SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________
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, 2003
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
__________________
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
___________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
(Title of class)
__________________
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of the Registrant's Common Stock, $0.01
par value, was 11,442,344 as of November 5, 2003.
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PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1 Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 . . . . . . . . . . . . . . . 2
Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002. . 3
Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2002. . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. . . . . . . . . . . 10
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . 24
ITEM 4. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Trademarks
Insightful, the Insightful logo, "intelligence from data" and 'human-like
intelligence" are trademarks of Insightful Corporation. S-PLUS, S-PLUS Analytic
Server, StatServer and InFact are registered trademarks of Insightful
Corporation. All other brand names, trademarks or service marks referred to in
the report are the property of their owners.
i
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
INSIGHTFUL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
ASSETS
Current Assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,778 $ 6,819
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,822 2,346
Other receivables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 980 955
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133 102
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 527 204
--------------- --------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,240 10,426
Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,300 2,055
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,230 1,230
Other intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165 276
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 49
--------------- --------------
$ 11,985 $ 14,036
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . $ 129 $ 129
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 945 1,030
Accrued expenses and other current liabilities . . . . . . . . . . . . . . . . . . 2,536 2,371
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,402 4,780
--------------- --------------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 8,012 8,310
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . 193 289
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-11,436,394 and 11,518,277, shares at September 30, 2003 and
December 31, 2002, respectively. . . . . . . . . . . . . . . . . . . . . . . . . 114 115
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,262 34,316
Deferred stock-based compensation. . . . . . . . . . . . . . . . . . . . . . . . . - (162)
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (30,663) (28,881)
Cumulative translation adjustment. . . . . . . . . . . . . . . . . . . . . . . . . 67 49
--------------- --------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . 3,780 5,437
--------------- --------------
$ 11,985 $ 14,036
=============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
2
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Revenues:
Software licenses . . . . . . . . . . . . . . . . . . . . $ 1,842 $ 1,512 $ 5,524 $ 4,308
Software maintenance. . . . . . . . . . . . . . . . . . . 1,627 1,563 5,010 4,380
Professional services and other . . . . . . . . . . . . . 555 795 2,100 3,455
---------- ---------- ---------- ----------
Total revenues. . . . . . . . . . . . . . . . . . . . 4,024 3,870 12,634 12,143
---------- ---------- ---------- ----------
Cost of Revenues:
Software related. . . . . . . . . . . . . . . . . . . . . 514 385 1,547 1,042
Professional services and other . . . . . . . . . . . . . 511 869 1,975 3,187
---------- ---------- ---------- ----------
Total cost of revenues. . . . . . . . . . . . . . . . 1,025 1,254 3,522 4,229
---------- ---------- ---------- ----------
Gross profit. . . . . . . . . . . . . . . . . . . . . 2,999 2,616 9,112 7,914
---------- ---------- ---------- ----------
Operating Expenses:
Sales and marketing . . . . . . . . . . . . . . . . . . . 1,671 1,693 5,286 5,150
Research and development. . . . . . . . . . . . . . . . . 1,646 1,963 5,095 6,191
Less-Funded research. . . . . . . . . . . . . . . . . . . (1,180) (1,245) (3,264) (3,753)
---------- ---------- ---------- ----------
Research and development, net. . . . . . . . . . . . 466 718 1,831 2,438
General and administrative. . . . . . . . . . . . . . . . 922 991 2,515 2,301
Amortization of other intangibles . . . . . . . . . . . . 64 50 188 144
Restructuring-related charges . . . . . . . . . . . . . . 911 501 911 501
---------- ---------- ---------- ----------
Total operating expenses. . . . . . . . . . . . . . . . . 4,034 3,953 10,731 10,534
---------- ---------- ---------- ----------
Loss from operations. . . . . . . . . . . . . . . . . . . (1,035) (1,337) (1,619) (2,620)
---------- ---------- ---------- ----------
Interest and other income . . . . . . . . . . . . . . . . . 66 23 96 106
Interest expense. . . . . . . . . . . . . . . . . . . . . . (5) (13) (15) (19)
---------- ---------- ---------- ----------
Loss before income taxes. . . . . . . . . . . . . . . . . (974) (1,327) (1,538) (2,533)
Income tax expense (benefit). . . . . . . . . . . . . . . . 16 (182) 107 (152)
---------- ---------- ---------- ----------
Loss from continuing operations . . . . . . . . . . . . . (990) (1,145) (1,645) (2,381)
Discontinued operations:
Gain (loss) from discontinued operations, net of tax. . . - 100 (137) 427
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (990) $ (1,045) $ (1,782) $ (1,954)
========== ========== ========== ==========
Basic and diluted net loss per share-continuing operations. $ (0.09) $ (0.10) $ (0.14) $ (0.21)
========== ========== ========== ==========
Basic and diluted income (loss) per share-discontinued
operations. . . . . . . . . . . . . . . . . . . . . . . . $ - $ 0.01 $ (0.01) $ 0.04
========== ========== ========== ==========
Basic and diluted net loss per share. . . . . . . . . . . . $ (0.09) $ (0.09) $ (0.16) $ (0.17)
========== ========== ========== ==========
Weighted average number of common shares outstanding. . . . 11,404 11,313 11,396 11,258
========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements
3
INSIGHTFUL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------
2003 2002
-------------- --------------
Operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . $ (1,782) $ (1,954)
Less-(Gain) loss from discontinued operations. . . . . . . 137 (427)
-------------- --------------
Loss from continuing operations. . . . . . . . . . . (1,645) (2,381)
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:
Depreciation, amortization and other non-cash charges. . 1,253 927
Amortization (reversal) of stock-based compensation . . (105) 184
Changes in current assets and liabilities:
Accounts and other receivables . . . . . . . . . . . . 499 945
Inventories. . . . . . . . . . . . . . . . . . . . . . (31) (43)
Prepaid expenses . . . . . . . . . . . . . . . . . . . (323) (143)
Accounts payable . . . . . . . . . . . . . . . . . . . (85) (338)
Accrued expenses and other current liabilities . . . . 162 (360)
Deferred revenue . . . . . . . . . . . . . . . . . . . (378) 985
-------------- --------------
Net cash used in continuing operating activities . . (653) (224)
-------------- --------------
Investing activities:
Purchases of property and equipment. . . . . . . . . . . . (145) (799)
Decrease (increase) in other assets. . . . . . . . . . . . (1) 55
Capitalized patent costs . . . . . . . . . . . . . . . . . (51) (56)
Net cash used in acquisitions. . . . . . . . . . . . . . . - (176)
-------------- --------------
Net cash used in investing activities. . . . . . . . (197) (976)
-------------- --------------
Financing activities:
Payments on long-term debt . . . . . . . . . . . . . . . . (96) (44)
Cash received on subscription receivable from director . . - 381
Proceeds from long-term debt . . . . . . . . . . . . . . . - 450
Proceeds from exercise of stock options and employee stock
purchase plan. . . . . . . . . . . . . . . . . . . . . . 25 450
-------------- --------------
Net cash (used in) provided by financing activities. (71) 1,237
-------------- --------------
Effect of exchange rate changes on cash and cash equivalents 17 (29)
-------------- --------------
Net cash used in continuing operations . . . . . . . . . . . (904) 8
Net cash used in discontinued operations . . . . . . . . . . (137) (57)
-------------- --------------
Net decrease in cash and cash equivalents. . . . . . . . . . (1,041) (49)
Cash and cash equivalents, beginning of period . . . . . . . 6,819 6,278
-------------- --------------
Cash and cash equivalents, end of period . . . . . . . . . . $ 5,778 $ 6,229
============== ==============
Supplemental disclosure of cash flow information:
Cash paid for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . $ 16 $ 19
============== ==============
Income taxes . . . . . . . . . . . . . . . . . . . . . . $ 128 $ 35
============== ==============
Reversal of deferred stock-based compensation for options
cancelled upon employee termination. . . . . . . . . . . . $ (139) $ -
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements
4
INSIGHTFUL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2003
(1) DESCRIPTION OF BUSINESS
a) CONTINUING OPERATIONS
Insightful Corporation and its wholly owned subsidiaries provide
enterprises with scalable data analysis solutions designed to drive better
decisions faster by revealing patterns, trends and relationships. Insightful is
a supplier of software and services for the statistical data mining, business
analytics, knowledge management, and information retrieval industry segments
enabling customers to gain intelligence from numerical data and text.
Insightful's products include InFact(R), Insightful Miner, S-PLUS(R),
StatServer(R), and S-PLUS Analytic Server(R). Insightful's consulting services
provide specialized expertise and proven processes for the design, development
and deployment of analytical 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 North American offices
in New York City and North Carolina. Insightful's international offices are
located in France, Switzerland, and the United Kingdom, with distributors around
the world.
(b) DISCONTINUED OPERATIONS
On January 23, 2001, Insightful sold the operations of its Engineering and
Education Products Division (EEPD). The assets of EEPD were sold to a third
party for $7,000,000. The 2001 sale of EEPD resulted in an initial gain of
$3,849,000, after taking into account net assets transferred and certain
liabilities arising from the transaction including severance and transaction
costs. The liabilities included accruals related to a contingency resulting from
the disposition. During 2002, the contingency was resolved and the accrued
liabilities related to the contingency were removed from the balance sheet
resulting in an additional gain on disposal of discontinued operations of
$427,000. During the quarter ended June 30, 2003, the Company determined that an
additional expense of $137,000 was required due to EEPD-related third party
contractual commitments, primarily for the years 1999 and 2000.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by Insightful 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. The balance sheet at
December 31, 2002 has been derived from audited financial statements at that
date, but does not include all disclosures required by generally accepted
accounting principles for complete financial statements. These condensed
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto for the year ended December 31, 2002
included in the Insightful's Annual Report on Form 10-K. The accompanying
consolidated financial statements reflect all adjustments (consisting solely of
normal, recurring adjustments), which, in the opinion of management, are
necessary for a fair presentation of results for the interim periods presented.
The results of operations for the three and nine month periods ended September
30, 2003 are not necessarily indicative of the results to be expected for the
entire fiscal year or future years.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Insightful and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
5
(c) REVENUE RECOGNITION
Insightful offers a variety of scalable data analysis software solutions,
maintenance contracts, training and consulting services to its customers.
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 perpetual software license agreements and is generally
recognized upon delivery of the software, after execution of a non-cancellable
signed license agreement or receipt of a definitive purchase order (when
appropriate), if collection of the resulting receivable is probable, the fee is
fixed or determinable, 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 non-essential elements is deferred and
subsequently recognized when earned. Insightful has established vendor-specific
objective evidence ("VSOE") of fair value for professional services, training
and support services. In addition, we have established VSOE for maintenance
related to most of our products. VSOE is based on the price charged when an
element is sold separately or, in case of an element not yet sold separately,
the price established by authorized management, if it is probable that the
price, once established, will not change before market introduction. Standard
terms for license agreements typically call for payment within 30 to 45 days.
Probability of collection is based upon the assessment of the customer's
financial condition through 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 under an unconditional 30 day return policy based on historical
experience
Maintenance revenue is recognized ratably over the term of the related
contracts which generally span one year or less. We require our customers to
purchase initial one-year maintenance contracts on most of our products.
Maintenance services, which include unspecified product upgrades on a
when-and-if available basis, are priced based on a percentage of the current
list price of the licensed software products. Maintenance renewals are optional.
Consulting revenues include deployment assistance, project management,
integration with existing customer applications and related services performed
on a time-and-materials basis under separate service arrangements. Revenues from
consulting and training services are generally recognized as services are
performed. Standard terms for renewal of customer support contracts, consulting
services and training call for payment within 30 to 45 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 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. Revenue from fixed-term
licenses sold with maintenance is recognized on a straight-line basis over the
license term if all other aspects of SOP 97-2 are satisfied. If a software
product is sold with maintenance where VSOE for the maintenance element has not
been established, all revenue under the arrangement is recognized over the
maintenance term provided all other revenue recognition criteria have been met.
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. Specifically, amortization of deferred stock-based
compensation expense, which was disclosed as a separate line item in the
statements of operations included in the third quarter 2002 Form 10-Q, was
reclassified to the appropriate functional expense line items in the
accompanying consolidated statements of operations.
(3) GOODWILL AND OTHER INTANGIBLES
Goodwill is not amortized to earnings but is 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 the relevant reporting unit below its carrying
value. Insightful determines fair value using the market value method or the
present value method of measurement of future cash flows. In assessing the
recoverability of goodwill and other intangible assets, we must make assumptions
regarding estimated future cash flows and other factors to determine the fair
value of the respective assets. Our future cash flows are based on current
6
volume and pricing levels with anticipated rates of growth and change. Separable
intangible assets that do not have indefinite lives are amortized over their
useful lives.
We will continue to evaluate goodwill and other intangibles for impairment
and, should an impairment be indicated, the corresponding charge will be taken
in that period.
(4) FINANCING ARRANGEMENTS
In March 2003, we renewed a $3.5 million working capital revolving line of
credit and security agreement with Silicon Valley Bank (SVB) secured by our
accounts receivable. This facility allows us to borrow up to the lesser of (a)
75% of its eligible accounts receivable (advances against US Government accounts
will be permitted up to 20% of the amount outstanding under the line of credit)
or (b) $3.5 million, and bears interest at the prime rate, which was 4.0% as of
September 30, 2003, plus 1%. At September 30, 2003, no amounts had been borrowed
and $988,000 was available for future borrowings under the line of credit
facility.
In March 2003, we also renewed an equipment term loan and security
agreement with SVB, which provides an additional $750,000 to finance the
purchase of equipment and fixtures. This facility allows us to take advances on
the cost of eligible equipment less than 90 days old and such advances are
secured by the underlying equipment. The advances may be made in two tranches of
$375,000 each, the first of which expired September 27, 2003 and the second
tranche expires on March 27, 2004. These term loan advances bear interest at the
prime rate, which was 4.0% as of September 30, 2003, 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. In 2002,
borrowings under this equipment term loan totaled $450,000 and the outstanding
balance at September 30, 2003 was $322,000. At September 30, 2003, $375,000 was
available under this facility for future equipment borrowings.
These credit facilities contain covenants that restrict the amount of net
loss we can incur in any quarter. The Company was out of compliance with these
covenants as of September 30, 2003 due to the restructuring charges incurred in
the third quarter of 2003. On October 23, 2003 Silicon Valley Bank waived the
existing default under the loan agreement. These credit facilities may be
utilized to finance future capital investments, including technology necessary
to support our new product lines and expand Insightful's liquid resources and
ability to maintain an adequate balance of cash-on-hand.
The following are repayments associated with our equipment term loan:
THREE MONTHS ENDING YEAR ENDING DECEMBER 31,
DECEMBER 31, ---------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL
------------------- ----------- ---------- --------- --------- ---------- ----------
Equipment term loan $33,000$ 129,000 $129,000 $31,000 - - $322,000
(5) NET LOSS PER SHARE
Basic net income (loss) per share is calculated using the weighted-average
number of shares of common stock outstanding. Stock issued and subject to
restrictions is 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.
(6) OTHER COMPREHENSIVE 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 loss, which the
Company currently reports, is foreign currency translation adjustments. Total
comprehensive loss is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ --------------------------
2003 2002 2003 2002
---------- ------------ ------------ ------------
Net loss . . . . . . . . . . . . . . . . . . $(990,000) $(1,045,000) $(1,782,000) $(1,954,000)
---------- ------------ ------------ ------------
Change in cumulative translation adjustment. 77,000 (9,000) 18,000 (21,000)
---------- ------------ ------------ ------------
Comprehensive loss . . . . . . . . . . . . . $(913,000) $(1,054,000) $(1,764,000) $(1,975,000)
========== ============ ============ ============
7
(7) SEGMENT REPORTING
SFAS No. 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. In the third quarter of 2003, management defined the Company's
segments to correspond with the way the Company is now organized and managed.
Accordingly, continuing business segment information includes the segments of
Domestic Data Analysis, International Data Analysis and Text Analysis. Segment
information for the nine months ended September 30, 2002 and 2003 and for the
three months ended September 30, 2002 has been presented in accordance with the
current segment definitions. The Company measures segment performance based on
their income or loss from operations. Assets are not allocated to segments for
internal reporting presentations.
THREE MONTHS ENDED NINE MONTHS ENDED
DOMESTIC DATA ANALYSIS SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
2003 2002 2003 2002
------------ ----------- ----------- ------------
Revenues . . . . . . . . . $ 2,701,000 $2,498,000 $8,318,000 $ 8,113,000
------------ ----------- ----------- ------------
Loss from
operations . . . . . . . (662,000) (837,000) (767,000) (1,489,000)
------------ ----------- ----------- ------------
THREE MONTHS ENDED NINE MONTHS ENDED
INTERNATIONAL DATA ANALYSIS SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
2003 2002 2003 2002
------------ ----------- ----------- ------------
Revenues. . . . . . . . . . $1,186,0000 $1,372,000 $3,795,000 $ 4,030,000
------------ ----------- ----------- ------------
Loss from
Operations. . . . . . . . (307,000) (386,000) (483,000) (875,000)
------------ ----------- ----------- ------------
THREE MONTHS ENDED NINE MONTHS ENDED
TEXT ANALYSIS SEPTEMBER 30, SEPTEMBER 30,
------------------------- ------------------------
2003 2002 2003 2002
------------ ----------- ----------- ------------
Revenues . . . . . . . . . $ 137,000 $ -- $ 521,000 $ --
------------ ----------- ----------- ------------
Loss from
operations . . . . . . . (66,000) (114,000) (369,000) (256,000)
------------ ----------- ----------- ------------
Non-operating income and expenses are not tracked by segment.
(8) STOCK-BASED COMPENSATION
A reconciliation of net loss as reported to pro-forma net loss that
includes stock-based employee compensation cost as if the fair value method had
been applied to all option awards is as follows:
8
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------- -------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- ---------------
Net loss. . . . . . . . . . . . . . . . . . . . . . . $ (990,000) $ (1,045,000) $ (1,782,000) $ (1,954,000)
-------------- -------------- -------------- ---------------
Add: Employee stock-based compensation, as
reported. . . . . . . . . . . . . . . . . . . . . 19,000 96,000 (105,000) 184,000
Deduct: Employee stock-based compensation determined
under SFAS 123 . . . . . . . . . . . . . . . . . . (337,000) (281,000) (953,000) (1,131,000)
-------------- -------------- -------------- ---------------
Pro forma net loss $ (1,308,000) $ (1,230,000) $ (2,840,000) $ (2,901,000)
============== ============== ============== ===============
Basic and diluted net loss per share as reported. . . $ (0.09) $ (0.09) (0.16) (0.17)
Pro forma basic and diluted net loss per share. . . . $ (0.11) $ (0.11) (0.25) (0.26)
In the first quarter of 2003, $139,000 in deferred stock compensation
expense previously recognized was reversed as a result of the return of
restricted shares issued in the acquisition of Predict AG.
(9) COMMITMENTS AND CONTINGENCIES
In December 2002, Wajih Alaiyan, a former Insightful employee, filed a
complaint against the Company in the Superior Court for King County, Washington.
Mr. Alaiyan alleges that his employment was wrongfully terminated, and he seeks
an unspecified amount of damages. The Company denies Mr. Alaiyan's claim and
will vigorously defend the lawsuit. An evaluation of the likelihood of an
adverse outcome cannot be expressed with sufficient certainty at this time. An
unfavorable outcome could have a materially adverse effect on our financial
position, results of operations, and cash flows.
(10) BUSINESS RESTRUCTURING
During the second and third quarter of 2003, the Company reduced its
headcount by 18%, or 23 employees. The reduction included employees from all
functional areas of the Company, 35% of which was in Europe. In addition, as
part of this restructuring, the Company combined its German operations with its
Swiss subsidiary headquartered in Basel, Switzerland. The Company evaluated the
goodwill acquired in the acquisition of its German business for impairment and
determined no impairment occurred in the third quarter. On September 30, 2003,
Shawn Javid, President and CEO, resigned from the company. The restructuring
charges, including charges associated with the resignation of Shawn Javid,
totaled $911,000 and consisted primarily of employee severance and termination
payments and lease termination costs, as well as a $176,000 non-cash
compensation charge related to a modification of stock options upon termination
of Mr. Javid. As of September 30, 2003 $426,000 in termination benefits remained
to be paid. All termination benefits will be paid by March 31, 2005. No
additional amounts are expected to be incurred. Restructuring-related charges at
September 30, 2003 consisted of the following:
Cost Category Costs Incurred and Costs Paid or Charged Off Balance at
Charged to Expense (Quarter Ended September 30,
(Quarter Ended September 30, 2003) 2003
September 30, 2003)
- --------------------------------------------------------------------------------------------------
Employee Severance Costs . . . . $ 255,000 $ 201,000 $ 54,000
Lease Termination Costs. . . . . 108,000 108,000 0
Costs Related to Resignation of
Shawn Javid - Cash . . . . . . . 372,000 0 372,000
Costs Related to Resignation of
Shawn Javid - Stock-Based. . . . 176,000 176,000 0
-------------------- -------------------------- --------------
$ 911,000 $ 485,000 $ 426,000
9
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 expected future sales trends for our products;
- 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.
DESCRIPTION OF THE COMPANY
We provide enterprises with scalable data analysis solutions designed to
drive better decisions faster by revealing patterns, trends and relationships.
We are a leading supplier of software and services for the statistical analysis,
data mining and knowledge access industry segments enabling customers to gain
intelligence from numerical data and text.
Our products include InFact(R), Insightful Miner, S-PLUS(R), StatServer(R),
and S-PLUS Analytic Server(R). Our consulting services provide specialized
expertise and proven processes for the design, development and deployment of
analytical solutions.
We have 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, we have North American offices in New
York and North Carolina. Our international offices are located in France,
Switzerland, and the United Kingdom, with distributors around the world.
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 perpetual software license agreements and is generally
10
recognized upon delivery 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
of fair value for professional services, training, and most 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 maintenance is the only remaining 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 to 45 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 generally recognized as services are performed. Standard terms for
renewal of customer support contracts, consulting services and training call for
payment within 30 to 45 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.
Sales Returns
We provide an estimated reserve for return rights at the time of sale. We
offer our customers a 30-day return policy on all of our products. Refunds are
provided to customers upon return to us of the complete product package,
including all original materials, CD-ROM or other media. Our provision for sales
returns is estimated based on historical returns experience and our judgment of
future return risk.
Bad Debts
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
At least annually we evaluate goodwill arising from 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.
Impairment losses will be charged to earnings in the period in which they
are identified. We will continue to evaluate goodwill for impairment and, should
an impairment be indicated, the corresponding charge will be taken in that
period. Separable intangible assets that do not have indefinite lives are
amortized over their useful lives.
11
Contingencies
We are engaged in legal actions arising in the ordinary course of business.
We are required to assess the likelihood of any adverse judgments or outcomes to
these matters as well as potential ranges of possible losses. A determination of
the amount of reserves required, if any, for these contingencies are made after
careful analysis of each individual matter. The required reserves if any, may
change in the future due to new developments in each matter or changes in
approach, such as a change in settlement strategy for a particular matter.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND
2002
REVENUES
Total revenues, which consist of software licenses, maintenance and service
revenue, were $4,024,000 for the three months ended September 30, 2003 and
$3,870,000 for the three months ended September 30, 2002, representing an
increase of $154,000 or 4%. Total revenues were $12,634,000 for the nine months
ended September 30, 2003 and $12,143,000 for the nine months ended September 30,
2002, representing an increase of $491,000 or 4%.
Software license revenues, consisting of software licenses and
subscriptions, accounted for 46% of total revenues for the three months ended
September 30, 2003 and 39% of total revenues for the three months ended
September 30, 2002. Software license revenues increased 22% from $1,512,000 for
the three months ended September 30, 2002 to $1,842,000 for the three months
ended September 30, 2003. Software license revenues increased 28% from
$4,308,000 for the nine months ended September 30, 2002 to $5,524,000 for the
nine months ended September 30, 2003. These increases are primarily due to an
increase in the number of large license transactions, growth in our customer
base and revenues from our InFact product, for which we first recognized revenue
in the fourth quarter of 2002. We expect software license revenues to increase
in the fourth quarter.
Software maintenance revenues accounted for 40% of total revenues for the
three months ended September 30, 2003 and 2002. Software maintenance revenue
increased 4% from $1,563,000 for the three months ended September 30, 2002 to
$1,627,000 for the three months ended September 30, 2003. Software maintenance
revenues increased 14% from $4,380,000 for the nine months ended September 30,
2002 to $5,010,000 for the nine months ended September 30, 2003. These increases
are primarily due to an increase in the size of our customer base. We expect
maintenance revenues to decrease slightly in the fourth quarter.
Professional services revenues generated from consulting and training
activities accounted for 14% of total revenues for the three months ended
September 30, 2003 and 21% of total revenues for the three months ended
September 30, 2002. Professional services revenues decreased 30% from $795,000
for the three months ended September 30, 2002 to $555,000 for the three months
ended September 30, 2003. Professional services revenue decreased 39% from
$3,455,000 for the nine months ended September 30, 2002 to $2,100,000 for the
nine months ended September 30, 2003. These decreases are primarily due to fewer
consulting projects in North America, as well as not completing engagements that
had formal acceptance criteria required in order to recognize the revenue. We
expect professional services revenues to begin to increase in the fourth quarter
with the introduction of more advanced training courses and the strengthening of
our worldwide services business. In addition, we expect fourth quarter
professional services service revenues to increase due to the completion of
projects with formal acceptance criteria.
Revenues from international operations decreased 14% from $1,372,000 for
the three months ended September 30, 2002 to $1,186,000 for the three months
ended September 30, 2003. Revenues from international operations decreased 6%
from $4,030,000 for the nine months ended September 30, 2002 to $3,795,000 for
the nine months ended September 30, 2003. This decrease resulted primarily from
reduced professional services revenues from our Swiss operations.
COST OF REVENUES
Total cost of revenues decreased 18% from $1,254,000 for the three months
ended September 30, 2002 to $1,025,000 for the three months ended September 30,
2003. Total cost of revenues decreased 17% from $4,229,000 for the nine months
ended September 30, 2002 to $3,522,000 for the nine months ended September 30,
2003. The decrease in total cost of revenues for these periods resulted
primarily from a decrease in professional service costs offset somewhat by
increases in the cost of software-related revenue.
The cost of software-related revenue, which consists of royalties for
third-party software, product media, product duplication, manuals and
maintenance costs, increased as a percentage of total software-related revenue
from 13% for the three months ended September 30, 2002 to 15% for the three
months ended September 30, 2003. Software-related costs increased as a
percentage of software-related revenue from 12% for the nine months ended
September 30, 2002 to 15% for the nine months ended September 30, 2003. These
increases were primarily the result of an increase in revenues from products on
which the Company is obligated to pay royalties. 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 in relation
to changes in the overall demand for our license products.
12
The cost of professional services consist primarily of salaries and other
operating costs of employees who provide consulting services and product
training. The cost of professional services decreased 41% from $869,000 for the
three months ended September 30, 2002 to $511,000 for the three months ended
September 30, 2003. The cost of professional services decreased 38% from
$3,187,000 for the nine months ended September 30, 2002 to $1,975,000 for the
nine months ended September 30, 2003. These decreases resulted primarily from
decreases in professional services headcount in response to a reduction in
demand for these services.
OPERATING EXPENSES
Sales and marketing expenses consist primarily of salaries, travel,
facilities costs for sales and marketing personnel, promotional activities, and
costs of advertising and trade shows. Sales and marketing expenses remained
unchanged at approximately $1,700,000 for the three months ended September
30,2002 and 2003. Sales and marketing expenses increased 3% from $5,150,000 for
the nine months ended September 30, 2002 to $5,286,000 for the nine months ended
September 30, 2003. This year-to-date increase primarily reflected increased
sales force headcount hired to help drive an increase in sales volume. We expect
quarterly sales and marketing expenses to remain at current levels for the
remainder of 2003. As a result, we expect sales and marketing expenses to
decrease as a percentage of software revenues if demand for our products
improves.
Net research and development expenses consist primarily of salaries and
related benefits, equipment for software developers, facility costs, and
payments to outside contractors, less funded research. Net research and
development expenses decreased 35% from $718,000 for the three months ended
September 30, 2002 to $466,000 for the three months ended September 30, 2003,
and decreased as a percentage of total revenues from 19% to 12% over the same
period. Net research and development expenses decreased 25% from $2,438,000 for
the nine months ended September 30, 2002 to $1,831,000 for the nine months ended
September 30, 2003. Gross research and development expenses decreased 16% from
$1,963,000 for three months ended September 30, 2002 to $1,646,000 for the three
months ended September 30, 2003. Gross research and development expenses
decreased 18% from $6,191,000 for the nine months ended September 30, 2002 to
$5,095,000 for the nine months ended September 30, 2003. These decreases were
primarily attributable to the workforce reductions implemented in July 2002 and
July 2003. Funded research, which consists primarily of government grants for
research projects, decreased 5% from $1,245,000 for the three months ended
September 30, 2002 to $1,180,000 for the three months ended September 30, 2003.
Funded research decreased 13% from $3,753,000 for the nine months ended
September 30, 2002 to $3,264,000 for the nine months ended September 30, 2003.
The decrease in funded research is primarily due to a more focused approach to
align research funding with our core products. We expect our gross research and
development expenses and our funded research to continue to fluctuate based on
contract awards.
General and administrative expenses, which consist primarily of salaries
and related costs associated with finance, accounting, investor relations,
administration and facilities activities, decreased 7% from $991,000 for the
three months ended September 30, 2002 to $922,000 for the three months ended
September 30, 2003. This decrease was primarily attributable to the workforce
reductions implemented in July 2002 and July 2003. General and administrative
expenses increased 9% from $2,301,000 for the nine months ended September 30,
2002 to $2,515,000 for the nine months ended September 30, 2003. The increase is
primarily due to increases in insurance, legal and audit expenses as well as
general and administrative expenses associated with the increasing costs of
being a public company. We expect future increases in general and administrative
expenses relating to continuing increases in insurance, legal, compliance and
audit expenses.
Restructuring-related charges increased from $501,000 for the three and
nine months ended September 30, 2002 to $911,000 for the corresponding periods
in 2003. The Company reduced its workforce by approximately 18% in both July
2002 and July 2003. The increase in restructuring oriented charges was primarily
attributable to the resignation of Mr. Javid as President and CEO of the Company
on September 30, 2003, resulting in $372,000 in employee severance and
termination payments and a $176,000 non-cash compensation charge related to a
modification of stock options upon termination of Mr. Javid.
INTEREST AND OTHER INCOME
Total interest and other income increased from $23,000 for the three months
ended September 30, 2002 to $66,000 for the three months ended September 30,
2003. Total interest and other income decreased 9% from $106,000 for the nine
months ended September 30, 2002 to $96,000 for the nine months ended September
30, 2003. The increase for the three months ended September 30, 2003 was
primarily the result of foreign currency activity. The decrease in interest and
other income for the nine months ended September 30, 2003 was primarily due to a
decrease in the prevailing interest rates partially offset by the foreign
currency transaction gain.
INCOME TAX PROVISION
The tax provision increased from a credit of $182,000 for the three months
ended September 30, 2002 to an expense of $16,000 for the three months ended
September 30, 2003. The tax provision increased from a credit of $152,000 for
the nine months ended September 30, 2002 to an expense of $107,000 for the nine
months ended September 30, 2003. This increase in the tax provision was
primarily due to income tax obligations generated in the Company's international
operations as compared to a refund receivable for the Company's international
operations for the nine months ended September 30, 2002.
13
LOSS FROM CONTINUING OPERATIONS
The loss from continuing operations decreased 14% from $1,145,000 for the
three months ended September 30, 2002 to $990,000 for the three months ended
September 30, 2003. Loss from continuing operations decreased 31% from
$2,381,000 for the nine months ended September 30, 2002 to $1,645,000 for the
nine months ended September 30, 2003. The decrease in the third quarter
operating loss and the year-to-date net loss from continuing operations reflects
higher revenues and gross profit in combination with unchanged operating
expenses compared to the prior year periods.
DISCONTINUED OPERATIONS
On January 23, 2001 we sold the assets of EEPD for cash proceeds of
$7,000,000. As a result of this transaction, we recorded the operations of EEPD
as discontinued operations. We recorded a net gain of $3,849,000 on the sale in
2001 after taking into account net assets transferred and certain liabilities
arising from the transaction including severance and transaction costs. The
liabilities arising from the sale included accruals related to certain
contingencies resulting from the disposition. In 2002, these contingencies were
favorably resolved resulting in a net gain of $427,000 recorded as a gain on
disposal of discontinued operations for the nine month period ended September
30, 2002. During the nine month period ended September 30, 2003 we recorded a
loss from discontinued operations of $137,000 related to third party contractual
commitments of EEPD. The amounts were not material to the periods in which they
applied, primarily 1999 and 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased from $6.8 million at December 31, 2002
to $5.8 million at September 30, 2003. Operating activities resulted in net cash
outflows of $224,000 for the nine months ended September 30, 2002 as compared to
$653,000 for the nine months ended September 30, 2003. Operating cash outflows
for the nine months ended September 30, 2002 were the result of a loss from
continuing operations of $2,381,000, partially offset by non-cash expenses of
$1,082,000 and by the receipt of cash and related deferral of the Company's
first InFact sale. Operating cash outflows for the nine months ended September
30, 2003 were the result of a loss from continuing operations of $1,645,000 and
increases in working capital, partially offset by non-cash expenses of
$1,166,000.
Investing activities resulted in net cash outflows of $976,000 for the nine
months ended September 30, 2002 and $197,000 for the nine months ended September
30, 2003. Investing cash outflows for both periods were primarily the result of
purchases of property and equipment. Investing activities for the nine months
ended September 30, 2002 included $176,000 for acquisitions and related
transaction expenses.
Financing activities resulted in net cash inflows of $1,237,000 for the
nine months ended September 30, 2002 and a net cash outflow of $71,000 for the
nine months ended September 30, 2003. The cash inflows for the nine months ended
September 30, 2002 resulted from a payment received from a director on
subscriptions receivable, proceeds from stock option exercises and stock
purchases under an employee stock purchase plan, and proceeds from equipment
financings. The cash outflows for the nine months ended September 30, 2003
resulted primarily from principal payments on long-term debt.
In March 2003, we renewed a $3.5 million working capital revolving line of
credit and security agreement with Silicon Valley Bank (SVB) secured by our
accounts receivable. This facility allows us to borrow up to the lesser of (a)
75% of our eligible accounts receivable (advances against US Government accounts
will be permitted up to 20% of the amount outstanding under the line of credit)
or (b) $3.5 million and bears interest at the prime rate, which was 4.0% as of
September 30, 2003, plus 1%. At September 30, 2003, no amounts had been borrowed
and $988,000 was available for future borrowings under the line of credit
facility. Due to the size of the operating loss in the third quarter 2003, the
Company was not in compliance with the agreement at September 30, 2003, but has
subsequently received a waiver of the covenant violation.
In March 2003, we also renewed an equipment term loan and security
agreement with SVB, which provides an additional $750,000 to finance the
purchase of equipment and fixtures. This facility allows us to take advances on
the cost of eligible equipment less than 90 days old and is secured by the
underlying equipment. The advances may be made in two tranches of $375,000 each,
the first of which expired September 27, 2003 and the second of which expires
March 27, 2004. These term loan advances bear interest at the prime rate, which
was 4.0% as of September 30, 2003, 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. In 2002, borrowings
under this equipment term loan totaled $450,000 and the outstanding balance at
September 30, 2003 was $322,000. At September 30, 2003 $375,000 was available
under this facility for future equipment borrowings.
14
These credit facilities contain covenants that restrict the amount of net
loss we can incur in any quarter. The Company was out of compliance with these
covenants as of September 30, 2003 due to the restructuring charges incurred in
the third quarter of 2003. On October 23, 2003 Silicon Valley Bank waived the
existing default under the loan agreement. These credit facilities may be
utilized to finance future capital investments, including technology necessary
to support our new product lines and expand Insightful's liquid resources and
ability to maintain an adequate balance of cash-on-hand.
At September 30, 2003 our principal unused sources of liquidity consisted
of cash and cash equivalents of $5.8 million. Our liquidity needs are
principally for financing of accounts receivable, capital assets, strategic
investments, product development, and flexibility in a dynamic and competitive
operating environment.
The following are our contractual commitments associated with our operating and
equipment financings:
THREE MONTHS ENDING
DECEMBER 31, YEAR ENDING DECEMBER 31,
--------------------------------------------------------
2003 2004 2005 2006 2007 THEREAFTER TOTAL
---------------- -------- -------- -------- -------- ----------- ----------
Commitments:
Equipment term loan . . . $ 33,000 $129,000 $129,000 $ 31,000 $ - $ - $ 322,000
Operating leases 333,000 763,000 163,000 128,000 107,000 196,000 1,690,000
-------------- -------- -------- -------- -------- ----------- ----------
Total commitments. $ 366,000 $892,000 $292,000 $159,000 $107,000 $ 196,000 $2,012,000
============== ======== ======== ======== ======== =========== ==========
As of September 30, 2003 we had net operating loss carryforwards of
approximately $22 million and research and development credit carryforwards of
approximately $2 million. The net operating loss and credit carryforwards will
expire at various dates beginning 2004 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 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. 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 may collect in
the future to drive higher return on investment. Overall, as recognized by
industry analysts, this implies long-term potential for data analysis companies
such as Insightful.
Throughout our history, we have, to varying degrees, tailored our data
analysis solutions to the needs of the following industries: securities and
banking, life sciences, manufacturing, telecommunications, environmental, and
defense/intelligence. We also serve the academic community, though our objective
in this community is not to drive short-term increased revenues but rather to
create a foundation for future commercial sales. The present and future outlook
for spending on software solutions in the industries we serve varies based on
macro- and micro-economic factors. Competition for the reduced software budgets
which organizations have available within these industries has been fierce. In
addition, we are seeing more of our customers explore and adopt open-source data
analysis technologies, instead of purchasing commercial software products.
15
To broaden the type of data analysis problems that our products can handle,
we undertook initiatives to expand our portfolio of products beyond statistics
to encompass data mining and knowledge access. As a result, in the first half of
2002, we augmented S-PLUS(R) with Insightful Miner and InFact(R), to address the
emerging need to analyze structured (numerical) and unstructured (linguistic and
textual) data sets. Although we believe that sales for these products have been
encouraging, these solutions have not yet achieved market acceptance.
We expect to continue to invest in both our existing and new products, as
well as our sales and marketing efforts, but at slower pace than historical
levels. Looking forward, we expect that our professional services revenue will
begin to increase. In addition, we anticipate growth for our software license
revenues, which will be predominantly driven by increased resources and
efficiency of our sales and marketing efforts worldwide.
16
IMPORTANT FACTORS THAT MAY AFFECT OUR BUSINESS, OUR OPERATING RESULTS AND OUR
STOCK PRICE
In addition to the other information contained in this quarterly report,
you should carefully read and consider the following risk factors. If any of
these risks actually occur, our business, financial condition or operating
results could be adversely affected and the trading price of our common stock
could decline.
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:
- our primary reliance on one product family;
- our ability to penetrate new markets;
- our ability to develop, introduce and market new products on a timely
basis;
- market acceptance of our products;
- our ability to compete in the highly competitive statistics, data
mining and knowledge access markets;
- our ability to obtain government research contracts;
- our ability to expand our sales and support infrastructure;
- our ability to maintain our relationships with key partners;
- our ability to successfully expand our international operations;
- loss of third-party licenses;
- our inability to protect our intellectual property rights;
- the loss of any of our key employees or management team members; and
- general economic conditions, which may affect our customers'
purchasing decisions;
As a result of these factors, we cannot predict our revenues and expenses
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.
17
IF POTENTIAL CUSTOMERS DO NOT CONTINUE TO PURCHASE THE S-PLUS PRODUCT
FAMILY, OUR REVENUES AND OPERATING RESULTS WILL BE ADVERSELY IMPACTED.
Since the divestiture of our Engineering and Educational Products Division
in January 2001we 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. 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 and operating results
will be adversely affected.
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 sophisticated statistics user 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 REVENUES AND OPERATING RESULTS WILL BE
ADVERSELY AFFECTED.
We cannot predict the degree to which our newest products, InFact and
Insightful Miner, 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 many times higher than our core
statistics products. We cannot forecast our customers' ability to make such a
significant capital expenditure in this economic climate. If InFact and
Insightful Miner do not achieve market acceptance in the timeframe we expect, we
may decide to discontinue further investment in them. If we are unsuccessful in
selling InFact and Insightful Miner, the growth of our business will be limited
and our revenues and operating results will be adversely affected.
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.
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, an open-source 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 and Iphrase, many of which are much larger than we are.
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.
18
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,
and we may decide to cancel or reassign certain ongoing projects that are not
aligned with our core business needs. 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 annual 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. Reductions
in government expenditures and termination or renegotiation of government-funded
programs or contracts could adversely 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, or OEM, partners, system integrators and consultants. We
have experienced and continue to experience difficulty in recruiting qualified
direct sales personnel and in establishing third-party relationships with VARs,
distributors, OEM partners and systems integrators and consultants. Our efforts
to restructure or expand our sales force may not prove successful and our
ability to retain top sales personnel may be affected, which could reduce our
sales or limit our sales growth. Even if we successfully expand our sales force
and other distribution channels, the expansion may not result in expected
revenue growth.
IF WE ARE UNABLE TO DEVELOP AND MAINTAIN EFFECTIVE LONG-TERM RELATIONSHIPS
WITH OUR KEY PARTNERS, OR IF OUR KEY PARTNERS FAIL TO PERFORM, OUR ABILITY
TO SELL OUR SOLUTION WILL BE LIMITED.
We rely on our existing relationships with a number of key partners,
including management consulting firms, system integrators, VARs, distributors
and third-party technology vendors, that are important to worldwide sales and
marketing of our solutions. We expect an increasing percentage of our revenues
to be derived from sales that arise out of our relationships with these key
partners. In addition, to be successful and to more effectively sell our
products to larger customers, we must develop successful new relationships with
other key partners. These key partners often provide enterprise software,
consulting, implementation and customer support services, and endorse our
solution during the competitive evaluation stage of the sales cycle. Although we
seek to maintain relationships with our key partners, and to develop
relationships with new partners, many of these existing and potential key
partners have similar, and often more established, relationships with our
competitors. These existing and potential partners, many of which have
significantly greater resources than we have, may in the future market software
products that compete with our solution or reduce or discontinue their
relationships with us or their support of our solution.
OUR SALES CYCLE IS VARIABLE, AND SALES DELAYS COULD CAUSE OUR OPERATING
RESULTS TO FLUCTUATE, WHICH COULD CAUSE A DECLINE IN OUR STOCK PRICE.
An enterprise's decision to purchase statistics, data mining 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.
19
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. A sudden termination of this license
would significantly harm our operations because Lucent Technologies is the sole
licensor of the "S" programming language.
The third-party software currently offered in conjunction with our solution
may become obsolete or incompatible with future versions of our products.
Further, numerous individual and institutional licensors have contributed
software code to S-PLUS in exchange for little or no consideration, and some of
these third parties may choose to revise or revoke their licensing terms with
us. A significant interruption in the supply of this technology could delay our
sales until we can find, license and integrate equivalent technology. This could
take a significant amount of time, perhaps several months, which would cause our
operating results to fall below the expectations of securities analysts or
investors and result in a decrease in our stock price
INTEGRATION OF PAST OR FUTURE ACQUISITIONS MAY BE DIFFICULT AND DISRUPTIVE.
In the past two years we have completed several acquisitions of businesses
with complementary technologies or service offerings. In addition to our
acquisition of Predict AG in Switzerland, we acquired the statistics businesses
of Waratah Corporation in North Carolina, Graphische Systeme GmbH in Germany and
Sigma-Plus SA in France. We have since closed the operation in Germany and have
lost certain key personnel acquired with Predict AG in Switzerland. 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;
20
- 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 have posted net losses for each fiscal quarter since the
fourth quarter of 2001. As of September 30, 2003, we had an accumulated deficit
of nearly $31 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. In addition, if we are unable to grow our revenues,
we may be forced to discontinue certain research and/or development projects,
which could limit our future product development opportunities.
CONTINUED DECREASES IN SERVICE REVENUES COULD DECREASE OUR TOTAL REVENUES
OR DECREASE OUR GROSS MARGINS, WHICH COULD CAUSE A DECREASE IN OUR STOCK
PRICE.
In the first nine months of 2003, our services revenues decreased 39% from
the prior nine month period. Consulting and training (service) revenues
represented 14% of our total revenues for the quarter ended September 30, 2003,
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 as occurred in the
quarter ended September 30, 2003 over the quarter ended June 30, 2003.
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 EEPD 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.
21
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 23 employees
in July 2003 in addition to reducing our work force 31 employees in July 2002.
Further reductions could occur if we are unable to grow our revenues. 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. Past or future
reductions in Research and Development could adversely affect our ability to
innovate and compete. 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 or cease operations.
We believe that our existing cash and cash equivalents and available bank
borrowings will be sufficient to meet the capital requirements of our core
business 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. If our
new products require substantial investment in order to make them commercially
viable, we may need to seek additional funding or we may be forced to
discontinue further investment in them. 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 August
2002, we renegotiated these covenants to exclude the restructuring charge we
expected to incur as a result of the July 2002 reduction in our workforce. In
January 2003 we again negotiated a waiver of the covenants to exclude the
impairment charge we expected to incur with respect to our acquisition of
Predict AG in 2001. In October 2003 we negotiated a waiver of the covenants to
exclude the restructuring charge incurred in the third quarter of 2003. 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 us.
WORLD EVENTS AND 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. As a result of the economic downturn, we have also experienced and may
continue to experience difficulties in collecting outstanding receivables from
our customers.
PRIVACY AND SECURITY CONCERNS MAY LIMIT THE EFFECTIVENESS OF AND REDUCE THE
DEMAND FOR OUR SOLUTION.
The effectiveness of our solution relies on the storage and use of data
collected from various sources, including personal information. The collection
and use of such data by our customers for customer profiling may raise privacy
and security concerns. Our customers generally have implemented security
measures to protect customer data from disclosure or interception by third
parties. However, the security measures may not be effective against all
potential security threats. If a well-publicized breach of customer data
security were to occur, our solution may be perceived as less desirable, which
could limit our revenue growth.
In addition, due to privacy concerns, some Internet commentators, consumer
advocates and governmental or legislative bodies have suggested legislation to
limit the use of customer profiling technologies. The European Union and some
European countries have already adopted some restrictions on the use of customer
profiling data. If major countries or regions adopt legislation or other
restrictions on the use of customer profiling data, our solution would be less
useful to customers, and our sales could decrease.
IF WE DO NOT RETAIN OUR KEY EMPLOYEES OR MANAGEMENT TEAM, AND INTEGRATE OUR
NEW PRESIDENT AND CEO, 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
senior managers and to retain our existing executive officers. 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 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. On September 30, 2003, Shawn Javid, President
and CEO, resigned from the Company and we named Jeffrey Coombs to succeed Mr.
Javid as President and interim CEO. To be fully integrated into our company, Mr.
Coombs must spend a significant amount of time learning our business model and
management system, in addition to performing his regular duties. Accordingly,
until Mr. Coombs has become familiar with our business model and systems, his
integration may result in some disruption to our ongoing operations.
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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 and commercial acceptance of open source software, 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. Past
or future reductions in our research and/or development personnel may harm our
ability to innovate and compete. 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 us, we license all
software and provide it in executable code only, with contractual restrictions
on copying, disclosure and transferability. As is customary in the industry, we
generally license our products to end-users by use of a 'shrink-wrap' license.
Certain specialized products may utilize a written, signed license agreement
with the customer. The source code for most of our products is protected as a
trade secret and as unpublished copyrighted work. Other parties may breach
confidentiality agreements and other protective contracts we have entered into,
and we may not become aware of, or have adequate remedies in the event of, a
breach. We face additional risk when conducting business in countries that have
poorly developed or inadequately enforced intellectual property laws. While we
are unable to determine the extent to which piracy of our software products
exists, we expect piracy to be a continuing concern, particularly in
international markets and as a result of the growing use of the Internet. In any
event, competitors may independently develop similar or superior technologies or
duplicate the technologies we have developed, which could substantially limit
the value of our intellectual property.
INTELLECTUAL PROPERTY CLAIMS AND LITIGATION COULD SUBJECT US TO SIGNIFICANT
LIABILITY FOR DAMAGES AND RESULT IN INVALIDATION OF OUR PROPRIETARY RIGHTS.
In the future, we may have to resort to litigation to protect our
intellectual property rights, to protect our trade secrets or to determine the
validity and scope of the proprietary rights of others. Any litigation,
regardless of its success, would probably be costly and require significant time
and attention of our key management and technical personnel. Although we have
not been sued for intellectual property infringement, we may face infringement
claims from third parties in the future. The software industry has seen frequent
litigation over intellectual property rights, and we expect that participants in
the industry will be increasingly subject to infringement claims as the number
of products, services and competitors grows and the functionality of products
and services overlaps. Infringement litigation could also force us to
- stop or delay selling, incorporating or using products that
incorporate the challenged intellectual property;
- pay damages;
- enter into licensing or royalty agreements, which may be unavailable
on acceptable terms; or
- redesign products or services that incorporate infringing technology,
which we might not be able to do at an acceptable price, in a timely
fashion or at all.
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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.
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 May 3,
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.
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
We operate in the United Kingdom, France and Switzerland and incur expenses
denominated in those local currencies. However, we do not believe that foreign
exchange rate fluctuations in these markets will significantly affect our
operating expenses or 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.
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ITEM 4. CONTROLS AND PROCEDURES
The term "disclosure controls and procedures" is defined in Rules 13a-15(e)
and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. These
rules refer to the controls and other procedures of a company that are designed
to ensure that the information required to be disclosed by a company in the
reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within required time periods. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed in our Exchange Act reports is
accumulated and communicated to management, including our chief executive
officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Our chief executive officer and our chief financial officer have evaluated
the effectiveness of our disclosure controls and procedures as of the end of the
period covered by this quarterly report, and they have concluded that, as of
that date, our disclosure controls and procedures were effective.
There were no significant changes in our internal controls during the
period covered by this quarterly report that have materially affected, or are
reasonably likely to materially affect, our internal controls.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See notes to consolidated financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Index to Exhibits.
(b) Reports filed on Form 8-K.
On July 2, 2003, we filed a Current Report on Form 8-K regarding our
preliminary financial results for the second quarter ended June 30, 2003.
(c) Reports furnished on Form 8-K
On July 31, 2003, we furnished a Current report on Form 8-K regarding
our financial results for the second quarter ended June 30, 2003
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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 13, 2003
INSIGHTFUL CORPORATION
By: /s/ Jeffrey Coombs
--------------------------------------------
Jeffrey Coombs
President and Chief Executive Officer
(Principal Executive Officer)
November 13, 2003
INSIGHTFUL CORPORATION
By: /s/ Fred Schapelhouman
--------------------------------------------
Fred Schapelhouman
Chief Financial Officer
(Principal Financial and Accounting Officer)
26
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
31.1 Certification of Chief Executive Officer of Insightful Corporation as
Required by Section 302 of Sarbanes-Oxley Act of 2002 (B)
31.2 Certification of Chief Financial Officer of Insightful Corporation as
Required by Section 302 of Sarbanes-Oxley Act of 2002 (B)
32.1 Certification of Financial Statements by Chief Executive Officer
Insightful Corporation as Required by Section 906 of Sarbanes-Oxley
Act of 2002
32.2 Certification of Financial Statements by Chief Financial Officer of
Insightful Corporation as Required by Section 906 of Sarbanes-Oxley
Act of 2002
27