MandrakeSoft's future.

Many of you have followed the evolution of MandrakeSoft throughout the past few years. Everyone who is concerned with the company's future is encouraged to read and distribute the following message.

Good news

MandrakeSoft recently announced [ http://www.mandrakesoft.com/company/investors/newsletter/sn021206 ] significant increases in revenue and reduction in expenses. While many companies have struggled to prevent declines in revenue and profitability in this economic climate, MandrakeSoft showed positive results in both areas in large part due to critical partnerships with OEMs, success of new online services, and a general growth in the demand for Linux solutions. After strenuous efforts over the past 12 months MandrakeSoft's business model is more solid than ever with a number of new announcements [ http://www.mandrakesoft.com/company/press/news ] and some exciting developments on the horizon.

Bad news

Unfortunately, this good news also comes with bad news. In order to reach the next release, MandrakeSoft currently needs to:

  • raise cash, and
  • quickly complete the Increase of Capital

    • A bit of history

    To fully understand the current financial situation, it is helpful to know the major points of our company's history. MandrakeSoft was born in 1998 with the simple goal of providing the widest number of people the opportunity to benefit from the power of Linux -- in short: Empower the masses by making GNU/Linux easier. MandrakeSoft's business model was based on generating money by selling products & services based on Mandrake Linux.

    This approach was very successful, and MandrakeSoft's first fiscal year was profitable.

    Then, beginning in mid-1999, we entered the "technology bubble" whereby several venture capitalists invested in MandrakeSoft. Their requirement was that we would accelerate the development of the company while leaving its management to an experienced staff of world-class managers.

    In May 2000, a new CEO and his management team joined MandrakeSoft. With this new management team, the company agressively increased expenses (by 400%), hired many new employees, and entered into many expensive long-term agreements. Under this new management, the plan was to build an ambitious company with a diversification in the areas of e-learning and e-support.

    By March 2001, the results of this strategy unfortunately did not give the expected results in terms of revenues, while expenses increased by 400%. At its worst point, MandrakeSoft's "burn rate" was approximately 1.5 ME/month ($1.5M/month). As a result, it was soon decided to abandon this strategy, refocus company's activities strictly toward the Linux market with the departure of this experienced management team.

    Since April 2001, we have worked hard to converge quickly toward profitability by reducing expenses & increasing income. This has resulted in notable success as shown by the current financial results and positive trends. Reaching the "break-even" point is now planned for the next release of Mandrake Linux in the spring of 2003. Reaching the break-even point was initially planned to occur sooner *if* we generated enough financial resources (e.g. an increase of capital) to cut all of our expensive external contracts (these contracts had huge financial break-penalties).

    The following table shows the impressive progression of operating results, semester by semester (in KEuros):

    This table shows the increase of income:

    The company is now very close to reaching break-even. But as a result of this major restructuring, we need to restore our capital finances (e.g. we need cash) to meet our supplier's engagements, and to match expenses needed to reach break-even. The "Club call" last March helped greatly, but unfortunately was not enough.

    The solution we are working on -- Increase of Capital

    Our current cash needs are approximately 4ME ($4M USD). This level of cash infusion would resolve outstanding debts, cover the expenses needed to become profitable, plus secure an extra amount to satisfy the needs of future growth.

    In order to solve this cash issue, MandrakeSoft has been conducting a Warrant operation since May 28th, 2002. This operation offers an extremely convenient way for current shareholders to purchase shares at a low price (2.1E/$2.1).

    It should be noted that before the launch of this operation, MandrakeSoft already had a commitment from a large investor for $4M. This fund expected to receive its funding before July 2002, but has been postponed.

    So, the issues are:

  • The warrant operation has been slower than expected due to potential shareholders being wary of the volatility of the current financial markets
  • The investor's fund has experienced delays in receiving its funding. We've just been informed that it still will not receive funding in the short term so we cannot rely on him for the current funding
  • We are also in discussion with several interested investors but those things takes time

    • Additionally, we have yet another commitment for about 30% of a 4ME investment round, but to close this round we must find at least a 2ME ($2M USD) complement.

    As a result we have a big short-term cash issue.

    How to solve this problem?

    If you are concerned about MandrakeSoft's future, this is the time to mobilize!

    Three options are available:

    1) Join the MandrakeClub or upgrade your current membership level. If you use Mandrake Linux day to day, now is the ideal time to purchase a Mandrake Club membership or upgrade your current Club membership. The Club offers many valuable services while membership fees are used to directly finance MandrakeSoft's development efforts.

    Mandrake Club: http://www.mandrakelinux.com/en/club
    Mandrake Corporate Club: http://www.mandrakesoft.com/corporateclub
    2) Purchase products & support at MandrakeStore. Many products are available, including - of course - the Mandrake Linux distribution, security appliances, support packs, and also goodies. You will certainly find a product that suits your current needs.
    MandrakeStore: http://www.mandrakestore.com/

    3) Help the current Increase of Capital.

    Maybe you are a qualified investor, or you can convince qualified investors to participate. Remember, MandrakeSoft is a company close to profitability, with an attractive value, with impressive business growth in a promising market, and with reputable products that are sold in more than 135 countries. The distribution is also number one in several countries in terms of number of users.

    If you are a qualified investor who would like to participate in the current round of financing, please contact investors@mandrakesoft.com with the amount you wish to invest.

    The world already boasts of several million Mandrake Linux users, and we know at least 200,000 of you. We could get over this crunch if less than 20,000 users became Silver Members of MandrakeClub.

    We are confident that with the help of the Mandrake community we can soon close this operation so that we can focus on what we do best -- developing & producing the best possible Mandrake Linux distribution. With our current vision and massive support from our users, we can continue to pursue our plans with focus.

    More information about MandrakeSoft

    The latest financial results:
    http://www.mandrakesoft.com/company/investors/newsletter

    What the press is saying about Mandrake Linux:
    http://www.mandrakelinux.com/en/reviews.php3

    Note: MandrakeSoft's share quotations on the Euronext market has been suspended until the increase of capital has been completed.

    We will keep you informed of the financial situation and how it progresses. We wish you and your family a Happy Holiday Season.

         Sincerely,

    MandrakeSoft team.

    Copyright 2002