and data, which is critical to technical problem solving. Through the use of MathSoft's proprietary "live document interface " these books provide the Mathcad user with on-screen access to interactive technical information. This enables a Mathcad user to either perform calculations in the book itself or transfer formulas, data and results to Mathcad for instant calculation and analysis. The Company is delivering electronic versions of industry leading reference works from nationally and internationally recognized publishers, in addition to internally authored works. In addition, the Company licenses its Mathcad and Electronic Book authoring technology to third party publishers for use in creating interactive Electronic Books which are marketed and distributed by such third party publishers as stand-alone products.
In May 1993, the Company opened an International office located in the United Kingdom to broaden distribution of its products. For the six months ended December 31, 1997, international sales of all technical calculation and data analysis software products and services represented 29.5% of total revenues.
In June 1993, the Company introduced a new product line through its wholly owned subsidiary, Statistical Sciences, Inc., now referred to as MathSoft's Data Analysis Products Division ("DAPD"). DAPD develops and markets advanced data analysis software products and services based on "S", a computer language designed for statistics applications. DAPD's principal product is S-PLUS , an interactive computing environment that provides both a full-featured graphical data analysis system and an object-oriented language. The Company acquired this business on June 30, 1993, through the acquisition of substantially all of the assets and business of Statistical Sciences, Inc., a Washington corporation. For the six-months ended December 31, 1997, worldwide sales of data analysis products and services represented 32.2% of total revenues.
The market for data analysis software consists principally of professional and academic scientists, engineers, statisticians and business analysts. Data analysis products are used in such fields as biomedical technology, quantitative financial analysis and risk assessment, environmental science and engineering, industrial and market research, and process control.
In November 1995, the Company acquired 100% of the outstanding stock of TriMetrix, Inc. ("TriMetrix"), a Washington corporation, in a business combination accounted for as a pooling of interests. As a result of the business combination, TriMetrix became a wholly owned subsidiary of the Company. MathSoft complemented its technical calculation product line with the addition of Axum , a Windows-based technical charting and data analysis product acquired with TriMetrix, which transforms, manipulates and sorts data sets to perform both simple and advanced analysis. Axum has been redesigned to link seamlessly with Mathcad and is the technological foundation for the most recent release of S-PLUS, S-PLUS 4.0, announced in June 1997.
In June 1996, the Company released StudyWorks! for Math and StudyWorks! for Science targeted specifically toward high school and non-engineering college students and educators. Both StudyWorks products offer an interactive learning environment and assist students in both mastering math and science concepts and creating professional looking homework and lab reports in addition to allowing both educators and students the ability to collaborate on projects. In September 1996, the Company announced the release of StudyWorks! Schools, an instructional edition of the StudyWorks for Math and StudyWorks for Science software, which offers teachers a tools-based, interactive teaching and learning environment.
In November 1996, the Company acquired 100% of the outstanding stock of acroScience Corporation ("acroScience"), a Washington corporation, in a business combination accounted for as a pooling of interests. As a result of the business combination, acroScience became a wholly owned subsidiary of the Company. MathSoft integrated visual modeling and programming technology acquired from acroScience into its technical calculation product line's latest release of Mathcad, Mathcad 7 for Windows, released in June 1997.
In April 1997, the Company expanded its data analysis product line by introducing MathSoft StatServer, a warehouse-independent platform for distributing statistical analysis and graphics to business professionals and analysts over corporate Intranets. StatServer uses the S-PLUS technology to create deployable intelligent analytics for an organization and integrates with existing data storage and desktop applications.
In December 1997, the Company changed its fiscal year end from June 30 to December 31. Accordingly, the Company began a new twelve-month fiscal year on January 1, 1998. The six month period resulting from this change, July 1, 1997 through December 31, 1997, is referred to as the "Transition Period".
The Company's goals are to continue to meet the expanding calculation and data analysis needs of technical professionals, to provide students and educators with software tools that can be used for learning and for solving real-world problems and to develop new products for the growing needs of businesses. The Company will continue to broaden the appeal for all of its products to existing and new markets through technological innovation, in such areas as ease-of-use, mathematical power, graphics and deployability, and to continue to expand its distribution as new products for new markets are introduced.
The Company was incorporated in Massachusetts in October 1984 under the name Engineering Specific Products Corp. and changed its name to MathSoft, Inc. in January 1986. The Company's principal executive offices are located at 101 Main Street, Cambridge, Massachusetts 02142, and its telephone number is (617) 577-1017.
Products
Technical Calculation Software Products
MathSoft publishes a range of technical calculation and software products, which allow users to perform calculations and create publication-quality documents on personal computers. Its principal product in this category, Mathcad, is to technical professionals what spreadsheets have proven to be for business professionals. Mathcad can be used by desktop computer users to perform technical calculations, from the simple to the elaborate. An innovative feature of Mathcad is its ability to allow the user to electronically access and manipulate formulas and data available in the Company's Electronic Books and Function Packs. Electronic Books provide on-screen libraries of industry-leading reference works, user guides, solution templates, and educational materials while Function Packs provide additional functionality for advanced users. StudyWorks, the most recent addition to the Mathcad product line, was designed as an integrated learning tool combining math, text, graphs and graphics for the high school and college market. StudyWorks helps student's master math and science concepts, get better grades and create professional-looking homework and lab reports.
Mathcad
Mathcad's broad appeal lies in its use of MathSoft's proprietary "live document interface" technology. This permits users to calculate on a computer in much the same way that they would on a scratchpad where equations can be written anywhere, using real math notation, and erased, changed and moved. A scratchpad can show a variety of expressions such as formulas, words, graphs, data, equations and pictures. Mathcad works in a similar free-form manner by literally turning a computer screen into a live worksheet and therefore provides a very intuitive interface to perform a wide range of numeric or symbolic calculations, but Mathcad has one distinct advantage over a real scratchpad - it calculates.
When using Mathcad, the computer screen initially appears blank like a scratchpad. Using the keyboard and the mouse, the user begins by placing the cursor anywhere on the screen and starts typing. To create a formula, the user types keystrokes (+, /, *, etc.) or uses a mouse to click on a symbol palette. As the user types, Mathcad automatically formats the formulas in standard mathematical notation and instantly calculates the results. To create a graph, the user selects the graph symbol from the palette and defines the parameters of the graph. As with an electronic spreadsheet, Mathcad instantly updates results as changes to variables or formulas are made. Text may be added anywhere. Multi-page presentation quality documents can be printed, complete with text, graphics, tables and equations. It's free-form interactive environment makes Mathcad ideal for formulating ideas, setting up problems and evolving solutions and sharing both the process and the results through printed documents, e-mail, and the World Wide Web.
Mathcad is used as a calculator for simple formulas, as a more elaborate solver for equations formally linked within a "live document", as a technical report generator, as a live charting facility, and as a mathematical teaching environment. Mathcad also provides an interface to on-line technical reference works. Mathcad performs numeric and symbolic calculations in the real and complex domain, solves systems of linear and non-linear equations, and performs iterative calculations.
Electronic Books
An extension of the Mathcad product line, Electronic Books deliver information and solutions in an interactive form to Mathcad users. Electronic Books provide the user with on-screen libraries of technical data combined with Mathcad's capacity to utilize and manipulate the raw data through its "live document interface". This enables the user to search the book for material, use hyperlinks to jump to related sections within the work, and calculate problems and manipulate data using formulas and data contained in the work. A key feature of MathSoft's Electronic Books is that the material is live and interactive, enabling a Mathcad user to apply the formulas or data from the book either by performing calculations in the book itself or by transferring the formulas or data, or results, to Mathcad for calculation and analysis. Without the Electronic Book, the user must manually key in entire formulas from published sources before using the software to solve equations. The book may contain reference information (e.g., the properties of various materials and standard formulas), solutions for standard engineering problems, tutorials on selected topics, or educational courseware. Additionally, Mathcad's "live document interface" supports the inclusion of sound and video components.
In addition to internally authored works, the Company delivers electronic versions of industry-leading reference works from nationally and internationally recognized publishers. The agreements by which the Company licenses content for Electronic Books from publishers typically provide for a non-exclusive license at an agreed upon royalty rate, and continue for a term of five to seven years unless extended by mutual agreement.
The Company also licenses its Mathcad and Electronic Book authoring technology to third party publishers for use in creating interactive Electronic Books which are marketed and distributed by such third party publishers as stand-alone products. Users are not required to use Mathcad to access these interactive Electronic Books.
Function Packs
Function Packs provide additional functionality to Mathcad in the areas of signal processing, data analysis, statistics and graphics. Once installed, the functions are seamlessly integrated with the Mathcad function set allowing the user to see results immediately and explore the effects of changing parameters in mathematical routines.
Axum
In November 1995, the Company acquired 100% of the outstanding stock of TriMetrix, Inc., a software company located in Seattle, Washington and the developer of Axum software. Axum is a Windows-based advanced technical graphing and data analysis software which offers scientists and engineers in the technical professional market, including Mathcad users, the advanced charting tools needed for creating compelling, highly visual presentations and publication-quality documents. Users can transform, manipulate and sort data sets to perform both simple and advanced analysis. Axum has also been redesigned to link seamlessly with Mathcad.
StudyWorks
StudyWorks! for Math and StudyWorks! for Science, productivity software for high school and college students and their teachers, was designed as a rich learning environment that helps students understand math and science problems, complete and check a variety of solutions, and print out great looking lab reports and homework papers. It also contains a section to help users prepare for the SAT II tests. Each product is a three-in-one combination of an application, rich interactive content and a unique two-way Internet access. StudyWorks is based on a powerful graphical calculation and document preparation tool and includes rich multimedia encyclopedias of math and science formulas and key concepts in algebra, geometry, earth science, chemistry, pre-calculus, physics, calculus and statistics. Users also receive built-in links to the Company's StudyWorks home page, which allows high school students, college students and teachers to participate in virtual study groups and discussion forums, pick up Homework Hints and link to related sites on the World Wide Web.
StudyWorks! for Schools, released in September 1996, was designed as the instructional edition complement to the Company's StudyWorks for Math and StudyWorks for Science software products. StudyWorks for Schools allows teachers to integrate software and distance learning approaches into their current math and science curriculum and provide students with an "active-learning", content-rich learning tool. StudyWorks for Schools integrates seamlessly with existing curricula, works with graphing calculators, includes a content-rich math and science reference library, and comes with a Teachers Resource Guide featuring sample lesson plans, classroom presentations, lab and homework exercises and tips for maximizing the use of the technology. It also connects teachers and students to each other via the Web-based Collaboratory for a variety of distance learning applications, including virtual study groups, on-line tutoring, and the dissemination of class or lab notes, problem sets, exams and solutions.
Data Analysis Software Products
S-PLUS
On June 30, 1993, the Company acquired substantially all of the assets of Statistical Sciences, Inc., a software company located in Seattle, Washington. The Company's principal product in this category, S-PLUS, is an advanced, exploratory data analysis and statistical data mining solution for technical and business professionals who need sophisticated analysis and visualization capabilities. Based on the object-oriented "S" programming language licensed from Lucent Technologies Inc., S-PLUS enables users to perform exploratory data analysis, graphics, statistics, visualization and mathematical computing in the Windows and UNIX environments. The primary advantage of S-PLUS lies within the "S" Language. The "S" language is the only modern object-oriented language created specifically for data visualization and exploration, statistical modeling and programming with data. This interactive language environment gives users immediate feedback at every stage of their analysis.
Modules
To complement S-PLUS, the Company offers add-on modules that work with S-PLUS and provide additional "S" language functions for specialized data analysis purposes.
StatServer
In April 1997, the Company expanded its data analysis product line by introducing MathSoft StatServer. 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, Netscape 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.
Marketing and Sales
Technical Calculation Software Products
The Company's market for technical calculation software products consists of two significant groups of end users: technical professionals and educators and students. End users within the technical professionals group span numerous fields and include electrical, mechanical and civil engineers, scientists, mathematicians, researchers, technicians and analysts. The education market consists of secondary, undergraduate and graduate educators and students in many technical disciplines. The Company's products are currently used as tools for diverse purposes from back-of-the envelope calculations to bridge design and genetic engineering.
MathSoft reaches domestic customers of Mathcad primarily through a network of educational and commercial third party resellers and distributors. To complement this network, the Company has a domestic telesales organization focused on sales to the registered installed base as well as lead generation, prospect qualification and sales of site license agreements and network licenses. In addition, Mathcad upgrades are primarily marketed to the Company's registered installed base via direct mail. For the Transition Period, domestic sales through distributor and reseller channels accounted for 46.9% of total domestic sales of technical calculation software products, with the balance of such sales through either installed base direct mail or the Company's telesales operations.
Internationally, all technical calculation software products are marketed primarily through a network of resellers and distributors. Mathcad upgrades are marketed through distributors as well as to the registered installed base via direct mail. For the Transition Period, international sales through resellers and distributors accounted for 99.6% of total international sales of technical calculation software products.
Data Analysis Software Products
The Company's market for data analysis products consists principally of professional and academic scientists, engineers and statisticians. The product is used in such fields as biomedical technology, quantitative financial analysis and risk assessment, environmental science and engineering, industrial and market research, and process control.
The Company reaches domestic customers of its data analysis products both through its domestic telesales organization and a new outside sales team. Leads are generated from advertising, vertical market list rentals and tradeshows, which are then pursued by the telesales organization.
Internationally, the Company reaches customers of its data analysis products entirely through a network of resellers and distributors.
Customer Technical Support
Technical Calculation Software Products
MathSoft subcontracts customer technical support to its domestic customers by phone, fax and mail through a third party vendor located in Denver, Colorado. A technical support staff of engineers located in Cambridge is available to support the vendor in Colorado as well as to resolve the most difficult technical support issues. The Company provides this support free of charge to individual end-users and offers a Premium Support Plan to its corporate customers. The Company currently provides technical support for its StudyWorks products free of charge and additionally supports all product via the Company's home page on the World Wide Web.
International customers who purchase product from distributors receive first line technical support from their respective local distributor. A technical support staff of engineers, located in the Company's United Kingdom sales and marketing office, is available to support the distributors.
Data Analysis Software Products
Technical support for the S-PLUS product line is provided to domestic customers by a staff of engineers located in Seattle. Support is only available to customers who purchase an annual maintenance and technical support plan.
International customers who purchase products from distributors receive first line technical support from their respective local distributor. A technical support staff of engineers, located in the Company's United Kingdom sales and marketing office, is available to support the distributors.
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.
Technical Calculation Software Products
The Company subcontracts with a single independent third party vendor, located in Plymouth, Massachusetts, to manufacture all of its technical calculation software products and fulfill all of its domestic orders.
With the exception of Mathcad upgrade orders generated by direct mail, the Company processes all domestic orders from its leased facilities located in Cambridge, Massachusetts. MathSoft subcontracts the processing of all Mathcad upgrade direct mail orders with an independent service company located in Chicago, Illinois.
All international orders are processed by a third party vendor located in the United Kingdom that also provides warehousing and fulfillment services.
Data Analysis Software Products
The Company subcontracts with a third party vendor, located in Monroe, Washington, to manufacture all of its S-PLUS product line products. The Company warehouses inventory and processes and fulfills domestic orders internally out of its Seattle office. All international orders are processed and fulfilled by third party vendors located in the United Kingdom that also provide warehousing and fulfillment services.
Product Development
MathSoft's research and development organization, divided between the Company's Cambridge, Massachusetts and Seattle, Washington locations, is responsible for software development, product documentation, and quality assurance. Its priorities are to continue technical innovation for power and performance and to respond to market feedback by continuing to design products for ease-of-use.
MathSoft's development team consists of experts in software engineering, quality assurance, mathematics, statistics, engineering and documentation. In software engineering, MathSoft's professional staff has expertise in computer graphics, compiler design, user interface design and advanced Windows and Internet technologies.
During the Transition Period, the six months ended December 31, 1996, and the fiscal years ended June 30, 1997, 1996 and 1995, research and development costs charged to operations were $2,816,000, $2,378,000, $5,143,000, $3,659,000, and $3,059,000, respectively. The Company has not capitalized any internal software development costs during the Transition Period.
Competition
The markets for technical calculation and data analysis software products are highly competitive. In the technical calculation software market, MathSoft considers its principal competition to include technical calculation software from companies providing specialized tools, such as The MathWorks, Waterloo Maple Software and Wolfram Research. In the data analysis market, the Company considers its principal competition to include statistical software products from such companies as SAS, SPSS, StatSoft, Inc. and Visual Numerics.
In both markets, the Company faces competition from companies providing competing software solutions, such as spreadsheets. The Company may also face new competition from potential entrants into the technical calculation and data analysis software markets and more focused competition from companies in related markets, such as providers of spreadsheet programs, which could add to or improve the technical calculation and data analysis functionality of their existing products. Some of these companies may have significant name recognition, as well as substantially greater capital resources, marketing experience, research and development staffs and production facilities than the Company. Although the Company believes it has a technological advantage over existing competitors in the technical calculation and the data analysis software markets, maintaining that advantage 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 such competitive advantage.
Intellectual Property Rights and Licenses
MathSoft's software is proprietary and the Company attempts to protect it with copyrights, trade secret laws and internal nondisclosure safeguards, as well as restrictions on copying, disclosure and transferability that are incorporated into its software license agreements. Generally, the Company's products are not physically copy-protected. In order to retain exclusive ownership rights to all software developed by MathSoft, the Company licenses all software and provides it in executable code only, with contractual restrictions on copying, disclosure and transferability. As is customary in the industry, MathSoft licenses its products to end-users by use of a 'shrink-wrap' license. The source code for all of the Company's products is protected as a trade secret and as unpublished copyrighted work. In addition, the Company has entered into nondisclosure and inventions agreements with key employees. The Company has been granted two patents and is aggressively pursuing patent protection. However, in those areas where the Company has no patent protection, judicial enforcement of copyright laws may be uncertain.
Prior to fiscal 1994, the Company licensed, on a worldwide basis, MAPLE V Symbolic Algebra Software jointly from the University of Waterloo, Waterloo Maple Software, Inc. and two authors in exchange for ongoing royalty payments. In fiscal 1994, the Company was granted a non-exclusive worldwide perpetual license for this technology for inclusion in Mathcad and other products in exchange for a fixed royalty payment.
The Company is a worldwide licensee until February 18, 2002 of Lucent Technologies Inc. for the "S" programming language. Under the license, the Company has the right to use, sublicense and support the "S" programming language from Lucent Technologies in exchange for royalties. Any modifications, enhancements, adaptations or derivations of the "S" programming language are the property of the Company. After February 18, 2002, the Company, at its election, may extend this license for five-year terms in perpetuity, provided that the Company continues to comply with its obligations under the license. Although termination of this license could have a material adverse effect on the Company's operations as 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, 1997, the Company employed approximately 160 regular full-time and part-time employees, of which 14 were outside the United States. As necessary, the Company supplements its regular employees with temporary and contract personnel. As of December 31, 1997, the Company employed 8 temporary and contract personnel, of which 1 was outside the United States. None of the Company's regular employees are represented by a labor union or are subject to a collective bargaining agreement. The Company has never experienced a work stoppage and believes that its employee relations are good.
Cautionary Statements
In addition to the other information in this report, the following cautionary statements should be considered carefully in evaluating the Company and its business. Information provided by the Company from time to time may contain certain "forward-looking" information, as that term is defined by (i) the Private Securities Litigation Reform Act of 1995 (the "Act") and (ii) in releases made by the Securities and Exchange Commission (the "SEC"). These cautionary statements are being made pursuant to the provisions of the Act and with the intention of obtaining the benefits of the "safe harbor" provisions of the Act.
Variability of Quarterly Operating Results. The Company's quarterly operating results may vary significantly from quarter to quarter, depending upon factors such as the introduction and market acceptance of new products and new versions of existing products, the ability to reduce expenses, 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, and substantially all of its product revenues in each quarter result from software licenses issued in that quarter, and the Company's ability to accurately forecast future revenues and income for any period is necessarily limited. Any forward-looking information provided from time to time by the Company represents only management's then-best current estimate of future results or trends, and actual results may differ materially from those contained in the Company's estimates.
Potential Volatility of Stock Price. There has been significant volatility in the market price of securities of technology companies. The Company believes factors such as announcements of new products by the Company or its competitors, quarterly fluctuations in the Company's financial results or other software companies' financial results, shortfalls in the Company's actual financial results compared to results previously forecasted by stock market analysts, and general conditions in the software industry and conditions in the financial markets could cause the market price of the Common Stock to fluctuate substantially. These market fluctuations may adversely affect the price of the Company's Common Stock.
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.
Risks Associated with Divestitures. The Company's product offerings presently may be divided between two principal product families - those related to its Mathcad line addressing the calculation needs of the technical, professional and education markets, and its S-PLUS offerings, marketed primarily to professionals needing statistical data analysis tools.
In setting strategic goals to maximize shareholder value, the Company from time to time considers the options of divesting itself of one product family or the other, or product lines within a given family, to concentrate its focus on the business opportunity associated with the remaining product family or product lines.
At the present time, the Company is not party to any agreement relating to the sale of either of its product families or product lines within such families, but it may elect to pursue such options at any time. If the Company were to consummate such a sale, there can be no assurance that it would receive returns from such sale that investors in the Company would consider attractive.
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. Mathcad products are currently marketed and distributed in the U.S. through third party resellers and distributors, telesales and direct mail. Internationally, the Company's Mathcad products are marketed and distributed through third party resellers and distributors. There can be no assurance that the Company will be able to retain its current resellers and distributors, or expand its distribution channels by entering into arrangements with new resellers and distributors in the Company's current markets or in new markets.
Risks Associated with International Operations. Sales outside North America accounted for approximately 36.1%, 32.5% and approximately 34.0% of the Company's total revenues in the twelve months ended June 30, 1995, 1996 and 1997, and approximately 29.5% of the Company's total revenues in the Transition Period, and may continue to represent a significant portion of the Company's product revenues. Any decrease in sales outside North America may have a materially adverse effect on the Company's operating results. The Company's international business and financial performance may be affected by fluctuations in exchange rates and by trade regulations.
Reliance on Third Party Licensors. Maple V, a software product licensed as a part of the most recent version of Mathcad, contains certain copyrighted texts licensed from third party publishers incorporated in the Company's Electronic Books, and the S programming language, the language on which all of StatSci's products are based, are currently licensed from a single source or limited source suppliers. If such licenses are discontinued, there can be no assurance that the Company will be able to independently develop substitutes or to obtain alternative sources or, if able to be developed or obtained as needed in the future, that such efforts would not result in delays or reductions in product shipments or cost increases that could have a material adverse effect on the Company's consolidated business operations.
Rapid Technological Change; Competition. The technical calculation software market is subject to rapid and substantial technological change, similar to that affecting the software industry generally. The Company, to remain successful, must be responsive to new developments in hardware and chip technology, operating systems, programming technology, Internet technology and multimedia capabilities. In addition, the Company competes against numerous other companies, some of which have significant name recognition, as well as substantially greater capital resources, marketing experience, research and development staffs and production facilities than the Company. The Company's financial results may be negatively impacted by the failure of new or existing products to be favorably received by retailers and consumers due to price, availability, features, other product choices or the necessity of promotions to increase sales of the Company's products.
Year 2000 Issues. The Year 2000 issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the century date change occurs, date-sensitive systems will recognize the year 2000 as 1900, or not at all. This inability to recognize or properly treat the Year 2000 may cause systems to process critical financial and operational information incorrectly. The Company utilizes software from third parties and related technologies throughout its business that will be affected by the date change in the year 2000. An internal study is currently under way to determine the full scope and related costs to insure that the Company's systems continue to meet its needs. The Company began incurring expenses in 1997 to resolve this issue. All expenditures will be expensed as incurred and they are not expected to have a significant impact on the Corporation's ongoing results of operations.
Uncertainties Regarding Protection of Proprietary Technology; Uncertainties Regarding Patents. The Company believes that while the mathematical calculations performed by the Company's software are not proprietary, the speed and quality of displaying the computation and the ease of use are unique to MathSoft's products. The Company's success will depend, in part, on its ability to protect the proprietary aspects of its products. The Company seeks to protect these proprietary aspects of its products principally through a combination of contract provisions and copyright, patent, trademark and trade secret laws. There can be no assurance that the steps taken by the Company to protect its proprietary rights will be adequate to prevent misappropriation of its technology. Although the Company believes that its products and technology do not infringe any existing proprietary rights of others, the use of patents to protect software has increased and there may be pending or issued patents of which the Company is not aware that the Company may need to license or challenge at significant expense. There can be no assurance that any such license would be available on acceptable terms, if at all, or that the Company would prevail in any such challenge.
Reliance on Attracting and Retaining Key Employees. The Company's continued success will depend in large part on its ability to attract and retain highly qualified technical, managerial, sales and marketing and other personnel. Competition for such personnel is intense. The Company has non-competition agreements with its key management and technical personnel. There can be no assurance that the Company will be able to continue to attract or retain such personnel.
ITEM 2.
ITEM 2. PROPERTIES.
The Company leases 34,562 square feet of office space at 101 Main Street, Cambridge, Massachusetts of which 23,350 square feet is occupied by the Company and 11,212 square feet is sublet to a third party. The terms of both the lease and sublease for office space are scheduled to terminate in October 1999. A third party vendor provides warehousing services to meet the Company's needs. The Company also leases 15,891 square feet of office space and subleases 4,423 square feet of office space at 1700 Westlake Avenue North, Seattle, Washington. This lease expires in September 1999 and the sublease expires in March 2000. In connection with the acquisition of acroScience, the Company assumed a lease on 1,740 square feet of office space in Boulder, Colorado, which is scheduled to terminate in January 2000. The Company currently sublets this space to a third party, the term of which is scheduled to terminate in May 1998. The Company also leases 2,931 square feet of office space in the United Kingdom. The term of the lease for this office space is scheduled to expire in March 2000.
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.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
An annual Meeting of the Stockholders of the Company was held on December 12, 1997. At the meeting, the Stockholders of the Company voted:
(i) to elect Charles J. Digate as a Class II director, to serve for a three-year term (until the Annual Meeting of Stockholders in 2000) (6,978,260 shares in favor, 453,082 shares withheld);
(ii) to elect June L. Rokoff as a Class II director, to serve for a three-year term (until the Annual Meeting of Stockholders in 2000) (6,981,061 shares in favor, 450,281 shares withheld);
(iii) to amend the Company's Amended and Restated 1992 Stock Plan to increase the number of shares of Common Stock available for issuance under the plan from 2,550,000 shares to 3,150,000 shares (2,927,183 shares in favor; 1,169,409 shares against; 48,035 shares abstaining; and 3,286,715 shares unvoted); and
(iv) to ratify the selection of Arthur Andersen LLP as auditors for the next fiscal year (7,359,217 shares in favor; 38,525 shares against; 33,660 shares abstaining; and 0 shares unvoted).
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock (Nasdaq: MATH) began trading publicly in the over-the-counter market through the Nasdaq National Market on February 3, 1993. Prior to that date, there was no public market for the Common Stock. On July 15, 1997, the Company transferred the listing of its Common Stock to the Nasdaq SmallCap Market. The following table presents quarterly information on the price range of the Common Stock. This information indicates the high and low bid prices for the Common Stock as reported by the Nasdaq National Market and the Nasdaq SmallCap Market for the periods indicated. These prices do not include retail markups, markdowns or commissions.
As of March 23, 1998, the number of stockholders of record of Common Stock was approximately 223. 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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data set forth below has been derived from the audited financial statements of the Company. The information should be read in conjunction with the financial statements and notes thereto set forth elsewhere herein.
FIVE YEAR SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 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 six months ended December 31, 1997 (the "Transition Period") and the six months ended December 31, 1996, the three years ended June 30, 1997 and the percentage changes in those items for six months ended December 31, 1997 and 1996 and the two years ended June 30, 1997.
Transition Period Ended December 31, 1997 Compared to the Six-Month Period Ended December 31, 1996
Total revenues for the Transition Period increased 37.4% from $9,478,000 for the six months ended December 31, 1996 to $13,024,000 during the Transition Period. This increase in total revenues was primarily attributable to upgrade revenue generated by the recent release of Mathcad 7 for Windows in June 1997, new license revenue generated from SPLUS-4.0 released in September 1997, and to a lesser extent, SPLUS service revenue.
Mathcad for Windows generated upgrade revenue of $680,000 for the six months ended December 31, 1996 compared to upgrade revenue of $2,677,000 during the Transition Period, an increase as a percentage of total revenues from 7.2% to 20.6%, respectively. Prior to the release of Mathcad 7 for Windows in June 1997, the Company's last significant upgrade, Mathcad 6.0 for Windows, was released approximately twenty-three months earlier in July 1995 and therefore upgrade revenue was much lower in the six months ended December 31, 1996. Worldwide S-PLUS product line revenue increased 39.4% from $2,531,000 for the six months ended December 31, 1996 to $3,529,000 during the Transition Period, and increased as a percentage of total revenues from 26.7% to 27.1%, respectively. Worldwide S-PLUS service revenue increased 167.7% from $269,000 in the six months ended December 31, 1996 to $720,000 during the Transition Period, and increased as a percentage of total revenues from 2.8% to 5.5%, respectively. Total international revenues attributable to sales of all Company product lines increased 20.9% from $3,182,000 for the six months ended December 31, 1996 to $3,846,000 during the Transition Period, and decreased as a percentage of total revenues from 33.6% to 29.5%, respectively.
Total cost of revenues for the six-month period increased 27.0% from $1,983,000 for the six months ended December 31, 1996 to $2,519,000 during the Transition Period, and decreased as a percentage of total revenues from 20.9% to 19.3%, respectively. The decrease in total cost of revenues as a percentage of total revenues was primarily attributable to switching from disk to CD media with the release of Mathcad 7 for Windows, thereby decreasing direct material costs on a per unit basis. To a lesser degree, fixed costs, such as licensing costs for the "S" language used in the S-PLUS product line and the amortization of purchased technology, decreased as a percentage of total revenues due to an overall higher revenue base during the Transition Period. Such decreases were partially offset by increased inventory reserves during the Transition Period to adequately cover inventory exposure in the sales distribution channel and an increase in cost of services from $404,000 for the six months ended December 31, 1996 to $702,000 during the Transition Period due to the increase in service revenue.
Sales and marketing expenses for the six-month period increased 3.2% from $5,007,000 for the six months ended December 31, 1996 to $5,169,000 during the Transition Period, and decreased as a percentage of total revenues from 52.8% to 39.7%, respectively. The increase in overall sales and marketing expenses was primarily attributable to expenses incurred related to the launch of Mathcad 7 for Windows and S-PLUS 4.0, as well as an increase in S-PLUS domestic sales expenses incurred to support direct sales of this expanding product line.
Research and development expenses for the six-month period increased 18.4% from $2,378,000 for the six months ended December 31, 1996 to $2,816,000 during the Transition Period, and decreased as a percentage of total revenues from 25.1% to 21.6%. The increase in overall research and development expenses was primarily attributable to expenses related to development initiatives in the Company's Data Analysis Products Division and additional personnel to support such initiatives, as well as an increase in international product translation costs for Mathcad 7 French, German and Japanese.
General and administrative expenses for the six-month period increased 14.3% from $1,241,000 for the six months ended December 31, 1996 to $1,418,000 during the Transition Period and decreased as a percentage of total revenues from 13.1% to 10.9%, respectively. The increase in overall general and administrative expenses was primarily attributable to costs incurred for management incentive compensation provisions based primarily on the achievement of profitability targets, and to a lesser extent, to fluctuations in international exchange rate transactions.
Net income for the Transition Period was $1,105,000 compared to net loss of $1,066,000 for the six months ended December 31, 1996. Improved performance from the recently refreshed Mathcad and S-PLUS product lines coupled with margin improvements all contributed to this improvement in profit.
Fiscal Year Ended June 30, 1997 Compared to Fiscal Year Ended June 30, 1996
Total revenues decreased 14.9% from $20,767,000 for the fiscal year ended June 30, 1996 ("Fiscal 1996") to $17,678,000 for the fiscal year ended June 30, 1997 ("Fiscal 1997"). The decrease in total revenues was primarily attributable to a worldwide decrease in both new license revenue and upgrade revenue generated by the Company's core product, Mathcad for Windows, and to a lesser extent, a decrease in sales of Electronic Books, which work with Mathcad, and a decrease in S-PLUS product line and services revenue. The decrease in total revenues was partially offset by revenue generated by the release of Mathcad 6.0 for Macintosh in November 1996, revenue generated by the StudyWorks! product line released in June 1996 and revenue generated from the Axum product line acquired in the second quarter of Fiscal 1996.
Mathcad for Windows generated upgrade revenue of $4,287,000 in Fiscal 1996 compared to upgrade revenue of $1,388,000 in Fiscal 1997, a decrease as a percentage of total revenues from 20.6% to 7.9%, respectively. Prior to the release of Mathcad 7 for Windows in June 1997, the Company's last significant upgrade, Mathcad 6.0 for Windows, was released approximately twenty-three months earlier during July 1995, and its upgrade cycle therefore came to a close in Fiscal 1997. Worldwide Mathcad for Windows non-upgrade revenue decreased 13.8% from $7,377,000 in Fiscal 1996 to $6,359,000 in Fiscal 1997 due primarily to the Company's distribution channel's anticipation of the delivery of the next major release of Mathcad for Windows, Mathcad 7 for Windows, and decreasing sell-through of the older Mathcad 6.0 for Windows release. Worldwide S-PLUS product line and services revenue decreased 8.7% from $5,904,000 in Fiscal 1996 to $5,389,000 in Fiscal 1997, and increased as a percentage of total revenues from 28.4% to 30.5%, respectively. The decrease in S-PLUS product line and services revenue was attributable to a reduction in license revenue, due to a material shift from UNIX license sales to lower priced Windows license sales, and to the discontinuance of unprofitable S-PLUS services revenue. Moreover, the product line reached its fourth year of life without a major new release resulting in sluggish new license sales prior to the delivery of S-PLUS 4.0 in the Transition Period. Revenues attributable to the Axum product line acquired in the TriMetrix, Inc. acquisition accounted for $676,000, or 3.3% of total revenues, in Fiscal 1996 compared to $1,023,000, or 5.8% of total revenues, in Fiscal 1997. Total international revenues attributable to sales of all Company product lines decreased 10.9% from $6,756,000 in Fiscal 1996 to $6,018,000 in Fiscal 1997, and increased as a percentage of total revenues from 32.5% to 34.0%, respectively.
Total cost of revenues decreased 1.4% from $4,000,000 in Fiscal 1996 to $3,946,000 in Fiscal 1997, and increased as a percentage of total revenues from 19.3% to 22.3%, respectively. The increase in total cost of revenues as a percentage of total revenues was primarily attributable to a reduction of inventory reserves in Fiscal 1996 based on an evaluation of actual inventory exposure and reserve requirements. In contrast, the Company increased inventory reserves in Fiscal 1997 to adequately cover inventory exposure in the sales distribution channel as the Company prepared to release its next major upgrade of Mathcad, Mathcad 7 for Windows. In addition, fixed licensing costs for the "S" language used in the S-PLUS product line increased in Fiscal 1997 per terms of the license agreement and other fixed costs, such as the amortization of purchased technology, increased as a percentage of total revenues by approximately 1.51% due to an overall lower revenue base in Fiscal 1997.
Sales and marketing expenses increased 5.5% from $9,719,000 in Fiscal 1996 to $10,251,000 in Fiscal 1997, and increased as a percentage of total revenues from 46.8% to 58.0%, respectively. The increase in overall sales and marketing expenses was attributable to marketing expenses incurred related to the Fiscal 1997 launch of the StudyWorks! product line, Mathcad 6.0 for Macintosh and, most recently, Mathcad 7 for Windows, as well as to an increase in S-PLUS domestic sales expenses as the Company reorganized its sales infrastructure to support direct sales into this expanding product line. International sales and marketing expenses increased 3.8% from $2,285,000 in Fiscal 1996 to $2,372,000 in Fiscal 1997.
Research and development expenses increased 40.6% from $3,659,000 in Fiscal 1996 to $5,143,000 in Fiscal 1997, and increased as a percentage of total revenues from 17.6% to 29.1%. The increase in overall research and development expenses was primarily attributable to increased personnel and consulting costs associated with the continued expansion and development of the S-PLUS product line, specifically related to the first release of StatServer in April, 1997 and the impending release of S-PLUS 4.0 during the Transition Period.
General and administrative expenses increased 11.3% from $2,455,000 in Fiscal 1996 to $2,732,000 in Fiscal 1997 and increased as a percentage of total revenues from 11.8% to 15.5%, respectively. The increase in overall general and administrative expenses was primarily attributable to fluctuations in international exchange rate transactions. The Company recorded exchange rate losses of $12,000 in Fiscal 1996 compared to exchange rate losses of $257,000 in Fiscal 1997.
Net loss for Fiscal 1997 was $4,300,000 compared to net income of $1,076,000 in Fiscal 1996. Fiscal 1997 reflected a year of investment for the Company as evidenced by its commitment to strategic development initiatives, most notably in the Company's Data Analysis Products Division. The release of new products with new product cycles will support renewed growth in both the Mathcad and S-PLUS product lines.
Fiscal Year Ended June 30, 1996 Compared to Fiscal Year Ended June 30, 1995
Total revenues increased 30.7% from $15,883,000 for the fiscal year ended June 30, 1995 ("Fiscal 1995") to $20,767,000 in Fiscal 1996. The increase in total revenues was primarily attributable to an increase in worldwide Mathcad product line licenses, an increase in worldwide S-PLUS product line and services revenue and revenue generated from the Axum product line acquired in the second quarter of Fiscal 1996. The release of Mathcad 6.0 in July 1995 supported a 129% worldwide increase in Mathcad upgrade revenue from $1,873,000 in Fiscal 1995 to $4,287,000 in Fiscal 1996. Mathcad upgrade revenue also increased as a percentage of total revenues from 11.8% in Fiscal 1995 to 20.6% in Fiscal 1996. The Company's last significant upgrade, Mathcad 5.0, was released approximately eighteen months earlier during January 1994, and its upgrade cycle therefore came to a close in Fiscal 1995. Worldwide Mathcad non-upgrade product line sales increased 18.3% from $6,236,000 in Fiscal 1995 to $7,377,000 in Fiscal 1996 and worldwide S-PLUS product line and services revenue increased 10.9% from $5,324,000 in Fiscal 1995 to $5,904,000 in Fiscal 1996. The increase in worldwide non-upgrade Mathcad revenue was due primarily to the Company's focus throughout Fiscal 1996 on a generating new license Mathcad sales by an increased penetration into the education market and renewed growth in the commercial markets. Total international revenues increased 17.7% from $5,739,000 in Fiscal 1995 to $6,756,000 in Fiscal 1996, and decreased as a percentage of total revenues from 36.1% to 32.5%, respectively. The increase in total international revenues was due to Mathcad upgrade revenues generated by the release of Mathcad 6.0, in addition to global distribution expansion efforts in both the commercial and education markets. Revenues attributable to the Axum product line acquired in the TriMetrix, Inc. acquisition accounted for $676,000, or 3.3% of total revenues, in Fiscal 1996. Gains and losses from foreign currency transactions in Fiscal 1996 were not significant.
Total cost of revenues decreased 1.6 % from $4,064,000 in Fiscal 1995 to $4,000,000 in Fiscal 1996, and decreased as a percentage of total revenues from 25.6% to 19.3%, respectively. The decrease in total cost of revenues as a percentage of total revenues was primarily attributable to the allocation of fixed costs, such as royalties and the amortization of purchased technology, over a higher revenue base for the year. In addition, amortization of product development costs accounted for $489,000 of total cost of revenues, or 3.1% of total revenues, in Fiscal 1995. There was no amortization of product development costs in Fiscal 1996 as amounts were fully amortized.
Sales and marketing expenses increased 11.7% from $8,703,000 in Fiscal 1995 to $9,719,000 in Fiscal 1996, and decreased as a percentage of total revenues from 54.8% to 46.8%, respectively. The increase in overall sales and marketing expenses was primarily attributable to more aggressive advertising and channel promotional activities and additional headcount and related costs in both the domestic sales and marketing functions. These increases were partially offset by a reduction in direct mail marketing activities to prospective customers. International marketing expenses decreased from $2,168,000 in Fiscal 1995 to $1,661,000 in Fiscal 1996 due primarily to a discontinuance of direct mail marketing activity to prospective customers and reduced installed base direct mail marketing activity.
Research and development expenses increased 19.6% from $3,059,000 in Fiscal 1995 to $3,659,000 in Fiscal 1996, and decreased as a percentage of total revenues from 19.2% to 17.6%. The increase in overall research and development expenses was primarily due to the addition of personnel from the TriMetrix, Inc. acquisition as well as expenses incurred related to product localization for international markets and S-PLUS development efforts.
General and administrative expenses increased 20.9% from $2,030,000 in Fiscal 1995 to $2,455,000 in Fiscal 1996 and decreased as a percentage of total revenues from 12.8% to 11.8%, respectively. The increase in overall general and administrative expenses was primarily attributable to costs incurred to attract and retain key management personnel in both the Company's Cambridge headquarters and Seattle operation including the addition of a new General Manager for the Company's Data Analysis Products Division in the third quarter of Fiscal 1996.
Net income for Fiscal 1996 was $1,076,000 compared to a net loss of $1,891,000 in Fiscal 1995, excluding the $1,662,000 non-cash charge for the revaluation of certain intangible assets. The release of Mathcad 6.0 in July 1995 and expansion of global distribution channels supported worldwide growth in both the Mathcad and S-PLUS product lines. In addition, the Company's renewed commitment to the education market in Fiscal 1996 resulted in increased penetration for both existing product lines and new product lines, such as StudyWorks released in June 1996.
Liquidity and Capital Resources
Cash and cash equivalents totaling $4,133,000 at December 31, 1997, increased $1,331,000 during the Transition Period from $2,802,000 at June 30, 1997. The positive cash flow resulted primarily from cash provided by operating activities of $1,602,000, proceeds from exercise of stock options and warrants of $179,000 offset by purchases of property and equipment of $424,000.
The Company generated $1,602,000 in cash from operating activities during the Transition Period. The cash generated by operating activities was primarily attributable to net income of approximately $1,105,000, non-cash depreciation and amortization charges, and to an increase in accounts payable and a decrease in prepaid expenses. The changes in accounts payable and prepaid expenses were due to the timing of payments and management's cash planning and forecasting efforts. The increase in accounts receivable and the decrease in accrued expenses offset these sources of cash. Accounts receivable increased due to the growth in the Company's business and accrued expenses decreased due to the timing of certain payments. The Company used $439,000 in investing activities primarily due to the purchase of $424,000 of property and equipment. Proceeds generated from sales/leaseback equipment financing and the exercise of stock options of $84,000 and $179,000, respectively, were offset by payments on capital lease obligations of $139,000.
The Company's financial reserves are represented by cash and cash equivalents as of December 31, 1997. The Company has a line of credit agreement with a commercial bank. Borrowings under the line are limited to the lesser of 65% of eligible domestic accounts or $1,000,000 based on certain profitability covenants. Borrowings are secured substantially all of the Company's assets and bear interest at the bank's prime rate plus 1%. The line of credit contains certain restrictive covenants, including minimum amounts of profitability, equity, leverage and liquidity, all as defined in the agreement, and expires on December 31,1998. There were no amounts outstanding under this line at December 31, 1997.
The Company believes its financial reserves and cash flows from future operations will be sufficient to meet its liquidity requirements for at least the next twelve months. The foregoing statement is forward-looking and involves risks and uncertainties, many of which are outside the Company's control. The Company's actual experience may differ materially from that discussed above. Factors that might cause such a difference include, but are not limited to, those discussed in "Cautionary Statements" in this Form 10-K for the Transition Period 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 or cash expenditures related to possible future acquisitions. The Company may be presented from time to time with acquisition opportunities which require additional external financing, and the Company may from time to time seek to obtain additional funds from public or private issuances of equity or debt securities. There can be no assurance that any such financing will be available at all or on terms favorable to the Company.
In addition to the other information in this report, the cautionary statements discussed in this Form 10-K for the Transition Period 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.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following consolidated financial statements are filed as part of this report:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1997 and June 30, 1997 and 1996
Consolidated Statements of Operations for the six-month periods ended December 31, 1997 and December 31, 1996 (unaudited) and for the years ended June 30, 1997, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1997, 1996 and 1995 and for the six-month period ended December 31, 1997
Consolidated Statements of Cash Flows for the six-month period ended December 31, 1997 and December 31, 1996 (unaudited) and for the years ended June 30, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
To MathSoft, Inc.:
We have audited the accompanying consolidated balance sheets of MathSoft, Inc. (a Massachusetts corporation) and subsidiaries as of December 31, 1997, June 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity and cash flows for the six-month period ended December 31, 1997 and each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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 financial statements referred to above present fairly, in all material respects, the financial position of MathSoft, Inc. and subsidiaries as of December 31, 1997 and June 30, 1997 and 1996 and the results of their operations and their cash flows for the six-month period ended December 31, 1997 and for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Boston, Massachusetts February 9, 1998
MATHSOFT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
MATHSOFT, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Continued)
MATHSOFT, INC. AND SUBSIDIARIES
MATHSOFT, INC. AND SUBSIDIARIES
MATHSOFT, INC. AND SUBSIDIARIES
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1997
(Including Data Applicable to Unaudited Periods)
(1) Operations and Significant Accounting Policies
MathSoft, Inc. (MathSoft) was incorporated on October 12, 1984. MathSoft develops, markets and supports software productivity tools for the technical calculation and data analysis markets comprised of professionals, students and educators.
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.
The accompanying consolidated financial statements comprise those of MathSoft and its wholly owned subsidiaries Statistical Sciences, Inc. (StatSci), TriMetrix, Inc. and acroScience Corporation (collectively referred to as the Company). All material intercompany accounts and transactions have been eliminated.
(a) Change In Fiscal Year
On December 16, 1997, the Company's Board of Directors approved a change in the Company's fiscal year. The Company's fiscal year ends on December 31.
(b) Revenue Recognition
The Company derives substantially all of its revenue from software products for use on desktop computers. Revenue from the licensing of software products is recognized when the products are shipped, as there are no significant postdelivery obligations, and the Company provides for estimated returns and warranty costs at the time of sale. The Company offers maintenance contracts and training on its products. Maintenance and training revenues are recognized ratably over the term of the related contracts generally for one year or less. Amounts received in advance for maintenance agreements are recorded as deferred revenue on the accompanying consolidated balance sheets.
(c) Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates market, and consist of short-term, highly liquid investments with original maturities of less than three months.
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1997
(Including Data Applicable to Unaudited Periods)
(Continued)
(d) Inventories
(e) Depreciation and Amortization
The Company provides for depreciation and amortization by charges to operations on a straight-line basis, in amounts estimated to recover the cost of the assets over their estimated useful lives as follows:
(f) Product Development Costs
The Company capitalizes product development costs subsequent to the establishment of technological and commercial feasibility, until the product is available for general release. Costs incurred prior to the establishment of technological feasibility are charged to research and development expense. Development costs associated with product enhancements that extend the original product's life or significantly improve the original product's marketability are also capitalized upon technological feasibility. Amortization of product development costs begins one month after the general release over the shorter of the estimated useful life of the product or 15 months.
No costs have been capitalized since 1995 because costs incurred from technological feasibility to general release have been immaterial. Amortization of product development costs of $488,964 for the year ended June 30, 1995, has been included in cost of revenues in the accompanying consolidated statements of operations.
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1997
(Including Data Applicable to Unaudited Periods)
(Continued)
(g) Basic and Diluted Net Income (Loss) per Common Share
In March 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings per Share. SFAS No. 128 establishes standards for computing and presenting earnings per share. This statement is effective for fiscal years ending after December 15, 1997. Net income (loss) per share has been restated for all periods presented to conform with SFAS No. 128.
Basic and diluted net income (loss) per share is as follows:
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1997
(Including Data Applicable to Unaudited Periods)
(Continued)
(h) Postretirement Benefits
The Company has no obligations for postretirement benefits.
(i) Foreign Currency Translation
Assets and liabilities of the Company's foreign branch are translated to U.S. dollars using the exchange rate at each balance sheet date. Income and expense accounts are translated using an average rate of exchange during the period. Foreign currency translation adjustments are accumulated as a separate component of stockholders' equity. The effect of aggregate transaction gains and losses were approximately $75,000 and $55,000 in the six-month periods ended December 31, 1997 and 1996, respectively, and were approximately $(257,000), $(12,000) and $38,000 in the years ended June 30, 1997, 1996 and 1995, respectively.
(j) Other Assets
In 1997, the Company implemented SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. This standard establishes accounting standards for long-lived assets and certain identifiable intangibles to be disposed of. The Company reviews all long-term assets for impairment. Should there be an impairment, the Company will write down the asset to its current value based on discounted cash flows.
(k) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information About Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, requires disclosure of any significant off-balance-sheet and credit risk concentrations. The Company's financial instruments that subject the Company to credit risk consist primarily of cash and cash equivalents and accounts receivable. The Company maintains the majority of its cash balances with one financial institution. The Company's accounts receivable are not concentrated within a specific geographic area; however, one single customer represents greater than 10% of the Company's net sales (see Note 8).
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1997
(Including Data Applicable to Unaudited Periods)
(Continued)
(l) New Accounting Standards
In July 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements, in order to measure all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. Comprehensive income, as defined by SFAS No. 130, is the total of net income and all other nonowner changes in equity. Under SFAS No. 130, companies would include the cumulative total of comprehensive income as a separate component of its stockholders' equity statement. This statement is effective for fiscal years beginning after December 15, 1997, and is applicable on both an interim and annual basis.
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of an Enterprise and Related Information. SFAS No. 131 requires certain financial and supplementary information to be disclosed on an annual and interim basis for each reportable segment of an enterprise. Reportable segments, as defined by this statement, correspond to the way management organizes units and evaluates performance internally, and may be based upon products, geography, legal entity, management structure or a combination of these methods. SFAS No. 131 is applicable only to public, for-profit entities and is effective for years beginning after December 15, 1997. Unless impracticable, companies would be required to restate prior period information upon adoption.
(m) 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.
(n) 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 and capital leases. The estimated fair value of these financial instruments approximates their carrying value in the accompanying financial statements. on
(o) Unaudited Period
The financial statements for the six months ended December 31, 1996 are unaudited and, in the opinion of management, include all adjustments (consisting only of normal and recurring adjustments) necessary for a fair presentation of results for the period.
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1997
(Including Data Applicable to Unaudited Periods)
(Continued)
(2) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities using currently enacted tax rates.
The components of domestic and foreign income (loss) before the provision for income taxes are as follows:
The provisions for income taxes consist of the following:
At December 31, 1997, the Company had available net operating loss carryforwards of approximately $12,916,000 and tax credit carryforwards of approximately $448,000. 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, 2012. 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.
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1997
(Including Data Applicable to Unaudited Periods)
(Continued)
(3) Capital Leases
The Company leases certain equipment under noncancelable leases expiring through fiscal 2002. Future minimum lease payments as of December 31, 1997 under these arrangements are as follows:
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1997
(Including Data Applicable to Unaudited Periods)
(Continued)
(4) Commitments
In August 1993, the Company entered into a six-year operating lease for its facility in Cambridge, Massachusetts. The lease provides for uneven payments during the six-year period. However, rent expense is charged to operations evenly over the leased period. The Company also has operating leases for its Seattle and International office spaces and certain office equipment.
The approximate future lease payments under the Company's operating lease arrangements, exclusive of operating costs and net of sublease revenue through October 2000, are as follows:
(5) Stockholders' Equity
(a) Stock Option Plans
The Company adopted two stock option plans in 1987 and 1992 (the Plans) whereby the Board of Directors may grant incentive stock options (ISOs), nonqualified stock options, awards of common stock and authorizations to make direct purchases of common stock to eligible employees and others, as defined. ISOs are granted at a price not less than fair market value at the date of grant. The options typically vest over a five-year period.
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1997
(Including Data Applicable to Unaudited Periods)
(Continued)
The Company has adopted the 1992 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 160,000 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.
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.
In 1996, the Company adopted the 1996 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 are 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 are not transferable.
As of December 31, 1997, a total of 4,698,508 shares of common stock were reserved for issuance under the Plans, the 1992 Director's Plan, the Key Officer Stock Options, and the 1996 Non-Officer Plan.
The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 123 establishes a fair-value-based method of accounting for stock-based compensation plans. The Company 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 1996 and 1997, including the Employee Stock Purchase Plan using the Black-Scholes option pricing model prescribed by SFAS No. 123. For nonemployees, SFAS No. 123 requires that the compensation expense calculated using the Black-Scholes option pricing model be charged to the statement of operations. The value of options awarded to nonemployees as determined under SFAS No. 123 is not material to the results of operations for both fiscal years ended June 30, 1997 and 1996, or for the six-month period ended December 31, 1997.
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1997
(Including Data Applicable to Unaudited Periods)
(Continued)
The assumptions used and the weighted average information are as follows:
The effect of applying SFAS No. 123 would be as follows:
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1997
(Including Data Applicable to Unaudited Periods)
(Continued)
The Company's stock option activity for all plans is as follows:
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1997
(Including Data Applicable to Unaudited Periods)
(Continued)
The following table summarizes information about stock options outstanding at December 31, 1997:
(b) Employee Stock Purchase Plan
The Company has an employee stock purchase plan pursuant to which the Company has reserved and may issue up to 200,000 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 six-month period ended December 31, 1997, the Company issued 23,470 shares under the Plan. During the years ended June 30, 1997, 1996 and 1995, the Company issued 28,463, 13,065, and 14,565 shares, respectively, under the Plan.
(6) Geographic Data
Revenues by geographic area as a percentage of total revenues were as follows:
MATHSOFT, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements December 31, 1997
(Including Data Applicable to Unaudited Periods)
(Continued)
(7) Accrued Expenses
(8) Significant Customer
During the six-month period ended December 31, 1997, one customer accounted for 12% of net sales. One customer accounted for 12% and 14% of net sales in the years ended June 30, 1996 and 1997, respectively. There were no significant customers in the year ended June 30, 1995.
(9) Line of Credit
The Company has a line of credit with a bank, collateralized by substantially all of the Company's assets. Borrowings are limited to the lesser of 65% of eligible domestic accounts or $1,000,000. Interest on outstanding borrowings under this line is based on the bank's prime rate (8.5% at December 31, 1997) plus 1%. The Company had no outstanding borrowings under this line as of December 31, 1997. The agreement contains covenants that, among other things, require the Company to meet certain profitability and maximum leverage ratios, and to maintain a minimum level of tangible net worth. The line of credit expires in December 1998.
(10) Acquisitions
In November 1996 and 1995, the Company acquired 100% of the outstanding capital stock of acroScience Corporation and TriMetrix, Inc., respectively, each business combination was accounted for as a pooling of interests. As a result of the business combinations, acroScience Corporation and TriMetrix, Inc. became wholly owned subsidiaries of the Company. acroScience Corporation develops visual modeling and programming tools. In consideration of this acquisition, former stockholders of acroScience Corporation received a total of 250,000 shares of the Company's common stock. TriMetrix, Inc. develops and manufactures advanced charting and data analysis software. In consideration of this acquisition, former stockholders of TriMetrix, Inc. received a total of 219,997 shares of the Company's common stock. For financial reporting purposes, the periods preceding the acquisitions have not been restated, as the acquisitions were not material. The results of operations of acroScience Corporation and TriMetrix, Inc. have been included in the consolidated operating results since the dates of the respective acquisitions.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The current directors and executive officers of the Corporation, their ages, and the positions currently held by each such person with the Corporation are as follows:
In accordance with the Corporation's Third Restated Articles of Organization, the Corporation's Board of Directors is divided into three classes each of which holds office for a three year term. Officers of the Corporation are elected by, and serve at the discretion of, the Board of Directors.
Charles J. Digate. Mr. Digate has been a director and an executive officer of the Corporation since September 1994. Mr. Digate's term as a Class II Director will expire as of the date of the Annual Meeting of Stockholders to be held in calendar year 2000. Mr. Digate founded Beyond Incorporated, a developer and publisher of enterprise messaging systems, in 1988 and served as its Chairman, Chief Executive Officer and President until February 1994 when Beyond was acquired. Prior to founding Beyond, Mr. Digate spent more than four years at Lotus Development Corp., where his posts included Senior Vice President, Analytical Software Products and Vice-President, International Operations and Corporate Marketing. Mr. Digate also served approximately seven years at Texas Instruments, primarily focusing on its consumer electronics products, including calculators and home computers. He also serves on the board of two privately held software companies, Centra Software and Network Integrity.
June L. Rokoff. Ms. Rokoff has been a director of the Corporation since 1994. Ms. Rokoff's term as a Class II Director will expire as of the date of the Annual Meeting of Stockholders to be held in calendar year 2000. Ms. Rokoff is also a director of NewsEDGE Corporation, a public company that provides customized real-time news and information. Until December 1995, Ms. Rokoff was a Senior Vice President, Worldwide Services Group, at Lotus Development Corp., where she had spent ten years in management. Lotus, a wholly owned subsidiary of International Business Machines, is a provider of software and support services for businesses and individuals. Prior management positions at Lotus included Senior Vice President, Development, Vice President, Graphics and Information Management Division, and General Manager, Lotus 1-2-3 Release 3.
Richard A. D'Amore. Mr. D'Amore retired as a director of the Corporation in February 1998. Mr. D'Amore had been a director since October 1987. Mr. D'Amore has been a general partner of various venture capital funds affiliated with Hambro International Venture Funds since 1982 and is currently also a general partner of the venture capital fund North Bridge Venture Partners. Mr. D'Amore is also a director of Solectron Corporation, a provider of customized manufacturing services to original equipment manufacturers in the electronics industry, Veeco Instruments, Inc., a designer, manufacturer and servicer of precision ion beam etching and surface measurement systems, and Xionics Document Technologies, a manufacturer of computer hardware and software for personal computer document image processing.
Charles H. Federman. Mr. Federman has been a director since December 1994. Mr. Federman's term as a Class I Director expires as of the date of the Annual Meeting of Stockholders to be held in calendar year 1999. Mr. Federman is the Managing Director of BMR Group, a private investment firm. Mr. Federman is also a director of Logic Works, Inc., SQRibe Technologies, Inc., Phoenix Technologies Ltd., International Micro Software, Inc. and Backweb Technologies, Inc. Logic Works, Inc. develops and publishes computer aided software engineering (CASE) software. SQRibe Technologies, Inc. develops off-the-shelf database enhancement and optimization tools. Phoenix Technologies Ltd. designs, develops and markets systems software compatibility products for personal computers, workstations and peripheral devices. International Micro Software, Inc. develops and publishes PC based productivity applications. Backweb Technologies, Inc. develops intranet software tools.
Steven R. Vana-Paxhia. Mr. Vana-Paxhia has been a director since July 1996. Mr. Vana-Paxhia's term as a Class III Director expires as of the date of the Annual Meeting of Stockholders to be held in calendar year 1998. Mr. Vana-Paxhia has been the President and Chief Executive Officer of Inso Corporation since the time of its initial public offering in March 1994. Inso Corporation provides multilingual software products to software developers, leading corporations and consumers across all industries. Inso Corporation was formerly the Software Division of Houghton Mifflin Corporation. From November 1990 to March 1994, Mr. Vana-Paxhia was Vice President of the Software Division of Houghton Mifflin Corporation. Mr. Vana-Paxhia is also a director of Spyglass, Inc., a developer of internet enabling technologies.
Robert P. Orlando. Mr. Orlando joined the Corporation in December 1991 as Vice President Finance and Administration and Chief Financial Officer. He was named Treasurer in November, 1994. From May 1987 to November 1991, Mr. Orlando was employed by Bitstream, Inc., most recently as Vice President of Finance and Treasurer. Before that he served as Controller of Unicco Service Co. from 1986 to 1987, as General Accounting Manager of Orion Research from 1985 to 1986 and as a certified public accountant with Arthur Andersen LLP from 1980 to 1985.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the Corporation's officers and directors, and persons who own more than ten percent of a registered class of the Corporation's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and The Nasdaq Stock Market. Officers, directors and greater-than-ten percent stockholders are required by Securities and Exchange Commission regulations to furnish the Corporation with all Section 16(a) forms they file.
Based solely on its review of the copies of such forms received by it, the Corporation believes that during the Transition Period all of its officers, directors and greater-than-ten percent stockholders complied with all Section 16(a) filing requirements with the following exception: Mr. Meshberg filed one report late which reported two transactions.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
Each non-employee director of the Corporation is entitled to participate in the Corporation's 1992 Non-Employee Director Stock Option Plan (the "Director Plan"). The Director Plan authorizes the grant of stock options only to members of the Corporation's Board of Directors who are neither employees nor officers of the Corporation. Under the Director Plan, each non-employee director who has served as a member of the Board for at least one year on February 3rd of each year receives automatically, on such date, an option to purchase 5,000 shares of Common Stock at an exercise price equal to 100% of the fair market value of a share of Common Stock on such date. Each non-employee director who has served for less than an entire year on February 3rd receives automatically an option to purchase the number of shares of Common Stock equal to the number of full months he has served on the Board during the prior year, divided by 12 and multiplied by 5,000. In addition, each non-employee director first elected to the Board of Directors after February 3, 1993 will receive automatically on the date of his or her election an option to purchase 20,000 shares of the Common Stock of the Corporation at an exercise price equal to 100% of the fair market value of a share of Common Stock on such date. Currently, the number of shares of Common Stock authorized for issuance under the Director Plan is 160,000 shares, of which 119,334 shares were outstanding as of March 23, 1998.
Options granted under the Director Plan may not be exercised until they become vested. Each option granted under the Director Plan becomes exercisable in one installment on the earlier of: (i) the first anniversary of the date of grant; or (ii) the first Annual Meeting of Stockholders following the date of grant at which members of the Board of Directors are elected, provided that the optionee has continuously served as a member of the Board of Directors through such date. Options granted under the Director Plan expire on the date which is ten years from the date of the option grant.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information with respect to the annual compensation paid or accrued by the Corporation for services rendered to the Corporation, in all capacities, for the Transition Period and for the fiscal years ended June 30, 1997 and 1996 by its Chief Executive Officer (the "CEO") and the other most highly compensated executive officer other than the CEO, whose total salary and bonus exceeded $100,000 (collectively with the CEO, the "Named Executive Officers"). The Corporation did not grant any restricted stock awards or stock appreciation rights or make any long-term incentive plan payouts during the Transition Period or the fiscal years ended June 30, 1997 and 1996.
OPTIONS/SAR GRANTS TABLE
There were no grants of stock options or SARs made to the Named Executive Officers during the Transition Period.
OPTION EXERCISES AND FISCAL YEAR END VALUES
Shown below is information with respect to options to purchase the Corporation's Common Stock granted under the Corporation's stock plans, including: (i) the number of shares of Common Stock purchased upon exercise of options in the Transition Period; (ii) the net value realized upon such exercise; (iii) the number of unexercised options outstanding at December 31, 1997; and (iv) the value of such unexercised options at December 31, 1997.
EMPLOYMENT AGREEMENTS AND CHANGE-IN-CONTROL ARRANGEMENTS
The Corporation has entered into an executive agreement (the "Executive Agreement") with Charles J. Digate, the Corporation's President and Chief Executive Officer. Pursuant to the Executive Agreement, Mr. Digate will receive a base salary of $250,000 for the twelve months ended June 30, 1998 and a bonus of up to $100,000 for the twelve months ended June 30, 1998 based on the Corporation's achievement of a net income plan approved by the Board of Directors, plus additional bonus payments based on specific objectives to be agreed upon between Mr. Digate and the Board from time to time.
If the Corporation terminates Mr. Digate's employment without cause, or if Mr. Digate terminates his employment following a change of control of the Corporation for certain specified reasons, Mr. Digate will receive severance benefits for eighteen months after such termination equal to his base salary immediately prior to his termination. Any options held by Mr. Digate which are then exercisable and unexpired may be exercised for three years following the later of (i) the termination of his employment or (ii) the date he ceases to be a member of the Corporation's Board of Directors. In addition, upon a change of control of the Corporation, fifty percent (50%) of the unexercisable and unexpired stock options held by Mr. Digate will become exercisable.
The Corporation has also entered into an option acceleration agreement with Mr. Orlando (the "Option Acceleration Agreement"). The Option Acceleration Agreement provides that (i) upon a change of control, the Corporation will cause fifty percent (50%) of any unexercisable, unexpired installments of stock options held by Mr. Orlando on the change of control to become exercisable, and (ii) the Corporation shall extend the period within which any option may be exercised by Mr. Orlando after the termination of his employment to twelve months.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the Transition Period, Mr. D'Amore and Ms. Rokoff served on the Compensation Committee. No person who served as a member of the Compensation Committee was, during the Transition Period, an officer or employee of the Corporation or any of its subsidiaries, was formerly an officer of the Corporation or any of its subsidiaries, or had any relationship requiring disclosure herein. No executive officer of the Corporation served as a member of the Compensation Committee (or other Board committee performing equivalent functions or, in the absence of any such committee, the entire Board of Directors) of another entity, one of whose executive officers served as a director of the Corporation.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of March 23, 1998 (unless otherwise indicated): (i) the name of each person who, to the knowledge of the Corporation, owned beneficially more than 5% of the shares of Common Stock of the Corporation outstanding at such date; (ii) the name of each director; (iii) the name of each Named Executive Officer; (iv) the number of shares owned by each of such persons; and (v) the percentage of the outstanding shares represented thereby, and also sets forth such information for all current directors and executive officers as a group.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Corporation has adopted a policy that all transactions between the Corporation and its officers, directors, principal stockholders and their affiliates be on terms no less favorable to the Corporation than could be obtained from unrelated third parties and must be approved by a majority of the non-employee independent and disinterested directors.
PART IV
ITEM 14.
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, 1997 and 1996 and June 30, 1997 and 1996.
Consolidated Statements of Operations for the six months ended December 31, 1997 and 1996 and the twelve months ended June 30, 1997, 1996 and 1995.
Consolidated Statements of Stockholders' Equity for the six months ended December 31, 1997 and 1996 and the twelve months ended June 30, 1997,1996 and 1995.
Consolidated Statements of Cash Flows for the six months ended December 31, 1997 and 1996 and the twelve months ended June 30, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules. The following financial ------------------------------- statement schedule is filed as part of this report and should be read in conjunction with the consolidated financial statements of the Company.
Schedule II Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto.
3. Exhibits. -------- 2.1 Asset Purchase Agreement, dated as of June 30, 1993 among the Registrant, Statistical Sciences, Inc., a Washington corporation, and the Stockholders listed on Schedule I thereto (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated June 30, 1993 and incorporated herein by reference).
3.1 Third Restated Articles of Organization of the Company (filed as Exhibit 3.2 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
3.2 Amended and Restated By-laws of the Company (filed as Exhibit 3.2 to Annual Report on Form 10-K for the fiscal year ended June 30, 1994, file number 0-020992, and incorporated herein by reference).
4.1 Specimen certificate representing the Common Stock (filed as Exhibit 4.1 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
4.2 Please refer to Article VI of Exhibit 3.1.
10.1 Amended and Restated 1992 Stock Plan (filed as Exhibit 10.1 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.2 1987 Combination Stock Plan, as amended (filed as Exhibit 10.2 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.3 Form of Key Officer Stock Option Agreement (filed as Exhibit 10.3 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.4 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).
10.5 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).
10.6 Lease dated August 12, 1988, as amended to date, between Registrant and Jonathan G. Davis, Trustee of the Broadway/Hampshire Development Trust (filed as Exhibit 10.6 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.7 Third Party Software Distribution Agreement, dated January 30, 1989, as amended, between the Company, University of Waterloo, Waterloo Maple Software, Inc. et al. (filed as Exhibit 10.7 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.8 Commitment Letter, dated August 28, 1992, between the Company and Silicon Valley Bank (filed as Exhibit 10.8 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.9 Third Schedule to the Series C Preferred Stock Purchase Agreement, dated as of June 29, 1989, among the Company and the Investors named in the First Schedule Annexed Thereto, regarding certain registration rights and related matters (filed as Exhibit 10.9 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.10 Distribution Agreement, dated as of June 18, 1987, between the Company and Micro D, Inc., a predecessor to Ingram Micro, Inc. (filed as Exhibit 10.10 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.11 Lease Between Riverfront Office Park Joint Venture and MathSoft, Inc., dated as of August 17, 1993 (filed as Exhibit 10.11 to Annual Report on Form 10-K for the fiscal year ended June 30, 1993, file number 0-020992, and incorporated herein by reference).
10.12 Lease Agreement with the Bartell Drug Co. (Landlord), dated as of June 22, 1990, together with Addendum Nos. A, B, C & D of even date and as amended by Addendum No. E dated December 9, 1992 (filed as Exhibit 10.12 to Annual Report on Form 10-K for the fiscal year ended June 30, 1993, file number 0-020992, and incorporated herein by reference).
10.13 Software License Agreement with American Telephone & Telegraph Company, effective as of April 1, 1991, as amended February 18, 1993 (filed as Exhibit 10.13 to Annual Report on Form 10-K for the fiscal year ended June 30, 1993, file number 0-020992, and incorporated herein by reference).*
10.14 Distributor Agreement with Mathematical Systems Institute, Inc., dated August 24, 1990 (filed as Exhibit 10.14 to Annual Report of Form 10-K for the fiscal year ended June 30, 1993, file number 0-020992, and incorporated herein by reference).
10.15 Distributorship Agreement dated as of March 1, 1994 between the Company and 766884 Ontario Inc., carrying on business as Waterloo Maple Software (filed as Exhibit 10.15 to Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994, file number 0-020992, and incorporated herein by reference).*
10.16 Perpetual Technology License dated as of March 1, 1994, as amended by Addendum No. 1 thereto dated as of March 25, 1994, between the Company and 766884 Ontario Inc., carrying on business as Waterloo Maple Software (filed as Exhibit 10.16 to Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994, file number 0-020992, and incorporated herein by reference).*
10.17 Line of Credit Agreement, dated January 11, 1996, between the Company and Fleet Bank of Massachusetts (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996, file number 0-020992, and incorporated herein by reference).
10.18 Consulting Agreement dated March 26, 1996 between the Company and Allen M. Razdow (filed as Exhibit 10.18 to Annual Report on Form 10-K for the fiscal year ended June 30, 1996, file number 0-020992, and incorporated herein by reference).
10.19 Software License Agreement, dated February 18, 1996, between the Company and Lucent Technologies Inc. (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1996, file number 0-020992, and incorporated herein by reference).*
10.20 Amendment to Software License Agreement, dated September 25, 1997, between the Company and Lucent Technologies Inc.*
10.21 Executive Agreement, dated as of July 28, 1997, between the Company and Charles J. Digate (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997, file number 0-020992, and incorporated herein by reference).#
10.22 Option Acceleration Agreement, dated as of September 15, 1997, between the Company and Robert P. Orlando (filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997, file number 0-020992, and incorporated herein by reference).#
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP
* Confidential treatment as to portions of the filed exhibit was previously granted.
# Management contract or compensatory arrangement required to be filed pursuant to Item 14(c) of Form 10-K
(b) Reports on Form 8-K. The Company filed a current Report on Form 8-K dated October 9, 1997 Reporting fiscal 1998 first quarter results. The Company filed a Current Report on Form 8-K dated December 17, 1997 Reporting the change of the Company's fiscal year end from June 30 To December 31.
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.
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.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION 2.1 Asset Purchase Agreement, dated as of June 30, 1993 among the Registrant, Statistical Sciences, Inc., a Washington corporation, and the Stockholders listed on Schedule I thereto (filed as Exhibit 2.1 to the Registrant's Current Report on Form 8-K dated June 30, 1993 and incorporated herein by reference).
3.1 Third Restated Articles of Organization of the Company (filed as Exhibit
3.2 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
3.2 Amended and Restated By-laws of the Company (filed as Exhibit 3.2 to Annual Report on Form 10-K for the fiscal year ended June 30, 1994, file number 0-020992, and incorporated herein by reference).
4.1 Specimen certificate representing the Common Stock (filed as Exhibit 4.1 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
4.2 Please refer to Article VI of Exhibit 3.1.
10.1 Amended and Restated 1992 Stock Plan (filed as Exhibit 10.1 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.2 1987 Combination Stock Plan, as amended (filed as Exhibit 10.2 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.3 Form of Key Officer Stock Option Agreement (filed as Exhibit 10.3 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.4 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).
10.5 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).
10.6 Lease dated August 12, 1988, as amended to date, between Registrant and Jonathan G. Davis, Trustee of the Broadway/Hampshire Development Trust (filed as Exhibit 10.6 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.7 Third Party Software Distribution Agreement, dated January 30, 1989, as amended, between the Company, University of Waterloo, Waterloo Maple Software, Inc. et al. (filed as Exhibit 10.7 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.8 Commitment Letter, dated August 28, 1992, between the Company and Silicon Valley Bank (filed as Exhibit 10.8 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.9 Third Schedule to the Series C Preferred Stock Purchase Agreement, dated as of June 29, 1989, among the Company and the Investors named in the First Schedule Annexed Thereto, regarding certain registration rights and related matters (filed as Exhibit 10.9 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
10.10 Distribution Agreement, dated as of June 18, 1987, between the Company and Micro D, Inc., a predecessor to Ingram Micro, Inc. (filed as Exhibit 10.10 to Registration Statement number 33-55658 on Form S-1 and incorporated herein by reference).
EXHIBIT NO. DESCRIPTION 10.11 Lease Between Riverfront Office Park Joint Venture and MathSoft, Inc., dated as of August 17, 1993 (filed as Exhibit 10.11 to Annual Report on Form 10-K for the fiscal year ended June 30, 1993, file number 0-020992, and incorporated herein by reference).
10.12 Lease Agreement with the Bartell Drug Co. (Landlord), dated as of June 22, 1990, together with Addendum Nos. A, B, C & D of even date and as amended by Addendum No. E dated December 9, 1992 (filed as Exhibit 10.12 to Annual Report on Form 10-K for the fiscal year ended June 30, 1993, file number 0-020992, and incorporated herein by reference).
10.13 Software License Agreement with American Telephone & Telegraph Company, effective as of April 1, 1991, as amended February 18, 1993 (filed as Exhibit 10.13 to Annual Report on Form 10-K for the fiscal year ended June 30, 1993, file number 0-020992, and incorporated herein by reference).* 10.14 Distributor Agreement with Mathematical Systems Institute, Inc., dated August 24, 1990 (filed as Exhibit 10.14 to Annual Report on Form 10-K for the fiscal year ended June 30, 1993, file number 0-020992, and incorporated herein by reference).
10.15 Distributorship Agreement dated as of March 1, 1994 between the Company and 766884 Ontario Inc., carrying on business as Waterloo Maple Software (filed as Exhibit 10.15 to Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994, file number 0-020992, and incorporated herein by reference).*
10.16 Perpetual Technology License dated as of March 1, 1994, as amended by Addendum No. 1 thereto dated as of March 25, 1994, between the Company and 766884 Ontario Inc., carrying on business as Waterloo Maple Software (filed as Exhibit 10.16 to Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994, file number 0-020992, and incorporated herein by reference).*
10.17 Line of Credit Agreement, dated January 11, 1996, between the Company and Fleet Bank of Massachusetts (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1996, file number 0-020992, and incorporated herein by reference).
10.18 Consulting Agreement dated March 26, 1996 between the Company and Allen M. Razdow (filed as Exhibit 10.18 to Annual Report on Form 10-K for the fiscal year ended June 30, 1996, file number 0-020992, and incorporated herein by reference).
10.19 Software License Agreement, dated February 18, 1996, between the Company and Lucent Technologies Inc. (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 1996, file number 0-020992, and incorporated herein by reference).*
10.20 Amendment to Software License Agreement, dated September 25, 1997, between the Company and Lucent Technologies Inc.*
10.21 Executive Agreement, dated as of July 28, 1997, between the Company and Charles J. Digate (filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997, file number 0-020992, and incorporated herein by reference).
10.22 Option Acceleration Agreement, dated as of September 15, 1997, between the Company and Robert P. Orlando (filed as Exhibit 10.2 to the Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997, file number 0-020992, and incorporated herein by reference).
21.1 Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP
* Confidential treatment as to portions of the filed exhibit was previously granted.