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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 SEPTEMBER 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 November 11, 2002, there were 11,517,096 shares of Common Stock, $0.01 par
value per share, outstanding.
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TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001. . . . . . . . . . . . . 1
Consolidated Statements of Operations for the three and nine months ended
September 30, 2002 and 2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Consolidated Statements of Cash Flows for the nine months ended September 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 . . . . . . . . . . . . . . . . . . . . . 24
ITEM 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
PART II. OTHER INFORMATION
ITEM 1 Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 2. Changes in Securities and Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
i
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INSIGHTFUL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2002 2001
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,229,330 $ 6,277,869
Accounts receivable, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,676,769 3,688,022
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,070,075 1,003,412
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,152 70,406
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 396,353 252,962
-------------- -------------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,485,679 11,292,671
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . 2,067,951 2,052,374
Goodwill, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,029,738 1,874,124
Other intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315,145 374,172
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,824 101,495
-------------- -------------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,945,337 $ 15,694,836
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligations and equipment financings . . . . $ 101,103 $ 44,163
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,036,300 1,374,665
Accrued expenses and other current liabilities. . . . . . . . . . . . . . . . 2,177,847 3,021,100
Deferred revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,803,289 3,818,258
-------------- -------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 8,118,539 8,258,186
Capital lease obligations and equipment financings, less current portion . . . . 348,745 -
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-11,518,277 and 11,326,441, shares at
September 30, 2002 and December 31, 2001, respectively . . . . . . . . . . 115,183 113,264
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,316,183 33,866,997
Deferred stock-based compensation. . . . . . . . . . . . . . . . . . . . . . . . (197,598) (382,145)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (27,753,466) (25,799,723)
Subscription receivable from director. . . . . . . . . . . . . . . . . . . . . . - (380,843)
Cumulative translation adjustment. . . . . . . . . . . . . . . . . . . . . . . . (2,249) 19,100
-------------- -------------
Total stockholders' equity. . . . . . . . . . . . . . . . . . . . . . . . . 6,478,053 7,436,650
-------------- -------------
Total liabilities and stockholders' equity. . . . . . . . . . . . . . . . . $ 14,945,337 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Revenues:
Software-related:
Software licenses . . . . . . . . . . . . . . . . . . . . . $ 1,511,559 $ 1,566,329 $ 4,308,036 $ 5,345,941
Software maintenance. . . . . . . . . . . . . . . . . . . . 1,563,295 1,277,578 4,379,822 3,831,020
------------ ------------ ------------ ------------
Total software-related revenue. . . . . . . . . . . . . . 3,074,854 2,843,907 8,687,858 9,176,961
Professional services and other . . . . . . . . . . . . . . . 794,846 1,449,729 3,455,616 3,870,314
------------ ------------ ------------ ------------
Total revenues. . . . . . . . . . . . . . . . . . . . . . . 3,869,700 4,293,636 12,143,474 13,047,275
------------ ------------ ------------ ------------
Cost of Revenues:
Software related. . . . . . . . . . . . . . . . . . . . . . . 385,282 354,099 1,041,748 1,279,686
Professional services and other . . . . . . . . . . . . . . . 808,783 1,184,398 3,108,404 3,099,706
------------ ------------ ------------ ------------
Total cost of revenues. . . . . . . . . . . . . . . . . . 1,194,065 1,538,497 4,150,152 4,379,392
------------ ------------ ------------ ------------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . 2,675,635 2,755,139 7,993,322 8,667,883
------------ ------------ ------------ ------------
Operating Expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . . . 1,665,456 1,452,737 5,066,196 4,215,280
Research and development. . . . . . . . . . . . . . . . . . . 1,954,431 1,819,832 6,168,958 5,723,680
Less-Funded research. . . . . . . . . . . . . . . . . . . . . (1,245,465) (1,068,743) (3,752,897) (3,798,636)
------------ ------------ ------------ ------------
Research and development, net . . . . . . . . . . . . . . 708,966 751,089 2,416,061 1,925,044
General and administrative. . . . . . . . . . . . . . . . . . 991,342 538,351 2,300,613 2,037,815
Amortization of goodwill. . . . . . . . . . . . . . . . . . . - 16,908 - 49,673
Amortization of other intangibles . . . . . . . . . . . . . . 50,268 5,801 144,888 5,801
Amortization of stock-based compensation. . . . . . . . . . . 95,677 - 184,547 -
Restructuring-related charges . . . . . . . . . . . . . . . . 501,275 - 501,275 -
------------ ------------ ------------ ------------
Total operating expenses. . . . . . . . . . . . . . . . . 4,012,984 2,764,886 10,613,580 8,233,613
------------ ------------ ------------ ------------
Income (loss) from continuing operations. . . . . . . . . (1,337,349) (9,747) (2,620,258) 434,270
Interest and other income . . . . . . . . . . . . . . . . . . . 21,894 68,214 105,573 262,033
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . (12,694) (5,952) (18,722) (17,460)
------------ ------------ ------------ ------------
Income (loss) before income taxes . . . . . . . . . . . . . . (1,328,149) 52,515 (2,533,407) 678,843
Income tax (benefit) expense. . . . . . . . . . . . . . . . . . (182,655) 8,781 (152,557) 38,114
------------ ------------ ------------ ------------
Net income (loss) before discontinued operations . . . . . . (1,145,494) 43,734 (2,380,850) 640,729
Discontinued operations:
Loss from discontinued operations, net of tax - - - (737,411)
Gain on disposal of discontinued operations, net of tax . . . 100,000 - 427,107 3,492,663
------------ ------------ ------------ ------------
Net income (loss). . . . . . . . . . . . . . . . . . . . . $(1,045,494) $ 43,734 $(1,953,743) $ 3,395,981
============ ============ ============ ============
Basic income (loss) per share- before discontinued operations. . $ (0.10) $ 0.00 $ (0.21) $ 0.06
============ ============ ============ ============
Diluted income (loss) per share- before discontinued operations $ (0.10) $ 0.00 $ (0.21) $ 0.06
============ ============ ============ ============
Basic income (loss) per share-discontinued operations. . . . . . $ 0.01 $ 0.00 $ 0.04 $ 0.26
============ ============ ============ ============
Diluted income (loss) per share-discontinued operations. . . . . $ 0.01 $ 0.00 $ 0.04 $ 0.25
============ ============ ============ ============
Basic net income (loss) per share. . . . . . . . . . . . . . . . $ (0.09) $ 0.00 $ (0.17) $ 0.32
============ ============ ============ ============
Diluted net income (loss) per share. . . . . . . . . . . . . . . $ (0.09) $ 0.00 $ (0.17) $ 0.31
============ ============ ============ ============
Weighted average number of common shares outstanding . . . . . . 11,312,705 10,857,382 11,258,342 10,772,861
============ ============ ============ ============
Weighted average number of common shares outstanding
assuming dilution. . . . . . . . . . . . . . . . . . . . . . . 11,312,705 11,604,962 11,258,342 11,137,473
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial
statements.
2
INSIGHTFUL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------
2002 2001
----------------- -----------------
Operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,953,743) $ 3,395,981
Less-Income from discontinued operations . . . . . . . . . . . . . . (427,106) (2,755,252)
----------------- -----------------
Income (loss) from continuing operations (2,380,849) 640,729
Adjustments to reconcile net income (loss) from continuing
operations to net cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . 926,807 550,615
Amortization of stock-based amortization. . . . . . . . . . . . . . 184,547 -
Currency translation adjustment . . . . . . . . . . . . . . . . . . (29,275) 7,192
Changes in current assets and liabilities:
Accounts and other receivables . . . . . . . . . . . . . . . . . . 944,590 (441,304)
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . (42,746) (19,461)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . (143,391) (230,543)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . (338,365) 282,199
Accrued expenses, payroll and other current liabilities. . . . . . (359,679) (367,475)
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . 985,031 19,208
----------------- -----------------
Net cash (used in) provided by continuing operating activities . (253,330) 441,160
----------------- -----------------
Investing activities:
Purchases of property and equipment. . . . . . . . . . . . . . . . . (799,420) (975,261)
Decrease (increase) in other assets. . . . . . . . . . . . . . . . . 54,671 (75,682)
Capitalized patent costs . . . . . . . . . . . . . . . . . . . . . . (55,676) -
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . (175,949) (1,689,344)
----------------- -----------------
Net cash (used in) investing activities. . . . . . . . . . . . . (976,374) (2,741,287)
----------------- -----------------
Financing activities:
Payments on capital lease obligations and equipment financings . . . (44,163) (118,318)
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 451,105 459,093
----------------- -----------------
Net cash provided by financing activities. . . . . . . . . . . . 1,237,633 340,775
----------------- -----------------
Net cash (used in) continuing operations . . . . . . . . . . . . . . . 7,929 (2,470,254)
----------------- -----------------
Net cash (used in) provided by discontinued operations . . . . . . . . (56,468) 5,438,555
----------------- -----------------
Net (decrease) increase in cash and cash equivalents . . . . . . . . . (48,539) 3,479,203
----------------- -----------------
Cash and cash equivalents, beginning of period . . . . . . . . . . . . 6,277,869 3,745,112
----------------- -----------------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . $ 6,229,330 $ 7,224,315
================= =================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,722 $ 2,417
================= =================
Income taxes paid, net . . . . . . . . . . . . . . . . . . . . . . $ 35,444 $ 38,144
================= =================
Issuance of common stock in connection with acquisitions . . . . . $ - $ 790,815
================= =================
Warrants issued in connection with acquisitions. . . . . . . . . . $ - $ 41,000
================= =================
The accompanying notes are an integral part of these consolidated financial
statements.
3
INSIGHTFUL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2002
(1) DESCRIPTION OF BUSINESS
(a) CONTINUING OPERATIONS
Insightful Corporation and subsidiaries provide enterprises with scalable
data analysis solutions focused on revealing patterns, trends and relationships.
As a supplier of software and services for statistical analysis, data mining and
knowledge access, 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
companies in financial services, pharmaceuticals, biotechnology,
telecommunications and manufacturing as well as 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) 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 nine
months ended September 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
certain contingencies resulting from the disposition. During the nine months
ended September 30, 2002, certain of these contingencies were favorably
resolved, resulting in a net gain on disposal of discontinued operations of
$427,100. As of September 30, 2002, no unresolved contingencies related to the
sale of EEPD remain.
The results of EEPD are presented on a net basis in the accompanying
consolidated statements of operations as discontinued operations.
Components of loss from discontinued operations approximate the following:
NINE MONTHS ENDED
SEPTEMBER 30, 2001
------------------
Revenues . . . . . . . . . . . . . . . . . . . . . $ 74,000
Costs and Expenses . . . . . . . . . . . . . . . . ( 811,000)
------------------
Loss from Discontinued Operations. . . . . . . . . $ (737,000)
==================
(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 nine-month period ended September 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
(UNAUDITED)
SEPTEMBER 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. In the event that vendor-specific objective evidence may not be
established for maintenance, and if maintenance is the only remaining
significant element of an arrangement, then all revenue associated with the
arrangement is recognized ratably starting the month after installation or
acceptance, whichever occurs later, to the end of the maintenance period.
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, which is 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 is 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 is 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
5
INSIGHTFUL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2002
from goodwill. SFAS 141 was effective for all business combinations after June
30, 2001. SFAS No. 142 discontinues amortization of goodwill and other
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
September 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. Insightful completed its first phase impairment analysis
during the second quarter of 2002 and found no instances of impairment of its
recorded goodwill; accordingly, the second testing phase was not necessary. The
Company will perform its annual goodwill impairment analysis in the fourth
quarter of 2002. Should an impairment be indicated, the corresponding charge
will be taken at that time.
Insightful's net loss and income for the nine months ended September 30,
2002 and 2001, adjusted to exclude goodwill amortization was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2002 2001 2002 2001
------------ ----------- ------------ -----------
Reported net income (loss) . . . . . . . . . $(1,045,494) $ 43,734 $(1,953,743) $ 3,395,981
Add back goodwill amortization, net of tax . - 16,908 - 49,673
------------ ----------- ------------ -----------
Adjusted net income (loss) . . . . . . . . . $(1,045,494) $ 60,642 $(1,953,743) $ 3,445,654
============ =========== ============ ===========
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 nine months ended September 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. Other
intangibles consist of the following:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
---------------------------------------- ----------------------------------------
GROSS OTHER GROSS OTHER
CARRYING ACCUMULATED INTANGIBLES, CARRYING ACCUMULATED INTANGIBLES,
AMOUNT AMORTIZATION NET AMOUNT AMORTIZATION NET
--------- -------------- ------------- --------- -------------- -------------
Non-compete agreements . . $ 177,120 $ (75,967) $ 101,153 $ 145,787 $ (18,224) $ 127,563
Customer relationships . . 164,158 (82,081) 82,077 164,158 (20,520) 143,638
Capitalized patent expenses 168,167 (36,252) 131,915 110,568 (7,597) 102,971
--------- -------------- ------------- --------- -------------- -------------
Other intangibles. . . . . $ 509,445 $ (194,300) $ 315,145 $ 420,513 $ (46,341) $ 374,172
========= ============== ============= ========= ============== =============
Other intangibles are scheduled to be fully amortized by December 31, 2005
with corresponding amortization estimated to be $53,274, $202,607, $50,355 and
$8,909 for the remainder of 2002, 2003, 2004 and 2005, 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 the prime rate,
which was 4.75% as of September 30, 2002, plus 1%. As of September 30, 2002,
Insightful had no outstanding borrowings under the working capital facility.
6
INSIGHTFUL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2002
The loan and security agreement with SVB requires Insightful to maintain
certain financial covenants. Insightful was in compliance with these covenants
at September 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 the prime rate, which was 4.75% as of September 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 September 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 September 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2002 2001 2002 2001
Weighted average common shares outstanding . . . . . . . . . 11,312,705 10,857,382 11,258,342 10,772,861
Effect of dilutive stock options . . . . . . . . . . . . . . - 747,580 - 364,612
---------- ---------- ---------- ----------
Weighted average common shares outstanding
assuming dilution. . . . . . . . . . . . . . . . . . . . . 11,312,705 11,604,962 11,258,342 11,137,473
========== ========== ========== ==========
(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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income (loss) . . . . . . . . . . . . . $(1,045,493 $ 43,734 $(1,953,744 $ 3,395,981
Change in cumulative translation adjustment (9,473 (157,018 (21,349 7,192
----------- ----------- ----------- -----------
Comprehensive income (loss) . . . . . . . . $(1,054,966 $ (113,284 $(1,975,093 $ 3,403,173
=========== =========== =========== ===========
7
INSIGHTFUL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
SEPTEMBER 30, 2002
(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
statistical analysis, data mining and knowledge access software and services. No
additional disclosure is required.
(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) BUSINESS RESTRUCTURING
In July 2002, Insightful implemented a workforce reduction of 31 employees,
which represented 18% of Insightful's employee base at that time and included
employees from all functional areas of Insightful. All of the restructuring
charges, totaling approximately $501,000, related to employee severance and
termination benefits. As of September 30, 2002, $329,000 of the severance and
termination benefits were paid and $172,000 remained accrued on that date. All
termination benefits will be paid by February 28, 2003.
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 focus on
revealing patterns, trends and relationships. As a supplier of software and
services for statistical analysis, data mining and 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
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-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 and the sale of our EEPD, we
relocated our headquarters from Boston, Massachusetts, to Seattle, Washington,
where DAPD was 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. In the event that vendor-specific objective evidence may not be
established for maintenance, and if maintenance is the only remaining
significant element of an arrangement, then all revenue associated with the
arrangement is recognized ratably starting the month after installation or
acceptance, whichever occurs later, to the end of the maintenance period.
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
10
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
and is subject to sudden changes.
Impairment of Goodwill and Other Long Lived 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.
The Company will perform its annual evaluation of goodwill for impairment
during the fourth quarter of 2002. Should an impairment be indicated, the
corresponding charge will be taken in that period.
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 NINE MONTHS ENDED SEPTEMBER 30, 2002 AND
2001
REVENUES
Total revenues, which consist of software license, subscription,
maintenance and service revenues, were $3.9 million for the three months ended
September 30, 2002, and $4.3 million for the three months ended September 30,
2001, representing a decrease of $424,000, or 9.9% between these periods. Total
revenues were $12.1 million for the nine months ended September 30, 2002, and
$13.0 million for the nine months ended September 30, 2001, representing a
decrease of $904,000, or 6.9% between these periods.
Software related revenues (software licenses, subscriptions and
maintenance) accounted for 79.5% of total revenues and increased 8.1% from $2.8
million for the three months ended September 30, 2001 to $3.1 million for the
three months ended September 30, 2002. This increase is attributable to an
increase in maintenance revenues. Software related revenues accounted for 71.5%
of total revenues and decreased 5.3% from $9.2 million for the nine months ended
September 30, 2001 to $8.7 million for the nine months ended September 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 20.5% of total revenues and decreased 45.2% from $1.5
million for the three months ended September 30, 2001 to $795,000 for the three
months ended September 30, 2002. Professional services revenues represented
28.5% of total revenues and decreased 10.7% from $3.9 million for the nine
months ended September 30, 2001 to $3.5 million for the nine months ended
September 30, 2002. We believe the decrease in professional services revenues in
the third quarter of 2002 resulted primarily from the generally weak economic
conditions that have adversely affected corporate spending. We expect
professional services revenues to fluctuate based on sales of our products, as
well as demand associated with implementation of future product sales, upgrades,
enhancements of our products and training services.
11
Revenues from international operations were $1.2 million for the three
months ended September 30, 2002, and $766,000 for the three months ended
September 30, 2001. Revenues from international operations were $4.3 million for
the nine months ended September 30, 2002, and $2.5 million for the nine months
ended September 30, 2001. This represents an increase of $414,000, or 54.1%, for
the three months ended September 30, 2002 over the three months ended September
30, 2001 and $1.7 million, or 68.3%, for the nine months ended September 30,
2002 over the nine months ended September 30, 2001. This increase resulted
primarily from Insightful's expansion in international channels and investment
in additional sales and consulting resources in Europe. The operations of our
French and Swiss subsidiaries were not included in our operating results until
late in the third quarter of 2001. The operations of our German subsidiary were
not included in our operations until the beginning of the first quarter of 2002.
The three and nine-month periods ending September 30, 2002, include the
operating results of these subsidiaries for the entire reporting period.
COST OF REVENUES
Total cost of revenues were $1.2 million for the three months ended
September 30, 2002, and $1.5 million for the three months ended September 30,
2001, representing a decrease of $344,000, or 22.4% between these periods. Total
cost of revenues were $4.2 million for the nine months ended September 30, 2002,
and $4.4 million for the nine months ended September 30, 2001, representing a
decrease of $229,000, or 5.2% between these periods. The decrease in total cost
of revenues for the three and nine-month periods ended September 30, 2002 as
compared to the same period in 2001 resulted primarily from actions taken by
management to reduce Insightful's cost structure.
The cost of software licenses, which consists of royalties for third-party
software, product media, product duplication and manuals, remained consistent as
a percentage of total software related revenues at 12.5% for the three months
ended September 30, 2002 and 2001. The cost of software licenses decreased as a
percentage of total software related revenues to 12.0% for the nine months ended
September 30, 2002, from 13.9% for the nine months ended September 30, 2001.
This decrease resulted primarily from the increase in maintenance revenue as a
percent of total software related revenues to 50.8% for the three months ended
September 30, 2002, from 44.9% for the three months ended September 30, 2001.
Maintenance revenue as a percent of total software related revenues also
increased to 50.4% for the nine months ended September 30, 2002, from 41.7% for
the nine months ended September 30, 2001. 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. We expect that the cost of
software licenses will continue to fluctuate modestly in relation to changes in
the overall demand for our license products.
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 $809,000 for the three months
ended September 30, 2002, representing a decrease of 376,000, or 31.7%, from
$1.2 million for the three months ended September 30, 2001. The cost of
professional services remained consistent at $3.1 million for the nine months
ended September 30, 2002 and 2001. The decrease in the cost of professional
services for the three-month periods ended September 30, 2002 and 2001 is
primarily due to workforce reductions implemented to lower Insightful's cost
structure. We expect the cost of professional services to decrease slightly or
remain at a level consistent with the results reported for the three months
ended September 30, 2002, but decrease as a percentage of related revenue as
utilization of our existing resources and demand for our services improves.
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 $1.7
million for the three month period ended September 30, 2002, and $1.5 million
for the period ended September 30, 2001, representing an increase of $213,000,
or 14.6% between these periods. Sales and marketing expenses were $5.1 million
for the nine month period ended September 30, 2002, and $4.2 million for the
period ended September 30, 2001, representing an increase of $851,000, or 20.2%
between these periods. This increase primarily reflected additions to the sales
force on an international basis to expand our sales opportunities through the
addition of our Swiss, German and French subsidiaries. We expect our sales and
marketing expenses to remain consistent with the results reported for the three
months ended September 30, 2002, but decrease as a percentage of software
revenues if demand for our products improves.
Net research and development expenses decreased 5.6%, from $751,000 for the
three months ended September 30, 2001 to $709,000 for the three months ended
September 30, 2002, and increased as a percentage of total revenues from 17.5%
to 18.3%, respectively. Net research and development expenses increased 25.5%,
from $1.9 million for the nine months ended September 30, 2001 to $2.4 million
for the nine months ended September 30, 2002, and increased as a percentage of
total revenues from 14.8% to 19.9%, respectively. Research and development
expenses consist primarily of salaries and related benefits, equipment for
software developers, facility costs, and payments to outside contractors. The
increase in gross research and development expenses was primarily attributable
to investments in new product development, as well as ongoing investments in
enhancing current products. Funded research, which consists primarily of
government grants for research projects, increased 16.5%, from $1.1 million for
the three months ended September 30, 2001 to $1.2 million for the three months
12
ended September 30, 2002. Funded research remained consistent at $3.8 million
for the nine months ended September 30, 2001 and for the nine months ended
September 30, 2002. The increase in funded research for the three-month period
ended September 30, 2002, is primarily due to an increase in the awards granted
for the same period last year.
General and administrative expenses, which consist primarily of salaries
and related costs associated with finance, accounting, investor relations,
administration and facilities activities, increased 84.1% from $538,000 for the
three months ended September 30, 2001 to $991,000 for the three months ended
September 30, 2002. General and administrative expenses increased 12.9% from
$2.0 million for the nine months ended September 30, 2001 to $2.3 million for
the nine months ended September 30, 2002. The increase is primarily due to
increases in insurance, legal and audit expenses as well as general and
administrative expenses associated with the previous Chief Financial Officer's
severance package and with our Swiss, French and German subsidiaries. We expect
future increases in general and administrative expenses relating to continuing
increases in insurance, legal and audit expenses. In September 2002, we
announced the resignation of our previous Chief Financial Officer and recorded
charges totaling approximately $124,000 related to severance and termination
benefits, which will be paid through June 2003.
Amortization of goodwill and other intangibles increased from $23,000 for
the three months ended September 30, 2001 to $50,000 for the three months ended
September 30, 2002. For the nine months ended September 30, 2001 and 2002,
amortization of goodwill and other intangibles increased from $55,000 to
$145,000, 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 September 30,
2001, which effectively decreased the amortization expense that would have been
recognized by approximately $16,000 for the three months ended September 30,
2002 and $48,000 for the nine months ended September 30, 2002.
Amortization of deferred stock-based compensation totaled $96,000 for the
three months ended September 30, 2002 and $185,000 for the nine months ended
September 30, 2002. Amortization of deferred stock-based compensation 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. In the third quarter
of 2002, the eligibility requirements related to the stock issued to one
individual were waived pursuant to an employment termination settlement.
Accordingly, the remaining deferred stock-based compensation relating to this
issuance totaling $51,000 is reflected in the expense during the third quarter
of 2002.
RESTRUCTURING-RELATED CHARGES
In July 2002, Insightful implemented a workforce reduction of 31 employees,
which represented 18% of Insightful's employee base at that time and included
employees from all functional areas of Insightful. All of the restructuring
charges, totaling approximately $501,000, related to employee severance and
termination benefits. As of September 30, 2002, $329,000 of the severance and
termination benefits were paid and $172,000 remained accrued on that date. All
termination benefits will be paid by February 28, 2003.
NET OPERATING RESULTS FROM CONTINUING OPERATIONS
The net loss from continuing operations for the three months ended
September 30, 2002 was $1.3 million compared to $10,000 for the three months
ended September 30, 2001. The net loss from continuing operations for the nine
months ended September 30, 2002 was $2.6 million compared to net income from
continuing operations of $434,000 for the nine months ended September 30, 2001.
The net loss for the three and nine-months ended September 30, 2002, reflects a
decrease in software and services revenues mostly due to prevailing economic
conditions as well as an increase in operating expenses. The net loss was
further affected by new acquisition related amortization and deferred
compensation charges of $146,000 and $329,000 as well as the
restructuring-related charges of $501,000 for both the three and nine-month
periods ended September 30, 2002.
INTEREST AND OTHER INCOME
Total interest and other income was $22,000 for the three months ended
September 30, 2002, and $68,000 for the three months ended September 30, 2001,
representing a decrease of $46,000 or 67.9%. Total interest and other income was
$106,000 for the nine months ended September 30, 2002, and $262,000 for the nine
months ended September 30, 2001, representing a decrease of $156,000 or 59.7%.
The decrease in interest 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.
13
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 nine months ended September 30, 2001. The liabilities arising
from the sale of EEPD included accruals related to certain contingencies
resulting from the disposition. During the nine months ended September 30, 2002,
certain of these contingencies were favorably resolved, resulting in a net gain
on disposal of discontinued operations of $100,000 for the three months ended
September 30, 2002, and $427,000 for the nine months ended September 30, 2002.
As of September 30, 2002, no unresolved contingencies related to the sale of
EEPD remain.
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 $6.3 million.
Insightful's continuing operations resulted in net cash outflows of $253,000 for
the nine months ended September 30, 2002. Operating cash outflows for the nine
months ended September 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 for the nine months ended September 30, 2002 resulted
in cash outflows of $976,000, primarily due to capital expenditures of $800,000
related to continuing operations and $176,000 for acquisitions and related
transaction expenses.
Financing activities provided cash inflows of $1.2 million for the nine
months ended 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 the prime rate,
which was 4.75% as of September 30, 2002, plus 1%.
In March 2002, Insightful also 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 the prime rate, which was 4.75% as of
September 30, 2002, plus 1%.
These credit facilities 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 incurred as a result of the July
2002 reduction in our workforce.
These credit facilities may 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 nine months ended September 30, 2002.
Cash outflows for discontinued operations relating to employee severance
and termination benefits amounted to $56,000, which brought the cash and cash
equivalent balance at September 30, 2002 to $6.2 million.
At September 30, 2002, Insightful's principal unused sources of liquidity
consisted of cash and cash equivalents of $6.2 million. 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.
14
The following are our contractual commitments associated with our operating
and capital leases and equipment financings:
THREE MONTHS
ENDING
DECEMBER 31,
----------- YEAR ENDING DECEMBER 31,
2002 2003 2004 2005 2006 THEREAFTER TOTAL
----------- ---------- -------- -------- -------- ----------- ----------
Commitments:
Capital leases and
equipment financings $ 11,549 $ 120,272 $127,373 $134,893 $ 55,761 $ - $ 449,848
Operating leases. . . 208,350 892,686 866,857 152,824 115,147 134,560 2,370,424
----------- ---------- -------- -------- -------- ----------- ----------
Total commitments . $ 219,899 $1,012,958 $994,230 $287,717 $170,908 $ 134,560 $2,820,272
=========== ========== ======== ======== ======== =========== ==========
As of September 30, 2002 we had net operating loss carryforwards of
approximately $23 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.
Recognizing these market trends, over the past two years we have been
expanding our portfolio of products beyond statistics to encompass data mining
and knowledge access. Our newest products, Insightful Miner and InFact, address
the emerging need to analyze structured (numerical) and unstructured (linguistic
and textual) data sets. These products 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 knowledge access 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.
15
Looking forward, we expect that our professional services revenue will
remain at its current depressed levels for the next couple of quarters. However,
we anticipate that our software-related revenues for S-PLUS, Insightful Miner,
and related servers will grow. This growth will be predominantly driven by (a)
increased resources and efficiency of our sales and marketing efforts worldwide,
and (b) growth from Insightful Miner revenue resulting from a Unix enterprise
edition release in the first half of next year.
We expect to continue to win deals for InFact. However, this product is
new, unproven and customer acceptance may take a considerable amount of time.
Further, there is no guarantee that competitors will not offer a comparable or
better product. 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 InFact 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
InFact provides 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;
- 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.
16
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 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 believe that revenues from our new products, InFact and Insightful
Miner, 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
expenditure in this economic climate. 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 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 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.
17
MANY POTENTIAL CUSTOMERS ARE NOT YET AWARE OF THE BENEFITS OF DATA MINING AND
KNOWLEDGE ACCESS SOLUTIONS, AND OUR PRODUCTS MAY NOT ACHIEVE MARKET ACCEPTANCE.
The markets for data mining 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.
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.
18
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 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 the past 12 months, and we expect to continue
to experience longer sales cycles over the next several quarters. 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.
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
19
INTEGRATION OF PAST OR FUTURE ACQUISITIONS MAY BE DIFFICULT AND DISRUPTIVE.
We have completed several acquisitions of businesses with complementary
technologies or service offerings, including our acquisitions of Predict AG,
Waratah Corporation, Graphische Systeme GmbH and Sigma-Plus SA. 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
nine months of 2002. As of September 30, 2002, we had an accumulated deficit of
$28 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.
CONTINUED DECREASES IN SERVICE REVENUES COULD DECREASE OUR TOTAL REVENUES OR
DECREASE OUR GROSS MARGINS, WHICH COULD CAUSE A DECREASE IN OUR STOCK PRICE.
During the quarter ended September 30, 2002, our services revenues
decreased 45.2% from the same quarter last year. Consulting and training
(service) revenues represented 28.5% of our total revenues for the first nine
months of 2002,and we anticipate that service revenues will continue to
represent a significant percentage of total revenues. If we are unable to
maintain or increase our consulting and training revenues, our total revenues
may fall.
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 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 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.
20
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 31 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 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 expected to incur as a result of the July 2002 reduction in our
workforce. Any additional 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 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 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.
21
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
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;
22
- 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.
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 $3.40 per share on April 19, 2002 and traded
as low as $0.66 per share on October 10, 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.
23
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.
ITEM 4. CONTROLS AND PROCEDURES
QUARTERLY EVALUATION OF THE COMPANY'S DISCLOSURE CONTROLS AND INTERNAL CONTROLS.
Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, the
company evaluated the effectiveness of the design and operation of its
"disclosure controls and procedures" (Disclosure Controls), and its "internal
controls and procedures for financial reporting" (Internal Controls). This
evaluation (the Controls Evaluation) was done under the supervision and with the
participation of management, including our Chief Executive Officer (CEO) and
Chief Financial Officer (CFO). Rules adopted by the SEC require that in this
section of the Quarterly Report we present the conclusions of the CEO and the
CFO about the effectiveness of our Disclosure Controls and Internal Controls
based on and as of the date of the Controls Evaluation.
CEO AND CFO CERTIFICATIONS. Appearing immediately following the Signatures
section of this Quarterly Report there are two separate forms of
"Certifications" of the CEO and the CFO. The first form of Certification is
required in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the
Section 302 Certification). This section of the Quarterly Report which you are
currently reading is the information concerning the Controls Evaluation referred
to in the Section 302 Certifications and this information should be read in
conjunction with the Section 302 Certifications for a more complete
understanding of the topics presented.
DISCLOSURE CONTROLS AND INTERNAL CONTROLS. Disclosure Controls are procedures
that are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934
(Exchange Act), such as this Quarterly Report, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's (SEC) rules and forms. Disclosure Controls are also
designed with the objective of ensuring that such information is accumulated and
communicated to our management, including the CEO and CFO, as appropriate to
allow timely decisions regarding required disclosure. Internal Controls are
procedures which are designed with the objective of providing reasonable
assurance that (1) our transactions are properly authorized; (2) our assets are
safeguarded against unauthorized or improper use; and (3) our transactions are
properly recorded and reported, all to permit the preparation of our financial
statements in conformity with generally accepted accounting principles.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. The company's management,
including the CEO and CFO, does not expect that our Disclosure Controls or our
Internal Controls will prevent all error and all fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part upon certain
assumptions about the likelihood of future events, and there can be no assurance
that any design will succeed in achieving its stated goals under all potential
future conditions; over time, control may become inadequate because of changes
in conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
SCOPE OF THE CONTROLS EVALUATION. The CEO/CFO evaluation of our Disclosure
Controls and our Internal Controls included a review of the controls' objectives
and design, the controls' implementation by the company and the effect of the
controls on the information generated for use in this Quarterly Report. In the
course of the Controls Evaluation, we sought to identify data errors, controls
problems or acts of fraud and to confirm that appropriate corrective action,
including process improvements, were being undertaken. This type of evaluation
will be done on a quarterly basis so that the conclusions concerning controls
effectiveness can be reported in our Quarterly Reports on Form 10-Q and Annual
24
Report on Form 10-K. Our Internal Controls are also evaluated on an ongoing
basis by personnel in our Finance organization and by our independent auditors
in connection with their audit and review activities. The overall goals of these
various evaluation activities are to monitor our Disclosure Controls and our
Internal Controls and to make modifications as necessary; our intent in this
regard is that the Disclosure Controls and the Internal Controls will be
maintained as dynamic systems that change (including with improvements and
corrections) as conditions warrant.
Among other matters, we sought in our evaluation to determine whether there were
any "significant deficiencies" or "material weaknesses" in the company's
Internal Controls, or whether the company had identified any acts of fraud
involving personnel who have a significant role in the company's Internal
Controls. This information was important both for the Controls Evaluation
generally and because items 5 and 6 in the Section 302 Certifications of the CEO
and CFO require that the CEO and CFO disclose that information to our Board's
Audit Committee and to our independent auditors and to report on related matters
in this section of the Quarterly Report. In the professional auditing
literature, "significant deficiencies" are referred to as "reportable
conditions"; these are control issues that could have a significant adverse
effect on the ability to record, process, summarize and report financial data in
the financial statements. A "material weakness" is defined in the auditing
literature as a particularly serious reportable condition where the internal
control does not reduce to a relatively low level the risk that misstatements
caused by error or fraud may occur in amounts that would be material in relation
to the financial statements and not be detected within a timely period by
employees in the normal course of performing their assigned functions. We also
sought to deal with other controls matters in the Controls Evaluation, and in
each case if a problem was identified, we considered what revision, improvement
and/or correction to make in accord with our on-going procedures.
CONCLUSIONS. Based upon the Controls Evaluation, our CEO and CFO have concluded
that, subject to the limitations noted above, our Disclosure Controls are
effective to ensure that material information relating to Insightful and its
consolidated subsidiaries is made known to management, including the CEO and
CFO, particularly during the period when our periodic reports are being
prepared, and that our Internal Controls are effective to provide reasonable
assurance that our financial statements are fairly presented in conformity with
generally accepted accounting principles.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
25
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 Loan Modification Agreement, dated August 15, 2002 , by and between Insightful Corporation and Silicon Valley
Bank (B)
99.1 Certification of Financial Statements by Chief Executive Officer of Insightful Corporation as Required by Section
906 of Sarbanes-Oxley Act of 2002 (D)
99.2 Certification of Financial Statements by Chief Financial Officer of Insightful Corporation as Required by Section
906 of Sarbanes-Oxley Act of 2002 (D)
- ---------------
(A) Incorporated by reference to the designated exhibit included with
Insightful's Quarterly Report on Form 10-Q (No. 0-020992) for the period
ended September 30, 2001, filed on November 14, 2001.
(B) Filed herewith.
(b) Reports on Form 8-K.
On July 17, 2002, we filed a Current Report on Form 8-K dated July 16, 2002
announcing the preliminary results for the fiscal quarter ended June 30, 2002
and a workforce reduction.
On August 5, 2002, we filed a Current Report on form 8-K dated August 1,
2002 announcing the resignation of Charles F. Digate, a director, from the
company's Board of Directors.
On September 17, 2002, we filed a Current Report on Form 8-K dated
September 13, 2002 announcing the resignation of Sar Ramadan as chief financial
Officer and the appointment of Fred Schapelhouman as interim Chief Financial
Officer.
26
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.
November 12, 2002
INSIGHTFUL CORPORATION
By: /s/ Shawn F. Javid
-------------------------------------------
Shawn F. Javid
President and Chief Executive Officer
(Principal Executive Officer)
November 12, 2002
INSIGHTFUL CORPORATION
By: /s/ Fred Schapelhouman
-------------------------------------------
Fred Schapelhouman
Interim Chief Financial Officer
(Principal Financial and Accounting Officer)
27
QUARTERLY CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Shawn F. Javid, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Insightful
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002 By: /s/ Shawn F. Javid
---------------------- -------------------------------------
Shawn F. Javid
President and Chief Executive Officer
28
QUARTERLY CERTIFICATION PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
I, Fred Schapelhouman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Insightful
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 12, 2002 By: /s/ Fred Schapelhouman
---------------------- ------------------------------------
Fred Schapelhouman
Interim Chief Financial Officer
29
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Registrant
3.2 Amended and Restated Bylaws of the Registrant
10.1 Loan Modification Agreement, dated August 15, 2002 , by and
between Insightful Corporation and Silicon Valley Bank
99.1 Certification of Financial Statements by Chief Executive Officer
Insightful Corporation as Required by Section 906 of
Sarbanes-Oxley Act of 2002
99.2 Certification of Financial Statements by Chief Financial Officer
of Insightful Corporation as Required by Section 906 of
Sarbanes-Oxley Act of 2002
- ---------------
30