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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __ TO ___
COMMISSION FILE NUMBER 0-020992
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INSIGHTFUL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2842217
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1700 WESTLAKE AVENUE NORTH, SUITE 500, SEATTLE, WASHINGTON 98109-3044
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(206) 283-8802
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(TITLE OF CLASS)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of August 12, 2002, there were 11,487,265 shares of Common Stock, $0.01 par
value per share, outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 . 1
Consolidated Statements of Operations for the three and six months
ended June 30, 2002 and 2001. . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001. . . . . . . . . . . . . . . . . . . . . . 3
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . 4
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . 23
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ITEM 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . . . . . 23
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . 24
ITEM 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . . . . 24
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
i
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INSIGHTFUL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2002 2001
============= =============
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,027,297 $ 6,277,869
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . 3,329,926 3,688,022
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,077,461 1,003,412
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,608 70,406
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 535,892 252,962
------------- -------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 11,121,184 11,292,671
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,078,551 2,052,374
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,029,738 1,874,124
Other intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328,950 374,172
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,210 101,495
------------- -------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,620,633 $ 15,694,836
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations and equipment financings. . . . $ 81,195 $ 44,163
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 935,707 1,374,665
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . 2,222,446 3,021,100
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,607,442 3,818,258
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Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . 7,846,790 8,258,186
Capital lease obligations and equipment financings, less current portion 374,910 -
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value-
Authorized-1,000,000 shares
Issued and outstanding-none. . . . . . . . . . . . . . . . . . . . . . . . . - -
Common stock, $0.01 par value-
Authorized-20,000,000 shares
Issued and outstanding-11,487,265 and 11,326,441, shares at June 30, 2002 and
December 31, 2001, respectively. . . . . . . . . . . . . . . . . . . . . . 114,873 113,264
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . 34,278,084 33,866,997
Deferred stock-based compensation. . . . . . . . . . . . . . . . . . . . . . . (293,275) (382,145
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26,707,973) (25,799,723
Subscription receivable from director. . . . . . . . . . . . . . . . . . . . . - (380,843
Cumulative translation adjustment. . . . . . . . . . . . . . . . . . . . . . . 7,224 19,100
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Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . 7,398,933 7,436,650
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Total liabilities and stockholders' equity . . . . . . . . . . . . . . . $ 15,620,633 $ 15,694,836
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
1
INSIGHTFUL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
================================ ==============================
2002 2001 2002 2001
============= ================= =========== =================
Revenues:
Software-related:
Software licenses . . . . . . . . . . . . . . . . $ 1,237,226 $ 1,969,384 $ 2,796,477 $ 3,779,612
Software maintenance . . . . . . . . . . . . . . . 1,489,596 1,264,831 2,816,527 2,553,442
-------------- ---------------- ------------ ----------------
Total software-related revenue . . . . . . . . . 2,726,822 3,234,215 5,613,004 6,333,054
Professional services and other. . . . . . . . . . . 1,155,678 1,415,003 2,660,770 2,420,585
-------------- ---------------- ------------ ----------------
Total revenues . . . . . . . . . . . . . . . . . 3,882,500 4,649,218 8,273,774 8,753,639
-------------- ---------------- ------------ ----------------
Cost of Revenues:
Software related . . . . . . . . . . . . . . . . . . 313,270 442,773 656,466 925,587
Professional services and other. . . . . . . . . . . 1,144,367 1,044,890 2,299,621 1,915,308
-------------- ---------------- ------------ ----------------
Total cost of revenues . . . . . . . . . . . . . 1,457,637 1,487,663 2,956,087 2,840,895
-------------- ---------------- ------------ ----------------
Gross profit . . . . . . . . . . . . . . . . . . 2,424,863 3,161,555 5,317,687 5,912,744
-------------- ---------------- ------------ ----------------
Operating Expenses:
Sales and marketing. . . . . . . . . . . . . . . . . 1,686,965 1,373,030 3,400,740 2,762,543
Research and development . . . . . . . . . . . . . . 2,195,537 2,008,829 4,214,527 3,903,848
Less-Funded research . . . . . . . . . . . . . . . . (1,252,850) (1,373,893) (2,507,432) (2,729,893)
-------------- ---------------- ------------ ----------------
Research and development, net. . . . . . . . . . 942,687 634,936 1,707,095 1,173,955
General and administrative . . . . . . . . . . . . . 728,558 776,810 1,309,271 1,499,464
Amortization of goodwill . . . . . . . . . . . . . . - 16,339 - 32,765
Amortization of other intangibles. . . . . . . . . . 49,608 - 94,620 -
Amortization of stock-based compensation . . . . . . 44,435 - 88,870 -
-------------- ---------------- ------------ ----------------
Total operating expenses . . . . . . . . . . . . 3,452,253 2,801,115 6,600,596 5,468,727
-------------- ---------------- ------------ ----------------
Income (loss) from continuing operations . . . . (1,027,390) 360,440 (1,282,909) 444,017
Interest and other income. . . . . . . . . . . . . . . . 29,100 86,350 83,679 193,819
Interest expense . . . . . . . . . . . . . . . . . . . . (2,890) (5,524) (6,028) (11,508)
-------------- ---------------- ------------ ----------------
Income (loss) before income taxes. . . . . . . . . . (1,001,180) 441,266 (1,205,258) 626,328
Income tax expense . . . . . . . . . . . . . . . . . . . 18,430 19,748 30,098 29,333
-------------- ---------------- ------------ ----------------
Income (loss) from continuing operations . . . . . . (1,019,610) 421,518 (1,235,356) 596,995
Discontinued operations:
Loss from discontinued operations, net of tax. . . . - - - (737,411)
Gain on disposal of discontinued operations, net
of tax . . . . . . . . . . . . . . . . . . . . . . . 327,106 - 327,106 3,492,663
-------------- ---------------- ------------ ----------------
Net income (loss). . . . . . . . . . . . . . . . $ (692,504) $ 421,518 $ (908,250) $ 3,352,247
============== ================ ============ ================
Basic income (loss) per share-continuing operations. . . $ (0.09) $ 0.04 $ (0.11) $ 0.06
============== ================ ============ ================
Diluted income (loss) per share-continuing operations. . $ (0.09) $ 0.04 $ (0.11) $ 0.05
============== ================ ============ ================
Basic income (loss) per share-discontinued operations. . $ 0.03 $ 0.00 $ 0.03 $ 0.26
============== ================ ============ ================
Diluted income (loss) per share-discontinued operations. $ 0.03 $ 0.00 $ 0.03 $ 0.25
============== ================ ============ ================
Basic net income (loss) per share. . . . . . . . . . . . $ (0.06) $ 0.04 $ (0.08) $ 0.32
============== ================ ============ ================
Diluted net income (loss) per share. . . . . . . . . . . $ (0.06) $ 0.04 $ (0.08) $ 0.30
============== ================ ============ ================
Weighted average number of common shares outstanding . . 11,273,685 10,732,334 11,231,160 10,730,601
============== ================ ============ ================
Weighted average number of common shares outstanding
assuming dilution. . . . . . . . . . . . . . . . . . . 11,273,685 10,966,638 11,231,160 10,903,729
============== ================ ============ ================
The accompanying notes are an integral part of these consolidated financial statements.
2
INSIGHTFUL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
===============================
2002 2001
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Operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (908,250) $ 3,352,247
Less-Income from discontinued operations. . . . . . . . . . . . . . . (327,106) (2,755,252)
-------------- ---------------
Income (loss) from continuing operations. . . . . . . . . . . . . (1,235,356) 596,995
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 593,084 314,981
Amortization of stock-based compensation. . . . . . . . . . . . . . 88,870 -
Currency translation adjustment . . . . . . . . . . . . . . . . . . (19,802) 164,210
Changes in current assets and liabilities:
Accounts and other receivables. . . . . . . . . . . . . . . . . . 284,047 (282,528)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . (80,202) 58,678
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . (282,930) (369,431)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . (438,958) 637,514
Accrued expenses, payroll and other current liabilities . . . . . (377,195) (70,721)
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . 789,184 (381,028)
-------------- ---------------
Net cash (used in) provided by continuing operating activities. (679,258) 668,670
-------------- ---------------
Investing activities:
Purchases of property and equipment . . . . . . . . . . . . . . . . . (524,642) (555,396)
Decrease (increase) in other assets . . . . . . . . . . . . . . . . . 39,285 (276,674)
Capitalized patent costs. . . . . . . . . . . . . . . . . . . . . . . (21,136) -
Acquisitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (175,949) -
-------------- ---------------
Net cash (used in) investing activities . . . . . . . . . . . . (682,442) (832,070)
-------------- ---------------
Financing activities:
Payments on capital lease obligations and equipment financings. . . . (37,906) (71,917)
Cash received on subscription receivable from director. . . . . . . . 380,843 -
Proceeds from equipment financings. . . . . . . . . . . . . . . . . . 449,848 -
Proceeds from exercise of stock options, and employee stock
purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . . 412,696 65,190
-------------- ---------------
Net cash provided by (used in) financing activities . . . . . . 1,205,481 (6,727)
-------------- ---------------
Net cash (used in) continuing operations. . . . . . . . . . . . . . . . (156,219) (170,127)
-------------- ---------------
Net cash (used in) provided by discontinued operations. . . . . . . . . (94,353) 5,953,604
-------------- ---------------
Net (decrease) increase in cash and cash equivalents. . . . . . . . . . (250,572) 5,783,477
-------------- ---------------
Cash and cash equivalents, beginning of period. . . . . . . . . . . . . 6,277,869 3,745,112
-------------- ---------------
Cash and cash equivalents, end of period. . . . . . . . . . . . . . . . $ 6,027,297 $ 9,528,589
============== ===============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,028 $ 11,508
============== ===============
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30,098 $ 19,748
============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
3
INSIGHTFUL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2002
(1) DESCRIPTION OF BUSINESS
(a) CONTINUING OPERATIONS
Insightful Corporation and subsidiaries provide enterprises with scalable
data analysis solutions that drive better decisions faster by revealing
patterns, trends and relationships. As a supplier of software and services for
statistical data mining, business analytics, knowledge access, and information
retrieval, Insightful enables clients to gain intelligence from numerical data,
text, and images.
Insightful products include InFact(TM), Insightful Miner, S-PLUS(R),
StatServer(R), and S-PLUS Analytic Server(TM). Insightful consulting services
provide specialized expertise and proven processes for the design, development
and deployment of customized solutions.
Insightful has been delivering data analysis solutions for fifteen years to
thousands of companies in financial services, pharmaceuticals, biotechnology,
telecommunications, manufacturing, plus government and research institutions.
Headquartered in Seattle, Washington, Insightful has offices in New York
City, North Carolina, France, Germany, Switzerland, and the United Kingdom with
distributors around the world.
(b) DISCONTINUED OPERATIONS
On January 23, 2001, Insightful sold the operations of its Engineering and
Education Products Division (EEPD). The assets of EEPD were transferred to a
newly created wholly owned subsidiary and then sold to a third party for cash
proceeds of $7,000,000. The sale of EEPD resulted in a gain of $3,492,663 for
the six months ended June 30, 2001, after taking into account net assets
transferred and certain liabilities arising from the transaction including
severance and transaction costs. The liabilities included accruals related to a
contingency resulting from the disposition. As of June 30, 2002, the contingency
was resolved and the accrued liabilities related to this contingency were
removed from the balance sheet and are reflected in the statement of operations
as a gain on disposal of discontinued operations.
The results of EEPD are presented on a net basis in the accompanying
consolidated statements of operations as discontinued operations.
Components of income (loss) from discontinued operations are as follows:
SIX MONTHS
ENDED JUNE 30,
2001
================
Revenues $ 74,000
----------------
Costs and Expenses ( 811,000)
----------------
Loss from Discontinued Operations $ (737,000)
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(2) SIGNIFICANT ACCOUNTING POLICIES
(a) UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying unaudited consolidated financial statements have been
prepared by Insightful Corporation (or the "Company") pursuant to accounting
principles generally accepted in the United States and the rules and regulations
of the Securities and Exchange Commission regarding interim financial reporting.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements
and should be read in conjunction with the consolidated financial statements and
notes thereto for the fiscal year ended December 31, 2001 included in the
Company's Annual Report on Form 10-K. The accompanying consolidated financial
statements reflect all adjustments (consisting solely of normal, recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of results for the interim periods presented. The results of
operations for the six-month period ended June 30, 2002 are not necessarily
indicative of the results to be expected for the entire fiscal year or future
years.
4
INSIGHTFUL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
JUNE 30, 2002
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Insightful and its wholly owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
(c) REVENUE RECOGNITION
Insightful records revenue in accordance with Statement of Position (SOP)
No. 97-2, Software Revenue Recognition, as amended by SOP No. 98-9, Software
Revenue Recognition, with Respect to Certain Transactions, and related
interpretations including Technical Practice Aids. License revenue consists
principally of revenue earned under fixed-term and perpetual software license
agreements and is generally recognized upon shipment of the software if
collection of the resulting receivable is probable, the fee is fixed or
determinable, undelivered elements are not deemed essential, and vendor-specific
objective evidence exists for all undelivered elements. Revenues under such
arrangements, which may include several different software products and services
sold together, are allocated based on the residual method in accordance with SOP
No. 98-9. Under the residual method, the fair value of the undelivered elements
is deferred and subsequently recognized when earned. Insightful has established
vendor specific objective evidence for professional services, training and
maintenance and support services. Vendor-specific objective evidence is based on
the price charged when an element is sold separately or, in case of an element
not yet sold separately, the price established by authorized management, if it
is probable that the price, once established, will not change before market
introduction. Standard terms for license agreements typically call for payment
within 30 days. Probability of collection is based upon the assessment of the
customer's financial condition through the review of their current financial
statements or credit reports. For existing customers, prior payment history is
also used to evaluate probability of collection. Insightful provides for
estimated returns at the time of sale.
Insightful offers maintenance contracts on certain of its products, as well
as consulting and training services. Maintenance revenue is recognized ratably
over the term of the related contracts, generally one year. Consulting revenues
are primarily related to implementation services performed on a
time-and-materials basis under separate service arrangements. Revenues from
consulting and training services are recognized as services are performed.
Standard terms for renewal of customer support contracts, consulting services
and training call for payment within 30 days.
Fees from licenses sold together with consulting are generally recognized
upon shipment of the software, provided that the above criteria are met, payment
of the license fees are not dependent upon the performance of the services, and
the consulting services are not essential to the functionality of the licensed
software. If the services are essential to the functionality of the software, or
payment of the license fees are dependent upon the performance of the services,
both the software license and consulting fees are recognized under the
percentage of completion method of contract accounting. All sales made through
indirect channels including value added resellers, or VARs, and distributors are
accounted for using the sell-through method.
If the fee is not fixed or determinable, revenue is recognized as payments
become due from the customer. If an acceptance period is required, revenues are
recognized upon the earlier of customer acceptance or the expiration of the
acceptance period.
Amounts received in advance for maintenance agreements are recorded as
deferred revenue on the accompanying consolidated balance sheets.
(d) RECLASSIFICATION OF AMOUNTS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
(3) CHANGE IN ACCOUNTING FOR GOODWILL AND CERTAIN OTHER INTANGIBLES
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 prospectively
prohibits the pooling of interest method of accounting for business
combinations, and broadens the criteria for recording intangible assets separate
from goodwill. SFAS 141 was effective for all business combinations after June
30, 2001. SFAS No. 142 discontinues amortization of goodwill and other
5
INSIGHTFUL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(UNAUDITED)
JUNE 30, 2002
intangible assets unless they have finite useful lives, and, instead,
establishes a new method of testing goodwill for impairment on an annual basis
or on an interim basis if an event occurs or circumstances change that would
reduce the fair value of a reporting unit below its carrying value. Intangible
assets with finite useful lives will continue to be amortized over their useful
lives.
As required under the transition provisions of SFAS 142, the Company
applied the non-amortization provisions of SFAS 142 for goodwill to all business
combinations completed after June 30, 2001. The Company adopted SFAS 142 in its
entirety on January 1, 2002. The accompanying 2002 consolidated financial
statements do not provide for amortization of goodwill, representing the excess
purchase price over the fair value of net assets acquired in business
acquisitions accounted for under the purchase method of accounting (with a June
30, 2002 balance of $2,029,738). Pursuant to SFAS 142, goodwill is evaluated for
impairment using a two-step approach. The first step is to screen for potential
impairment, while the second step measures the amount of impairment, if any. The
transitional requirements of SFAS 142 require that Phase 1 of the analysis be
completed within the first six months of adoption using the measurement date as
of the beginning of the fiscal year. Insightful completed its first phase
impairment analysis, based on a January 1, 2002 measurement date, during the
second quarter of 2002 and found no instances of impairment of its recorded
goodwill; accordingly, the second testing phase, absent future indicators of
impairment, is not necessary as of June 30, 2002. Insightful will continue to
evaluate goodwill for impairment on an annual basis or as indicators of
impairment arise.
Insightful's net loss and income for the six months ended June 30, 2002 and
2001, adjusted to exclude goodwill amortization was as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
================================ ============================
2002 2001 2002 2001
============== ================ =========== ===============
Reported net income (loss) . . . . . . . . . $ (692,504) $ (421,518) $ (908,250) $ 3,352,247
Add back goodwill amortization, net of tax . - 16,339 - 32,765
-------------- ---------------- ----------- ---------------
Adjusted net income (loss) . . . . . . . . . $ (692,504) $ (405,179) $ (908,250) $ 3,385,012
============== ================ =========== ===============
There was no significant impact on basic or diluted income or loss per
share due to the amortization of goodwill, net of taxes.
During the six months ended June 30, 2002, goodwill of $125,474 and other
intangible assets of $31,333 were acquired through the purchase of the German
data analysis business completed on January 1, 2002 (See Note 9). Balances are
contingent upon the final purchase price allocation and are subject to change.
All other intangibles were acquired subsequent to June 30, 2001. As of June
30, 2002, other intangibles consisted of the following:
GROSS OTHER
CARRYING ACCUMULATED INTANGIBLES,
AMOUNT AMORTIZATION NET
========== ============== =============
Non-compete agreements . . . $ 177,120 $ (57,743) $ 119,377
Customer relationships . . . 164,158 (61,561) 102,597
Capitalized patent expenses. 131,704 (24,728) 106,976
---------- -------------- -------------
Other intangibles . . . . . $ 472,982 $ (144,032) $ 328,950
========== ============== =============
Other intangibles are scheduled to be fully amortized by December 31, 2003
with corresponding amortization estimated to be $129,994 and $198,956, for the
remainder of 2002 and 2003, respectively.
(4) LINE OF CREDIT
In March 2002, Insightful entered into a $3.0 million working capital
revolving line of credit and security agreement with Silicon Valley Bank (SVB)
that is secured by Insightful's accounts receivable. This facility allows
Insightful to borrow up to the lesser of (a) 75% of its eligible accounts
receivable as determined by SVB's accounts receivable audit (advances against US
Government accounts will be permitted up to 20% of the amount outstanding under
the line of credit) or (b) $3.0 million and bears interest at SVB's prime rate,
which was 4.75% as of June 30, 2002, plus 1%. As of June 30, 2002, Insightful
had no outstanding borrowings under the working capital facility.
The loan and security agreement with SVB requires Insightful to maintain
certain financial covenants. Insightful was in compliance with these covenants
at June 30, 2002.
6
INSIGHTFUL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
JUNE 30, 2002
(5) EQUIPMENT TERM LOAN
In March 2002, Insightful entered into an equipment term loan and security
agreement with SVB, which provides up to $1.5 million in two tranches to finance
the purchase of equipment and fixtures. This facility allows Insightful to take
advances on the cost of eligible equipment less than 90 days old and the
advances bear interest at SVB's prime rate, which was 4.75% as of June 30, 2002,
plus 1%. Interest only is due until the expiration of each tranche period, at
which point monthly payments of principal and interest begin. Advances are
repaid over a 42-month period and a 36-month period, for the first and second
tranche, respectively. As of June 30, 2002, borrowings under this equipment term
loan totaled $450,000.
The loan and security agreement with SVB requires Insightful to maintain
certain financial covenants. Insightful was in compliance with these covenants
at June 30, 2002.
(6) NET INCOME (LOSS) PER SHARE
Basic net income (loss) per share is calculated using the weighted-average
number of shares of common stock outstanding. Stock issued subject to
restrictions are excluded from the calculation. Diluted net income (loss) per
share reflects the dilutive effect of common stock equivalents (including stock
options and warrants), unless their effect on earnings per share from continuing
operations is anti-dilutive.
A reconciliation of basic and diluted shares outstanding is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
============================ ==========================
2002 2001 2002 2001
============ ============== ========== ==============
Weighted average common shares outstanding . 11,273,685 10,732,334 11,231,160 10,730,601
Effect of dilutive stock options . . . . . . - 234,304 - 173,128
------------ -------------- ---------- --------------
Weighted average common shares outstanding
assuming dilution . . . . . . . . . . . . 11,273,685 10,966,638 11,231,160 10,903,729
============ ============== ========== ==============
The following securities were not included in computing diluted earnings
per share because their effect would be antidilutive:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
============================ =========================
2002 2001 2002 2001
============ ============== ========== =============
Weighted average antidilutive stock options and
warrants . . . . . . . . . . . . . . . . . . . 3,245,370 1,875,941 3,245,370 1,875,941
============ ============== ========= ==========
(7) OTHER COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. The only item of other comprehensive income (loss), which
the Company currently reports, are foreign translation adjustments. Total
comprehensive income (loss) is as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
=============================== =============================
2002 2001 2002 2001
============== =============== ============ ===============
Net income (loss). . . . . . . . . . . . . . $ (692,504) $ 421,518 $ (908,250) $ 3,352,247
Change in cumulative translation adjustment. 36,389 97,034 (11,876) 164,210
-------------- --------------- ------------ ---------------
Comprehensive income (loss). . . . . . . . . $ (656,115) $ 518,552 $ (920,126) $ 3,516,457
============== =============== ============ ===============
(8) SEGMENT REPORTING
SFAS 131, "Disclosures About Segments of an Enterprise and Related
Information," establishes standards for reporting information about operating
segments in annual financial statements. It also establishes standards for
related disclosures about products, services, geographical areas and major
customers. Insightful currently operates in a single business segment related to
data mining, analysis and knowledge access software and services. No additional
disclosure is required.
7
INSIGHTFUL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
JUNE 30, 2002
(9) ACQUISITION
On January 1, 2002, Insightful's German subsidiary completed the
acquisition of a data analysis business from Graphische Systeme GmbH (GraS),
Insightful's German distributor. Consideration for the acquisition was cash of
$157,000. This transaction was accounted for as an asset purchase in the first
quarter of 2002. The results of the acquired data analysis business have been
included in the operating results of Insightful since the acquisition date. The
Company is in the process of valuing certain intangible assets; thus, the
allocation of the purchase price is subject to refinement.
(10) SUBSEQUENT EVENT
In July 2002, in response to Insightful's results for the second quarter of
2002 as well as the near term outlook, Insightful implemented a workforce
reduction of 25 employees, which represented 17% of Insightful's employee base
at that time and included employees from all functional areas of Insightful. All
of the restructuring charges, totaling approximately $600,000, related to
employee severance and termination benefits. All termination benefits will be
paid by December 31, 2002.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Our disclosure and analysis in this report contain forward-looking
statements, which provide our current expectations or forecasts of future
events. Forward-looking statements in this report include, without limitation:
- information concerning possible or assumed future results of
operations, trends in financial results and business plans, including
those relating to earnings growth and revenue growth;
- statements about the level of our costs and operating expenses
relative to our revenues, and about the expected composition of our
revenues;
- statements about our future capital requirements and the sufficiency
of our cash, cash equivalents, investments and available bank
borrowings to meet these requirements;
- information about the anticipated release dates of new products;
- other statements about our plans, objectives, expectations and
intentions; and
- other statements that are not historical facts.
Words such as "believes," "anticipates" and "intends" may identify
forward-looking statements, but the absence of these words does not necessarily
mean that a statement is not forward-looking. Forward-looking statements are
subject to known and unknown risks and uncertainties and are based on
potentially inaccurate assumptions that could cause actual results to differ
materially from those expected or implied by the forward-looking statements. Our
actual results could differ materially from those anticipated in the
forward-looking statements for many reasons, including the factors described in
the section entitled "Important Factors That May Affect Our Business, Our
Operating Results and Our Stock Price" in this report. Other factors besides
those described in this report could also affect actual results. You should
carefully consider the factors described in the section entitled "Important
Factors That May Affect Our Business, Our Operating Results and Our Stock Price"
in evaluating our forward-looking statements.
You should not unduly rely on these forward-looking statements, which speak
only as of the date of this report. We undertake no obligation to publicly
revise any forward-looking statement to reflect circumstances or events after
the date of this report, or to reflect the occurrence of unanticipated events.
You should, however, review the factors and risks we describe in the reports we
file from time to time with the Securities and Exchange Commission, or SEC.
DESCRIPTION OF THE COMPANY
We provide enterprises with scalable data analysis solutions that drive
better decisions faster by revealing patterns, trends and relationships. As a
supplier of software and services for statistical data mining, business
analytics, knowledge access, and information retrieval, we enable clients to
gain intelligence from numerical data, text, and images.
Our products include InFact(TM), Insightful Miner, S-PLUS(R),
StatServer(R), and S-PLUS Analytic Server(TM). Our consulting services provide
specialized expertise and proven processes for the design, development and
deployment of customized solutions.
We have been delivering data analysis solutions for fifteen years to
thousands of companies in financial services, pharmaceuticals, biotechnology,
telecommunications, manufacturing, plus government and research institutions.
Headquartered in Seattle, Washington, we have offices in New York City,
North Carolina, France, Germany, Switzerland, and the United Kingdom with
distributors around the world.
HISTORY OF OPERATIONS
Insightful was originally incorporated in Massachusetts in October 1984
under the name Engineering Specific Products Corp. and changed its name to
MathSoft, Inc. in January 1986.
As of December 31, 1999 we operated three divisions consisting of our
Seattle, Washington, based Data Analysis Products Division, or DAPD, and our
Massachusetts based Engineering and Education Products Division, or EEPD, and
FreeScholarships.com, or FSC. In September 2000, we discontinued operations of
our internet business, FSC. We sold the EEPD division on January 23, 2001.
Following the closing of our internet business FSC in September 2000 and the
sale of our EEPD in January 2001, we relocated our headquarters from Boston,
Massachusetts, to Seattle, Washington, where DAPD is located. This business was
acquired by Mathsoft in June 1993 through the acquisition of substantially all
the assets of Statistical Sciences, Inc.
9
In June of 2001, the stockholders voted to change our company name to
Insightful Corporation from MathSoft, Inc. and to change our jurisdiction of
incorporation from Massachusetts to Delaware.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We have based our discussion and analysis of our financial condition and
results of operations upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our critical accounting policies
and estimates, including those related to revenue recognition, bad debts,
intangible assets, restructuring, and contingencies and litigation. We base our
estimates on historical experience and on various other assumptions that we
believe to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. We believe the
following critical accounting policies affect the more significant judgments and
estimates used in the preparation of our consolidated financial statements.
Revenue Recognition
Revenue recognition rules for software companies are complex and subject to
constant refinement. We follow specific and detailed guidelines in measuring
revenue; however, certain judgments affect the application of our revenue
policy. Revenue results are difficult to predict, and any shortfall in revenue
or delay in recognizing revenue could cause our operating results to vary
significantly from quarter to quarter and could result in future operating
losses.
We record revenue in accordance with Statement of Position, or SOP, No.
97-2, Software Revenue Recognition, as amended by SOP 98-9, Software Revenue
Recognition, with Respect to Certain Transactions, and related interpretations
including Technical Practice Aids. License revenue consists principally of
revenue earned under fixed-term and perpetual software license agreements and is
generally recognized upon shipment of the software if collection of the
resulting receivable is probable, the fee is fixed or determinable, undelivered
elements are not deemed essential, and vendor-specific objective evidence exists
for all undelivered elements. Revenues under such arrangements, which may
include several different software products and services sold together, are
allocated based on the residual method in accordance with SOP 98-9. Under the
residual method, the fair value of the undelivered elements is deferred and
subsequently recognized when earned. We have established vendor specific
objective evidence for professional services, training and maintenance and
support services. Vendor-specific objective evidence is based on the price
charged when an element is sold separately or, in case of an element not yet
sold separately, the price established by authorized management, if it is
probable that the price, once established, will not change before market
introduction. Standard terms for license agreements call for payment within 30
days. Probability of collection is based upon the assessment of the customer's
financial condition through the review of their current financial statements or
credit reports. For existing customers, prior payment history is also used to
evaluate probability of collection. We provide for estimated returns at the time
of sale.
We offer maintenance contracts, training and consulting services on certain
of our products. Maintenance revenue is recognized ratably over the term of the
related contracts generally for one year or less. Consulting revenues are
primarily related to implementation services performed on a time-and-materials
basis under separate service arrangements. Revenues from consulting and training
services are recognized as services are performed. Standard terms for renewal of
customer support contracts, consulting services and training call for payment
within 30 days.
Fees from licenses sold together with consulting are generally recognized
upon shipment of the software, provided that the above criteria are met, payment
of the license fees are not dependent upon the performance of the services, and
the consulting services are not essential to the functionality of the licensed
software. If the services are essential to the functionality of the software, or
payment of the license fees are dependent upon the performance of the services,
both the software license and consulting fees are recognized under the
percentage of completion method of contract accounting. All sales made through
indirect channels including value added resellers, or VARs, and distributors are
accounted for using the sell through method.
If the fee is not fixed or determinable, revenue is recognized as payments
become due from the customer. If an acceptance period is required, revenues are
recognized upon the earlier of customer acceptance or the expiration of the
acceptance period.
Amounts received in advance for maintenance agreements are recorded as
deferred revenue on the balance sheets.
Bad Debts
We are required to estimate the collectibility of our trade receivables. A
considerable amount of judgment is required when we assess the ultimate
realization of receivables including assessing the aging of the amounts and
reviewing the current credit-worthiness of each customer. Customer credit
worthiness is subject to many business and finance risks facing each customer as
is subject to sudden changes.
10
Impairment of Goodwill and Other Intangible Assets
We periodically evaluate acquired businesses for potential impairment
indicators. Our judgments regarding the existence of impairment indicators are
based on legal factors, market conditions and operational performance of our
acquired businesses. Future events could cause us to conclude that impairment
indicators exist and that goodwill associated with our acquired business is
impaired.
Goodwill represents the excess of the purchase price over the fair value of
net tangible assets acquired. Before 2002, we amortized goodwill and other
intangibles on a straight-line basis over lives ranging from two to five years.
With required adoption of SFAS No. 142, "Goodwill and Other Intangible Assets,"
beginning January 1, 2002, we no longer amortize goodwill and other intangibles
with indefinite lives to earnings. Instead goodwill will be reviewed for
impairment on an annual basis or on an interim basis if circumstances change or
if events occur that reduce the fair value of a reporting unit below its
carrying value. Impairment losses will be charged to earnings in the period in
which they are identified. Separable intangible assets that do not have
indefinite lives will continue to be amortized over their useful lives.
Deferred Taxes
We record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. While Insightful has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event the
Company were to determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an adjustment to the
deferred tax asset would increase income in the period such determination was
made. Likewise, should the Company determine that it would not be able to
realize all or part of its net deferred tax asset in the future, an adjustment
to the deferred tax asset would be charged to income in the period such
determination was made.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
REVENUES
Total revenues, which consist of software license, maintenance and service
revenues, were $3,883,000 for the three months ended June 30, 2002, and
$4,649,000 for the three months ended June 30, 2001, representing a decrease of
$766,000, or 16.5% between these periods. Total revenues were $8,274,000 for the
six months ended June 30, 2002, and $8,754,000 for the six months ended June 30,
2001, representing a decrease of $480,000, or 5.5% between these periods.
Software related revenues (software licenses, subscriptions and
maintenance) accounted for 70.2% of total revenues and decreased 15.7% from
$3,234,000 for the three months ended June 30, 2001 to $2,727,000 for the three
months ended June 30, 2002. Software related revenues accounted for 67.8% of
total revenues and decreased 11.4% from $6,333,000 for the six months ended June
30, 2001 to $5,613,000 for the six months ended June 30, 2002. We believe this
decrease resulted primarily from the generally weak economic environment that
has adversely affected corporate spending on information technology in many of
the industries that Insightful serves as well as lower productivity from our
sales forces worldwide.
Professional services revenues generated from consulting and training
activities represented 29.8% of total revenues and decreased 18.3% from
$1,415,000 for the three months ended June 30, 2001 to $1,156,000 for the three
months ended June 30, 2002. We believe decrease in professional services
revenues in the second quarter of 2002 resulted primarily from the generally
weak economic conditions that have adversely affected corporate spending as well
as lower utilization of our consulting resources worldwide. Professional
services revenues represented 32.2% of total revenues and increased 9.9% from
$2,421,000 for the six months ended June 30, 2001 to $2,661,000 for the six
months ended June 30, 2002. The revenue growth in professional services for the
six month period is primarily attributable to worldwide expansion of the
Company's consulting resources in the pharmaceutical and CRM markets in the US
and Europe.
Revenues from international operations were $1,281,000 for the three months
ended June 30,2002, and $856,000 for the three months ended June 30, 2001.
Revenues from international operations were $3,071,000 for the six months ended
June 30,2002, and $1,760,000 for the six months ended June 30, 2001. This
represents an increase of $425,000, or 49.7%, and $1,311,000, or 74.5%, in each
respective period. This increase resulted primarily from Insightful's expansion
in international channels and investment in additional sales and consulting
resources in Europe.
11
COST OF REVENUES
Total cost of revenues were $1,458,000 for the three months ended June 30,
2002, and $1,488,000 for the three months ended June 30, 2001, representing a
decrease of $30,000, or 2.0% between these periods. Total cost of revenues were
$2,956,000 for the six months ended June 30, 2002, and $2,841,000 for the six
months ended June 30, 2001, representing an increase of $115,000, or 4.0%
between these periods. The increase in total cost of revenues for the six-month
period ended June 30, 2002 as compared to the same period in 2001 resulted
primarily from additional sales and consulting resources in Europe. The increase
in total cost of revenues as a percentage of total revenues was primarily
attributable to a product mix shift toward lower margin services such as
consulting.
The cost of software licenses, which consists of royalties for third-party
software, product media, product duplication and manuals, decreased as a
percentage of total software related revenues to 11.5% from 13.7% for the three
months ended June 30, 2002 and 2001, respectively. The cost of software licenses
decreased as a percentage of total software related revenues to 11.7% from 14.6%
for the six months ended June 30, 2002 and 2001, respectively. This decrease
resulted primarily from the increase in maintenance revenue as a percent of
total software related revenues to 54.6% from 38.6% for the three months ended
June 30, 2002 and 2001, respectively, and to 50.2% from 40.3% for the six months
ended June, 2002 and 2001, respectively. Maintenance revenue carries a low cost
of sales component. We are a worldwide licensee of the "S" programming language
from Lucent Technologies Inc. Under the license, we have the right to use,
sublicense and support the "S" programming language in exchange for royalties,
which are included in the cost of software licenses.
The cost of professional services includes primarily the salaries, and
other operating costs of employees who provide consulting services and product
training. The cost of professional services was $1,144,000 and $1,045,000 for
the three months ended June 30, 2002 and 2001, respectively, and $2,300,000 and
$1,915,000 for the six months ended June 30, 2002 and 2001, respectively,
representing an increase of $99,000 or 9.5% and $385,000 or 20.1% in each
respective period. The increase in cost of professional services was primarily
due to increased investment in professional services resources, including
acquired businesses, to help the Company scale and leverage additional product
sales. The cost of professional services increased as a percentage of total
professional services revenues to 99.0% from 73.8% for the three months ended
June 30, 2002 and 2001, respectively, and to 86.4% from 79.1% for the six months
ended June 30, 2002 and 2001, respectively. This increase in the cost of
professional services as a percentage of total professional services revenue
resulted primarily from a lower than anticipated level of corporate spending for
our services due to the generally weak economic environment combined with an
increase in investment by us on consulting and training resources.
OPERATING EXPENSES
Sales and marketing expenses consist primarily of salaries, travel,
facility costs for sales and marketing personnel, promotional activities, and
costs of advertising and trade shows. Sales and marketing expenses were
$1,687,000 and $1,373,000 for the three months ended June 30, 2002 and 2001,
respectively, and $3,401,000 and $2,763,000 for the six months ended June 30,
2002 and 2001, respectively, representing increases of approximately 23.1% for
both periods. This increase primarily reflected additions to the sales force to
expand our sales opportunities, as well as additional marketing expenses to
communicate Insightful's new positioning as a company focusing on data analysis
software and services.
Net research and development expenses increased 48.5%, from $635,000 for
the three months ended June 30, 2001 to $943,000 for the three months ended June
30, 2002, and increased as a percentage of total revenues from 13.7% to 24.3%,
respectively. Net research and development expenses increased 45.4%, from
$1,174,000 for the six months ended June 30, 2001 to $1,707,000 for the six
months ended June 30, 2002, and increased as a percentage of total revenues from
13.4% to 20.6%, respectively. Research and development expenses consist
primarily of salaries and related benefits, equipment for software developers,
facility costs, and payments to outside contractors. The overall increase in net
research and development expenses was primarily attributable to investments in
new product development, as well as ongoing investments in enhancing current
products, combined with a decrease in research funding. Funded research, which
consists primarily of government grants for research projects, decreased 8.8%,
from $1,374,000 for the three months ended June 30, 2001 to $1,253,000 for the
three months ended June 30, 2002. Funded research, which consists primarily of
government grants for research projects, decreased 8.2%, from $2,730,000 for the
six months ended June 30, 2001 to $2,507,000 for the six months ended June 30,
2002. The decrease in funded research is attributable to a decrease in awards
granted and a delay in government financing.
General and administrative expenses, which consist primarily of salaries
and related costs associated with finance, accounting, investor relations, human
resources, administration and facilities activities, decreased 6.2% from
$777,000 for the three months ended June 30, 2001 to $729,000 for the three
months ended June 30, 2002. General and administrative expenses decreased 12.7%
from $1,499,000 for the six months ended June 30, 2001 to $1,309,000 for the six
months ended June 30, 2002. The decrease in general and administrative costs
during the first half of 2002 in comparison to the first half of 2001 relates to
the reduction of costs associated with management's actions to reduce expenses
and the discontinuation of expenses relating to divesting the MathSoft
12
Engineering and Educations Products Division and migrating the corporate
headquarters from Cambridge, Massachusetts to Seattle, Washington.
Amortization of goodwill and other intangibles increased from $16,000 for
the three months ended June 30, 2001 to $50,000 for the three months ended June
30, 2002. For the six months ended June 30, 2001 and 2002, amortization of
goodwill and other intangibles increased from $33,000 to $95,000, respectively.
This increase is attributable to an increase in other intangibles with finite
useful lives as a result of business acquisitions completed in the third quarter
of 2001 and first quarter of 2002. In accordance with SFAS 142, "Goodwill and
Other Intangibles", we have discontinued amortizing goodwill originating in
business combinations completed prior to June 30, 2001, which effectively
decreased the amortization expense that would have been recognized by
approximately $16,000 for the three months ended June 30, 2002 and $33,000 for
the six months ended June 30, 2002.
Amortization of deferred stock-based compensation totaled $44,000 and
$89,000 for the three and six months ended June 30, 2002, respectively, and
relates to restricted stock issued as part of the acquisition of Predict AG in
the third quarter of 2001. The value of the restricted shares is being amortized
over a three-year vesting period using a graded vesting approach.
NET OPERATING RESULTS FROM CONTINUING OPERATIONS
The net loss from continuing for the three months ended June 30, 2002 was
$1,027,000 compared to net income from continuing operations of $360,000 for the
three months ended June 30, 2001. The net loss from continuing operations for
the six months ended June 30, 2002 was $1,283,000 compared to net income from
continuing operations of $444,000 for the six months ended June 30, 2001. The
net loss for the three and six months ended June 30, 2002, reflects a decrease
in software revenues mostly due to prevailing economic conditions as well as a
change in the revenue mix toward lower margin service revenues which, in turn,
negatively impacted net income. The net loss was further affected by new
acquisition related amortization and deferred compensation charges of $94,000
and $183,000 for the three and six months ended June 30, 2002, respectively.
INTEREST AND OTHER INCOME
Total interest and other income was $29,000 and $86,000 for the three
months ended June 30, 2002 and 2001, respectively, and $84,000 and $194,000 for
the six months ended June 30, 2002 and 2001, respectively, representing a
decrease of $57,000 or 66.3% and $110,000 or 56.8% in each respective period.
The decrease in interest income and other income was primarily due to a decrease
in cash and cash equivalents upon which we earn interest as well as a decrease
in the prevailing interest rates.
DISCONTINUED OPERATIONS
On January 23, 2001, Insightful transferred the assets of EEPD to a newly
created wholly owned Insightful subsidiary that was then sold to a third party
for cash proceeds of $7,000,000. As a result of this transaction, Insightful has
recorded the operations of EEPD as discontinued operations.
The net gain of $3,493,000 on the sale of EEPD, after taking into account
net assets transferred and certain liabilities arising from the transaction
including severance and transaction costs, is presented in the accompanying
consolidated statements of operations as a gain on disposal of discontinued
operations for the six months ended June 30, 2001. The liabilities arising from
the sale of EEPD included accruals related to a contingency resulting from the
disposition. As of June 30, 2002, the contingency was resolved and the accrued
liabilities related to this contingency were removed from the balance sheet and
are reflected in the statement of operations as a gain on disposal of
discontinued operations for the three and six month periods ended June 30, 2002.
EEPD's operating loss totaling $737,000 represents revenues earned of
approximately $74,000, offset by costs and expenses totaling approximately
$811,000 for the 23-day period ending January 23, 2001.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at December 31, 2001 amounted to $6,278,000.
Insightful's continuing operations resulted in net cash outflows of $679,000 for
the six months ended June 30, 2002. Operating cash outflows for the six months
ended June 30, 2002 were primarily the result of a loss from continuing
operations adjusted for noncash depreciation and amortization, a large increase
in prepaid expenses due to a prepaid royalty of $450,000 made annually and
decreases in accounts receivable and current liabilities.
Investing activities in the first half of 2002 resulted in cash outflows of
$682,000, primarily due to capital expenditures of $525,000 related to
continuing operations and $176,000 for acquisitions and related transaction
expenses.
13
Financing activities provided cash inflows of $1,205,000 in the first half
of 2002 primarily due to proceeds from the exercise of stock options and stock
issued through the employee stock purchase plan, proceeds from equipment
financing and receipt of an outstanding subscription receivable.
In March 2002, Insightful entered into a $3.0 million working capital
revolving line of credit and security agreement with Silicon Valley Bank, or
SVB, that is secured by Insightful's accounts receivable. This facility allows
Insightful to borrow up to the lesser of (a) 75% of its eligible accounts
receivable as determined by SVB's accounts receivable audit (advances against US
Government accounts will be permitted up to 20% of the amount outstanding under
the line of credit) or (b) $3.0 million and bears interest at SVB's prime rate,
which was 4.75% as of June 30, 2002, plus 1%.
In March 2002, Insightful entered into an equipment term loan and security
agreement with SVB, which provides up to $1.5 million in two tranches to finance
the purchase of equipment and fixtures. This facility allows Insightful to take
advances on the cost of eligible equipment less than 90 days old and the
advances bear interest at SVB's prime rate, which was 4.75% as of June 30, 2002,
plus 1%.
These credit facilities will be utilized to finance future capital
investments, including technology necessary to support our new product lines.
These credit facilities expand Insightful's liquid resources and ability to
maintain an adequate balance of cash-on-hand. Advances taken on the equipment
term loan totaled $450,000 for the six months ended June 30, 2002.
Cash outflows for discontinued operations relating to employee severance
and termination benefits amounted to $94,000, which brought the cash and cash
equivalent balance at June 30, 2002 to $6,027,000.
At June 30, 2002, Insightful's principal unused sources of liquidity
consisted of cash and cash equivalents of $6,027,000. Insightful's liquidity
needs are principally for financing of accounts receivable, capital assets,
strategic investments, product development, and flexibility in a dynamic and
competitive operating environment.
The following are our contractual commitments associated with our operating
and capital leases and equipment financings:
SIX MONTHS ENDING
DECEMBER 31, YEAR ENDING DECEMBER 31,
===================
2002 2003 2004 2005 2006 THEREAFTER TOTAL
=================== ============ ============= ======== ======= =========== ==========
Commitments:
Capital leases . . . $ 6,257 $ - $ - $ - $ - $ - $ 6,257
Equipment financings 15,542 120,480 127,594 135,127 51,105 - 449,848
Operating leases . . 415,218 835,574 897,178 70,432 32,755 47,623 2,298,780
------------------ ------------ ------------- -------- ------- ----------- ----------
Total commitments. $ 437,017 $ 956,054 $ 024,772 $205,559 $83,860 $ 47,623 $2,754,885
================== ============ ============= ======== ======= =========== ==========
As of June 30, 2002 we had net operating loss carryforwards of
approximately $22 million and research and development credit carryforwards of
approximately $3 million. The net operating loss and credit carryforwards will
expire at various dates through 2021, if not used. Under the provisions of the
Internal Revenue Code, substantial changes in our ownership may limit the amount
of net operating loss carryforwards that could be utilized annually in the
future to offset taxable income. A full valuation allowance has been established
in our financial statements to reflect the uncertainty of our ability to use
available tax loss carryforwards and other deferred tax assets.
We believe that our existing cash and cash equivalents, investments and
available bank borrowings will be sufficient to meet our capital requirements
for at least the next 12 months. However, if during that time, we choose to
increase our investment in current or new product and marketing initiatives,
market conditions worsen, or if other unforeseen events should occur, we would
likely deem it necessary to seek additional funds through public or private
equity financing or from other sources in order to fund our operations and
pursue our growth strategy. Any financing we obtain may contain covenants that
restrict our freedom to operate our business or may require us to issue
securities that have rights, preferences or privileges senior to our common
stock and may dilute stockholder ownership interest in Insightful.
BUSINESS OUTLOOK
We provide our customers with useful and innovative software and services
to derive intelligence from the data they collect. We believe that the
application of data analysis to business problems is still in its infancy.
Today, organizations collect far more data, of varied forms, than they actually
analyze and meaningfully apply. The analysis of this data can lead to
significant improvements in the quality and efficacy of products built,
marketed, and sold. Furthermore, there are large amounts of additional
information that organizations will collect in the future to drive higher return
on investment.
14
Recognizing these market trends, over the past two years we have been
expanding our portfolio of products beyond statistics to encompass both
structured and unstructured data mining. Our newest products, Insightful Miner
and InFact, were launched in the first half of 2002 and have higher price points
than our statistics products.
Insightful Miner is the industry's newest, scalable data mining software.
Insightful Miner was designed specifically to solve data analysis problems
involving data set sizes too large for existing statistical analysis products to
handle without ignoring significant data.
InFact is our new software solution for extracting knowledge from documents
containing text, tables of numbers, and images such as graphs, charts, and maps.
InFact peruses entire documents and extracts the meaning from each sentence,
allowing the user to ask free form, natural language questions and get back
precise answers, not just a list of documents that may contain the answer.
In the second quarter of 2002, we completed our first sale of InFact for
approximately $600,000 for licenses and related maintenance through a reseller
to the U.S. Government. We deferred 100% of all revenues related to this sale
pending the actual installation of the software at the customer's site and the
total fulfillment of its potential support obligations to the reseller.
Over the past year, we have also expanded our U.S. and European sales
presence to provide better service for our customers.
During these challenging economic times, we are focusing on efficiently
using our resources to achieve sales while advancing the technological
advantages of our products. We have recently taken measures to reduce our
workforce in order to facilitate a return to profitability in 2003. This is the
second reduction in work force made in the past twelve months and expense cuts
were from all functional areas of the company. We are continuing to invest in
both our existing and new products, but at a slower pace.
Looking forward, management expects that the core S-PLUS software business,
including desktop and server licenses, will continue to be flat or decline on a
quarter-to-quarter basis for the foreseeable future. In addition management
forecasts that services revenue for this business will decline for one to two
more quarters, as customers are not currently undertaking significant new
analytic projects requiring our services in this economic environment.
We expect to continue to win deals for Insightful Miner and InFact.
However, these products are new, unproven and customer acceptance may take a
considerable amount of time. Further, there is no guarantee that competitors
will not offer comparable or better products. The past couple of quarters
indicate that many of the private sector customers we have contacts with are
currently unable or unwilling to undertake significant capital expenditure in
this economic climate. As a result, our expectations are that sales for our new
products will continue to be intermittent on a quarter-by-quarter basis and that
the best short-term opportunities exist in the public sector. However, we remain
positive about the longer term potential that these products provide in the
private sector.
IMPORTANT FACTORS THAT MAY AFFECT OUR BUSINESS, OUR OPERATING RESULTS AND OUR
STOCK PRICE
OUR OPERATING RESULTS FLUCTUATE AND COULD FALL BELOW EXPECTATIONS OF
SECURITIES ANALYSTS AND INVESTORS, RESULTING IN A DECREASE IN OUR STOCK
PRICE.
Our operating results have varied widely in the past, and we expect that
they could continue to fluctuate in the future. If our operating results for a
particular quarter or year fall below the expectations of securities analysts
and investors, it could result in a decrease in our stock price. Some of the
factors that could affect the amount and timing of our revenues and related
expenses and cause our operating results to fluctuate include:
- general economic conditions, which may affect our customers'
purchasing decisions;
- our ability to obtain government research contracts;
- our ability to compete in the highly competitive markets;
- rate of market acceptance of our software products and solutions;
- our reliance on a one product family;
- our ability to expand our sales and support infrastructure;
- the loss of any of our key employees or management team members;
- our ability to develop, introduce and market new products on a timely
basis;
- our ability to successfully expand our international operations;
15
- our ability to maintain our relationships with key partners; and
- the cost and financial accounting effects of any acquisitions of
companies or complementary technologies that we may complete.
As a result of these factors, we cannot predict our revenues with
certainty, and future product revenues may differ from historical patterns. It
is particularly difficult to predict the timing or amount of our license
revenues because:
- our sales cycles are lengthy and variable, typically ranging between
two and eight months from our initial contact with a potential
customer;
- for our newest products, we have no history by which to gauge the
sales cycles or acceptance rates;
- a substantial portion of our sales are completed at the end of the
quarter and, as a result, a substantial portion of our license
revenues are recognized in the last days of a quarter;
- the amount of unfulfilled orders for our products at the beginning of
a quarter is typically small; and
- delay of new product releases can result in a customer's decision to
delay execution of a contract or, for contracts that include the new
release as an element of the contract, will result in deferral of
revenue recognition until such release.
Even though our revenues are difficult to predict with certainty, we base
our decisions regarding our operating expenses on anticipated revenue trends.
Many of our expenses are relatively fixed, and we cannot quickly reduce spending
if our revenues are lower than expected. As a result, revenue shortfalls could
result in significantly lower income or greater loss than anticipated for any
given period, which could result in a decrease in our stock price.
IF POTENTIAL CUSTOMERS DO NOT CONTINUE TO PURCHASE THE S-PLUS PRODUCT
FAMILY, OUR REVENUES WILL FALL AND WE MAY INCUR MORE LOSSES.
Prior to the sale of our Engineering and Educational Products Division in
January of 2001, our product offerings included those related to the MathCad(R)
line addressing the calculation needs of the technical, professional and
education markets. Since the divestiture we have relied on a one-product family,
the S-PLUS line, for the success of our business, and license revenues from the
S-PLUS product and add-on modules accounted for nearly all of our license
revenues in 2001. We expect license revenues from the S-PLUS product family to
continue to account for a substantial amount of our future revenues. As a
result, factors adversely affecting the pricing of or demand for the S-PLUS
product family, such as competition or technological change, could dramatically
affect our operating results. If we are unable to successfully deploy current
versions of the S-PLUS product family and to develop, introduce and establish
customer acceptance of new and enhanced versions of the S-PLUS product family,
our revenues will fall, leading to more losses.
IF WE ARE UNABLE TO PENETRATE NEW VERTICAL AND END-USER MARKETS WITH OUR
CURRENT AND FUTURE PRODUCTS, THE GROWTH OF OUR BUSINESS WILL BE LIMITED.
We currently serve a relatively small number of customers in a narrow
market, and we believe that the statistics market we currently serve with the
S-PLUS product family will grow at a slower rate than it has in the past. In
order to grow our business at a satisfactory rate, we will need to expand into
new end-user markets and new vertical markets for our statistics software, and
we must simultaneously develop and sell new products that address these and
other markets. We will need to invest in the expansion of our statistics product
and service offerings beyond the "statistics guru" segment into the business
mainstream, in the expansion of our product and service offerings into new
vertical markets, and in the development of our data mining, business analytics,
and knowledge access products. These simultaneous investments may strain our
financial resources and diffuse management's time and attention. If any of these
initiatives fails, or if we fail to maintain adequate revenues from our
traditional business during the transition to any of these initiatives, our
business will not grow and could fail.
IF WE ARE UNSUCCESSFUL IN THE MARKETING AND SELLING OF OUR NEWEST PRODUCTS,
INFACT AND INSIGHTFUL MINER, OUR REVENUE GROWTH WILL BE LIMITED, OUR
REVENUES WILL FALL AND WE MAY INCUR MORE LOSSES.
We expect that our core domestic S-Plus business, including desktop and
server licenses, as well as consulting and training revenues, will continue to
be flat and possibly down, on a quarter-to-quarter basis for the foreseeable
future due to our customers' reductions in information technology spending. We
expect that the majority of our revenue growth in 2002 will come from InFact and
Insightful Miner, our newest products. We believe that revenues from these new
products will help offset potential weakness in our core statistics business.
However, we cannot predict the degree to which these new products will achieve
market acceptance or the extent to which they will perform as our customers
expect. If our new products contain defects or errors, or otherwise do not run
as expected, their market acceptance may be delayed or limited, and our
reputation may be damaged. Moreover, InFact and Insightful Miner have price
points that are more than ten times higher than our core domestic products. We
cannot forecast our customers' ability to make such a significant capital
16
expenditure in this economic climate. If our new products do not achieve general
market acceptance, our revenue growth will be limited. We believe that our
ability to effectively expand our business depends on the successful market
acceptance of these new products. If we are unsuccessful in selling InFact and
Insightful Miner, the growth of our business and our revenue will be limited.
IF WE ARE UNABLE TO COMPETE SUCCESSFULLY IN THE STATISTICS, DATA MINING,
BUSINESS ANALYTICS, AND KNOWLEDGE ACCESS MARKETS, OUR BUSINESS WILL FAIL.
Our S-PLUS product suite targets the statistics market. This market is
highly competitive, fragmented and mature. We face competition in the statistics
market primarily from large enterprise software vendors and our potential
customers' information technology departments. These departments may seek to
develop data analysis solutions that utilize R, a free software package that
performs operations similar to the S language that forms the core of S-PLUS. The
dominant competitor in our industry is SAS Institute. Other companies with which
we compete include, but are not limited to, SPSS, Inc., StatSoft Inc. and
Minitab, Inc. In addition to competition from other statistical software
companies, we also face competition from providers of software for specific
statistical applications.
In the data mining, business analytics, and knowledge access markets, we
face competition from many companies, including SAS Institute, SPSS, IBM, NCR,
Autonomy, Verity, Inxight, ClearForest, Iphrase, Inktomi and Ask Jeeves / Jeeves
Solutions, many of which are much larger than we are. With the exception of SAS
and SPSS, these competitors do not currently offer the range of analytical
capability that we offer, and as a result are both competitors and potential
partners for our technology.
In addition, as we develop other new products, or attempt to expand our
sales into new vertical and end-user markets, we may begin competing with
companies with whom we have not previously competed. It is also possible that
new competitors will enter the market. An increase in competitive pressures in
our market or our failure to compete effectively may result in pricing
reductions, reduced gross margins and loss of market share. Many of our
competitors have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical, marketing and
other resources than we do. We could also experience competition from companies
in other sectors of the broader market for business intelligence software, like
providers of OLAP (On-Line Analytical Processing), Business Intelligence and
analytical application software, as well as from companies in other sectors.
MANY POTENTIAL CUSTOMERS ARE NOT YET AWARE OF THE BENEFITS OF DATA MINING,
BUSINESS ANALYTICS, AND KNOWLEDGE ACCESS SOLUTIONS, AND OUR PRODUCTS MAY
NOT ACHIEVE MARKET ACCEPTANCE.
The markets for data mining, business analytics, and knowledge access
solutions are still emerging and continued growth in demand for and acceptance
of these solutions remains uncertain. Even if these markets grow, businesses may
purchase our competitors' solutions or develop their own. We intend to spend
considerable resources educating potential customers not only about our
solutions but also about the value of such systems in general. Even with these
educational efforts, however, market acceptance of our solutions may not
increase. If our products do not achieve market acceptance, our results will
suffer.
OUR BUSINESS IS SENSITIVE TO THE RISKS ASSOCIATED WITH GOVERNMENT FUNDING
DECISIONS.
We regularly apply for and are granted research contracts from a variety of
government agencies and funding programs. Over the last three fiscal years,
these contracts have generated an average of $4.7 million per year in offsets to
our research and development expenses. We may not receive new funded research
contracts or any renewals of government-funded projects currently in process.
The personnel and other costs associated with these programs are relatively
fixed in the short run, and a sudden cancellation or non-renewal of a major
funding program or multiple smaller programs would be harmful to our quarterly
results. A substantial portion of the research grant money we receive is granted
to us based on our status as a small business, the definition of which varies
depending on the individual contract terms. If and when the number of our
employees or the amount of our revenues grow beyond the limits prescribed in any
of these contracts, we will no longer be eligible for such research contracts
and we will have to incur certain research and development expenses without the
benefit of offsets.
Furthermore, a significant portion of our license revenues come from
foreign and domestic government entities, as well as institutions, healthcare
organizations and private businesses that contract with or are funded by
government entities. Government appropriations processes are often slow and
unpredictable and may be affected by factors outside of our control. In
addition, proposals are currently being made in various countries, including the
United States, to reduce government spending. Reductions in government
expenditures and termination or renegotiation of government-funded programs or
contracts will seriously affect our revenue and operating results.
17
WE MAY BE UNABLE TO EXPAND OUR SALES ORGANIZATION, WHICH COULD HARM OUR
ABILITY TO EXPAND OUR BUSINESS.
To date, we have sold our desktop products primarily through our telesales
department while we have relied on our field sales force to sell our
server-based solutions and place orders for multiple desktop licenses. We
believe our future revenue growth will depend in large part on recruiting,
training and retaining direct sales personnel, including those whose experience
and qualifications differ from those of our current sales force. Our growth will
further depend on expanding our indirect distribution channels. These indirect
channels include value added resellers, or VARs, distributors, original
equipment manufacturer ("OEM") partners, system integrators and consultants. We
have experienced and continue to experience difficulty in recruiting qualified
direct sales personnel and in establishing third-party relationships with VARs,
distributors, OEM partners and systems integrators and consultants. Our efforts
to restructure or expand our sales force may not prove successful and our
ability to retain top sales personnel may be affected, which could reduce our
sales or limit our sales growth. Even if we successfully expand our sales force
and other distribution channels, the expansion may not result in expected
revenue growth.
IF WE ARE UNABLE TO DEVELOP AND MAINTAIN EFFECTIVE LONG-TERM RELATIONSHIPS
WITH OUR KEY PARTNERS, OR IF OUR KEY PARTNERS FAIL TO PERFORM, OUR ABILITY
TO SELL OUR SOLUTION WILL BE LIMITED.
We rely on our existing relationships with a number of key partners,
including management consulting firms, system integrators, VARs, distributors
and third-party technology vendors, that are important to worldwide sales and
marketing of our solutions. We expect an increasing percentage of our revenues
to be derived from sales that arise out of our relationships with these key
partners. In addition, to be successful and to more effectively sell our
products to larger customers, we must develop successful new relationships with
other key partners. These key partners often provide enterprise software,
consulting, implementation and customer support services, and endorse our
solution during the competitive evaluation stage of the sales cycle. Although we
seek to maintain relationships with our key partners, and to develop
relationships with new partners, many of these existing and potential key
partners have similar, and often more established, relationships with our
competitors. These existing and potential partners, many of which have
significantly greater resources than we have, may in the future market software
products that compete with our solution or reduce or discontinue their
relationships with us or their support of our solution.
OUR SALES CYCLE IS VARIABLE, AND SALES DELAYS COULD CAUSE OUR OPERATING
RESULTS TO FLUCTUATE, WHICH COULD CAUSE A DECLINE IN OUR STOCK PRICE.
An enterprise's decision to purchase statistics, data mining, business
analytics, and knowledge access software and services is discretionary, involves
a significant commitment of its resources and is influenced by its budget
cycles. Our sales cycles are long and variable, typically ranging between two
and eight months from our initial contact with a potential customer to the
issuance of a purchase order or signing of a license or services agreement,
although the amount of time varies substantially from customer to customer and
occasionally sales require substantially more time. When economic conditions
weaken, sales cycles for software products and related services tend to
lengthen, and as a result, we experienced longer sales cycles in 2001, and we
expect to continue to experience longer sales cycles in 2002. Sales delays could
cause our operating results to fall below the expectations of securities
analysts or investors, which could result in a decrease in our stock price.
IF WE DO NOT EXPAND OUR INTERNATIONAL OPERATIONS AND SUCCESSFULLY OVERCOME
THE RISKS INHERENT IN INTERNATIONAL BUSINESS ACTIVITIES, THE GROWTH OF OUR
BUSINESS WILL BE LIMITED.
To be successful, we must continue to expand our international operations
and enter new international markets. This expansion may be delayed as a result
of operating expense reduction measures and general economic conditions. If we
do expand internationally, it will require significant management attention and
financial resources to successfully translate and localize our software products
to various languages and to develop direct and indirect international sales and
support channels. Even if we successfully translate our software and develop new
channels, we may not be able to maintain or increase international market demand
for our solutions. We, or our VARs or distributors, may be unable to sustain or
increase international revenues from licenses or from consulting and customer
support. In addition, our international sales are subject to the risks inherent
in international business activities, including
- costs of customizing products for foreign countries;
- export and import restrictions, tariffs and other trade barriers;
- the need to comply with multiple, conflicting and changing laws and
regulations;
- reduced protection of intellectual property rights and increased
liability exposure; and
- regional economic, cultural and political conditions, including the
direct and indirect effects of terrorist activity and armed conflict
in countries in which we do business.
18
Our foreign subsidiaries operate primarily in local currencies, and their
results are translated into U.S. dollars. We do not currently engage in currency
hedging activities, but we may do so in the future. Changes in the value of the
U.S. dollar relative to foreign currencies have not materially affected our
operating results in the past. Our operating results could, however, be
materially harmed if we enter into license or service agreements providing for
significant amounts of foreign currencies with extended payment terms or
extended implementation timeframes if the values of those currencies fall in
relation to the U.S. dollar over the payment period of the agreement.
DELIVERY OF OUR SOLUTION MAY BE DELAYED IF WE CANNOT CONTINUE TO LICENSE
THIRD-PARTY TECHNOLOGY THAT IS IMPORTANT TO THE FUNCTIONALITY OF OUR
SOLUTION.
We incorporate into our products software that is licensed to us by
third-party software developers, including Lucent Technologies, from whom we
license the S programming language that forms the core of our S-PLUS product.
Under the license, we have the worldwide, exclusive right, through February
2007, to use, sublicense and support the "S" language in exchange for royalties.
Any modifications, enhancements, adaptations or derivations of the language are
our property. After February 18, 2007, we, at our election, may extend this
license for five-year terms in perpetuity, provided that we continue to comply
with our obligations under the license. Although sudden termination of this
license would harm our operations because Lucent Technologies is the sole
licensor of the "S" programming language, we are not presently aware of any
circumstances that would prevent us from fulfilling our obligations under the
license.
In addition, numerous individual and institutional licensors have
contributed software code to S-PLUS in exchange for little or no consideration.
The third-party software currently offered in conjunction with our solution may
become obsolete or incompatible with future versions of our products. Further,
some third parties may choose to revise or revoke their licensing terms with us.
A significant interruption in the supply of this technology could delay our
sales until we can find, license and integrate equivalent technology. This could
take a significant amount of time, perhaps several months, which would cause our
operating results to fall below the expectations of securities analysts or
investors and result in a decrease in our stock price
INTEGRATION OF RECENT OR FUTURE ACQUISITIONS MAY BE DIFFICULT AND
DISRUPTIVE.
We have completed several acquisitions of businesses with complementary
technologies or service offerings, including our recent acquisitions of Predict
AG, Waratah Corporation, Graphische Systeme GmbH and Sigma-Plus. In the future,
we may acquire additional complementary companies or technologies. Managing
these acquisitions has entailed, and may in the future entail, numerous
operational and financial risks and strains, including
- dilution of stockholders' equity;
- difficulty and cost in combining the operations and personnel of
acquired businesses with our operations and personnel;
- disruption of our ongoing business and diversion of management's time
and attention to integrating or completing the development or
commercialization of any acquired technologies;
- impairment of relationships with key customers of acquired businesses
due to changes in management and ownership of the acquired businesses;
- impairment of goodwill arising as a result of completed or future
acquisitions, resulting in a financial loss; and
- inability to retain key employees of any acquired businesses.
If we do not successfully integrate any technologies, products, personnel
or operations of companies that we have acquired or that we may acquire in the
future, our business will be harmed.
WE HAVE INCURRED LOSSES IN RECENT PERIODS, AND MAY CONTINUE TO DO SO, WHICH
COULD CAUSE A DECREASE IN OUR STOCK PRICE.
If we do not return to profitability in future quarters, our stock price
could decrease. We incurred net losses in the fourth quarter of 2001 and the
first half of 2002. As of June 30, 2002, we had an accumulated deficit of $27
million. In the near-term, we believe our revenues will increase to a level that
is closer to our expected costs and operating expenses, allowing us to continue
to invest in accordance with our strategic priorities. We may not, however,
realize the anticipated revenue increases from our new product and positioning
initiatives in future periods. In addition, we may be unable to achieve cost
savings without adversely affecting our business and operating results. We may
continue to experience losses and negative cash flows in the near term, even if
sales of our products and services continue to grow.
We believe that we may need to significantly increase our sales and
marketing, product development and professional services efforts to expand our
market position and further increase acceptance of our products. We may not be
able to increase our revenues sufficiently to keep pace with these growing
expenditures, if at all, and, as a result, may be unable to achieve or maintain
profitability in the future.
19
FLUCTUATIONS IN SERVICE REVENUES COULD DECREASE OUR TOTAL REVENUES OR
DECREASE OUR GROSS MARGINS, WHICH COULD CAUSE A DECREASE IN OUR STOCK
PRICE.
During the year ended December 31, 2001, our service revenues represented a
higher percentage of our total revenues than in past periods, which negatively
impacted our profitability. To the extent that this trend continues, our
profitability will continue to suffer. Consulting and training (service)
revenues represented 27% of our total revenues in 2000 and 32% in 2001. We
anticipate that service revenues will continue to represent a significant
percentage of total revenues. Because service revenues have lower gross margins
than license revenues, a continued increase in the percentage of total revenues
represented by service revenues or any decrease in license revenues could have a
detrimental effect on our overall gross margins and thus on our operating
results.
WE HAVE A LIMITED OPERATING HISTORY UNDER OUR NEW BUSINESS MODEL, NO
OPERATING HISTORY WITH OUR NEW PRODUCTS, AND ARE SUBJECT TO THE RISKS OF
NEW ENTERPRISES.
In connection with our divestiture of our Engineering and Educational
Products Division in 2001 we changed our name, headquarters location,
jurisdiction of incorporation, and more significantly, our management team and
business model. Our new business model calls for significant contributions from
our data mining, business analytics, and knowledge access products. Our limited
operating history in these markets makes it difficult to predict how our
business will develop. Accordingly, we face all of the risks and uncertainties
encountered by early-stage companies, such as:
- no history of sustained profitability under our new business model;
- uncertain growth in the market for, and uncertain market acceptance
of, our new solutions;
- the evolving nature of the data mining, business analytics, and
knowledge access markets;
- reliance on new and unproven products to maintain our revenue
projections;
- the risk that competition, technological change or evolving customer
preferences could harm sales of our products or services.
OUR WORKFORCE REDUCTIONS AND FINANCIAL PERFORMANCE MAY PLACE ADDITIONAL
STRAIN ON OUR RESOURCES AND MAY HARM THE MORALE AND PERFORMANCE OF OUR
PERSONNEL AND OUR ABILITY TO HIRE NEW PERSONNEL.
In connection with our effort to streamline our operations, reduce costs
and bring our staffing and structure in line with our revenue base, we
restructured our organization with reductions in our workforce by 25 employees
in November 2001 and 22 employees in July 2002. There have been and may continue
to be substantial costs associated with the workforce reduction related to
severance and other employee-related costs, and our restructuring plan may yield
unanticipated consequences, such as attrition beyond our planned reduction in
workforce. In addition, many of the employees who were terminated possessed
specific knowledge or expertise, and that knowledge or expertise may prove to
have been important to our operations. In that case, their absence may create
significant difficulties. Further, the reduction in workforce may reduce
employee morale and may create concern among potential and existing employees
about job security at Insightful, which may lead to difficulty in hiring and
increased turnover in our current workforce. In addition, this headcount
reduction may subject us to the risk of litigation, which could result in
substantial costs to us and could divert management's time and attention away
from business operations. Any further workforce reductions may significantly
strain our operational and financial resources and may result in increasing
responsibilities for each of our management personnel. As a result, our ability
to respond to unexpected challenges may be impaired, and we may be unable to
take advantage of new opportunities.
WE MAY BE UNABLE TO OBTAIN THE FUNDING NECESSARY TO SUPPORT THE EXPANSION
OF OUR BUSINESS.
Our future revenues may be insufficient to support the expenses of our
operations and the expansion of our business. We may therefore need additional
equity or debt capital to finance our operations. If we are unable to generate
sufficient cash flow from operations or to obtain funds through additional
financing, we may have to reduce some or all of our development and sales and
marketing efforts and limit the expansion of our business.
We believe that our existing cash and cash equivalents, investments and
available bank borrowings will be sufficient to meet our capital requirements
for at least the next twelve months. However, if during that time market
conditions worsen, or if other unforeseen events such as those of September 11,
2001 should occur, we may need additional funds through public or private equity
financing or from other sources in order to fund our operations and pursue our
growth strategy. We have no commitment for additional financing, and we may
experience difficulty in obtaining funding on favorable terms, if at all.
Our credit line and equipment term loan with Silicon Valley Bank contain
covenants that require us to maintain a certain level of net income. In July of
2002, we renegotiated these covenants to exclude the one-time restructuring
charge we expect to incur as a result of the July 2002 reduction in our
workforce. Any additional financing we obtain may contain covenants that
20
restrict our freedom to operate our business or may require us to issue
securities that have rights, preferences or privileges senior to our common
stock and may dilute your ownership interest in Insightful.
ECONOMIC CONDITIONS COULD ADVERSELY AFFECT OUR REVENUE GROWTH AND ABILITY
TO FORECAST REVENUE.
Our revenue growth and potential for profitability depend on the overall
demand for statistics, data mining, business analytics, and knowledge access
software and services. Because our sales are primarily to corporate customers,
our business also depends on general economic and business conditions. A
softening of demand for computer software caused by the weakened economy, both
domestic and international, has affected our sales and may continue to result in
decreased revenues and growth rates. As a result of the economic downturn, we
have also experienced and may continue to experience difficulties in collecting
outstanding receivables from our customers. In addition, recent terrorist
attacks on the United States, and the armed conflict that has followed, have
added or exacerbated economic, political and other uncertainties, which could
adversely affect our sales and thus our revenue growth.
PRIVACY AND SECURITY CONCERNS MAY LIMIT THE EFFECTIVENESS OF AND REDUCE THE
DEMAND FOR OUR SOLUTION.
The effectiveness of our solution relies on the storage and use of data
collected from various sources, including personal information. The collection
and use of such data by our customers for customer profiling may raise privacy
and security concerns. Our customers generally have implemented security
measures to protect customer data from disclosure or interception by third
parties. However, the security measures may not be effective against all
potential security threats. If a well-publicized breach of customer data
security were to occur, our solution may be perceived as less desirable, which
could limit our revenue growth.
In addition, due to privacy concerns, some Internet commentators, consumer
advocates and governmental or legislative bodies have suggested legislation to
limit the use of customer profiling technologies. The European Union and some
European countries have already adopted some restrictions on the use of customer
profiling data. If major countries or regions adopt legislation or other
restrictions on the use of customer profiling data, our solution would be less
useful to customers, and our sales could decrease.
IF WE DO NOT RETAIN OUR KEY EMPLOYEES OR MANAGEMENT TEAM, AND INTEGRATE OUR
NEW SENIOR MANAGEMENT PERSONNEL, OUR ABILITY TO EXECUTE OUR BUSINESS
STRATEGY WILL BE LIMITED.
Our future performance will depend largely on the efforts and abilities of
our key technical, sales, customer support and managerial personnel and on our
ability to attract and retain them. In addition, our ability to execute our
business strategy will depend on our ability to recruit additional experienced
management personnel and to retain our existing executive officers. The
competition for qualified personnel in the computer software and technology
markets is particularly intense. We have in the past experienced difficulty in
hiring qualified technical, sales, customer support and managerial personnel,
and we may be unable to attract and retain such personnel in the future. In
addition, due to the intense competition for qualified employees, we may be
required to increase the level of compensation paid to existing and new
employees, which could materially increase our operating expenses. Our key
employees are not obligated to continue their employment with us and could leave
at any time.
RAPID CHANGES IN TECHNOLOGY COULD RENDER OUR PRODUCTS OBSOLETE OR
UNMARKETABLE, AND WE MAY BE UNABLE TO INTRODUCE NEW PRODUCTS AND SERVICES
SUCCESSFULLY AND IN A TIMELY MANNER.
The business software market is characterized by rapid change due to
changing customer needs, rapid technological developments and advances
introduced by competitors. Existing products can become obsolete and
unmarketable when products using new technologies are introduced and new
industry standards emerge. New technologies, including the rapid growth of the
Internet, could change the way software is sold or delivered. We may also need
to modify our products when third parties change software that we integrate into
our products. As a result, the life cycles of our products are difficult to
estimate.
To be successful, we must continue to enhance our current product line and
develop new products that successfully respond to changing customer needs,
technological developments and competitive product offerings. We may not be able
to successfully develop or license the applications necessary to respond to
these changes, or to integrate new applications with our existing products. We
may not be able to introduce enhancements or new products successfully or in a
timely manner in the future. If we delay release of our products and product
enhancements, or if they fail to achieve market acceptance when released, it
could harm our reputation and our ability to attract and retain customers, and
our revenues may decline. In addition, customers may defer or forego purchases
of our products if we, our competitors or major hardware, systems or software
vendors introduce or announce new products or product enhancements.
WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS, WHICH MAY
LIMIT OUR ABILITY TO COMPETE EFFECTIVELY.
Our success depends in part on our ability to protect our proprietary
rights. To protect our proprietary rights, we rely primarily on a combination of
patent, copyright, trade secret and trademark laws, confidentiality agreements
with employees and third parties, and protective contractual provisions such as
21
those contained in license agreements with consultants, vendors and customers,
although we have not signed these agreements in every case. Despite our efforts
to protect our proprietary rights, unauthorized parties may copy aspects of our
products and obtain and use information that we regard as proprietary.
Generally, our products are not physically copy-protected. In order to retain
exclusive ownership rights to all software developed by Insightful, we license
all software and provide it in executable code only, with contractual
restrictions on copying, disclosure and transferability. As is customary in the
industry, we generally license our products to end-users by use of a
'shrink-wrap' license. Certain specialized products may utilize a written,
signed license agreement with the customer. The source code for most of our
products is protected as a trade secret and as unpublished copyrighted work.
Other parties may breach confidentiality agreements and other protective
contracts we have entered into, and we may not become aware of, or have adequate
remedies in the event of, a breach. We face additional risk when conducting
business in countries that have poorly developed or inadequately enforced
intellectual property laws. While we are unable to determine the extent to which
piracy of our software products exists, we expect piracy to be a continuing
concern, particularly in international markets and as a result of the growing
use of the Internet. In any event, competitors may independently develop similar
or superior technologies or duplicate the technologies we have developed, which
could substantially limit the value of our intellectual property.
INTELLECTUAL PROPERTY CLAIMS AND LITIGATION COULD SUBJECT US TO SIGNIFICANT
LIABILITY FOR DAMAGES AND RESULT IN INVALIDATION OF OUR PROPRIETARY RIGHTS.
In the future, we may have to resort to litigation to protect our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Any litigation,
regardless of its success, would probably be costly and require significant time
and attention of our key management and technical personnel. Although we have
not been sued for intellectual property infringement, we may face infringement
claims from third parties in the future. The software industry has seen frequent
litigation over intellectual property rights, and we expect that participants in
the industry will be increasingly subject to infringement claims as the number
of products, services and competitors grows and the functionality of products
and services overlaps. Infringement litigation could also force us to
- stop or delay selling, incorporating or using products that
incorporate the challenged intellectual property;
- pay damages;
- enter into licensing or royalty agreements, which may be unavailable
on acceptable terms; or
- redesign products or services that incorporate infringing technology,
which we might not be able to do at an acceptable price, in a timely
fashion or at all.
OUR PRODUCTS MAY SUFFER FROM DEFECTS OR ERRORS, WHICH COULD RESULT IN LOSS
OF REVENUES, DELAYED OR LIMITED MARKET ACCEPTANCE OF OUR PRODUCTS,
INCREASED COSTS AND REPUTATIONAL DAMAGE.
Software products as complex as ours frequently contain errors or defects,
especially when first introduced or when new versions are released. Our
customers are particularly sensitive to such defects and errors because of the
importance of accuracy in software used in analyzing data. We have had to delay
commercial release of past versions of our products until software problems were
corrected, and in some cases have provided product updates to correct errors in
released products. Our new products or releases may not be free from errors
after commercial shipments have begun. Any errors that are discovered after
commercial release could result in loss of revenues or delay in market
acceptance, diversion of development resources, damage to our reputation,
increased service and warranty costs or claims against us.
In addition, the operation of our products could be compromised as a result
of errors in the third-party software we incorporate into our software. It may
be difficult for us to correct errors in third-party software because that
software is not in our control.
THE CONCENTRATED OWNERSHIP OF OUR COMMON STOCK COULD DELAY OR PREVENT A
CHANGE OF CONTROL, WHICH COULD CAUSE A DECLINE IN THE MARKET PRICE OF OUR
COMMON STOCK.
As of December 31, 2001, our current officers, directors and affiliated
entities together beneficially owned 3,502,348 shares of our common stock
(excluding stock options) or approximately 31% of the total shares outstanding.
Taken together, this group also held stock options representing 750,625 shares
that were vested and exercisable on or before May 3, 2002. As a result, these
stockholders may, as a practical matter, be able to exert significant influence
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions such as
acquisitions, and to block unsolicited tender offers. This concentration of
ownership may delay, deter or prevent a third party from acquiring control over
us at a premium over the then current market price of our common stock, which
could result in a decrease in our stock price.
22
OUR STOCK PRICE MAY BE VOLATILE.
The price of our common stock has been volatile over the past 12 months.
Our common stock reached a high of $4.44 per share on August 20, 2001 and traded
as low as $1.02 per share on July 24, 2002. As a result of fluctuations in the
price of our common stock, you may be unable to sell your shares at or above the
price you paid for them. The trading price of our common stock could be subject
to fluctuations for a number of reasons, including
- future announcements concerning us or our competitors;
- actual or anticipated quarterly variations in operating results;
- changes in analysts' earnings projections or recommendations;
- announcements of technological innovations;
- the introduction of new products;
- changes in product pricing policies by us or our competitors;
- loss of key personnel;
- proprietary rights litigation or other litigation; or
- changes in accounting standards that adversely affect our revenues and
earnings.
In addition, stock prices for many technology companies fluctuate widely
for reasons that may be unrelated to operating results of these companies. These
fluctuations, as well as general economic, market and political conditions, such
as national or international currency and stock market volatility, recessions or
military conflicts, may materially and adversely affect the market price of our
common stock, regardless of our operating performance and may expose us to class
action securities litigation which, even if unsuccessful, would be costly to
defend and distracting to management. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against these companies. Litigation
brought against us could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
on our business, financial condition and operating results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We develop products in the United States and sell them worldwide. As a
result, our financial results could be affected by factors such as changes in
foreign currency exchange rates or weak economic conditions in foreign markets.
Since our sales are currently priced in U.S. dollars and translated into local
currency amounts, a strengthening of the dollar could make our products less
competitive in foreign markets. We operate in the United Kingdom, Germany,
France and Switzerland and incur expenses denominated in those local currencies.
However, we do not believe that these operating expenses will harm our results
of operations. Interest income and expense are sensitive to changes in the
general level of U.S. interest rates, particularly since the Company's
investments are in short-term instruments. Based on the short term nature and
current levels of our investments and debt, however, we do not believe that
there is any material market risk or exposure.
Our general investing policy is to limit the risk of principal loss and
ensure the safety of invested funds by limiting credit and market risk. We
currently invest in highly liquid money market accounts and short-term
investments. All highly liquid investments with original maturities of three
months or less are considered to be cash equivalents.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
23
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our annual meeting of stockholders held on April 17, 2002, stockholders
approved the following proposals:
i. The election of the following Class III Directors for three-year terms
expiring at the 2005 annual meeting of stockholders:
Votes Cast
---------------------------
For Against
-------------- -----------
Shawn F. Javid 9,901,669 200,491
Mark C. Ozur 10,009,614 92,546
Current directors whose terms are continuing after the 2002 annual
meeting are Christopher H. Covington, Charles J. Digate, Samuel R.
Meshberg and Arthur H. Reidel.
ii. To approve a proposal to amend the 2001 Stock Option and Incentive
Plan to increase the number of shares issuable under the plan and
provide for certain automatic increases in the number of issuable
shares on an annual basis.
Votes Cast
---------------------------------------------
For Against Abstaining
-------------- ------------- --------------
3,193,396 797,282 39,631
iii. To approve a proposal to amend the 2001 Non-Employee Director Stock
Option Plan to increase the number of shares issuable under the plan
and increase the number of shares automatically granted to
non-employee directors.
Votes Cast
---------------------------------------------
For Against Abstaining
-------------- ------------- --------------
3,268,241 723,615 38,453
iv. To approve a proposal to amend the 2001 Employee Stock Purchase Plan.
Votes Cast
---------------------------------------------
For Against Abstaining
-------------- ------------- --------------
9,535,715 529,789 36,656
v. To ratify the selection of the firm of Ernst & Young LLP as auditors
for the fiscal year ending December 31, 2002.
Votes Cast
---------------------------------------------
For Against Abstaining
-------------- ------------- --------------
10,070,303 12,542 19,315
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION
======= ===========
3.1 Amended and Restated Certificate of Incorporation of the Registrant (A)
3.2 Amended and Restated Bylaws of the Registrant (A)
10.1 2001 Stock Option and Incentive Plan (B)
10.2 2001 Employee Stock Purchase Plan (C)
10.3 2001 Non-Employee Director Stock Option Plan (B)
24
99.1 Certification of Financial Statements by Chief Executive Officer and
Chief Financial Officer of Insightful Corporation as Required by
Section 906 of Sarbanes-Oxley Act of 2002. (C)
- ---------------
(A) Incorporated by reference to the designated exhibit included with
Insightful's Quarterly Report on Form 10-Q (No. 0-20992) for the period
ended September 30, 2001, filed on November 14, 2001.
(B) Incorporated by reference to the designated exhibit included with
Insightful's Registration Statement on Form S-8 (No. 333-64724), filed on
July 3, 2001.
(C) Filed herewith.
(b) Reports on Form 8-K.
On June 6, 2002, we filed a Current Report on Form 8-K dated June 5, 2002
announcing the election of Samuel R. Meshberg as Chairman of the Board of
Directors.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
August 12, 2002
INSIGHTFUL CORPORATION
By: /s/ Shawn F. Javid
--------------------------------------
Shawn F. Javid
President and Chief Executive Officer
(Principal Executive Officer)
August 12, 2002
INSIGHTFUL CORPORATION
By: /s/ SARWAT H. RAMADAN
--------------------------------------
Sarwat H. Ramadan
Vice President, Chief Financial Officer,
Treasurer and Secretary (Principal
Financial and Accounting Officer)
26
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
======= ===========
3.1 Amended and Restated Certificate of Incorporation of the Registrant (A)
3.2 Amended and Restated Bylaws of the Registrant (A)
10.1 2001 Stock Option and Incentive Plan (B)
10.2 2001 Employee Stock Purchase Plan (C)
10.3 2001 Non-Employee Director Stock Option Plan (B)
99.1 Certification of Financial Statements by Chief Executive Officer and
Chief Financial Officer of Insightful Corporation as Required by
Section 906 of Sarbanes-Oxley Act of 2002. (C)
- ---------------
27