<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INSO CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<TABLE>
<S> <C>
DELAWARE 04-3216243
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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31 ST. JAMES AVENUE
BOSTON, MASSACHUSETTS 02116
(617) 753-6500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
BRUCE G. HILL, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
INSO CORPORATION
31 ST. JAMES AVENUE
BOSTON, MASSACHUSETTS 02116
(617) 753-6500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
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MARK G. BORDEN, ESQ. MARGARET A. BROWN, ESQ.
HALE AND DORR SKADDEN, ARPS, SLATE,
60 STATE STREET MEAGHER & FLOM
BOSTON, MASSACHUSETTS 02109 ONE BEACON STREET
(617) 526-6000 BOSTON, MASSACHUSETTS 02108
(617) 573-4800
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / / ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / / ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
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CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) FEE
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Common Stock, $.01 par value per share...... 1,380,000 shares $53.625 $74,002,500 $25,519
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</TABLE>
(1) Includes an aggregate of 180,000 shares which the Underwriters have the
option to purchase from the Company to cover over-allotments, if any. See
"Underwriting."
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
as amended, and based on the average of the high and low sales prices per
share of the Common Stock on the Nasdaq National Market on September 20,
1996.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(a), MAY
DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
SEPTEMBER 25, 1996
1,200,000 SHARES
[INSO LOGO]
COMMON STOCK
------------------
All of the shares of Common Stock offered hereby are being sold by INSO
Corporation ("INSO" or the "Company"). The Company's Common Stock is traded on
the Nasdaq National Market under the symbol "INSO." On September 24, 1996, the
last reported sale price of the Common Stock on the Nasdaq National Market was
$56.50 per share. See "Price Range of Common Stock and Dividend Policy."
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
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PRICE UNDERWRITING PROCEEDS
TO DISCOUNTS AND TO
PUBLIC COMMISSIONS COMPANY(1)
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Per Share................. $ $ $
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Total(2).................. $ $ $
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</TABLE>
(1) Before deducting estimated expenses of $265,000, all of which will be
payable by the Company.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to 180,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent the option is exercised, the
Underwriters will offer the additional shares at the Price to Public. If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of Alex. Brown & Sons Incorporated, Baltimore, Maryland, on or about
, 1996.
ALEX. BROWN & SONS
INCORPORATED
ADAMS, HARKNESS & HILL, INC.
MONTGOMERY SECURITIES
THE DATE OF THIS PROSPECTUS IS , 1996.
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS (AND SELLING GROUP
MEMBERS) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance with
the Exchange Act files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). The Company has filed a
registration statement on Form S-3 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with the SEC with
respect to the Common Stock offered hereby. This Prospectus, which constitutes
part of the Registration Statement, does not contain all the information set
forth in the Registration Statement and reference is made to the Registration
Statement and the exhibits thereto for further information with respect to the
Company and the Common Stock. Such reports, proxy statements, Registration
Statement and exhibits and other information omitted from this Prospectus can be
inspected and copied at the public reference facilities maintained by the SEC at
450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the SEC's
Regional Offices located at Seven World Trade Center, Suite 1300, New York, N.Y.
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, IL
60661-2511. Copies of such material can be obtained at prescribed rates from the
Public Reference Section of the SEC, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Such reports, proxy statements and other information
concerning the Company can be inspected at the Nasdaq Stock Market at 1735 K
Street, N.W., Washington, D.C. 20006. In addition, the Company is required to
file electronic versions of these documents with the SEC through the SEC's
Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The SEC
maintains a World Wide Web site at http://www.sec.gov that contains reports,
proxy and information statements and other information regarding registrants
that file electronically with the SEC.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1995, the Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1996 and June 30, 1996, the Company's Current Report on Form 8-K dated
July 16, 1996, including the amendment thereto on Form 8-K/A filed with the SEC
on September 17, 1996, and the description of the Common Stock contained in the
Company's Registration Statement on Form 8-A filed by the Company with the SEC
on February 2, 1994, are incorporated by reference in this Prospectus. All
documents filed by the Company pursuant to Sections 13(a), 13(c), 14, or 15(d)
of the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the offering made hereby shall be deemed to be incorporated by
reference into this Prospectus and to be made a part hereof from the respective
dates of filing of such documents. Any statement in any document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of the Registration Statement and this Prospectus to the
extent that a statement contained herein or in any subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of the
Registration Statement or this Prospectus.
Copies of the above documents (other than exhibits to such documents unless
such exhibits are specifically incorporated by reference in such documents) may
be obtained upon written or oral request without charge from the Company, 31 St.
James Avenue, Boston, MA 02116-4101, Attention: Investor Relations, telephone
(617) 753-6500.
CorrecText (R), Information Please(R), IntelliFinder (R), IntelliScope(R),
Outside In(R), Quick View Plus (R), ImageStream(R), CADleaf (R), DynaText (R),
DynaTag (R), and DynaWeb (R)are registered trademarks of INSO Corporation or one
of its wholly owned subsidiaries. International CorrectSpell (TM), International
ProofReader (TM), CorrectEnglish (TM), InWords (TM), Inso Search Wizard (TM),
and CyberSpell (TM)are trademarks of INSO Corporation or one of its wholly owned
subsidiaries. Windows (R) 95, Word (R), and Office (R) are registered trademarks
of Microsoft Corporation; WordPro (R), SmartSuite (R), and Notes (R) are
registered trademarks of Lotus Development Corporation; American Heritage (R) is
a registered trademark of Forbes, Inc.; A&E (R) is a registered trademark of the
Arts & Entertainment Network, Inc.; and InterGO (TM) is a trademark of InterGO
Communications, Inc. All other trademarks, service marks or trade names referred
to in this Prospectus are the property of their respective owners.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus as well as the information incorporated
herein by reference. Unless otherwise indicated, all information contained in
this Prospectus assumes that the Underwriters' over-allotment option will not be
exercised. This Prospectus contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.
THE COMPANY
INSO Corporation ("INSO" or the "Company") is a leading provider of
multilingual software products and systems that help people correct, find, view,
publish, and distribute data, text, and images in electronic environments
ranging from individual desktops to the Internet. The Company markets certain of
its products worldwide to original equipment manufacturers ("OEMs") of computer
hardware, software, and consumer electronics products. The Company also markets
software applications and systems to major corporations, government agencies,
and end users. The Company currently has nearly 450 OEM customers and over 600
direct corporate licensees, and the Company believes that the worldwide
installed base of end-user licensees of OEM products incorporating INSO's
technology exceeds 50,000,000.
The Company's products are divided into four categories:
- Proofing Tools. The Company's Proofing Tools product line includes
software programs and related databases for correcting errors in
spelling, grammar, punctuation, capitalization, spacing, and other
mistakes in documents created by users of computer applications. The
Company's Proofing Tools products include OEM products such as
International CorrectSpell, the industry-standard spelling correction
system; International ProofReader, a multilingual proofreading system
available in 10 languages that addresses numerous classes of writing
errors and style problems; and CorrectText Grammar Correction System, the
leading English grammar correction technology used in word processors
today. The Proofing Tools product line also includes the Company's
CorrectEnglish English-as-a-Second Language writing system products,
CyberSpell, SciWords, and InWords. Examples of products using the
Company's Proofing Tools include Word and Office by Microsoft Corporation
("Microsoft"), WordPro, SmartSuite, and Notes by Lotus Development
Corporation, and a version of Powerpack by Netscape Communications
Corporation.
- Information Management Tools. The Company's Information Management Tools
product line includes both search and indexing enhancement products and
file filtering, viewing, and conversion products. These products include
IntelliScope, a multilingual tool that performs linguistic analysis; Inso
Search Wizard, an interactive search expansion and refinement utility;
the Outside In OEM viewing technology; the Quick View Plus end-user
product, an application that provides corporations and consumers with the
ability to view, export, copy, and print files originating in any of over
200 applications; and the ImageStream graphics filters OEM product, which
permits the exchange of graphical images among more than 60 charting,
presentation, and graphical applications. Examples of products using the
Company's Information Management Tools include Microsoft's Windows 95,
Fulcrum Technology Inc.'s SearchServer, and Novell, Inc.'s GroupWise.
- Information Products. The Company's Information Products product line
includes the Company's electronic reference works, proprietary
information databases, and software retrieval technology. The Information
Products line includes more than 60 reference titles, including The
Columbia Encyclopedia, Fifth Edition, The Concise Columbia Electronic
Encyclopedia, and the American Heritage dictionaries. The Company's
Information Products also include reference products developed from its
proprietary information databases. Certain of these products are
published in print form as the Information Please almanacs and the A&E
Entertainment Almanac. The Company anticipates that it will continue to
add to its proprietary information databases and produce new reference
products from those databases.
3
<PAGE> 5
Examples of products using the Company's Information Products include
Microsoft's Bookshelf, CompuServe, Inc.'s CompuServe Information Service,
Starwave Corporation's ESPNET SportsZone, InterGO Communications, Inc.'s
InterGO, AT&T New Media Services' AT&T Business Network, and Bloomberg
L.P.'s THE BLOOMBERG.
- Electronic Publishing Solutions. The Company's Electronic Publishing
Solutions are software solutions based on the use of structured
documents, together with proprietary search and retrieval software, to
address mission-critical publishing problems on an enterprise level.
These products include the DynaText publishing system, which is composed
of automated and interactive tools to create structured content from
commonly used word processing and page makeup systems, and browsing
technology that permits users to select from among specific views and
structures to personalize the retrieval and presentation of data. These
products allow major corporations and government users to distribute and
maintain complex documents in many languages through multiple media such
as print, CD-ROM, LANs, WANs, and the World Wide Web.
The Company's strategy is to concentrate its development and marketing
efforts on building and promoting solutions where the combination of its core
competencies can create substantial added value and to optimize those solutions
for markets and market segments where the Company can achieve a significant
position. Key elements of the Company's strategy include (i) extending its
technological lead in its core competencies, (ii) diversifying its product
offerings and product lines, (iii) diversifying its distribution channels, and
(iv) accelerating its growth and strengthening its core competencies through
acquisitions.
Prior to its initial public offering of Common Stock in March 1994 (the
"IPO"), the Company operated as the Software Division (the "Software Division")
of Houghton Mifflin Company ("Houghton Mifflin"). As of August 31, 1996,
Houghton Mifflin held 4,015,100 shares of Common Stock, representing
approximately 30.7% (28.1% after giving effect to this offering) of the
outstanding shares of Common Stock. Pursuant to the terms of Houghton Mifflin's
6% Exchangeable Notes Due 1999 ("Stock Appreciation Income Linked Securities" or
"SAILS(SM)"), Houghton Mifflin may, at its option, deliver to the SAILS holders
up to 3,840,000 shares of Common Stock of the Company held by Houghton Mifflin
upon exchange of the SAILS. See "Relationship with Houghton Mifflin."
The Company is incorporated in Delaware. The Company's principal executive
offices are located at 31 St. James Avenue, Boston, MA 02116, and its telephone
number is (617) 753-6500.
ACQUISITION OF EBT
On July 16, 1996, the Company acquired all of the outstanding capital stock
of Electronic Book Technologies, Inc., renamed INSO Providence Corporation
("EBT" or "INSO Providence"), a leading developer of electronic publishing tools
and solutions that form the core of the Company's Electronic Publishing
Solutions product category. In connection with the EBT acquisition, the Company
paid $27,800,000 in cash in July 1996 and is obligated to pay an additional
$1,500,000 to the former principal stockholder of EBT in January 1998 and up to
an additional $10,400,000 to purchase shares of EBT stock issuable upon exercise
of outstanding EBT stock options. In the event that certain EBT financial and
operating goals are met, contingent payments of up to an additional $5,300,000
will be paid by the Company. The acquisition was accounted for as a purchase and
included the acquisition of certain technology under research and development,
which will result in a charge of $34,300,000 to the Company's earnings in the
third quarter of 1996.
4
<PAGE> 6
THE OFFERING
<TABLE>
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Common Stock offered by the Company.................... 1,200,000 shares
Common Stock to be outstanding after the offering...... 14,284,224 shares(1)
Use of proceeds........................................ General corporate purposes,
including research and development
and potential acquisitions.
Nasdaq National Market symbol.......................... INSO
</TABLE>
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(1) Excludes 3,852,714 shares of Common Stock issuable upon the exercise of
options outstanding as of September 24, 1996.
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS SIX MONTHS PRO FORMA YEAR ENDED
ENDED ENDED JUNE 30, YEAR ENDED DECEMBER 31,
JUNE 30, ------------------- DECEMBER 31, -----------------------------
1996(1) 1996 1995 1995(1) 1995 1994 1993
---------- ------- ------- ------------ ------- ------- -------
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STATEMENT OF
OPERATIONS DATA:
Net revenues......... $ 35,093 $27,605 $17,925 $ 57,201 $43,387 $23,463 $13,757
Operating income..... 3,493 5,201 883 11,089 11,578 8,533 4,386
Net income (loss).... 1,296(2) 2,720(2) (1,363)(3) 5,479 5,994(3) 5,663 2,575
Primary net income
(loss) per share... $ 0.09(2) $ 0.20(2) $ (0.11)(3) $ 0.45 $ 0.49(3) $ 0.48 $ 0.22(4)
Weighted average
shares
outstanding........ 13,690 13,690 12,292 12,228 12,228 11,798 11,560(4)
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(5)
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BALANCE SHEET DATA:
Working capital............................................... $57,538 $ 19,961 $ 84,106
Total assets.................................................. 91,729 68,564 132,709
Stockholders' equity.......................................... 80,464 46,164 110,309
</TABLE>
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(1) The pro forma consolidated statement of operations data for the six months
ended June 30, 1996 and the year ended December 31, 1995 give pro forma
effect to the Company's July 16, 1996 acquisition of EBT (including payments
by the Company for the EBT stock issuable upon exercise of outstanding EBT
stock options) as if such acquisition had occurred on January 1, 1996 and
1995, respectively, and the pro forma consolidated balance sheet data at
June 30, 1996 give pro forma effect to the EBT acquisition as if it had
occurred on June 30, 1996. The pro forma statement of operations data for
the six months ended June 30, 1996 and the year ended December 31, 1995 do
not reflect a charge of $34,300,000 for certain purchased in-process
research and development to be recorded by the Company in the third quarter
of 1996. See the Company's Pro Forma Consolidated Financial Information
(Unaudited) appearing elsewhere herein.
(2) Acquisition-related charges for certain purchased technology under research
and development at Imagemark Software Labs, Inc. (renamed INSO Kansas City
Corporation), which was acquired by the Company in January 1996, reduced net
income and net income per share for the six months ended June 30, 1996
(actual and pro forma) by $4,400,000 and $0.32, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Acquisition-related charges for certain purchased technology under research
and development at Systems Compatibility Corporation (renamed INSO Chicago
Corporation), which was acquired by the Company in April 1995, reduced net
income and net income per share for the six months ended June 30, 1995 and
the year ended December 31, 1995 by $5,500,000 and $0.45, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(4) Assumes that the 11,560,000 shares of Common Stock outstanding immediately
after the Company's initial public offering were outstanding throughout
1993.
(5) Adjusted to give effect to the sale by the Company of 1,200,000 shares of
Common Stock offered hereby at an assumed public offering price of $56.50
per share (the last reported sale price on the Nasdaq National Market on
September 24, 1996) and after deducting estimated underwriting discounts and
commissions and offering expenses and the application of the net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
5
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus (including all
documents incorporated by reference herein), the following factors should be
considered carefully in evaluating an investment in the Common Stock offered by
this Prospectus. This Prospectus contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from the results anticipated in these forward-looking statements as a
result of certain of the factors set forth in the following risk factors and
elsewhere in this Prospectus.
Reliance on Key Customers. For the year ended December 31, 1995, five of
the Company's customers accounted for 67% (64%, if certain non-recurring revenue
earned from royalty audits is excluded) of its revenues, compared to 69% for the
year ended December 31, 1994. Microsoft accounted for 52% (50%, if certain
non-recurring revenue earned from royalty audits is excluded) of the Company's
revenues for the year ended December 31, 1995, compared to 55% for the year
ended December 31, 1994. The Company anticipates that the percentage of its
revenue from Microsoft will decline further as the Company continues to expand
its product offerings and diversify its customer base. A loss of, or significant
decline in, revenues from any key customer could have a material adverse effect
on the Company's business, financial condition, and results of operations.
Most of the revenues received by INSO from Microsoft derive from the use of
INSO's Proofing Tools in Microsoft's Word and Office products. During 1995, the
Company amended its agreement with Microsoft with respect to Proofing Tools.
Under the terms of the amended agreement, the Company has granted to Microsoft,
for substantially equal fixed quarterly minimum payments in 1996 and 1997, (i) a
license to use version 3.02 of INSO's grammar product (the "Licensed Grammar
Product") in specified versions of Microsoft's Word and Office products and (ii)
an unlimited license to use a version of INSO's spelling and thesaurus products
in all Microsoft products. Depending on the versions of Word and Office in which
Microsoft uses the Licensed Grammar Product after June 30, 1996, INSO can earn
additional predetermined revenues ("Usage Fees") through the termination date of
the agreement (March 2001). INSO expects that its revenues for the third quarter
of 1996 will include certain such Usage Fees. There can be no assurance,
however, that INSO will receive any revenues from Microsoft after December 1997
with respect to the Licensed Grammar Product. It is also possible that
Microsoft, in the future, could add features and functionality to its operating
systems, including future versions of Windows 95 and Windows NT, that may
compete with the Company's products and reduce demand for the Company's products
by Microsoft or the Company's other OEM customers. Any such development could
reduce the Company's revenues from Microsoft and have a material adverse effect
on the Company's business, financial condition, and results of operations. See
"Business -- Key Customers."
Dependence on OEMs. The Company receives the majority of its revenues from
OEMs that integrate the Company's products with their own products and market
them to end users as a single unit. The business of the Company's OEM customers
is intensely competitive, and the computer software industry has continued to
consolidate. As a result, there is both a decreasing number of potentially
significant OEM customers for the Company's products and increasing competitive
pressure for the Company's existing and potential customers to reduce costs. At
the same time, it is possible that consumers may reduce purchases of the
products of OEMs for reasons unrelated to the quality or price of the Company's
products. It is also possible that consolidation within the software industry
will reduce the need for competitors to differentiate their products based on
features such as those provided by the Company's OEM products, which could in
turn reduce the demand for the Company's products from OEM customers. These
factors could result in decreased revenues from OEMs, as well as the loss of
significant OEM customers, such as Microsoft, who may choose to develop products
internally that compete with those of the Company in order to reduce their
costs. In addition, economic conditions, inventory positions, the ability to
sell the Company's products to end users, and other marketing restrictions that
adversely affect the operations of the Company's OEMs could have a substantial
impact upon the Company's financial results. No assurances can be
6
<PAGE> 8
given that the Company's OEMs will not experience financial or other
difficulties that could adversely affect their operations, and, in turn, the
operating results of the Company.
New Marketing Approaches. To reduce its reliance on OEMs, the Company is
marketing certain of its products through direct sales efforts aimed at major
corporations and government agencies, traditional software distribution
channels, and electronic distribution. The Company intends to expand this
activity through greater sales efforts and the introduction of new products for
corporate and government use. The success or failure of these efforts will have
a substantial impact on the Company's ability to sustain its historical rates of
revenue and net income growth. In addition, the marketing and distribution of
products directly to end users, either by the Company or by resellers or
distributors, requires higher sales and marketing expenditures as a percentage
of revenues than the OEM distribution channel, which could have a negative
impact on the Company's operating results. Products distributed through
electronic means have not historically contributed significantly to the
Company's revenues or operating results, and there may be either consumer
dissatisfaction with the Company's products or a reluctance on the part of
consumers to receive or purchase products through such means. If the Company is
unable to achieve substantial revenues from direct electronic distribution, the
marketing of products to end users through more traditional reseller and
distribution channels could result in both lower revenues and lower operating
margins on those revenues.
Integration of EBT. On July 16, 1996, the Company acquired all of the
outstanding capital stock of EBT. EBT is substantially larger, in terms of
number of employees and revenues, than the businesses that INSO has previously
acquired. EBT has historically marketed its products almost exclusively through
direct and reseller distribution channels. There can be no assurance that the
operations of EBT can be successfully integrated with those of the Company. In
addition, certain of the technologies currently under development at EBT are not
complete and have not gained market acceptance, and the Company is unable to
predict the level of additional research and development expenditures that may
be required to make those technologies competitive in their intended markets.
The Company anticipates that those technologies could require substantial
ongoing research and development expenditures in order to expand their markets.
Competition and Market Trends. The computer software market is highly
competitive. Some of the Company's competitors or potential competitors have
substantially greater development, marketing, sales, and financial resources
than the Company. The Company has historically operated in market segments that
have attracted fewer substantial participants than the general market for
software applications. With the development of products for end users,
particularly in the Information Management Tools market and as a result of the
acquisition of EBT, the Company has begun to participate in broader markets
where it anticipates increased competition, both as to quality and price, from
entities with greater resources than those of the Company, including existing
participants in those markets. These competitors or potential competitors may be
able to adapt more quickly to new or emerging technologies and standards or
changes in customer requirements or may be able to devote greater resources to
the promotion and sale of their products than the Company. It is also possible
that competitors or potential competitors may have more ability than the Company
to control pricing and marketing decisions affecting their revenues. Continued
investment in research and development and in marketing efforts will be required
to permit the Company to compete successfully in this industry, and there is no
assurance that the Company will have the necessary capital to fund that
investment.
New Products and Technological Change. The Company's future performance
will depend upon its ability to enhance its current products, successfully
complete products currently under research and development, introduce new
products that keep pace with technological developments, respond to changing
customer requirements, and achieve market acceptance. Any failure by the Company
to anticipate or respond adequately to technological developments and customer
requirements, or any significant delay in product development or introduction,
could have a material adverse effect upon the Company. In addition, undetected
errors and performance deficiencies
7
<PAGE> 9
which are not corrected prior to product releases may require the Company to
expend additional resources to prepare remedies or redesign products, and may
result in reduced customer goodwill. Delays or difficulties in the distribution
or marketing, or lack of market acceptance, of new products could have a
material adverse effect on the Company's business, financial condition, and
results of operations in the future.
Future Acquisitions of Businesses and Assets. The Company's historical and
projected growth has come from a combination of growth from internally developed
products and the successful acquisition and integration of businesses and
assets. Changes in the availability of acquisition candidates on attractive
terms could make it more difficult for the Company to achieve growth levels
consistent with those historically achieved. In addition, the Company's ability
to achieve growth in revenues and net income from the development of new
Information Products is dependent to a large degree on the Company's ability to
acquire, either by license or purchase, the rights to additional authoritative
reference works. Changes in the market for the electronic rights to such works
could make it difficult or impossible for the Company to acquire such rights on
favorable economic terms, which could materially adversely affect the Company's
revenues and operating results.
Dependence on Key Personnel. The Company's ability to remain competitive
in the software industry is dependent on the services of a number of key
technical personnel, principally software engineers, linguists, and database
specialists. Competition for such personnel in the software industry is intense.
None of the Company's officers or key employees is bound by employment
agreements. In addition, personnel costs for technical staff represent a
significant portion of the Company's operating expenses, and increased
competition and related personnel cost increases for such staff could have a
material adverse impact on the Company's business, financial condition, and
results of operations.
International Operations. The Company has recently commenced actively
marketing its products to end users outside the United States and, with the
acquisition of EBT, it is currently anticipated that the percentage of the
Company's total revenues that is derived from sales to end users in foreign
markets will likely increase. The marketing of products to end users outside the
United States, directly or through resellers and distributors, increases the
risk to the Company's revenues associated with fluctuations of the U.S. dollar
in relation to foreign currencies. Such fluctuations could also result in
increased operating expenses associated with foreign operations. In addition,
the development of end-user products for overseas markets requires additional
investments in product development. The Company does not have substantial
expertise in the development of end-user products for such markets, and there is
the possibility that increased development expenditures for such products will
have an adverse impact on the Company's business, financial condition, and
results of operations.
Additional risks inherent in the Company's international business
activities generally include unexpected changes in regulatory requirements,
tariffs, and other trade barriers, longer accounts receivable payment cycles,
potentially adverse tax consequences, potentially less comprehensive
intellectual property protection, and the burdens of complying with a wide
variety of foreign laws. There can be no assurance that such factors will not
have an adverse effect on the Company's future international revenues and,
consequently, the Company's business, financial condition, and results of
operations.
Dependence on Content Suppliers. Several of the Company's major
Information Products, including the American Heritage electronic dictionaries
and Roget's II Electronic Thesaurus, incorporate database content from Houghton
Mifflin which is subject to a written license agreement expiring December 31,
1998, except that customer licenses in effect on the termination date will
remain in effect. Any extension of that license agreement or any future proposal
for use of Houghton Mifflin database content in the Company's products will be
based on arm's-length negotiations with Houghton Mifflin. There can be no
assurance that the Company will be able to continue to market
8
<PAGE> 10
and develop such products if its existing license were to terminate. See
"Business--Third-Party Database and Content Supply Arrangements."
Fluctuations in Quarterly Operating Results. The Company operates without
substantial backlog and quarterly revenues are difficult to forecast, and may
fluctuate as a result of a number of factors, including without limitation the
timing of new product introductions; announcements of new products by the
Company, its competitors, or its customers; delays in customer purchases in
anticipation of industry developments; and gross profit margin variations
relating to variations in product mix involving products with different royalty
rates payable to database suppliers. As a result, the Company believes that
period-to-period comparisons of its operating results are not necessarily
meaningful and should not be relied upon as indications of future performance.
In addition, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and investors.
In such event, the price of the Company's Common Stock would likely be
materially adversely affected.
Concentration of Ownership. Immediately following the issuance and sale of
1,200,000 shares of Common Stock being offered hereby by the Company, Houghton
Mifflin will hold 4,015,100 shares of Common Stock or 28.1% of the Company's
outstanding Common Stock. Of such shares, Houghton Mifflin exercises voting
rights with respect to all shares issuable upon conversion of the SAILS (up to
3,840,000 shares) until such time or times, if any, as the SAILS are exchanged
or redeemed for shares of Common Stock. Accordingly, Houghton Mifflin will
continue to have the ability to influence significantly the election of all of
the Company's directors and most corporate actions. The Company has agreed, so
long as Houghton Mifflin owns at least 20% of the outstanding Common Stock of
the Company, to nominate two persons designated by Houghton Mifflin to serve on
its Board of Directors. Currently, Houghton Mifflin has designated only one such
director. Such a level of ownership also may have the effect of delaying,
deferring, or preventing a change in the control of the Company. Sales of Common
Stock by Houghton Mifflin pursuant to Rule 144 under the Securities Act or other
exemptions from registration, or pursuant to registration rights, may have an
adverse effect on the market price for the Common Stock and could impair the
Company's ability to raise capital through an offering of its equity securities.
See "Relationship with Houghton Mifflin."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,200,000 shares of
Common Stock offered by the Company hereby are estimated to be $64,145,000
($73,806,500 if the Underwriters' over-allotment option is exercised in full)
after deducting estimated underwriting discounts and commissions and offering
expenses payable by the Company and assuming a public offering price of $56.50
per share (the last reported sale price on September 24, 1996).
The Company intends to use the net proceeds for general corporate purposes,
including (i) research and development efforts to enhance the Company's existing
software products and to develop new products; (ii) acquisitions of information
content and technologies; and (iii) acquisitions of businesses that are
potentially complementary to the Company's business. Pending such uses, the net
proceeds of this offering will be invested in investment grade, interest-bearing
securities. The Company currently has no commitments or agreements for the
acquisition of any businesses.
9
<PAGE> 11
PRICE RANGE OF COMMON STOCK
AND DIVIDEND POLICY
The Common Stock of the Company is listed on the Nasdaq National Market
under the symbol "INSO." The following table sets forth the high and low sales
prices per share of the Company's Common Stock for the calendar periods listed
below as reported on the Nasdaq National Market. Such information reflects
interdealer prices, without retail markup, markdown, or commission, and may not
represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1994
First Quarter (from March 1, 1994)................................ $12.25 $ 8.57
Second Quarter.................................................... 12.88 8.63
Third Quarter..................................................... 14.50 10.50
Fourth Quarter.................................................... 17.88 13.75
1995
First Quarter..................................................... $25.88 $16.53
Second Quarter.................................................... 32.50 24.13
Third Quarter..................................................... 36.25 29.38
Fourth Quarter.................................................... 47.50 27.25
1996
First Quarter..................................................... $50.25 $31.25
Second Quarter.................................................... 68.00 45.75
Third Quarter (through September 24, 1996)........................ 58.50 39.25
</TABLE>
On September 1, 1995, the Company effected a two-for-one stock split in the
form of a stock dividend of one share of Common Stock for each outstanding share
of Common Stock. The dividend was payable to stockholders of record on August
18, 1995. All references in the above table have been retroactively restated to
reflect this transaction.
On September 24, 1996, the last reported sale price of the Common Stock on
the Nasdaq National Market was $56.50 per share. As of September 24, 1996, the
Company's Common Stock was held by 454 holders of record. The number of record
holders may not be representative of the number of beneficial holders because
many shares are held by depositaries, brokers, or other nominees. The Company
has paid no cash dividends on its Common Stock since its formation and has no
present plans to do so.
10
<PAGE> 12
CAPITALIZATION
The following table sets forth as of June 30, 1996 (i) the actual
capitalization of the Company, (ii) the pro forma capitalization of the Company
as described in Note (1) below, and (iii) the pro forma capitalization of the
Company as adjusted to reflect the issuance and sale by the Company of 1,200,000
shares of Common Stock offered hereby at an assumed public offering price of
$56.50 per share (the last sale price on September 24, 1996) and receipt of the
net proceeds therefrom, after deducting estimated underwriting discounts and
commissions and offering expenses payable by the Company. This table should be
read in conjunction with the consolidated financial statements of the Company
and the related notes thereto appearing elsewhere in this Prospectus. See
"Selected Consolidated Financial Information" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED
------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued............................... -- -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 13,078,448 shares issued (actual and pro
forma) and 14,278,448 shares issued (pro forma as
adjusted)(2).......................................... $ 131 $ 131 $ 143
Capital in excess of par value.......................... 66,585 66,585 130,718
Retained earnings....................................... 14,377 (19,923) (19,923)
------- -------- ---------
$81,093 $ 46,793 $ 110,938
Unamortized value of restricted shares.................. (572) (572) (572)
Treasury stock, at cost, 5,075 shares................... (57) (57) (57)
------- -------- ---------
Total stockholders' equity.................... $80,464 $ 46,164 $ 110,309
======= ======== =========
</TABLE>
- ---------------
(1) Gives pro forma effect to the July 16, 1996 acquisition of EBT (including
payments by the Company for the EBT stock issuable upon exercise of
outstanding EBT stock options) by the Company as if such acquisition had
occurred on June 30, 1996.
(2) Excludes 2,294,114 shares of Common Stock issuable upon the exercise of
options outstanding as of June 30, 1996.
11
<PAGE> 13
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following selected financial information for the three years ended
December 31, 1995, have been derived from the Company's audited consolidated
financial statements. The financial data for the six months ended June 30, 1996
and 1995 are derived from the unaudited consolidated financial statements of the
Company. The unaudited financial statements include all adjustments, consisting
of normal recurring accruals, which the Company considers necessary for the fair
presentation of the financial position and results of operations for these
periods. Operating results for the six months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the entire year
ending December 31, 1996. The financial data set forth below should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus.
The pro forma consolidated statement of operations data for the six months
ended June 30, 1996 and the year ended December 31, 1995 give pro forma effect
to the Company's July 16, 1996 acquisition of EBT (including payments by the
Company for the EBT stock issuable upon exercise of outstanding EBT stock
options) as if such acquisition had occurred on January 1, 1996 and 1995,
respectively, and the pro forma consolidated balance sheet data at June 30, 1996
give pro forma effect to the EBT acquisition as if it had occurred on June 30,
1996. The pro forma statement of operations data for the six months ended June
30, 1996 and the year ended December 31, 1995 do not reflect a charge of
$34,300,000 for certain purchased in-process research and development to be
recorded by the Company in the third quarter of 1996. See the Company's Pro
Forma Consolidated Financial Information (Unaudited) appearing elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA SIX MONTHS PRO FORMA
SIX MONTHS ENDED JUNE 30, YEAR ENDED YEAR ENDED DECEMBER 31,
ENDED JUNE -------------------- DECEMBER ------------------------------
30, 1996 1996 1995 31, 1995 1995 1994 1993
---------- ------- ------- ----------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................... $ 35,093 $27,605 $17,925 $57,201 $43,387 $23,463 $13,757
Cost of revenues............... 5,785 3,845 2,516 9,067 5,792 3,074 1,870
------- ------- ------- ------- ------- ------- -------
Gross profit................... 29,308 23,760 15,409 48,134 37,595 20,389 11,887
Total operating expenses....... 25,815 18,559 14,526 37,045 26,017 11,856 7,501
------- ------- ------- ------- ------- ------- -------
Operating income............... 3,493 5,201 883 11,089 11,578 8,533 4,386
Net investment income.......... 1,479 1,533 337 1,432 1,468 319
------- ------- ------- ------- ------- ------- -------
Income before provision for
income taxes................. 4,972 6,734 1,220 12,521 13,046 8,852 4,386
Income tax expense............. 3,676 4,014 2,583 7,042 7,052 3,189 1,811
------- ------- ------- ------- ------- ------- -------
Net income (loss).............. $ 1,296(1) $ 2,720(1) $(1,363)(2) $ 5,479 $ 5,994(2) $ 5,663 $ 2,575
======= ======= ======= ======= ======= ======= =======
Primary net income (loss)
per share.................... $ 0.09(1) $ 0.20(1) $ (0.11)(2) $ 0.45 $ 0.49(2) $ 0.48 $ 0.22(3)
Weighted average shares
outstanding.................. 13,690 13,690 12,292 12,228 12,228 11,798 11,560(3)
</TABLE>
<TABLE>
<CAPTION>
PRO
FORMA JUNE 30, DECEMBER 31,
JUNE 30, -------- -------------------------------
1996 1996 1995 1994 1993
-------- -------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................................. $19,961 $57,538 $55,460 $15,522 $ 1,802
Deferred income tax benefit, net................................ 3,910 3,803 3,847 4,175 --
Total assets.................................................... 68,564 91,729 91,129 33,494 6,373
Stockholders' equity............................................ 46,164 80,464 75,163 27,614 --
Net assets...................................................... -- -- -- -- 3,238(4)
</TABLE>
12
<PAGE> 14
- ---------------
(1) Acquisition-related charges for certain purchased technology under research
and development at Imagemark Software Labs, Inc. (renamed INSO Kansas City
Corporation), which was acquired by the Company in January 1996, reduced net
income and net income per share for the six months ended June 30, 1996
(actual and pro forma) by $4,400,000 and $0.32, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(2) Acquisition-related charges for certain purchased technology under research
and development at Systems Compatibility Corporation (renamed INSO Chicago
Corporation), which was acquired by the Company in April 1995, reduced net
income and net income per share for the six months ended June 30, 1995 and
the year ended December 31, 1995 by $5,500,000 and $0.45, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(3) Assumes that the 11,560,000 shares of Common Stock outstanding immediately
after the Company's initial public offering were outstanding throughout
1993.
(4) Net assets represent Houghton Mifflin's net investment in the Company during
the time the Company operated as a division of Houghton Mifflin.
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company derives its revenues from royalties, including initial
nonrefundable royalties, from license arrangements with OEMs, one-time license
and annual software maintenance fees from site-license agreements with corporate
customers, and from one-time fees for direct licenses to consumers.
Royalty revenues are earned in one of the following ways: as a percentage
of net revenues from product unit sales by licensees that incorporate the
Company's products, as a fixed per-unit royalty, or as a regular periodic fee
based on estimated shipments or usage over time. Royalty revenues are generally
recognized in the Company's financial statements in the quarter in which amounts
due to the Company have been determined. In the event that further substantial
support or performance obligations exist, revenues are recognized ratably as
earned. Revenues from initial nonrefundable royalty arrangements are recognized
at the time of product acceptance by the licensee if no significant obligation
relating to the underlying contract remains to be completed. Revenues from
corporate site-license agreements generally consist of a one-time license fee
based on the number of individual users licensed and an annual software
maintenance fee calculated as a percentage of the one-time fee. Payment of the
maintenance fee permits customers to receive updates and enhancements to the
software licensed for the duration of the maintenance agreement.
Typical license terms provide for a non-exclusive two-to-three year license
grant limited to use with specified OEM products or on specified platforms. In
certain limited circumstances, typically involving Information Products, a
license may be exclusive for a specified platform or product type, subject to
the satisfaction of performance standards. When possible, the Company licenses
off-the-shelf versions of its products to customers, although the Company
sometimes performs custom product development for a fee.
The Company generates a significant portion of its revenues from customers
outside the United States. Such revenues totaled $5,673,000, $4,216,000, and
$3,076,000, for the years ended December 31, 1995, 1994, and 1993, respectively.
The Company believes that a substantial amount of products shipped by its
domestic OEM customers is sold internationally. Accordingly, the actual use of
the Company's products by overseas end users is higher than the export revenues
reported for accounting purposes as described above. The Company expects that
the international market will continue to account for a significant portion of
its total business. The Company's export revenues are primarily denominated and
collected in U.S. dollars. The Company also denominates the prices for its
corporate and end-user products sold internationally in U.S. dollars. Business
with overseas end users may be subject to greater currency exchange rate risk in
the future.
Cost of revenues primarily comprises royalty expense for the licensing of
technology, content databases, published reference works from Houghton Mifflin
and other third parties, and the amortization of capitalized product development
costs and intangible assets from the acquisitions and license agreements
described in Note 4 of Notes to the Company's Consolidated Financial Statements.
The level of amortization expense of capitalized product development costs is
directly related to the amount of product development costs capitalized in each
year and the time frame in which a specific product is available for general
release to customers. The royalty cost includes direct royalty obligations as
well as the amortization of royalty advances.
14
<PAGE> 16
The following table sets forth, for the periods indicated, certain income
statement data expressed as a percentage of revenues.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
--------------- -------------------------
1996 1995 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenues.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues................................ 13.9 14.0 13.3 13.1 13.6
----- ----- ----- ----- -----
Gross profit.................................... 86.1 86.0 86.7 86.9 86.4
Operating expenses:
Sales and marketing........................... 17.9 14.7 15.1 15.7 19.0
Product development........................... 19.2 18.4 17.3 20.1 21.3
General and administrative.................... 14.3 17.3 14.9 14.7 14.2
Purchased in-process research and
development................................ 15.9 30.7 12.7 -- --
----- ----- ----- ----- -----
Total operating expenses........................ 67.3 81.1 60.0 50.5 54.5
----- ----- ----- ----- -----
Operating income................................ 18.8 4.9 26.7 36.4 31.9
Net investment income........................... 5.6 1.9 3.4 1.3 --
----- ----- ----- ----- -----
Income before provision for income taxes........ 24.4 6.8 30.1 37.7 31.9
Income tax expense.............................. 14.5 14.4 16.3 13.6 13.2
----- ----- ----- ----- -----
Net income (loss)............................... 9.9% (7.6)% 13.8% 24.1% 18.7%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996, COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Revenues. Revenues for the six months ended June 30, 1996 increased
$9,680,000, or 54.0%, to $27,605,000 compared to $17,925,000 for the six months
ended June 30, 1995. Royalty revenues increased 26.8% due primarily to higher
revenues from existing licenses of GCS, IntelliScope, ImageStream, and Outside
In. Contributing to the increase in royalty revenues were revenues from the INSO
Chicago Corporation ("INSO Chicago") and INSO Kansas City Corporation ("INSO
Kansas City") acquisitions as well as higher revenues from existing licensees.
Non-refundable royalty revenues in the first six months of 1996 more than
doubled over the same period in 1995, reflecting new licenses of the Information
Please almanacs; Dutch, Italian, Spanish, German, and French bilingual
dictionaries; ImageStream; and Outside In. Direct and retail sales of Quick View
Plus, CyberSpell, InWords, and SciWords also contributed to the overall increase
in total revenues.
Gross Profit. Gross profit increased $8,351,000 to $23,760,000 for the six
months ended June 30, 1996 from $15,409,000 for the six months ended June 30,
1995. Gross profit as a percentage of revenues for the six months ended June 30,
1996 was 86.1% compared to 86.0% for the six months ended June 30, 1995. The
increase in gross profit percentage was primarily attributable to higher
revenues from ImageStream and Outside In, which carry lower royalty burdens,
partially offset by higher amortization of license fees and other intangibles.
Sales and Marketing. Sales and marketing expenses consist primarily of
commissions on sales; salaries of sales, marketing, and technical support
personnel; and promotional expenses. Sales and marketing expenses increased
$2,293,000 to $4,927,000 for the six months ended June 30, 1996, reflecting
staff additions in sales as the Company establishes its presence in the
corporate sales channel and staff additions in the product management area to
support new product development. Sales and marketing expenses increased as a
percentage of revenues to 17.9% for the six months ended June 30, 1996 from
14.7% for the six months ended June 30, 1995.
Product Development. Product development expenses consist primarily of
personnel costs and, to a lesser extent, fees paid for outside software
development and consulting services. Product development expenses increased
$1,990,000 due to revisions to, and new product development for, the Company's
Proofing Tools, Information Products, and Information Management Tools product
lines. The Company's total product development costs, including capitalized
costs, were $6,146,000,
15
<PAGE> 17
or 22.3% of revenues, for the six months ended June 30, 1996 compared to
$3,863,000, or 21.6% of revenues, for the six months ended June 30, 1995. New
products released during the first six months of 1996 included Cyberspell,
SciWords, InWords, the electronic versions of The 1996 Information Please
Almanac and The Information Please Sports Almanac, IntelliScope search enhancer
for Japanese, Inso Search Wizard, ImageStream for Microsoft Office, and Quick
View Plus plug-in for Netscape Navigator 2.0.
General and Administrative. General and administrative expenses increased
$850,000 to $3,951,000 for the six months ended June 30, 1996 compared to
$3,101,000 for the six months ended June 30, 1995. The increase in general and
administrative expenses was primarily attributable to increases in personnel and
general corporate expenses required to support the growth of the Company's
operations. General and administrative expenses declined as a percentage of
revenues to 14.3% for the six months ended June 30, 1996 from 17.3% for the six
months ended June 30, 1995 as a result of improved efficiencies and economies of
scale in the administrative area.
Purchased In-Process Research and Development. The acquisition of INSO
Kansas City and INSO Chicago, respectively, included the purchase of certain
technology under research and development, which resulted in a charge to the
Company's June 30, 1996 and 1995 consolidated results of $4,400,000, or $0.34
per share and $5,500,000, or $0.44 per share, respectively.
Income Taxes. The Company's effective tax rate for the six months ended
June 30, 1996 and 1995 was influenced by the $4,400,000 INSO Kansas City and the
$5,500,000 INSO Chicago research and development charges discussed above. The
charges were not deductible for tax purposes. Excluding the charges, the
Company's effective tax rate for the six months ended June 30, 1996 was 36.1%
compared to 38.4% for the six months ended June 30, 1995.
Net Income. Excluding the $4,400,000 ($0.34 per share) in-process research
and development charge related to the INSO Kansas City acquisition in the six
months ended June 30, 1996 and the $5,500,000 ($0.44 per share) in-process
research and development charge related to the INSO Chicago acquisition in the
six months ended June 30, 1995, net income and earnings per share would have
been $7,120,000 and $0.52, respectively, for the six months ended June 30, 1996,
compared to $4,137,000 and $0.34, respectively, for the six months ended June
30, 1995.
YEAR ENDED DECEMBER 31, 1995, COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. Revenues for 1995 increased $19,924,000, or 84.9%, to
$43,387,000, including $1,500,000 of non-recurring revenues earned from royalty
audits, compared to $23,463,000 for 1994.
Revenues in 1995 included revenues from the acquisition of INSO Chicago since
the acquisition date of April 1, 1995. See Note 4 of Notes to the Company's
Consolidated Financial Statements. Revenues from INSO Chicago accounted for
approximately 20% of the total in 1995. Royalty revenues increased 71.1%,
including the revenues earned from royalty audits, as a result of increased
sales by existing licensees as well as the number of licensees making royalty
payments, which increased to 110 from 82 at December 31, 1994. Royalty revenues
increased 62.7%, excluding the $1,500,000 non-recurring royalty audit revenues.
The increase in the number of licensees making royalty payments reflects new
licensees resulting from the INSO Chicago acquisition, as well as royalty flow
from existing licensees who have earned their prepaid minimum royalties. In
particular, continuing sales of Microsoft's Word and Office products, which
incorporate the Company's CorrecText and International CorrectSpell, contributed
substantially to gains in revenues. Nonrefundable royalty revenues for 1995
increased 77.9%, reflecting the addition of 149 new licenses in 1995 compared to
109 new licenses in 1994. New licensees for 1995 included InterGO
Communications, Inc. (formerly TeacherSoft Corporation), America Online, Inc.,
AT&T New Media Services, Bloomberg, L.P., the European Commission, and Starwave
Corporation. During 1995, the Company released additional languages for
International CorrectSpell, IntelliScope, International ProofReader,
CorrectEnglish, and concise electronic thesaurus. Also released during 1995 were
new versions of Quick View Plus, IntelliFinder, and Dutch, French, Italian, and
Spanish bilingual
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<PAGE> 18
dictionary databases, as well as electronic versions of The 1996 Information
Please Business Almanac and The 1996 Information Please Entertainment Almanac.
Gross Profit. Gross profit as a percentage of revenues was 86.7% in 1995
compared to 86.9% in 1994. Amortization of capitalized software and intangibles
increased as a percentage of revenues in 1995 as a result of the release of new
languages of CorrectEnglish, International ProofReader, concise electronic
thesaurus, and IntelliScope; numerous reference works; and a new version of
Quick View Plus; as well as amortization of costs related to the INSO Chicago
acquisition and rights related to the Information Please almanac series. This
increase in amortization was more than offset by lower royalty costs as a
percentage of revenue as a greater proportion of 1995 revenues was derived from
the CorrecText, Outside In, and Quick View Plus products, which carry lower
royalty burdens.
Sales and Marketing. Sales and marketing expenses for 1995 increased 78.7%
to $6,570,000 from $3,676,000 for 1994, reflecting increased staff due to the
INSO Chicago acquisition, entry into new markets (corporate and consumer), staff
additions in product management to support the higher levels of sales, and
higher commissions due to increased revenues.
Product Development. Product development expenses increased 58.4% to
$7,489,000 for 1995 from $4,728,000 for 1994. The increase in product
development costs was primarily due to investments in CorrectEnglish,
International ProofReader, IntelliScope, Quick View Plus, IntelliFinder,
CyberSpell, Inso Search Wizard, and various reference works. As a percentage of
revenues, product development expenses decreased to 17.3% in 1995 from 20.1% for
1994. The decrease as a percentage of revenues was primarily attributable to
non-labor costs that represented a lower percentage of revenues in 1995 compared
to 1994. This decrease was partially offset by capitalized development costs for
IntelliScope, CorrectEnglish, Quick View Plus, Inso Search Wizard, concise
electronic thesaurus, and bilingual dictionary databases that approximated 1994
in terms of dollars but represented a lower percentage of development expenses
(15.4% in 1995 versus 22.2% in 1994). The Company's total product development
costs, including capitalized costs, were $8,853,000, or 20.4% of revenues, for
1995, compared to $6,080,000, or 25.9% of revenues, for 1994.
General and Administrative. General and administrative expenses in 1995
increased 87.1% to $6,458,000 from $3,452,000 in 1994. The increase in general
and administrative expenses was primarily attributable to increases in personnel
and general corporate expenses required to support the growth of the Company's
operations. General and administrative expenses increased only slightly as a
percentage of revenues to 14.9% for 1995 compared with 14.7% for 1994.
Purchased In-Process Research and Development. The acquisition of INSO
Chicago included the purchase of certain technology under research and
development, which resulted in a charge to the Company's 1995 consolidated
results of $5,500,000, or $0.44 per share.
Income Taxes. The Company's effective tax rate was influenced by the
$5,500,000 INSO Chicago research and development charge discussed above. The
charge was not deductible for tax purposes. Excluding the charge, the Company's
effective tax rate in 1995 was 38.0% compared to 36.0% in 1994. The increase is
a result of the increased profitability causing a shift to a higher tax bracket
as well as amortization of the intangible assets from the INSO Chicago
acquisition, which are not deductible for income tax purposes.
Net Income. Excluding the INSO Chicago research and development charge
noted above, net income and earnings per share would have been $11,494,000 and
$0.94 per share, respectively.
YEAR ENDED DECEMBER 31, 1994, COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenues. Revenues for 1994 increased $9,706,000, or 70.6% to $23,463,000
compared to $13,757,000 for 1993. Royalty revenues were up 70.3% as a result of
increased sales by existing licensees as well as the number of licensees making
royalty payments, which increased to 82 from 50 at December 31, 1993. The
increase in the number of licensees making royalty payments reflects
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<PAGE> 19
new licensees resulting from the Microlytics, Inc. license agreement, described
in Note 4 of Notes to the Company's Consolidated Financial Statements, as well
as royalty flow from existing licensees that have earned out the amount of their
prepaid minimum royalties. In particular, continuing sales of Microsoft's Word
and Office products, which incorporate the Company's CorrecText and
International CorrectSpell, contributed substantially to the gains in revenues.
Nonrefundable royalty revenues for 1994 increased 71.3%, reflecting the addition
of 109 new licenses in 1994 compared to 71 new licenses in 1993. New licensees
for 1994 included Dataware Technologies, MINDSCAPE, Ligature, NOVA, Catena,
Digital Communications Associates, and Gold Disk. During 1994, the Company
released CorrectEnglish in French and German, as well as International
ProofReader and IntelliScope, which is the first product in the Company's new
line of Information Management Tools. In addition, new versions of International
CorrectSpell and IntelliFinder were released in 1994.
Gross Profit. Gross profit as a percentage of revenues was 86.9% in 1994
compared to 86.4% in 1993. Amortization of capitalized software and software
licenses increased in 1994 as a result of the release of new products such as
CorrectEnglish, International ProofReader, IntelliScope, and numerous reference
works, as well as the Microlytics, Inc. license. This increase in amortization
was more than offset by lower royalty costs that resulted from a greater
proportion of 1994 revenues being derived from the CorrecText and IntelliScope
products, which carry lower royalty burdens.
Sales and Marketing. Sales and marketing expenses for 1994 increased 40.7%
to $3,676,000 from $2,612,000 for 1993, reflecting increased market research and
staff additions in product management to support the higher levels of sales as
well as higher commissions due to increased revenues.
Product Development. Product development expenses increased 61.3% to
$4,728,000 for 1994 from $2,932,000 for 1993. The increase in product
development costs was primarily due to investments in CorrectEnglish,
International ProofReader, reference works, and development of the Company's new
line of Information Management Tools, including IntelliScope, which was released
on schedule in mid-1994. As a percentage of revenues, product development
expenses decreased to 20.1% for 1994 from 21.3% for 1993. The decrease as a
percentage of revenues was partially attributable to capitalization of a
slightly higher proportion of development expenses (22.2% in 1994 versus 21.6%
in 1993) in 1994 reflecting the IntelliScope and CorrectEnglish development.
Also contributing to the decrease was containment of non-labor costs
representing a lower percentage of revenues in 1994 compared to 1993. The
Company's total product development costs, including capitalized costs, were
$6,080,000, or 25.9% of revenues, for 1994, compared to $3,738,000, or 27.2% of
revenues, for 1993.
General and Administrative. General and administrative expenses in 1994
increased 76.4% to $3,452,000 from $1,957,000 in 1993. The increase in general
and administrative expenses was primarily attributable to increases in personnel
and general corporate expenses required to support the growth of the Company's
operations. General and administrative expenses increased only slightly as a
percentage of revenues to 14.7% for 1994 compared to 14.2% for 1993.
Income Taxes. The Company's effective tax rate in 1994 was 36.0% compared
to 41.3% in 1993. The decrease in the effective rate reflects the benefit from
the valuation of the deferred tax asset resulting from the formation of the
Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities have provided cash of $6,859,000 for the
six months ended June 30, 1996 and $19,720,000, $6,852,000, and $1,404,000 for
the years ended December 31, 1995, 1994, and 1993, respectively.
The Company's investing activities have used cash of $33,005,000 for the
six months ended June 30, 1996 and $36,611,000, $6,415,000, and $1,031,000 for
the years ended December 31, 1995, 1994, and 1993, respectively. Of these
amounts, $865,000, $1,364,000, $1,352,000, and $806,000 respectively, were for
capitalized product development costs as discussed above. Cash used for
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<PAGE> 20
investing activities during the six months ended June 30, 1996 reflects the
January 9, 1996 acquisition of all of the outstanding capital stock of INSO
Kansas City for net cash of $6,492,000. The increase in investing activities in
1995 reflects investments in marketable securities totaling $25,397,000 and two
acquisitions completed during 1995 for $7,639,000 in cash. Also contributing to
the increased investing activities were additional investments in leasehold
improvements, furniture, and equipment related to the Company's move of its
corporate headquarters, completed at the end of April 1995.
The Company's financing activities used cash of approximately $4,777,000
for the six months ended June 30, 1996 and provided cash of $40,268,000 and
$13,421,000 for the years ended December 31, 1995 and 1994, respectively. As
part of the INSO Chicago acquisition in April 1995, the Company issued
promissory notes in the amount of $6,367,500, which were repaid in full in
February 1996 from available cash. In August 1995, the Company completed a
public offering of 1,200,000 shares of the Company's common stock, which
provided net proceeds of approximately $39,300,000.
The Company had available to it a deferred income tax benefit in the amount
of $9,456,000 as of June 30, 1996, which is recorded at the net amount of
$4,648,000 after deduction of a valuation allowance in the amount of $4,808,000.
This benefit relates to a basis difference between assets reported in the
Company's financial statements and for income tax purposes, primarily tax basis
intangible assets arising in connection with the formation of the Company and
completion of its initial public offering. The tax benefit is subject to
statutory realization ratably over a remaining 13-year period and, as a result,
the Company's prospective cash requirement for income taxes may be reduced by
approximately $700,000 per year. The amount of the tax benefit ultimately
recovered is dependent upon the amount of taxable income earned by the Company
both annually and over the 15-year period following the initial public offering
of the Company's common stock. Therefore, there can be no assurance that all or
some portion of the annual cash requirement reduction, or the full amount of the
tax benefit relative to the asset basis differential, will be realized.
As of June 30, 1996, the Company had working capital of $57,538,000. Cash,
cash equivalents, and marketable securities as of June 30, 1996 totaled
$55,910,000. On July 16, 1996, the Company acquired all of the outstanding
capital stock of EBT. In connection with the EBT acquisition, the Company paid
$27,800,000 in cash in July 1996 and is obligated to pay an additional
$1,500,000 to the former principal stockholder of EBT in January 1998 and up to
an additional $10,400,000 to purchase EBT stock issuable upon exercise of
outstanding EBT stock options. The purchase price is expected to be paid from
available cash and marketable securities. In the event that certain EBT
financial and operating goals are met, contingent payments of up to an
additional $5,300,000 are also expected to be paid from available cash and
marketable securities. The Company believes that the proceeds of this offering,
together with funds expected to be generated from operations, will be sufficient
to finance the Company's operations for the foreseeable future.
INFLATION
The Company does not believe that inflation has had a significant impact on
its results of operations for the periods presented.
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<PAGE> 21
BUSINESS
The Company is a leading provider of multilingual software products and
systems that help people correct, find, view, publish, and distribute data,
text, and images in electronic environments ranging from individual desktops to
the Internet. The Company markets certain of its products worldwide to OEMs of
computer hardware, software, and consumer electronics products. The Company also
markets software applications and systems to major corporations, government
agencies and end users. The Company currently has nearly 450 OEM customers and
over 600 direct corporate licensees, and the Company believes that the worldwide
installed base of end-user licensees of OEM products incorporating INSO's
technology exceeds 50,000,000.
CORE TECHNOLOGIES
The Company draws on proprietary technologies in areas such as linguistic
and data analysis to create products focused on the needs of each of the
Company's markets. The Company has assembled a team of distinguished experts in
the fields of linguistics, data analysis, and document structuring and has
extensive experience in developing its technologies into software products.
The Company's core technologies are distinguished by a combination of four
core competencies:
- Computational Linguistics and Lexicography. Computational linguistics is
a scientific discipline concerned with the analysis of the patterns and
irregularities of languages, and the encoding of those properties so that
language can be efficiently processed by computer. Lexicography is the
process or work of compiling and analyzing words in order to create a
dictionary.
- Software Engineering. The creation of efficient software code for
language and data analysis supporting numerous computing platforms.
- Information Base Technology. Techniques and tools for structuring,
indexing, and compressing raw or formatted data, text, graphics and other
content elements to facilitate the building of either proprietary or
open, standards-compliant databases for efficient and customizable access
to and retrieval of information.
- Document Structure Knowledge. Techniques and processes that interrogate,
analyze, and process text, graphics, and other content elements within
software application files and provide file access, viewing, and
conversion.
BUSINESS STRATEGY
The Company's strategy is to concentrate its development and marketing
efforts on building and promoting solutions where the combination of its core
competencies can create substantial added value and to optimize those solutions
for markets and market segments where the Company can achieve a significant
position. Key elements of this strategy include:
Extend Technological Lead in Core Competencies. The Company strives to
extend the depth of its core competencies. For example, in 1994, through its
research and development efforts with respect to the technologies underlying
IntelliScope, the Company expanded its linguistic core competencies to include
sentence structure analysis in all major European languages. The Company has
continued to expand its linguistics capabilities, and in 1996 released
IntelliScope in Japanese, beginning the extension of its linguistic core
competency to Asian languages. Similarly, in 1995 the Company began to expand
its core competencies to include the management of search queries. Through a
combination of computational linguistic techniques and information base
technology, the Company developed during 1996 the Inso Search Wizard query
refinement tool that limits the query to the specific subject matter area that
the user selects, and then expands the query within that subject matter area by
also searching on related terms.
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<PAGE> 22
Diversify Product Offerings and Product Lines. The Company seeks to
diversify its sources of revenue through the addition of products in existing
markets and the introduction of products in new and emerging markets. In 1994,
the Company added the Columbia Encyclopedia, Fifth Edition and the Concise
Columbia Electronic Encyclopedia to its Information Products reference line. In
1995, the Company further expanded its Information Products through the
acquisition of the Information Please almanacs and the addition of three new
titles to the Information Please line.
The Company also seeks to diversify its product offerings through the
addition of products intended for distribution through alternative channels. In
1996, the Company introduced CyberSpell, a Netscape Navigator plug-in proofing
technology for electronic and retail distribution, and ImageStream for Microsoft
Office, a graphics conversion utility intended for direct, electronic, and
retail distribution.
Expand Distribution Channels. The Company has expanded its customer base
through the use of multiple distribution channels. In 1995, the Company began
marketing Quick View Plus directly to corporate users and, through software
distribution channels, to consumers. Also during 1995, the Company opened its
European headquarters to manage the marketing of its products directly to
corporations and consumers in the European market. To complement its existing
reseller and distributor channels, the Company has recently commenced the direct
marketing of certain products to end users through electronic means.
In 1996, the Company substantially strengthened its direct corporate
selling activity and began a concentrated government sales effort. At the same
time, the Company has significantly expanded its relationships with distributors
and resellers of computer software, and has added marketing resources dedicated
to the development of the direct and consumer channels throughout the world.
Accelerate Growth and Strengthen Core Competencies Through
Acquisitions. In 1995, the Company acquired Systems Compatibility Corporation
(subsequently renamed INSO Chicago), which was at that time a leading supplier
of file viewing technologies to the software industry. This acquisition expanded
the Company's revenue base and provided a significant new core competency in
document structure knowledge and strengthened the Company's competency in
software engineering. At the same time, the Company acquired a corporate sales
presence in order to diversify its distribution channels. In January 1996, the
Company acquired Imagemark Software Labs, Inc. (subsequently renamed INSO Kansas
City), which added to the depth of the Company's document structure knowledge
and further expanded its revenue base. The INSO Kansas City acquisition also
gave the Company a leading position in the graphics conversion market,
reflecting the use of INSO Kansas City's graphics filters by leading developers
of software applications in the United States.
Similarly, through the acquisition of EBT (renamed INSO Providence), the
Company has substantially increased the depth of its information base technology
and document structure knowledge. In addition, this acquisition has diversified
both the Company's product offerings and its distribution channels by adding a
significant new product line and a substantial base of new corporate,
government, and international customers.
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<PAGE> 23
PRODUCTS
The Company offers a diverse array of products and solutions targeting
multiple distribution channels and market segments within the software industry.
The Company's product strategy is to leverage its linguistic, document and data
structuring, and software engineering expertise into fast, efficient, and
portable software products and solutions targeted at specific user needs. The
Company's products are divided into four major categories: Proofing Tools,
Information Management Tools, Information Products, and Electronic Publishing
Solutions.
Proofing Tools
The Company's Proofing Tools product line includes software programs and
related databases for correcting errors in spelling, grammar, punctuation,
capitalization, spacing, and other mistakes in documents created by users of
computer applications. The Company's Proofing Tools products include OEM
products such as International CorrectSpell, the industry-standard spelling
correction system; International ProofReader, a multilingual proofreading system
available in 10 languages that addresses numerous classes of writing errors and
style problems; and CorrectText Grammar Correction System, the leading English
grammar correction technology used in word processors today. Examples of
products using the Company's Proofing Tools include Microsoft's Word and Office,
Lotus Development Corporation's WordPro, SmartSuite, and Notes, and a version of
Netscape Communications Corporation's Powerpack.
The Company's newest Proofing Tool, CorrectEnglish, is a writing system
targeting the specific errors made by native speakers of Chinese, French,
German, Japanese, and Spanish when producing English language documents. This
product is designed to capitalize on the growing trend toward the use of English
as the international commercial language, and makes use of the Company's
linguistic expertise in both English and foreign languages by combining English
spelling, proofing and grammar correction with error messages and correction
instructions in the user's native language.
PROOFING TOOLS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
PRODUCT DESCRIPTION
-------------------------------------- -------------------------------------
<S> <C>
International CorrectSpell 24-language spelling correction
International ProofReader 10-language proofreading system
CorrectText Grammar Correction System English grammar correction
technology
CorrectEnglish English as a second language writing
system
SciWords Scientific and technical spelling
dictionaries
InWords Add-on spelling dictionary
CyberSpell Text-proofing add-on product for
Internet e-mail applications
- -----------------------------------------------------------------------------------------
</TABLE>
Information Management Tools
The Company's Information Management Tools product line includes search and
indexing enhancement products and file filtering, viewing, and conversion
products. The Company's search enhancement products are based on the ability of
the Company's technologies to analyze and process linguistic information. These
products are designed to bring the Company's linguistic expertise to bear on the
increasingly difficult problem of accurate searching and indexing of information
across desktops, LANs, WANs, and the World Wide Web, and include IntelliScope, a
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<PAGE> 24
multilingual tool that performs linguistic analysis, and Inso Search Wizard, an
interactive search expansion and refinement utility.
The Company's file filtering, viewing and conversion products are based on
the Company's document structure knowledge and the ability of the Company's
software programs to use that knowledge to render or convert information within
documents quickly and accurately. These products are designed to fulfill the
need for access to text, images and data created in a variety of formats as the
amount and complexity of documents stored and transmitted in electronic format
continues to increase, and include the Outside In OEM viewing technology; the
Quick View Plus end-user product, an application that provides corporations and
consumers with the ability to view, export, copy, and print files originating in
any of over 200 applications; the ImageStream graphics filters OEM product,
which permits the exchange of graphical images among more than 60 charting,
presentation, and graphical applications; and the CADleaf computer assisted
design file format viewing, conversion, and annotation utility.
Some examples of products using the Company's Information Management Tools
include Microsoft's Windows 95, Fulcrum Technology Inc.'s SearchServer, and
Novell, Inc.'s GroupWise.
INFORMATION MANAGEMENT TOOLS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- --------------------------------- ------------------------------------
<S> <C>
Intelliscope 15-language search and indexing
enhancement tool
Inso Search Wizard Interactive search expansion and
refinement utility
Outside In OEM file viewing and data access
technology
Quick View Plus End-user file viewing application
ImageStream OEM graphical file filtering and
conversion technology
ImageStream for Microsoft Office End-user Office-compatible graphics
conversion utility
CADleaf Viewing, conversion, and annotation
utility for computer assisted design
and manufacturing file formats
</TABLE>
- --------------------------------------------------------------------------------
Information Products
The Company's Information Products product line utilizes the Company's
information base technology and lexical expertise to produce electronic
reference works that combine authoritative, current content with advanced
electronic search capabilities. Through its ownership of information databases
and use of internal editorial resources, the Company creates proprietary content
designed for distribution through electronic means. The Company also licenses
authoritative content from information providers around the world, including
major print publishers, as the bases for additional Information Products. The
Information Products line includes more than 60 reference titles, including The
Columbia Encyclopedia, Fifth Edition, The Concise Columbia Electronic
Encyclopedia, and the American Heritage dictionaries. The Company's Information
Products also include reference products developed from its proprietary
information databases. Certain of these products are published in print form as
the Information Please almanacs and the A&E Entertainment Almanac. The Company
anticipates that it will continue to add to its proprietary information
databases and produce new reference products from those databases. Examples of
products using the Company's Information Products include Microsoft's Bookshelf,
CompuServe, Inc.'s CompuServe Information Service, Starwave Corporation's ESPNET
SportsZone, InterGO Communications, Inc.'s
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<PAGE> 25
InterGO, AT&T New Media Services' AT&T Business Network, and Bloomberg L.P.'s
THE BLOOMBERG.
INFORMATION PRODUCTS
<TABLE>
<S> <C>
------------------------------------------------------------------------------------
PRODUCT DESCRIPTION
Information Please series General, Business, Sports, Kids' and
Girls' almanacs, and the A&E
Entertainment Almanac
Monolingual dictionaries, Standard language references
including the American Heritage
dictionaries
Bilingual dictionaries Bi-directional language references
The Columbia Encyclopedia, Fifth Edition Information references
The Concise Columbia Electronic
Encyclopedia
IntelliFinder Software information retrieval
program for use with
Information Products
------------------------------------------------------------------------------------
</TABLE>
Electronic Publishing Solutions
The Company's Electronic Publishing Solutions feature the DynaText
publishing system, which is composed of automated and interactive tools to
create structured content from commonly used word processing and page makeup
systems, and browsing technology which permits users to select from among
specific views and structures to personalize the retrieval and presentation of
data. These products allow major corporations and government users to distribute
and maintain complex documents in many languages through multiple media such as
print, CD-ROM, LANs, WANs, and the World Wide Web.
ELECTRONIC PUBLISHING SOLUTIONS
<TABLE>
<S> <C>
------------------------------------------------------------------------------------
PRODUCT DESCRIPTION
DynaText Electronic publishing system
DynaTag SGML structuring utility
DynaWeb Web publishing extension to
DynaText
------------------------------------------------------------------------------------
</TABLE>
MARKETING, SALES, AND DISTRIBUTION
The Company markets its products worldwide to OEMs of computer software,
hardware, and consumer electronic products; corporations and government
agencies; and end users. The Company currently has nearly 450 OEM customers and
over 600 direct corporate licensees, and the Company believes that the worldwide
installed base of end-user licensees of OEM products incorporating INSO's
technology exceeds 50,000,000. The Company markets its products directly to OEMs
through its dedicated account management staff. The Company also markets its
products to corporations and government agencies directly and through resellers
and distributors, both domestically and overseas. The Company also markets and
sells certain products directly and indirectly to end users through electronic
means, to complement its existing reseller and distributor channels.
24
<PAGE> 26
The Company's sales and marketing organization, consisting of approximately
130 individuals, is managed from the Company's headquarters in Boston,
Massachusetts, and includes sales representatives or account managers in several
major markets worldwide. The Company conducts its OEM sales through a dedicated
account management program for large customers and through worldwide new
business development efforts. New business development efforts for OEM sales are
focused on identifying potential new applications and markets for the Company's
OEM products. The Company's corporate and governmental sales efforts are
conducted through sales forces dedicated to the Company's end-user products,
both directly and indirectly.
The Company, through its various subsidiaries, currently has operations in
many major European countries, as well as Japan and Australia. These operations
manage sales of the Company's products to end users, both directly and through
networks of value-added resellers and distributors, as well as to OEMs.
KEY CUSTOMERS
For the year ended December 31, 1995, five of the Company's customers
accounted for 67% (64%, if certain non-recurring revenue earned from royalty
audits is excluded) of its revenues, compared to 69% of its revenues for the
year ended December 31, 1994. A loss of, or significant decline in, revenues
from any key customer could have a material adverse effect on the Company's
business, financial condition, and results of operations.
For the year ended December 31, 1995, Microsoft accounted for 52% (50%, if
certain non-recurring revenue earned from royalty audits is excluded) of the
Company's revenues compared to 55% for 1994. Most of the revenues received by
INSO from Microsoft derive from the use of INSO's Proofing Tools in Microsoft's
Word and Office products. During 1995, the Company amended its agreement with
Microsoft with respect to Proofing Tools. Under the terms of the amended
agreement, the Company has granted to Microsoft, for substantially equal fixed
quarterly minimum payments in 1996 and 1997, (i) a license to use version 3.02
of INSO's grammar product (the "Licensed Grammar Product") in specified versions
of Microsoft's Word and Office products and (ii) an unlimited license to use a
version of INSO's spelling and thesaurus products in all Microsoft products.
Depending on the versions of Word and Office in which Microsoft uses the
Licensed Grammar Product after June 30, 1996, INSO can earn additional
predetermined revenues ("Usage Fees") through the termination date of the
agreement (March 2001). INSO expects that its revenues for the third quarter of
1996 will include certain such Usage Fees. There can be no assurance, however,
that INSO will receive any revenues from Microsoft after December 1997 with
respect to the Licensed Grammar Product. See "Risk Factors -- Reliance on Key
Customers."
RESEARCH AND DEVELOPMENT
The Company operates in an industry that is subject to rapid technological
change, and its ability to compete and operate successfully depends on, among
other factors, its ability to anticipate such change. Accordingly, the Company
is committed to the development of new products and the continuing evaluation of
new technologies. In addition, the Company is currently developing new products
for use on or in conjunction with the Internet and the World Wide Web. The rapid
changes that characterize these markets may require that the Company make
substantial additional investments in research and development in order to
respond to unforeseen market or technological developments. During the six
months ended June 30, 1996, and during 1995, 1994, and 1993, the Company's
expenditures for developing new products and product enhancements were
$6,146,000, $8,853,000, $6,080,000, and $3,738,000, respectively. These
expenditures represented 22%, 20%, 26%, and 27%, respectively, of total revenues
for those periods. Of these amounts, $865,000, $1,364,000, $1,352,000, and
$806,000, respectively, were capitalized in accordance with applicable
accounting principles and are subject to amortization over subsequent periods.
The balance was charged as product development expense.
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<PAGE> 27
COMPETITION
The market for Proofing Tools is characterized by a relatively small number
of participants marketing primarily through OEM channels. In addition to the
Company, the principal participants in the Proofing Tools market include
SoftArt, Inc. and WordPerfect Corporation, now a subsidiary of Novell, Inc.,
which, following the sale of its word processing and office suite software
products to Corel Corporation, has licensed its linguistic technology to
software developers on an OEM basis. The Company also could face competition
from Microsoft or any other OEM customer that were to develop internally its own
products comparable to the products currently licensed from the Company.
Competition in the markets for the Company's Information Management Tools
is significant. The Company's search enhancement products compete with products
offered by an affiliate of Xerox Corporation, and potentially compete with
offerings from other software development organizations with the capacity and
expertise to enter this market. The Company believes that as it continues to
introduce products focusing on query refinement and expansion, including concept
searching, it will face significant competition. The Company believes that the
principal competitive factors in these markets are product quality and
compatibility with multiple applications, with price being a secondary factor.
The Company's file-viewing technologies face competition from affiliates of
Adobe Systems, Inc. ("Adobe") in the OEM market and FTP Software Corporation in
the direct and retail markets. The Company's current graphics file conversion
products face competition from a number of smaller organizations, each
specializing in certain formats or applications. The Company expects that as it
broadens its file-viewing and conversion product line to include formats such as
HTML, it will encounter significant competition from a large number of
participants. The Company also faces limited competition in certain market
segments from large companies such as Oracle Corporation and International
Business Machines Corporation.
There is a large number of participants in the market for the Company's
Information Products, none of which has a dominant market position. Participants
in parts of this market segment include Franklin Electronic Publishers, Inc. and
Random House Electronic Publishing, Inc. (electronic dictionaries); Compton's
NewMedia, Inc. and Groliers Electronic Publishing, Inc. (electronic
encyclopedias); and Microsoft (Information Products generally). In addition, in
certain language markets, the Company may face competition from information
products developed by or for print publishers having substantial name
recognition in such markets.
The market for Electronic Publishing Solutions is characterized by a
limited number of large participants offering full or partial solutions, based
largely on proprietary formats. Participants in this market include Adobe and
its affiliates, Interleaf, Quark, and SoftQuad. In addition, as the market for
electronic publishing solutions grows, the Company expects to face additional
competition from participants offering standards-based solutions, such as those
offered by the Company.
The Company believes that the principal competitive factors in the markets
for its principal products are product quality, ease of use, platform support,
and price. An additional competitive factor in the market for Proofing Tools is
language coverage.
Some of the Company's competitors and potential competitors have
substantially greater development, marketing, sales, and financial resources
than the Company.
THIRD-PARTY DATABASE AND CONTENT SUPPLY ARRANGEMENTS
The Company's Proofing Tools and Information Products, and certain of its
Information Management Tools, products typically combine a database (such as a
word list or a general reference database) with proprietary software technology.
These databases are generally acquired through licensing arrangements with
domestic and international third-party sources, typically print publishers and
universities, although a number of such databases are owned by the Company. The
Company seeks to work with leading, authoritative content sources in each of its
product and market
26
<PAGE> 28
segments. The Company has arrangements in place with more than 40 publishers and
other information suppliers.
For its Proofing Tools and Information Management Tools product lines, the
Company acquires both word lists and full-definition databases. For its
Information Products line, the Company generally acquires selected electronic
rights for the underlying works on which the products are based. The Company
owns the copyrights to the databases used in its English-language Proofing Tools
and Information Management Tools products.
Although terms vary according to each individually negotiated license, the
Company's typical content license arrangement for its Proofing Tools calls for a
nonexclusive grant of rights for its use of the content in products it builds
for license to OEM customers. Content licenses for Information Products may be
made either on an exclusive or a nonexclusive basis. This usually includes the
right to refine and augment the content editorially for its purposes and the
right to use any associated trademarks and copyrights in the marketing of the
material both to and by licensees. The typical term of nonexclusive licenses is
five to 10 years.
EMPLOYEES
As of August 31, 1996, the Company had 388 employees, including 203 in
research and development, 133 in sales and marketing, and 52 in financial and
administrative positions.
The Company believes that its future success will depend in large part upon
its continued ability to recruit and retain highly qualified technical,
managerial, and marketing personnel. To date, the Company has been successful in
attracting and retaining skilled employees. None of the Company's employees is
represented by a labor union, and the Company considers its relationship with
its employees to be satisfactory.
RELATIONSHIP WITH HOUGHTON MIFFLIN
In connection with the Company's IPO, the Company issued to Houghton
Mifflin 2,330 shares of its Series A Convertible Preferred Stock (the "Series A
Preferred Stock") in exchange for the assets and properties formerly
constituting the Software Division of Houghton Mifflin. The Series A Preferred
Stock converted into 4,660,000 shares of Common Stock, or approximately 40.3% of
the then outstanding shares of Common Stock, immediately following the issuance
of the Common Stock offered to the public in connection with the IPO.
Immediately following the issuance and sale of the 1,200,000 shares of Common
Stock being offered hereby by the Company, Houghton Mifflin will continue to
hold 4,015,100 shares of Common Stock, representing approximately 28.1% of the
outstanding shares of Common Stock.
In August 1995, Houghton Mifflin completed a public offering of its SAILS.
Pursuant to the terms of the SAILS, Houghton Mifflin may, at its option, deliver
shares of Common Stock of the Company held by Houghton Mifflin upon exchange of
the SAILS. The SAILS will mature on August 1, 1999, unless previously redeemed
by Houghton Mifflin on or after August 1, 1998. After maturity of the SAILS, and
assuming the issuance and sale of 1,200,000 shares of Common Stock being offered
hereby by the Company, (i) if Houghton Mifflin elects to deliver cash in
exchange for the SAILS, it could continue to hold up to 4,015,100 shares of
Common Stock, representing 28.1% of the Company's outstanding Common Stock or
(ii) if Houghton Mifflin elects to deliver Common Stock in exchange for the
SAILS, it could hold, depending on the maturity price of the SAILS, from 175,100
to 704,636 shares, representing approximately 1.2% to 4.9% of the Company's
outstanding Common Stock.
On January 10, 1994, the Company and Houghton Mifflin entered into a
Formation Agreement pursuant to which the Company agreed to assume the
obligations and liabilities of Houghton Mifflin relating to the Software
Division, and granted Houghton Mifflin certain registration rights with respect
to the shares of Common Stock issued upon conversion of the Series A Preferred
Stock held
27
<PAGE> 29
by Houghton Mifflin. Under the Formation Agreement as amended to date, Houghton
Mifflin will be entitled to participate in certain registrations initiated by
the Company, at the Company's expense and subject to limitations that may be
imposed by the underwriters in an underwritten offering, during the three-year
period commencing on August 2, 1998. In addition, for a period of 180 days
following August 2, 1998, Houghton Mifflin will be entitled, on one occasion, to
request that the Company register for resale shares of Common Stock held by
Houghton Mifflin provided that (i) prior to August 2, 1998, either the Company
has not initiated a registration in which Houghton Mifflin could participate or,
if such a registration occurred, Houghton Mifflin was unable to register all of
the shares of Common Stock that Houghton Mifflin requested to be included
because of limitations imposed by the Company or its underwriters; and (ii) the
number of shares of Common Stock that Houghton Mifflin requests to be registered
has a market value at the date of such request of not less than $10,000,000.
The Formation Agreement also provides that the Company will use its best
efforts to cause its Board to nominate persons selected by Houghton Mifflin for
election as directors of the Company so that two Houghton Mifflin nominees will
serve on the Board (or at least two-sevenths of the Board, if the size of the
Board is increased), so long as Houghton Mifflin holds at least 20% of the
Company's outstanding Common Stock. Originally, the two Houghton Mifflin
nominees on the Company's Board were William J. Wisneski, an executive officer
of Houghton Mifflin, and Stephen O. Jaeger, who resigned as Chief Financial
Officer of Houghton Mifflin effective as of March 15, 1995 and, until the
expiration of his term on April 26, 1995, was a member of Houghton Mifflin's
Board of Directors. The Company and Houghton Mifflin have agreed that Mr. Jaeger
will no longer be considered a Houghton Mifflin nominee and Houghton Mifflin
will have the right to nominate another person for election as a director of the
Company in accordance with the Formation Agreement. Houghton Mifflin has not
exercised this right at the present time. Another director of the Company, Mr.
Joseph A. Baute, is a director of Houghton Mifflin, but was not designated by
Houghton Mifflin for election to the Company's Board.
28
<PAGE> 30
MANAGEMENT
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ---------------------------------------------------
<S> <C> <C>
Steven R. Vana-Paxhia............ 49 President, Chief Executive Officer, and Director
Kirby A. Mansfield............... 42 Vice President of Business Development
Jeffrey J. Melvin................ 36 Vice President and General Manager of Tools and
Technologies
Michael E. Melody................ 52 Vice President and General Manager of Information
Products
Carol J. Mitchell................ 50 Vice President of Sales
Sunanda Mathai................... 45 Vice President of Engineering
Paul F. Henderson................ 39 Vice President of Marketing
Betty J. Savage.................. 38 Vice President, Chief Financial Officer, and
Treasurer
Linda J. Barnes.................. 38 Vice President and Controller
Bruce G. Hill.................... 33 Vice President, General Counsel, and Secretary
J.P. Barger(1)(2)................ 69 Director
Joseph A. Baute(2)(3)............ 68 Director
Samuel H. Fuller(4).............. 50 Director
John Guttag(4)................... 47 Director
Stephen O. Jaeger(1)............. 52 Director
Joanna T. Lau(1)................. 38 Director
Raymond Stata(2)(3).............. 61 Director
William J. Wisneski(3)........... 50 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Governance Committee.
(3) Member of the Compensation Committee.
(4) Member of the Technology and Strategy Committee.
Steven R. Vana-Paxhia has been President and Chief Executive Officer and a
director of the Company since its inception on November 10, 1993. Mr.
Vana-Paxhia was Director of the Software Division of Houghton Mifflin from
November 1990 until March 1994 and was a Vice President of Houghton Mifflin from
April 1991 until March 1994. Prior to joining Houghton Mifflin, Mr. Vana-Paxhia
was Managing Director of Macmillan's Berlitz Translation Services from November
1987 until April 1990. Mr. Vana-Paxhia is also a director of Spyglass, Inc., a
provider of enabling technologies for the World Wide Web and MathSoft, Inc., a
software company.
Kirby A. Mansfield has been Vice President of Business Development of the
Company since June 1994. From the inception of the Company until June 1994, Mr.
Mansfield was Vice President of Marketing and Business Development. Mr.
Mansfield joined Houghton Mifflin in July 1989 initially as a consultant for the
Software Division and subsequently as its Director of Technical Development. Mr.
Mansfield was appointed a Vice President of the Software Division in February
1992 and became Vice President and Director of Marketing and Business
Development of the Software Division in October 1993.
Jeffrey J. Melvin has been Vice President and General Manager of Tools and
Technologies of the Company since October 1995. From January 1995 to October
1995, Mr. Melvin was Vice President of Sales and Marketing of the Company and
from the Company's inception to January 1995, he was the Company's Vice
President and Director of Sales. Mr. Melvin joined Houghton Mifflin in April
1991 as Director of Sales for the Software Division and was appointed Vice
President, Director of Sales of the Software Division in March 1993. Prior to
joining Houghton Mifflin, Mr. Melvin held various positions with Digital
Equipment Corporation ("DEC") beginning in 1983.
29
<PAGE> 31
Michael E. Melody has been Vice President and General Manager of
Information Products of the Company since March 1996. From October 1994 through
February 1996, Mr. Melody was Principal of Michael E. Melody, Consulting. From
October 1990 through September 1994, Mr. Melody was Executive Vice President,
College and Software Publishing of Houghton Mifflin. Prior to joining Houghton
Mifflin, Mr. Melody held various executive positions with Simon & Schuster,
Macmillan Publishing Company, and Prentice-Hall, Inc.
Carol J. Mitchell has been Vice President of Sales of the Company since
October 1995 and was Director of OEM Sales of the Company from January 1995
until October 1995. Prior to joining the Company, Ms. Mitchell held various
sales management positions, including New England large account sales manager,
with DEC, beginning in 1986. Prior to joining DEC, Ms. Mitchell held various
sales and sales management positions with Wang Laboratories, beginning in 1978.
Sunanda Mathai has been Vice President of Engineering of the Company since
its inception. Ms. Mathai joined Houghton Mifflin in October 1993 as the Vice
President of Engineering of the Software Division. Prior to joining Houghton
Mifflin, Ms. Mathai held several positions at ATEX, Inc., including Director of
Quality Assurance from March 1990 until September 1991 and Senior Director of
Engineering from October 1991 until joining Houghton Mifflin.
Paul F. Henderson has been Vice President of Marketing of the Company since
August 1996. Prior to joining the Company, Mr. Henderson was Vice President of
Marketing of Centerline Software, Inc. from February 1995 until August 1996.
Prior to that time, Mr. Henderson held various positions at Sun Microsystems,
Inc., including Director of Marketing, Worldwide Field Operations, for SunSoft,
the software products business of Sun Microsystems, from June 1994 to January
1995.
Betty J. Savage has been Vice President, Chief Financial Officer, and
Treasurer of the Company since its inception. Prior to joining the Company, Ms.
Savage had been employed with Ernst & Young LLP in auditing and other capacities
since 1980.
Linda J. Barnes has been Vice President and Controller of the Company since
its inception. Ms. Barnes joined Houghton Mifflin in 1982 and became a Software
Division Vice President in March 1993.
Bruce G. Hill has been Vice President, General Counsel, and Secretary of
the Company since March 1994. Prior to joining the Company, Mr. Hill had been an
associate attorney specializing in corporate and mergers and acquisitions
matters at the law firm of Skadden, Arps, Slate, Meagher & Flom in Boston,
Massachusetts, from 1988 until March 1994.
J.P. Barger has been a director of the Company since March 8, 1994. Mr.
Barger, who is retired, was the Chairman of the Board of Dynatech Corporation, a
diversified manufacturer, from July 1991 until August 1994 and was its President
from 1959 until July 1991 and its Chief Executive Officer from 1987 until
January 1993.
Joseph A. Baute has served as a director of the Company since its
inception. Mr. Baute has been a principal in Baute & Baute, a consulting firm
for family businesses, since 1993. Mr. Baute was Chairman and Chief Executive
Officer of Markem Corporation, which provides systems, supplies, and services to
mark customers' products, from 1979 until his retirement in June 1993. Mr. Baute
is also a director of Houghton Mifflin, Dead River Group, Nashua Corporation,
State Street Bank and Trust Company, and the Rodney Hunt Company and a member of
the Board of Advisors of Kearsage Capital Fund, L.P.
Samuel H. Fuller has been a director of the Company since May 1996. Dr.
Fuller is currently Vice President, Corporate Technology Strategy and Chief
Scientist for DEC. Dr. Fuller has held various other positions with DEC since
1978, and served as its Vice President of Research from 1983 to January, 1996.
Dr. Fuller is also a director of Analog Devices, MCC and the National Research
Initiatives.
30
<PAGE> 32
John Guttag has been a director of the Company since May 1996. Dr. Guttag
is currently Associate Department Head for Computer Science of the Electrical
Engineering and Computer Science Department at the Massachusetts Institute of
Technology, where he has been a member of the faculty since 1979. Dr. Guttag is
also a director of Revco D.S. and of the Computing Research Association.
Stephen O. Jaeger has been a director of the Company since its inception.
Since March 15, 1995, Mr. Jaeger has served as Vice President, Finance and Chief
Financial Officer of The Perkin-Elmer Corporation, a leading worldwide producer
of analytical instruments and life science systems. Mr. Jaeger was Chief
Financial Officer of Houghton Mifflin from 1988 until March 1995. Mr. Jaeger was
originally designated to serve as a director of the Company by Houghton Mifflin
under the Formation Agreement with Houghton Mifflin, but no longer serves in
such capacity.
Joanna T. Lau has been a director of the Company since March 8, 1994. Ms.
Lau has been the President and Chairman of the Board of Lau Technologies, Inc.,
which provides manufacturing services for electronic systems and produces
digitized imaging identification systems, since March 1990. Ms. Lau held various
management positions at DEC and General Electric Company from 1981 until 1990.
Ms. Lau is also a director of FSI International, a semiconductor manufacturer.
Raymond Stata has been a director of the Company since March 8, 1994. Mr.
Stata has been the Chairman of the Board and Chief Executive Officer of Analog
Devices, Inc., a manufacturer of hardware components for computer systems, since
1973 and was its President from 1971 until 1991.
William J. Wisneski has been a director of the Company since its inception.
Mr. Wisneski has been Executive Vice President, School Publishing of Houghton
Mifflin since August 1992 and has held various other positions with Houghton
Mifflin and its subsidiaries since June 1990. Mr. Wisneski was President of
Learned & Tested, The Education Company, a supplementary materials subsidiary of
Harcourt Brace Jovanovich, Inc., from September 1988 until June 1990. Mr.
Wisneski was originally designated to serve as a director by Houghton Mifflin
under the Formation Agreement and continues to serve in such capacity.
31
<PAGE> 33
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives,
Alex. Brown & Sons Incorporated, Adams, Harkness & Hill, Inc. and Montgomery
Securities, have severally agreed to purchase from the Company the following
respective numbers of shares of Common Stock at the public offering price less
the underwriting discounts and commissions set forth on the cover page of this
Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------------- ---------
<S> <C>
Alex. Brown & Sons Incorporated..........................................
Adams, Harkness & Hill, Inc..............................................
Montgomery Securities....................................................
-------
Total.......................................................... 1,200,000
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
such shares are purchased.
The Company has been advised by the Representatives of the Underwriters
that the Underwriters propose to offer the shares of Common Stock to the public
at the public offering price set forth on the cover page of this Prospectus, and
to certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After
the public offering, the public offering price and other selling terms may be
changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 180,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 1,200,000 and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 1,200,000 shares are being offered.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
The Company, all executive officers and directors of the Company, and
Houghton Mifflin have agreed, subject to certain exceptions, not to offer, sell
or otherwise dispose of any shares of Common Stock for a period of 90 days after
the date of this Prospectus without the prior written consent of Alex. Brown &
Sons Incorporated, except that the Company may issue, and grant options to
purchase, shares of Common Stock under its current stock option and purchase
plans and other currently outstanding options and except that Houghton Mifflin
may sell up to 75,000 shares of Common Stock in open market transactions,
subject to certain other restrictions. In addition, the
32
<PAGE> 34
Company may issue shares of Common Stock in connection with any acquisition of
another company if the terms of such issuance provide that such Common Stock
shall not be resold prior to the expiration of the 90-day period referenced in
the preceding sentence.
Certain of the Underwriters and selling group members (if any) that
currently act as market makers for the Common Stock may engage in "passive
market making" in the Common Stock on the Nasdaq National Market ("Nasdaq") in
accordance with Rule 10b-6A under the Exchange Act. Rule 10b-6A permits, upon
the satisfaction of certain conditions, underwriters and selling group members
participating in a distribution that are also Nasdaq market makers in the
security being distributed to engage in limited market making transactions
during the period when Rule 10b-6 under the Exchange Act would otherwise
prohibit such activity. Rule 10b-6A prohibits underwriters and selling group
members engaged in passive market making generally from entering a bid or
effecting a purchase at a price that exceeds the highest bid for those
securities displayed on Nasdaq by a market maker that is not participating in
the distribution. Under Rule 10b-6A, each underwriter or selling group member
engaged in passive market making is subject to a daily net purchase limitation
equal to 30% of such entity's average daily trading volume during the two full
consecutive calendar months immediately preceding the date of the filing of the
registration statement under the Securities Act pertaining to the security to be
distributed. Passive market making may stabilize the market price of the Common
Stock at a level above that which might otherwise prevail and, if commenced, may
be discontinued at any time.
Alex. Brown & Sons Incorporated provided financial advisory services to the
Company in connection with the Company's acquisition of EBT on July 16, 1996.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Hale and Dorr,
Boston, Massachusetts. Certain legal matters in connection with the offering
will be passed upon for the Underwriters by Skadden, Arps, Slate, Meagher &
Flom, Boston, Massachusetts.
EXPERTS
The consolidated financial statements (including schedules incorporated by
reference) of INSO Corporation at December 31, 1995 and 1994, and for each of
the three years in the period ended December 31, 1995, appearing in this
Prospectus and Registration Statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing and
incorporated by reference herein. The consolidated financial statements of
Electronic Book Technologies, Inc. at December 31, 1995 and 1994 and for the
years then ended appearing in INSO Corporation's Report on Form 8-K/A filed
September 17, 1996 have been audited by Ernst & Young LLP, as set forth in their
report included therein and incorporated herein by reference. The consolidated
financial statements referred to above are included and incorporated herein by
reference in reliance upon such reports given upon the authority of such firm as
experts in accounting and auditing.
33
<PAGE> 35
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors........................................................ F-2
Consolidated Balance Sheets at December 31, 1995 and 1994............................. F-3
Consolidated Statements of Income for the years ended December 31, 1995, 1994, and
1993................................................................................ F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994, and
1993................................................................................ F-5
Consolidated Statement of Stockholders' Equity for the years ended December 31, 1995
and 1994............................................................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
Pro Forma Consolidated Financial Information (Unaudited).............................. F-17
</TABLE>
F-1
<PAGE> 36
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
INSO Corporation
We have audited the accompanying consolidated balance sheets of INSO
Corporation as of December 31, 1995 and 1994, the related consolidated
statements of income and cash flows for each of the three years in the period
ended December 31, 1995, and the related consolidated statements of
stockholders' equity for each of the two years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
INSO Corporation at December 31, 1995 and 1994, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Boston, Massachusetts
February 1, 1996
F-2
<PAGE> 37
INSO CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1994
------- -------
(IN THOUSANDS
EXCEPT SHARE
AMOUNTS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $37,235 $13,858
Marketable securities.......................................... 25,397
Accounts receivable, net of allowances of $790 in 1995 and $372
in 1994..................................................... 8,264 7,464
Other current assets........................................... 530 80
------- -------
Total current assets................................... 71,426 21,402
Property and equipment, at cost:
Leasehold improvements......................................... 476 18
Computer equipment and software................................ 3,880 2,189
Furniture and fixtures......................................... 711 78
------- -------
5,067 2,285
Less accumulated amortization and depreciation................... (2,810) (1,313)
------- -------
2,257 972
Royalty advances and other assets, net........................... 980 1,094
Product development costs, net of accumulated amortization of
$6,775 in 1995 and $4,734 in 1994.............................. 3,229 2,156
Intangible assets, net of accumulated amortization of $1,491 in
1995 and $328 in 1994.......................................... 9,390 3,695
Deferred income tax benefit, net................................. 3,847 4,175
------- -------
Total Assets........................................... $91,129 $33,494
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities....................... $ 1,885 $ 787
Accrued salaries, commissions, and bonuses..................... 2,094 1,272
Unearned revenue............................................... 875 375
Royalties payable.............................................. 1,461 1,212
Due to Houghton Mifflin Company................................ 314 903
Promissory notes............................................... 6,037
Current income taxes payable................................... 883 61
Deferred income taxes.......................................... 2,417 1,270
------- -------
Total current liabilities.............................. 15,966 5,880
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
none issued.................................................
Common stock, $.01 par value; 25,000,000 and 12,000,000 shares
authorized in 1995 and 1994, respectively; 12,965,700 and
5,814,211 shares issued in 1995 and 1994, respectively...... 130 58
Capital in excess of par value................................. 64,096 22,420
Retained earnings.............................................. 11,657 5,663
------- -------
75,883 28,141
Unamortized value of restricted shares......................... (669) (506)
Treasury stock, at cost, 4,975 and 850 shares in 1995 and 1994,
respectively................................................ (51) (21)
------- -------
Total stockholders' equity............................. 75,163 27,614
------- -------
Total Liabilities and Stockholders' Equity............. $91,129 $33,494
======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE> 38
INSO CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Net revenues.................................................... $43,387 $23,463 $13,757
Cost of revenues................................................ 5,792 3,074 1,870
------- ------- -------
Gross profit.................................................. 37,595 20,389 11,887
Operating expenses:
Sales and marketing........................................... 6,570 3,676 2,612
Product development........................................... 7,489 4,728 2,932
General and administrative.................................... 6,458 3,452 1,957
Purchased in-process research and development................. 5,500
------- ------- -------
Total operating expenses.............................. 26,017 11,856 7,501
------- ------- -------
Operating income................................................ 11,578 8,533 4,386
Net investment income........................................... 1,468 319
------- ------- -------
Income before provision for income taxes........................ 13,046 8,852 4,386
Income tax expense.............................................. 7,052 3,189 1,811
------- ------- -------
Net income...................................................... $ 5,994 $ 5,663 $ 2,575
======= ======= =======
Primary earnings per share...................................... $ 0.49 $ 0.48 $ 0.22
======= ======= =======
Fully diluted earnings per share................................ $ 0.47 $ 0.47 $ 0.22
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 39
INSO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------
1995 1994 1993
-------- -------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Cash flows from (used in) operating activities:
Net income.................................................. $ 5,994 $ 5,663 $ 2,575
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 3,712 1,504 464
Purchased in-process research and development............ 5,500
-------- -------- -------
15,206 7,167 3,039
Changes in operating assets and liabilities:
Accounts receivable...................................... 189 (3,226) (2,451)
Royalty advances......................................... 414 (779) (27)
Accounts payable and accrued liabilities................. 1,861 1,941 93
Current and deferred income taxes........................ 2,495 789 378
Royalties payable........................................ 266 310 372
Due to Houghton Mifflin Company.......................... (589) 773
Other assets and liabilities............................. (122) (123)
-------- -------- -------
Net cash provided by operating activities................ 19,720 6,852 1,404
Cash flows from (used in) investing activities:
Property and equipment expenditures......................... (2,211) (1,040) (225)
Capitalized product development costs....................... (1,364) (1,352) (806)
Acquisition of Systems Compatibility Corporation, net of
cash acquired and issuance of promissory notes........... (4,184)
Purchase of rights of Information Please(R) Almanacs........ (3,455)
Purchase of marketable securities........................... (25,397)
Software license............................................ (4,023)
-------- -------- -------
Net cash used in investing activities.................... (36,611) (6,415) (1,031)
Cash flows from (used in) financing activities:
Net proceeds from issuance of common stock.................. 39,616 47,399
Payment to Houghton Mifflin Company and transfer of net
assets................................................... (34,155)
Principal stockholder's contribution to capital............. 130
Purchases of treasury stock................................. (30) (21)
Proceeds from exercise of stock options..................... 1,012 68
Repayment of promissory notes............................... (330)
-------- -------- -------
Net cash provided by financing activities................ 40,268 13,421
-------- -------- -------
Net increase in cash and cash equivalents..................... 23,377 13,858
Net cash transferred to Houghton Mifflin
Company..................................................... $ 373
=======
Cash and cash equivalents at beginning of the period.......... 13,858 0 $ 0
-------- -------- -------
Cash and cash equivalents at end of the period................ $ 37,235 $ 13,858 $ 0
======== ======== =======
Supplementary information:
Income taxes paid........................................... $ 5,017 $ 2,312
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 40
INSO CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
COMMON STOCK
---------------------------- CAPITAL IN UNAMORTIZED
AMOUNT EXCESS OF RETAINED VALUE OF TREASURY STOCK
SHARES $.01 PAR VALUE PAR VALUE EARNINGS RESTRICTED SHARES SHARES AMOUNT TOTAL
---------- --------------- ----------- -------- ------------------ -------- ------ -------
(IN THOUSANDS EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1994................. $ 0
Net proceeds from
initial public
offering............. 3,450,000 $ 35 $ 47,262 47,297
Payment to Houghton
Mifflin Company and
transfer of net
assets............... 2,321,300 23 (31,029) (31,006)
Deferred income tax
benefit,
net.................. 5,326 5,326
Stock options
exercised............ 4,500 100 100
Issuance of restricted
shares............... 23,518 552 $ (552) 0
Principal stockholder's
contribution to
capital.............. 8,700 130 130
Issuance of shares
pursuant to
Employee Stock
Purchase
Plan................. 6,193 79 79
Share repurchases...... 850 $(21) $ (21)
Amortization of
restricted shares.... 46 46
Net income............. $ 5,663 5,663
---------- ---- -------- ------- ----- ----- ---- -------
BALANCE AT DECEMBER 31,
1994................. 5,814,211 $ 58 $ 22,420 $ 5,663 $ (506) 850 $(21) $27,614
Issuance of shares
pursuant to
Employee Stock
Purchase Plan
and Benefit Plan..... 18,414 501 501
Net proceeds from
public
offering............. 600,000 6 39,286 39,292
Stock options
exercised............ 45,875 1 1,011 1,012
Issuance of restricted
shares............... 10,500 336 (336) 0
Other issuances and
repurchases.......... 3,500 119 4,125 (30) 89
Two-for-one stock
split................ 6,473,200 65 (65) 0
Amortization of
restricted
shares............... 173 173
Tax benefits of stock
option
exercises............ 488 488
Net income............. 5,994 5,994
---------- ---- -------- ------- ----- ----- ---- -------
BALANCE AT DECEMBER 31,
1995................. 12,965,700 $ 130 $ 64,096 $11,657 $ (669) 4,975 $(51) $75,163
========== ==== ======== ======= ===== ===== ==== =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 41
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
INSO Corporation, formerly InfoSoft International, Inc., (the "Company")
was formed on November 10, 1993, as the successor Company to the Software
Division of Houghton Mifflin Company ("Houghton Mifflin"). At the time of
incorporation in Delaware, the Board of Directors established a class of Series
A Convertible Preferred Stock with priority dividend rights (the "Series A
Preferred"). The Company and Houghton Mifflin entered into a Formation Agreement
on January 10, 1994, in which Houghton Mifflin agreed to purchase all of the
Company's authorized Series A Preferred and transfer to the Company the net
assets and business of the Software Division. The transactions provided for in
the Formation Agreement were consummated concurrent with the Company's
completion of an initial public offering of its common stock on March 8, 1994.
The shares of Series A Preferred issued to Houghton Mifflin were entitled to a
preferential dividend equal to 80% of the net proceeds received by the Company
in connection with the sale of the common stock in such public offering.
Simultaneous with the payment of the dividend, the Series A Preferred was
converted into 4,660,000 shares of common stock, equivalent to approximately a
40% equity interest in the Company.
The accompanying financial statements are presented as though the Company
had existed as a corporation separate from Houghton Mifflin throughout the
periods presented and include the historical assets, liabilities, revenues, and
expenses that are directly related to the Company's operations, including
expenses charged to the Company by Houghton Mifflin. (See Notes 6 and 7.)
Nature of Operations
The Company is a provider of multilingual software products that help
people enhance the quality of their written communications, provide them with
access to information from authoritative sources, and make it easier for them to
locate, retrieve, and view information, regardless of format or structure. The
Company markets its products worldwide to original equipment manufacturers
(OEMs) of computer hardware, software and consumer electronics products;
corporations; and end users. These operations are reported as one business
segment.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Revenue Recognition
The Company derives its revenues from royalties, including initial
nonrefundable royalties from license arrangements, one-time license and annual
software maintenance fees from site-license agreements with corporate customers,
and from one-time fees for direct licenses to customers. Royalty revenue is
earned in one of the following ways: as a percentage of net revenues from
product unit sales by licensees that incorporate the Company's products, as a
fixed per-unit royalty, or as a regular periodic fee based on estimated
shipments or usage over time.
The Company accounts for revenue in accordance with Statement of Position
91-1, "Software Revenue Recognition," issued by the American Institute of
Certified Public Accountants. Specifically, royalty revenues are generally
recognized in the Company's financial statements in the quarter in which amounts
due to the Company have been determined. In the event that further substantial
support or performance obligations exist, revenue is recognized ratably as
earned. Revenues from initial nonrefundable royalty arrangements are recognized
at the time of product acceptance by the
F-7
<PAGE> 42
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
licensee if no significant obligation relating to the underlying contract
remains to be completed. Nonrefundable royalty amounts payable to the Company
according to specified payment dates are recorded as receivables. Revenues from
corporate site licenses are recognized at the time of the delivery to the
customer. Revenues for maintenance agreements are recognized as income over the
term of the agreement using the straight-line method.
Cash and Cash Equivalents
The Company considers highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents.
Investments
The Company accounts for its investments in securities, including certain
cash equivalents and marketable securities, in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The appropriate classification of debt securities
is determined at the time of purchase and is reevaluated at each balance sheet
date. (See Note 2.)
Product Development Costs
Software and other costs incurred in connection with product development
are charged to expense until such time as specific product technological
feasibility has been established. Thereafter, product development costs specific
to the product are capitalized and reported at the lower of unamortized cost or
net realizable value.
Amortization of capitalized product development costs begins when the
related product is available for general release to customers. These costs are
amortized using the shorter of the estimated future product revenue streams or
the straight-line method over a period not exceeding three years.
Amortization of $1,308,000, $588,000, and $245,000 for the years ended
1995, 1994, and 1993, respectively, are included as a component of cost of
revenues.
Royalty Advances
Royalty advances, which pertain to payments by the Company for the license
of technology and/or content used in its products, are stated at cost less
royalty amounts expensed based on revenues recognized over the life of the
related agreement.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
an accelerated method over the estimated economic life of the assets, generally
three to five years. Depreciation is provided on leasehold improvements using
the straight-line method over the economic life of the asset or the lease term,
whichever is shorter.
Intangible Assets
Intangible assets are being amortized over their estimated economic lives.
If facts and circumstances suggest that an impairment may have occurred, the
unamortized balances of these assets are reviewed under the provisions of
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." If
this review
F-8
<PAGE> 43
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
indicates that the remaining balance is not recoverable, as determined based
upon the estimated undiscounted cash flows of the asset during its remaining
economic life, the value assigned to the asset would be reduced to its fair
value.
Concentration of Credit Risk
In 1995, 1994, and 1993 one customer accounted for 52%, 55%, and 48% of
revenues, respectively. The 1995 revenues for that customer include $1,500,000
of non-recurring revenue earned from royalty audits. The Company performs
ongoing credit evaluations of its customers and maintains reserves for potential
credit losses; to date, losses have not been material to the Company's financial
position or results of operations.
The Company licenses its products primarily to customers in North America.
Sales to foreign customers accounted for $5,673,000, $4,216,000, and $3,076,000
for the years ended December 31, 1995, 1994, and 1993, respectively.
Substantially all export sales have been consummated by the Company's United
States operation.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its stock-based compensation plans rather than
the alternative fair value accounting provided under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). The Company expects to continue to account for stock issued to employees
in accordance with APB 25 and will make all disclosures required by SFAS 123
beginning in fiscal year 1996.
Earnings Per Share
As the Company's operations were included in the consolidated financial
statements of Houghton Mifflin on a divisional basis prior to the initial public
offering, there are no stockholder equity accounts for the Company prior to
1994. Common shares outstanding of 11,560,000 at March 8, 1994, have been
included in the earnings per share calculation as if the shares were outstanding
for all periods prior to March 8, 1994. Primary and fully diluted earnings per
share are based on the weighted average number of shares outstanding during the
period and the assumed exercise of dilutive stock options using the treasury
stock method. The primary weighted average number of common and equivalent
shares outstanding was 12,228,000 in 1995, 11,798,000 in 1994, and 11,560,000 in
1993. The fully diluted weighted average number of common and equivalent shares
outstanding was 12,839,000 in 1995, 11,946,000 in 1994, and 11,560,000 in 1993.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior year's consolidated
financial statements to conform to the 1995 presentation.
F-9
<PAGE> 44
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2. INVESTMENTS
The Company's available-for-sale investments carried at cost which
approximates fair value, included in cash equivalents and marketable securities,
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1995 1994
------- -------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Commercial paper................................................. $26,950 $ 1,000
Corporate notes.................................................. 9,707
Money market funds............................................... 9,697 6,300
Tax-exempt municipal bonds....................................... 8,726.. 6,050
United States agency bonds....................................... 4,993
Asset-backed securities.......................................... 1,971
------- -------
Total.................................................. $62,044 $13,350
======= =======
</TABLE>
Interest on securities classified as available-for-sale of $1,208,000 and
$321,000 is included in net investment income in 1995 and 1994, respectively.
Dividend income, included in net investment income, for securities classified as
available-for-sale was $269,000 in 1995.
At December 31, 1995, $50,366,000 of securities mature within one year and
$11,678,000 of securities mature between one and two years. At December 31,
1994, all securities were to mature within 90 days.
NOTE 3. COMMON STOCK
On August 2, 1995, the Company completed a public offering of 600,000
shares (1,200,000 shares adjusted for stock dividend) of the Company's common
stock, which provided the Company with net proceeds of approximately
$39,300,000.
On September 1, 1995, the Company effected a two-for-one stock split in the
form of a stock dividend of one share of common stock for each outstanding share
of common stock. The dividend was payable to holders of record on August 18,
1995. All references in the financial statements to the average number of shares
outstanding and related prices, per share amounts, stock plans data, and benefit
plan data have been retroactively restated to reflect this transaction. In
addition, an amount equal to the par value of the shares outstanding at
September 1, 1995, has been transferred from capital in excess of par to common
stock.
NOTE 4. ACQUISITIONS AND LICENSE AGREEMENTS
Systems Compatibility Corporation
On April 1, 1995, the Company acquired all of the outstanding capital stock
of privately held Systems Compatibility Corporation (SCC), now INSO Chicago, for
a purchase price of $12,367,500. The purchase was paid in the form of $6,000,000
in cash and $6,367,500 in promissory notes with a final payment due on February
1, 1996. The notes were supported by outstanding letters of credit. The
transaction was accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition. The acquisition
included the purchase of certain technology under research and development,
which resulted in a charge to the Company's consolidated results for the quarter
ended June 30, 1995, of $5,500,000, or $0.44 per share. The charge was not
deductible for tax purposes. The purchase price has been allocated on the basis
of the estimated fair market value of the assets acquired and liabilities
assumed. Intangible assets of $3,842,000 were
F-10
<PAGE> 45
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
recorded as part of the acquisition and are being amortized on a straight-line
basis over their estimated useful lives of seven years.
Unaudited pro-forma revenue, net income, and earnings per share shown below
for the years ended December 31, 1995 and 1994 assume the acquisition occurred
on January 1, 1995 and 1994, respectively:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1995 1994
------- -------
(UNAUDITED)
(IN THOUSANDS OF
DOLLARS
EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C>
Revenue...................................................... $45,093 $29,285
Net income................................................... $ 5,819 $ 5,740
Earnings per share........................................... $ 0.48 $ 0.49
</TABLE>
Information Please(R) Almanacs
On July 5, 1995, the Company acquired all rights to the Information
Please(R) names, trademarks, copyrights, and related assets from Houghton
Mifflin for approximately $3,600,000. Approximately $3,300,000 of the total
acquisition price was allocated to the aforementioned publishing rights and is
being amortized on a straight-line basis over an estimated useful life of 15
years as determined by the revenue history of the Information Please(R)
almanacs.
Microlytics, Inc.
Effective March 3, 1994, the Company consummated a license agreement with
Microlytics, Inc. and its parent, SelecTronics, Inc., for rights to certain of
Microlytics' proofing tools and certain related products. In connection with
this license agreement, the Company was assigned certain license agreements
between Microlytics and its OEM customers. The initial term of the license
agreement is eight years with five, one-year renewal options. The net cost for
the license and assignment of contracts was $4,023,000 plus a royalty if annual
revenue from the licensed products exceeds certain amounts. The license is being
amortized over the initial eight-year period based on the relationship of
current period revenues to anticipated total revenues during the license period.
NOTE 5. INCOME TAXES
The taxable income of the Company was included in the consolidated tax
returns of Houghton Mifflin until the completion of the initial public offering
described in Note 1. Income tax expense has been provided as though the Company
were filing separate tax returns for all periods prior to the initial public
offering.
F-11
<PAGE> 46
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense comprised the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994 1993
------ ------ ------
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C> <C>
Current:
Federal.................................................. $4,239 $1,818 $ 963
Foreign.................................................. 230 190 176
State.................................................... 1,108 401 341
------ ------ ------
Total current.................................... 5,577 2,409 1,480
Deferred:
Federal.................................................. 1,320 710 255
State.................................................... 155 70 76
------ ------ ------
Total deferred................................... 1,475 780 331
------ ------ ------
$7,052 $3,189 $1,811
====== ====== ======
</TABLE>
A reconciliation of income tax expense to the statutory federal income tax
rate was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1995 1994 1993
-------------- -------------- --------------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Federal statutory rate................ $4,566 35.00% $3,010 34.00% $1,535 35.00%
State income taxes, net of
federal effect...................... 775 5.94 311 3.51 272 6.19
Change in valuation allowance......... (328) (2.51) (302) (3.41)
Purchased in-process research and
development......................... 1,925 14.75
INSO Chicago intangible asset
amortization........................ 264 2.02
Research and development credit....... (294) (2.25) (26) (.29)
Other................................. 144 1.10 196 2.21 4 0.10
------ ----- ------ ----- ------ -----
Total....................... $7,052 54.05% $3,189 36.02% $1,811 41.29%
====== ===== ====== ===== ====== =====
</TABLE>
Significant components of the Company's net deferred income tax
assets/(liabilities) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Net deferred tax assets:
Intangible assets..................................... $ 9,456 $10,165
Valuation allowance................................... (4,808) (5,135)
Capitalized development costs......................... (860) (827)
Deferred income....................................... (193) (193)
Other................................................. 252 165
------- -------
3,847 4,175
Net deferred tax liabilities:
Deferred income....................................... 2,883 1,511 $ 1,218
Capitalized development costs......................... 545
Other................................................. (466) (241) (150)
------- ------- -------
2,417 1,270 1,613
------- ------- -------
Net deferred income tax assets/(liabilities)............ $ 1,430 $ 2,905 $(1,613)
======= ======= =======
</TABLE>
F-12
<PAGE> 47
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The deferred income tax benefit included on the accompanying consolidated
balance sheet relates to a tax basis difference between assets for financial
reporting and for income tax purposes, primarily tax basis intangible assets
arising in connection with the formation of the Company and completion of the
initial public offering. The valuation allowance of $4,808,000 and $5,135,000 at
December 31, 1995 and 1994, respectively, was determined after evaluating the
Company's historical operating results and anticipated performance over its
normal planning horizon. The Company periodically evaluates the valuation
allowance and makes adjustments to the extent that actual and anticipated
operating results vary from those initially estimated at the time the valuation
allowance was established. The tax benefit associated with the intangible assets
is subject to statutory realization ratably over a fifteen-year period in total
if the Company achieves certain levels of taxable income.
NOTE 6. SHARED SERVICES WITH HOUGHTON MIFFLIN
The Company and Houghton Mifflin entered into an Administration and
Services Agreement ("Services Agreement"), which was effective upon completion
of the initial public offering described in Note 1 and under which Houghton
Mifflin provided directly some of the general services discussed in the
following paragraph that were previously provided to the Company. The term of
the Services Agreement extended through December 31, 1995. The fees charged for
general services under the Services Agreement, which are believed by the Company
to approximate amounts between unrelated parties, totaled $131,000 and $245,000
for 1995 and 1994, respectively.
Prior to the completion of the initial public offering described in Note 1,
Houghton Mifflin provided various administrative services to the Company,
including, but not limited to, payroll, data processing, tax, legal, treasury,
human resources, employee benefits administration, financial and accounting,
executive services, and insurance administration. In addition, the Company's
employees participated in the various Houghton Mifflin benefit plans, and the
Company was charged for these benefits on the same basis as Houghton Mifflin
charged its other operating units. The following table lists the amounts charged
by Houghton Mifflin for the year ended December 31, 1993, along with offsetting
amounts recovered by the Company:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1993
-----------------------
(IN THOUSANDS OF
DOLLARS)
<S> <C>
Insurance and benefits....................................... $ 866
General services............................................. 263
Rent and occupancy costs..................................... 884
------
Total charges................................................ 2,013
Less recovery for development work performed................. (73)
------
Net Charges.................................................. $ 1,940
======
</TABLE>
The charges for rent and occupancy generally represent a pro-rata
pass-through of actual rent and related costs for the space occupied by the
Company. Following the initial public offering, these charges were covered by a
separate agreement. (See Note 7.)
NOTE 7. OTHER TRANSACTIONS WITH HOUGHTON MIFFLIN
The Company and Houghton Mifflin have various license agreements (the
"License Agreements") for the purpose of licensing certain database content from
published reference products of Houghton Mifflin's Trade and Reference Division
for use in certain of the Company's products. Included in the Company's cost of
revenues for the years ended December 31, 1995, 1994, and 1993, were royalties
to Houghton Mifflin for the licensing of this database content amounting to
F-13
<PAGE> 48
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$700,000, $754,000, and $371,000, respectively. The terms of the License
Agreements are substantially the same as those in effect while the Company
operated as a division of Houghton Mifflin, except that the minimum royalty for
certain licenses of reference work content has been increased to 15% from 10%
only with respect to new OEM licenses entered into after January 1, 1994.
Effective December 31, 1994, the Company completed an agreement with Houghton
Mifflin whereby the rights of use and ownership of certain word lists were
transferred to the Company for $250,000, which was paid to Houghton Mifflin in
1995.
During 1995, the book rights for the series of Information Please(R)
Almanacs were licensed back to Houghton Mifflin. (See Note 4.) In connection
with the book right licensing arrangement, the Company recognized approximately
$1,000,000 for the initial guaranteed royalty. As of December 31, 1995, $750,000
remained unpaid under the royalty arrangement and is included in accounts
receivable.
Until May 1995, the Company's corporate offices occupied approximately
27,000 square feet in the Houghton Mifflin headquarters location in Boston,
Massachusetts. The Company and Houghton Mifflin entered into a Use and Occupancy
Agreement, which provided that the Company had the right to occupy that space
through December 31, 1995. That agreement was subject to termination by either
party with appropriate notice. On May 12, 1994, the Company notified Houghton
Mifflin that the Company was exercising its right to terminate the Use and
Occupancy Agreement effective May 12, 1995, in anticipation of the Company's
move to new office space in Boston. (See Note 11.) The Company's rent and
related costs under the agreement were consistent with past practice in that the
Company's costs were based upon a pro-rata share of the total Houghton Mifflin
headquarters space occupied and related services used by the Company. The
amounts incurred under this agreement for 1995 and 1994 totaled $219,000 and
$657,000, respectively.
On April 1, 1994, Houghton Mifflin transferred to the Company's 87
employees, who had previously been in the employment of Houghton Mifflin, a
total of 17,400 shares of the Company's common stock. The transfer was accounted
for as a capital contribution equal to the value of common stock at the time of
transfer.
NOTE 8. LINE OF CREDIT
The Company has an unsecured line of credit for $1,000,000 available for
general use with no specific financial covenants. This line is supported by
commitment fees on the unused portion of the credit line. During 1995 and 1994,
the Company had no borrowings under this agreement.
NOTE 9. STOCK PLANS
Stock Incentive Plan
The Company has reserved 3,000,000 shares for issuance under the 1993 Stock
Incentive Plan ("1993 Plan"), which provides for the issuance of incentive stock
options, non-qualified stock options, unrestricted stock, restricted stock, and
performance share awards. Under the 1993 Plan, both incentive options and
non-qualified options may be granted to employees and consultants, and
non-qualified options may be granted to non-employee directors. The option
exercise price shall not be less than 100% of the fair market value of the
shares on date of grant in the case of incentive options and not less than 85%
of the fair market value of the shares on the date of grant in the case of
non-qualified options. The 1993 Plan also provides for the grant of performance
share awards to employees entitling the recipient to receive shares of common
stock based upon achievement of individual or Company performance goals. The
term of each option and the vesting periods for options and stock awards is
fixed by the Compensation Committee of the Company's Board of
F-14
<PAGE> 49
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Directors. The term for incentive stock option grants may not exceed 10 years
from the date of grant. A summary of information regarding stock options is as
follows:
<TABLE>
<CAPTION>
AVAILABLE OPTIONS PRICE
FOR GRANT OUTSTANDING PER SHARE
---------- ----------- -------------
<S> <C> <C> <C>
1994
Authorized................................... 1,000,000
Granted...................................... (806,964) 806,964 $ 7.50-$13.18
Exercised.................................... (9,000) $ 7.50
Canceled..................................... 3,000 (3,000) $ 7.50
Restricted stock grant....................... (47,036)
-------------
---------- ---------
At December 31, 1994......................... 149,000 794,964 $ 7.50-$13.18
1995
Additional authorized........................ 2,000,000
Granted...................................... (1,494,250) 1,494,250 $16.75-$36.88
Exercised.................................... (77,000) $ 7.50-$31.00
Canceled..................................... 53,000 (53,000) $ 7.50-$31.00
Restricted stock grant....................... (14,000)
-------------
---------- ---------
At December 31, 1995......................... 693,750 2,159,214 $ 7.50-$36.88
========== ========= =============
</TABLE>
The market value of the 14,000 and 47,036 of restricted shares awarded in
1995 and 1994 of $336,000 and $552,000, respectively has been recorded as
unearned compensation and is shown as a separate component of stockholders'
equity. Unearned compensation is being amortized to expense over the four- and
five-year vesting periods. Amortization totaled $173,000 and $46,000 at December
31, 1995 and 1994, respectively.
At December 31, 1995, options to purchase 331,482 shares were exercisable.
Stock Purchase Plan
Under the Company's 1993 Stock Purchase Plan, employees have the
opportunity to purchase the Company's common stock. The first offering under the
Stock Purchase Plan commenced on the effective date of the initial public
offering and concluded on June 30, 1994. Subsequent offerings begin on July 1
and January 1 of each year and conclude on December 31 and June 30,
respectively. The price at which the employee may purchase the common stock is
85% of the last reported sale price of the Company's common stock on the Nasdaq
National Market on the date the offering period commences or concludes,
whichever is lower. A total of 200,000 shares of common stock have been reserved
under this plan.
Activity in the plan was as follows:
<TABLE>
<CAPTION>
SHARES PRICE
------- ------------
<S> <C> <C>
1994
Authorized................................................... 200,000
Purchased during 1994........................................ 12,386 $6.38
-------
Available for issuance at December 31, 1994.................. 187,614
1995
Purchased during 1995........................................ 26,492 $9.72-$14.51
-------
Available for issuance at December 31, 1995.................. 161,122
=======
</TABLE>
In January 1996, for the six-month period ended December 31, 1995, 11,648
shares were issued at $25.50 per share.
F-15
<PAGE> 50
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. BENEFIT PLAN
The Company has a 401(k) retirement savings plan ("401(k) Plan")
established in 1994 covering substantially all of the Company's domestic
employees. The Company has authorized 100,000 shares for issuance under the
Plan. Eligible employees are permitted to make pre-tax contributions, up to 15%
of their compensation subject to an annual limit, to seven funds, including
funds invested in the Company's common stock. Under the 401(k) Plan, the Company
may make contributions either in cash or common stock of the Company at the
discretion of the Company's Board of Directors. The contribution may match in
whole or in part the salary deferral contributions of the participants and/or
represent additional profit-sharing contributions tied to the Company's net
income performance. During 1995 and 1994, the Company's total contribution
amounted to approximately $197,000 and $180,000, respectively. The total 1994
Company contribution was matched in common stock of 10,336 shares during 1995.
NOTE 11. LEASE COMMITMENTS
The Company has various lease agreements for office space under operating
leases that expire in 2006. The Company's leases include certain renewal and
expansion options, escalation clauses for the Company's proportionate share of
increases in building maintenance costs, and periods of free rent. At December
31, 1995, future minimum lease commitments for noncancelable leases are as
follows:
<TABLE>
<S> <C>
1996........................................................ $ 853,000
1997........................................................ 1,060,000
1998........................................................ 1,042,000
1999........................................................ 1,044,000
2000........................................................ 1,071,000
Thereafter.................................................. 5,938,000
</TABLE>
Rent expense, including the amounts under the Use and Occupancy Agreement
with Houghton Mifflin, was approximately $836,000 in 1995. (See Notes 6 and 7.)
NOTE 12. SUBSEQUENT EVENTS
On January 9, 1996, the Company acquired all of the outstanding stock of
privately held ImageMark Software Labs, Inc. of Kansas City, Missouri, for
$5,500,000 in cash, which may be increased by $950,000 if certain 1996 revenue
levels are met or exceeded. ImageMark licenses graphical file format translation
technologies to original equipment manufacturers. The transaction will be
accounted for as a purchase. The Company also caused ImageMark to enter into
employment and noncompetition agreements with two key executives and made
aggregate payments of $1,000,000 under those agreements.
F-16
<PAGE> 51
INSO CORPORATION
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro forma consolidated statement of operations data
for the six months ended June 30, 1996 and the year ended December 31, 1995 give
pro forma effect to the Company's July 16, 1996 acquisition of EBT (including
payments by the Company for the EBT stock issuable upon exercise of outstanding
EBT stock options) as if such acquisition had occurred on January 1, 1996 and
1995, respectively, and the following unaudited pro forma consolidated balance
sheet data at June 30, 1996 gives pro forma effect to the EBT acquisition as if
it had occurred on June 30, 1996. The pro forma statement of operations data for
the six months ended June 30, 1996 and the year ended December 31, 1995 do not
reflect a charge of $34,300,000 for certain purchased in-process research and
development to be recorded by the Company in the third quarter of 1996. The
unaudited pro forma consolidated financial data are not necessarily indicative
of what the Company's financial condition or results of operations would have
been had the acquisition been consummated at the assumed dates.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996 YEAR ENDED DECEMBER 31, 1995
---------------------------------------------- -----------------------------------------------
PRO PRO
FORMA FORMA
INSO EBT ADJUST- PRO FORMA INSO EBT ADJUST- PRO FORMA
HISTORICAL HISTORICAL MENTS(1) COMBINED HISTORICAL HISTORICAL MENTS(1) COMBINED
---------- ---------- -------- --------- ---------- ---------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................... $ 27,605 $ 7,488 $ -- $35,093 $ 43,387 $ 13,814 $ -- $57,201
Cost of revenues............... 3,845 1,604 336 (a) 5,785 5,792 2,603 672(a) 9,067
------- ------- ------- ------- ------- ------- ------- -------
Gross profit................... 23,760 5,884 (336 ) 29,308 37,595 11,211 (672) 48,134
Operating Expenses:
Sales and marketing.......... 4,927 3,113 (25 )(b) 8,015 6,570 4,976 (50)(b) 11,496
Product development.......... 5,281 3,292 (25 )(b) 8,548 7,489 4,746 (50)(b) 12,185
General and administrative... 3,951 911 (10 )(b) 4,852 6,458 1,426 (20)(b) 7,864
Purchased in-process research
and development............ 4,400 -- -- 4,400 5,500 -- -- 5,500
------- ------- ------- ------- ------- ------- ------- -------
Total operating expenses....... 18,559 7,316 (60 ) 25,815 26,017 11,148 (120) 37,045
Operating income (loss)........ 5,201 (1,432) (276 ) 3,493 11,578 63 (552) 11,089
Net investment income
(expense).................... 1,533 (54) 1,479 1,468 (36) 1,432
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before provision
for income taxes............. 6,734 (1,486) (276 ) 4,972 13,046 27 (552) 12,521
Income tax expense (benefit)... 4,014 (338) 3,676 7,052 (10) 7,042
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss).............. $ 2,720 $ (1,148) $ (276 ) $ 1,296 $ 5,994 $ 37 $ (552) $ 5,479
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) per share.... $ 0.20 $ (0.08) $ (0.02 ) $ 0.09 $ 0.49 $ 0.00 $ (0.05) $ 0.45
Weighted average shares
outstanding.................. 13,690 13,690 13,690 13,690 12,228 12,228 12,228 12,228
</TABLE>
F-17
<PAGE> 52
INSO CORPORATION
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED) -- (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------------------------------------
INSO EBT PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS(1) COMBINED
---------- ---------- --------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Current assets
Cash, cash equivalents and marketable securities.......... $ 55,910 $ 367 $ (38,408)(c) $ 20,376
2,507(d)
Accounts receivable, net.................................. 11,761 3,673 15,434
Other current assets...................................... 1,132 291 1,423
Refundable income taxes................................... 336 3,325(e) 3,661
------- ------- ------- -------
Total current assets................................ 68,803 4,667 (32,576) 40,894
Property and equipment, net................................. 3,250 2,286 (359)(f) 5,177
Royalty advances and other assets, net...................... 2,304 98 2,402
Product development costs, net.............................. 4,085 595 2,017(f) 6,697
Intangible assets, net...................................... 9,484 9,484
Deferred income tax benefit, net............................ 3,803 107 3,910
------- ------- ------- -------
Total assets................................................ $ 91,729 $7,753 $ (30,918) $ 68,564
======= ======= ======= =======
Current liabilities
Accounts payable and accrued liabilities.................. $ 4,899 $3,018 $ 2,746(g) $ 10,663
Dividend payable.......................................... 1,898(h) 1,898
Unearned revenue.......................................... 449 1,858 2,307
Royalties payable......................................... 1,748 1,748
Due to Houghton Mifflin Company........................... 346 346
Current income taxes payable.............................. 1,406 1,406
Deferred income taxes..................................... 2,417 107 (1,685)(i) 839
Subordinated notes payable and long-term debt............. 1,726 1,726
------- ------- ------- -------
Total current liabilities........................... 11,265 6,709 2,959 20,933
Payable to stockholder...................................... 1,467(j) 1,467
Redeemable preferred stock.................................. 286 (286)(k) 0
Total stockholders' equity.................................. 80,464 758 (758)(k) 46,164
(34,300)(l)
------- ------- ------- -------
80,464 758 (35,058) 46,164
------- ------- ------- -------
Total liabilities and stockholders' equity.................. $ 91,729 $7,753 $ (30,918) $ 68,564
======= ======= ======= =======
</TABLE>
- ---------------
(1) A summary of the pro forma adjustments is set forth as follows:
(a) To record product development amortization expense using an
amortization period of three years.
(b) To adjust depreciation expense for the fair market value adjustment of
the related assets.
(c) To record operating cash paid for all outstanding Common and Preferred
Stock, including the underlying common stock of the surviving EBT
options.
(d) To record cash received from the exercise of stock options.
(e) To record income tax receivable resulting from tax benefits associated
with the exercise of EBT stock options.
(f) To adjust assets acquired to estimated fair market value.
(g) To record direct costs of the merger including legal and accounting
services and appraisal fees and to record estimated costs to eliminate
excess and duplicate activities relating to the merger.
(h) To record dividend payable to the former stockholders of EBT.
(i) To record current deferred tax asset resulting from tax benefits to be
derived from costs to eliminate excess and duplicate activities and
the exercise of EBT stock options.
(j) To accrue additional merger consideration to be paid to the principal
stockholder of EBT within 18 months of the closing date.
(k) To eliminate EBT's redeemable preferred stock and stockholders' equity.
(l) To record the write-off of certain purchased technology under research
and development.
F-18
<PAGE> 53
- ------------------------------------------------------
- ------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. 2
Incorporation of Certain Documents by
Reference........................... 2
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 9
Price Range of Common Stock and
Dividend Policy..................... 10
Capitalization........................ 11
Selected Consolidated Financial
Information......................... 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 14
Business.............................. 20
Relationship with Houghton Mifflin.... 27
Management............................ 29
Underwriting.......................... 32
Legal Matters......................... 33
Experts............................... 33
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,200,000 SHARES
LOGO
COMMON STOCK
----------------------
PROSPECTUS
----------------------
ALEX. BROWN & SONS
INCORPORATED
ADAMS, HARKNESS & HILL, INC.
MONTGOMERY SECURITIES
, 1996
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 54
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates except
for the Securities and Exchange Commission registration fee, the NASD filing
fee, and the Nasdaq listing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................................. $ 25,519
NASD Filing Fee.................................................................. 7,901
Nasdaq Listing Fee............................................................... 17,500
Blue Sky Fees and Expenses....................................................... 12,000
Transfer Agent and Registrar Fees................................................ 5,000
Accounting Fees and Expenses..................................................... 50,000
Legal Fees and Expenses.......................................................... 60,000
Printing, Engraving and Mailing Expenses......................................... 85,000
Miscellaneous.................................................................... 2,080
-------
Total.................................................................. $ 265,000
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law empowers a Delaware
corporation to indemnify its officers and directors and certain other persons to
the extent and under the circumstances set forth therein.
Article V of the By-laws of the Registrant provides for indemnification of
officers and directors of the Registrant and certain other persons against
liabilities and expenses incurred by any of them in certain stated proceedings
and under certain stated conditions.
Section 8 of the Underwriting Agreement among Alex. Brown & Sons
Incorporated, Adams, Harkness & Hill, Inc. and Montgomery Securities (the
"Underwriters") and the Registrant, a copy of which is filed herewith as Exhibit
1, provides for indemnification by the Registrant of the Underwriters and each
person, if any, who controls the Underwriters against certain liabilities, as
stated therein, which may include liabilities under the Securities Act of 1933,
as amended. The Underwriting Agreement also provides that the Underwriters shall
similarly indemnify the Registrant and its directors, officers and controlling
persons, as set forth therein.
II-1
<PAGE> 55
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement.
*4.1 Form of Certificate for the Registrant's Common Stock.
5 Opinion of Hale and Dorr.
23.1 Consent of Hale and Dorr (included in Exhibit 5)
23.2 Consent of Ernst & Young LLP.
23.3 Consent of Ernst & Young LLP.
24 Power of Attorney (included on the signature page of the Registration Statement
page II-3).
</TABLE>
- ---------------
* Incorporated herein by reference to Exhibit 4 to the Registrant's
Registration Statement on Form S-3 (File No. 33-92784).
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 15 above, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 56
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Boston, the Commonwealth of Massachusetts on
September 25, 1996.
INSO CORPORATION
By:/s/ STEVEN R. VANA-PAXHIA
--------------------------------------
Steven R. Vana-Paxhia
President and Chief Executive
Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of INSO Corporation, hereby
severally constitute and appoint Steven R. Vana-Paxhia, Betty J. Savage, and
Bruce G. Hill, and each of them singly, our true and lawful attorneys with full
power to them, and each of them singly, to sign for us and in our names in the
capacities indicated below, the Registration Statement on Form S-3 filed
herewith and any and all pre-effective and post-effective amendments to said
Registration Statement, and any subsequent Registration Statement for the same
offering which may be filed under Rule 462(b), and generally to do all such
things in our names and on our behalf in our capacities as officers and
directors to enable INSO Corporation to comply with the provisions of the
Securities Act of 1933, as amended, and all requirements of the Securities and
Exchange Commission, hereby ratifying and confirming our signatures as they may
be signed by our said attorneys, or any of them, to said Registration Statement
and any and all amendments thereto or to any subsequent Registration Statement
for the same offering which may be filed under Rule 462(b).
Pursuant to the Requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------- -------------------
<S> <C> <C>
/s/ STEVEN R. VANA-PAXHIA President, Chief Executive
- ------------------------------------- Officer and Director (Principal
Steven R. Vana-Paxhia Executive Officer) September 25, 1996
/s/ BETTY J. SAVAGE Vice President and Chief
- ------------------------------------- Financial Officer (Principal
Betty J. Savage Financial Officer) September 25, 1996
/s/ LINDA J. BARNES Vice President and Controller
- ------------------------------------- (Principal Accounting Officer)
Linda J. Barnes September 25, 1996
/s/ JOSEPH A. BAUTE Director
- -------------------------------------
Joseph A. Baute September 25, 1996
</TABLE>
II-3
<PAGE> 57
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------- -------------------
<S> <C> <C>
/s/ J.P. BARGER Director
- -------------------------------------
J.P. Barger September 25, 1996
/s/ SAMUEL H. FULLER Director
- -------------------------------------
Samuel H. Fuller September 25, 1996
/s/ JOHN GUTTAG Director
- -------------------------------------
John Guttag September 25, 1996
/s/ STEPHEN O. JAEGER Director
- -------------------------------------
Stephen O. Jaeger September 25, 1996
/s/ JOANNA T. LAU Director
- -------------------------------------
Joanna T. Lau September 25, 1996
/s/ RAY STATA Director
- -------------------------------------
Ray Stata September 25, 1996
/s/ WILLIAM J. WISNESKI Director
- -------------------------------------
William J. Wisneski September 25, 1996
</TABLE>
II-4
<PAGE> 1
Exhibit 1
1,200,000 Shares(1)
INSO CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
----------------------
October [ ], 1996
Alex. Brown & Sons Incorporated
Adams, Harkness & Hill, Inc.
Montgomery Securities
As Representatives of the Several Underwriters
c/o Alex. Brown & Sons Incorporated
101 Federal Street, 15th Floor
Boston, Massachusetts 02110
Gentlemen:
INSO Corporation, a Delaware corporation (the "Company"), proposes to
issue and sell to the several underwriters (the "Underwriters"), named in
Schedule I hereto for whom you are acting as representatives (the
"Representatives"), an aggregate of 1,200,000 shares (the "Firm Shares"), of
common stock, par value $.01 per share of the Company (the "Company Common
Stock"). The respective amounts of the Firm Shares to be so purchased by the
several Underwriters are set forth opposite their names on Schedule I hereto.
The Company also proposes to grant to the Underwriters an option to purchase up
to 180,000 additional shares of the Company's Common Stock (the "Option
Shares") as set forth below. As used in this Agreement, the term "Shares" shall
include the Firm Shares and the Option Shares (to the extent the aforementioned
option is exercised).
- -----------------
(1) Plus an option to purchase up to 180,000 shares of Company Common Stock
from the Company to cover over-allotments, if any.
<PAGE> 2
As the Representatives, you have advised the Company (a) that you are
authorized to enter into this Agreement on behalf of the several Underwriters,
and (b) that the several Underwriters are willing, acting severally and not
jointly, to purchase the numbers of Firm Shares set forth opposite their
respective names in Schedule I, plus their pro rata portion of the Option Shares
if you elect to exercise the Over-allotment Option in whole or in part for the
accounts of the several Underwriters.
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to, and agrees with, each of the
Underwriters that:
(a) The Company meets the requirements for the use of Form S-3
under the Securities Act of 1933, as amended (the "Act"). A
registration statement on Form S-3 (File No. 33-______), including a
preliminary form of prospectus, with respect to the Shares has been
prepared by the Company in conformity with the requirements of the Act,
and the Rules and Regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") promulgated
thereunder and has been filed with the Commission. Copies of such
registration statement, including any amendments thereto, the
preliminary prospectuses (meeting the requirements of the Act and the
Rules and Regulations) contained therein and the exhibits, financial
statements and schedules, as finally amended and revised, have
heretofore been delivered by the Company to you. Such registration
statement, together with any registration statement filed by the
Company pursuant to Rule 462(b) of the Act, are herein referred to as
the "Registration Statement," which shall be deemed to include all
information omitted therefrom in reliance upon Rule 430A and contained
in the Prospectus as defined below, has become effective under the Act
and no post-effective amendment to the Registration Statement has been
filed as of the date of this Agreement. "Prospectus" means (a) the form
of prospectus first filed with the Commission pursuant to Rule 424(b)
or (b) the last preliminary prospectus included in the Registration
Statement filed prior to the time such Registration Statement becomes
effective or filed pursuant to Rule 424(a) under the Act that is
delivered by the Company to the Underwriters for delivery to purchasers
of the Shares, together with the term sheet or abbreviated term sheet
filed with the Commission pursuant to Rule 424(b)(7) under the Act.
Each preliminary prospectus included in the Registration Statement
prior to the time it becomes effective is herein referred to as a
"Preliminary Prospectus." Any reference herein to the Registration
Statement, any Preliminary Prospectus or to the Prospectus shall be
deemed to refer to and include any documents incorporated by reference
therein, and, in the case of any reference herein to any Prospectus,
also shall be deemed to include any documents incorporated by reference
therein, and any supplements or amendments thereto, filed with the
Commission after the date of filing of the Prospectus under Rules
424(b) or 430A, and prior to the termination of the offering of the
Shares by the Underwriters.
2
<PAGE> 3
(b) The Company has been duly organized and incorporated and
is validly existing as a corporation in good standing under the laws of
the State of Delaware, with full corporate power and authority to own,
lease and operate its properties and conduct its business as described
in the Registration Statement. Each of the subsidiaries of the Company,
as listed in Exhibit A hereto, (collectively, the "Subsidiaries"), has
been duly organized and incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, with full corporate power and authority to own, lease
and operate its properties and conduct its business as described in the
Registration Statement. The Company and each of the Subsidiaries are
duly qualified to transact business as foreign corporations and are in
good standing in each jurisdiction in which their respective ownership
or lease of property or the conduct of their respective businesses
requires such qualification. The outstanding shares of capital stock of
each of the Subsidiaries have been duly authorized and validly issued,
are fully paid and non-assessable and are owned by the Company or
another Subsidiary free and clear of all liens, encumbrances, equities
and claims; and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert any
obligations into shares of capital stock or ownership interests in the
Subsidiaries are outstanding.
(c) The outstanding shares of Company Common Stock have been
duly authorized and validly issued and are fully paid and
non-assessable; the Shares to be issued and sold by the Company have
been duly authorized and when issued and delivered as contemplated
herein will be duly authorized, validly issued, fully paid and
non-assessable; and no preemptive rights of stockholders exist with
respect to any of the Shares or the issue and sale thereof and there
are no outstanding options, warrants or other rights for the issuance
of, and there are no commitments, plans or arrangements to issue, any
shares of capital stock of the Company or any security convertible
into, exercisable for or exchangeable for any shares of capital stock
of the Company. Neither the filing of the Registration Statement nor
the offering or sale of the Shares as contemplated by this Agreement
gives rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any shares of Common
Stock.
(d) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct. The capital
stock of the Company (including the Shares) conforms to the statements
relating thereto contained in the Registration Statement and the
Prospectus. The form of certificate for the Company Common Stock is in
due and proper form and otherwise complies with all statutory
requirements under the laws of the State of Delaware.
(e) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering
of the Shares nor instituted proceedings for that purpose. At the time
of effectiveness of the Registration
3
<PAGE> 4
Statement and at the execution and delivery of this Agreement, the
Registration Statement contained or contains, and the Prospectus and
any amendments or supplements thereto will contain, all statements
which are required to be stated therein by, and will conform to the
requirements of the Act and the Rules and Regulations. The documents
incorporated by reference in the Registration Statement or the
Prospectus, when they became effective or were filed with the
Commission conformed in all respects to the requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or
the Act and the Rules and Regulations, as applicable, and any
applicable rules and regulations of the Commission under the Exchange
Act. The Registration Statement and any amendment thereto do not
contain, and will not contain, any untrue statement of a material fact;
and do not omit; and will not omit, to state any material fact required
to be stated therein or necessary to make the statements therein not
misleading. The Prospectus and any amendments and supplements thereto
do not contain, and will not contain, any untrue statement of a
material fact; and do not omit; and will not omit, to state any
material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they
were made, not misleading. The two preceding sentences do not apply to
statements in or omissions from the Registration Statement or the
Prospectus based upon written information furnished to the Company by
any Underwriter whether individually or through the Representatives
specifically for use therein, it being understood and agreed that the
only such information is that described in Section 13 hereof.
(f) The audited consolidated financial statements of the
Company and the Subsidiaries, together with the related notes and
schedules as set forth or incorporated by reference in the Registration
Statement and Prospectus, present fairly the financial position and the
results of operations and cash flows of the Company and the
consolidated Subsidiaries, at the indicated dates and for the indicated
periods. Such audited financial statements and related schedules and
all interim unaudited financial information of the Company filed with
the Commission as part of the Registration Statement have been prepared
in accordance with generally accepted principles of accounting,
consistently applied throughout the periods involved, except as
disclosed herein, and all adjustments necessary for a fair presentation
of results for such periods have been made. The summary and selected
financial and statistical data included in the Registration Statement
presents fairly the information shown therein and such data has been
compiled on a basis consistent with the financial statements presented
therein and the books and records of the Company. The pro forma
financial statements and other pro forma financial information included
in the Registration Statement and the Prospectus present fairly the
information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements, have been properly compiled on the pro forma bases
described therein, and, in the opinion of the Company, the assumptions
used in the preparation thereof are reasonable and the adjustments used
therein are appropriate to give effect to the transactions or
circumstances referred to therein.
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<PAGE> 5
(g) Ernst & Young LLP, who have certified certain of the
financial statements filed with the Commission as part of, or
incorporated by reference in, the Registration Statement, are
independent public accountants within the meaning of the Act and the
Rules and Regulations.
(h) There is no action, suit, claim or proceeding pending or,
to the knowledge of the Company, threatened against the Company or any
of the Subsidiaries or any of their respective officers or any of their
respective properties, assets or rights by or before any court or
governmental agency, authority or body or otherwise which if determined
adversely to the Company or any of its Subsidiaries might result in a
material adverse effect on the condition (financial or otherwise),
business, management, properties, assets, rights, operations, or
prospects of the Company and its Subsidiaries taken as a whole (a
"Company Material Adverse Effect"), or prevent the consummation of the
transactions contemplated hereby, except as set forth in the
Registration Statement.
(i) The Company and the Subsidiaries have good and marketable
title to all of the properties and assets reflected in the financial
statements (or as described in the Registration Statement) hereinabove
described, subject to no lien, mortgage, pledge, charge or encumbrance
of any kind except those reflected in such financial statements (or as
described in the Registration Statement) or which are not material in
amount. The Company and the Subsidiaries occupy their leased properties
under valid and binding leases conforming in all material respects to
the description thereof set forth in the Registration Statement.
(j) The Company and the Subsidiaries have filed all Federal,
State, local and foreign income tax returns which have been required to
be filed and have paid all taxes indicated by said returns and all
assessments received by them or any of them to the extent that such
taxes have become due. All tax liabilities have been adequately
provided for in the financial statements of the Company.
(k) Since the respective dates as of which information is
given in the Registration Statement, as it may be amended or
supplemented, there has not been (i) any material adverse change or any
development involving a prospective material adverse change in or
affecting the earnings, business, management, properties, assets,
rights, operations, condition (financial or otherwise), or prospects of
the Company and its Subsidiaries taken as a whole, whether or not
occurring in the ordinary course of business, (ii) any material
transaction entered into or any material transaction that is probable
of being entered into by the Company or the Subsidiaries, other than
transactions in the ordinary course of business and changes and
transactions described in the Registration Statement, as it may be
amended or supplemented, (iii) any change in the capital stock or
outstanding indebtedness of the Company which is material to the
Company and its Subsidiaries taken as a whole, (iv) any issuance or
granting of any right to acquire any securities of the Company (other
than grants of stock options
5
<PAGE> 6
to directors or employees in the ordinary course) or (v) any dividend
or distribution of any kind declared, paid or made on the capital stock
of the Company. The Company and the Subsidiaries have no material
contingent obligations which are not disclosed in the Company's
financial statements which are included in the Registration Statement.
(l) Neither the Company nor any of the Subsidiaries is or with
the giving of notice or lapse of time or both, will be, in violation of
or in default under its Charter or By-Laws or under any agreement,
lease, contract, indenture or other instrument or obligation to which
it is a party or by which it, or any of its properties, is bound and
which default would cause a Company Material Adverse Effect. The
execution and delivery of this Agreement and the consummation of the
transactions herein contemplated and the fulfillment of the terms
hereof will not conflict with or result in a breach of any of the terms
or provisions of, or constitute a default under, any material
indenture, mortgage, deed of trust or other agreement or instrument to
which the Company or any Subsidiary is a party, or of the Charter or
By-laws of the Company or any Subsidiary or any law or any order, rule
or regulation of any governmental agency or body or any court having
jurisdiction over the Company or any Subsidiary or over the properties
of the Company or any such Subsidiary.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body necessary in connection with the execution and
delivery by the Company of this Agreement and the consummation of the
transactions herein contemplated (except such additional steps as may
be required by the Commission, the National Association of Securities
Dealers, Inc. (the "NASD") or such additional steps as may be necessary
to qualify the Shares for public offering by the Underwriters under
state securities or Blue Sky laws) has been obtained or made and is in
full force and effect.
(n) The Company has the full legal right, corporate power and
authority to enter into this Agreement and perform the transactions
contemplated hereby; this Agreement has been duly authorized, executed
and delivered by the Company and is a valid and binding agreement of
the Company, enforceable against the Company in accordance with its
terms.
(o) The Company and each of the Subsidiaries holds all
material licenses, certificates and permits from governmental
authorities which are necessary to the conduct of their businesses; and
neither the Company nor any of the Subsidiaries has infringed or
conflicted with any patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, trade names or copyrights which
infringement is material to the business of the Company and the
Subsidiaries taken as a whole. The Company and the Subsidiaries own or
possess adequate rights to use all material patents, patent rights,
inventions, trade secrets, know-how, trademarks, service marks, trade
names and copyrights described or referred to in the Prospectus as
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<PAGE> 7
owned or used by it or which are necessary for the conduct of its
business as described in the Prospectus.
(p) Neither the Company, nor to the Company's best knowledge,
any of its affiliates, has taken or may take, directly or indirectly,
any action designed to cause or result in, or which has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Company Common Stock to
facilitate the sale or resale of the Shares.
(q) Neither the Company nor any Subsidiary is regulated, and
after giving effect to the offering and sale of the Shares and the
application of the proceeds as described in the Prospectus, neither
will be required to be registered as an "investment company" within the
meaning of such term under the Investment Company Act of 1940, as
amended, and the rules and regulations of the Commission thereunder.
(r) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(s) The Company Common Stock is listed on the Nasdaq National
Market ("NNM"), and the Company has received no notice of any
proceeding having the purpose or effect of discontinuing such listing,
and the Shares have been approved for listing on the NNM, subject to
official notice of issuance.
(t) The Company has not distributed and will not distribute
any prospectus or other offering materials in connection with the
offering and sale of the Shares other than the Preliminary Prospectus,
the Prospectus or other material permitted by the Act.
(u) The Company will comply with all agreements to be complied
with on its part, and use all reasonable efforts to satisfy all
conditions to be satisfied on its part pursuant to this Agreement on or
prior to the Closing Date or any Option Closing Date, as the case may
be.
(v) The Company and each of its Subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is
adequate for the conduct of
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<PAGE> 8
their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar
industries.
(w) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event"
(as defined in ERISA) has occurred with respect to any "pension plan"
(as defined in ERISA) for which the Company would have any liability;
the Company has not incurred and does not expect to incur liability
under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the
Internal Revenue Code of 1986, as amended, including the regulations
and published interpretations thereunder (the "Code"); and each
"pension plan" for which the Company would have any liability that is
intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether by
action or by failure to act, which would cause the loss of such
qualification.
(x) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 1 of Laws of Florida, Chapter
92-198, AN ACT RELATING TO DISCLOSURE OF DOING BUSINESS WITH CUBA, and
the Company further agrees that if it commences engaging in business
with the government of Cuba or with any person or affiliate located in
Cuba after the date the Registration Statement becomes or has become
effective with the Commission or with the Florida Department of Banking
and Finance (the "Department"), whichever date is later, or if the
information reported or incorporated by reference in the Prospectus, if
any, concerning the Company's business with Cuba or with any person or
affiliate located in Cuba changes in any material way, the Company will
provide the Department notice of such business or change, as
appropriate, in a form acceptable to the Department.
2. PURCHASE, SALE AND DELIVERY OF THE FIRM SHARES.
----------------------------------------------
(a) On the basis of the representations, warranties and
covenants herein contained, and subject to the conditions herein set
forth, the Company agrees to sell to the Underwriters and each
Underwriter agrees, severally and not jointly, to purchase, at a price
of $[ ] per share, the number of Firm Shares set forth opposite the
name of each Underwriter in Schedule I hereof, subject to adjustments
in accordance with Section 9 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be
made in New York Clearing House funds by certified or bank cashier's
checks drawn to the order of the Company against delivery of
certificates therefor to the Representatives for the several accounts
of the Underwriters. Such payment and delivery are to be made at the
offices of Alex. Brown & Sons Incorporated, [135 East Baltimore
Street, Baltimore, Maryland, at 10:00 a.m., Baltimore time], on the
third business day after
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<PAGE> 9
the date of this Agreement or at such other time and date not later
than five business days thereafter as you and the Company shall agree
upon, such time and date being herein referred to as the "Closing
Date." (As used herein, "business day" means a day on which the New
York Stock Exchange is open for trading and on which banks in New York,
New York are open for business and are not permitted by law or
executive order to be closed.) The certificates for the Firm Shares
will be delivered in such denominations and in such registrations as
the Representatives request in writing not later than the second full
business day prior to the Closing Date, and will be made available for
inspection by the Representatives at least one business day prior to
the Closing Date.
(c) In addition, on the basis of the representations and
warranties herein contained and subject to the terms and conditions
herein set forth, the Company hereby grants an option to the several
Underwriters to purchase the Option Shares at the price per share as
set forth in the first paragraph of this Section 2. The option granted
hereby may be exercised in whole or in part by giving written notice
(i) at any time before the Closing Date and (ii) only once thereafter
within 30 days after the date of this Agreement, by the
Representatives, to the Company setting forth the number of Option
Shares as to which the several Underwriters are exercising the option,
the names and denominations in which the Option Shares are to be
registered and the time and date at which such certificates are to be
delivered. The time and date at which certificates for Option Shares
are to be delivered shall be determined by the Representatives but
shall not be earlier than three nor later than ten full business days
after the exercise of such option, nor in any event prior to the
Closing Date (such time and date being herein referred to as the
"Option Closing Date"). If the date of exercise of the option is three
or more days before the Closing Date, the notice of exercise shall set
the Closing Date as the Option Closing Date. The number of Option
Shares to be purchased by each Underwriter shall be in the same
proportion to the total number of Option Shares being purchased as the
number of Firm Shares being purchased by such Underwriter bears to
1,200,000, adjusted by you in such manner as to avoid fractional
shares. The option with respect to the Option Shares granted hereunder
may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters. You, as the Representatives of the several
Underwriters, may cancel such option at any time prior to its
expiration by giving written notice of such cancellation to the
Company. To the extent, if any, that the option is exercised, payment
for the Option Shares shall be made on the Option Closing Date in New
York Clearing House funds by certified or bank cashier's check drawn to
the order of the Company against delivery of certificates therefor at
the offices of Alex. Brown & Sons Incorporated, [135 East Baltimore
Street, Baltimore, Maryland.]
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<PAGE> 10
3. OFFERING BY THE UNDERWRITERS.
----------------------------
It is understood that the several Underwriters are to make a
public offering of the Firm Shares as soon as the Representatives deem
it advisable to do so. The Firm Shares are to be initially offered to
the public at the initial public offering price set forth in the
Prospectus. The Representatives may from time to time thereafter change
the public offering price and other selling terms. To the extent, if at
all, that any Option Shares are purchased pursuant to Section 2 hereof,
the Underwriters will offer them to the public on the foregoing terms.
It is further understood that you will act as the
Representatives for the Underwriters in the offering and sale of the
Shares in accordance with a Master Agreement Among Underwriters entered
into by you and the other Underwriters.
4. COVENANTS OF THE COMPANY.
------------------------
The Company covenants and agrees with the several Underwriters
that:
(a) The Company will (A) use its best efforts to cause the
Registration Statement to become effective or, if the procedure in Rule
430A of the Rules and Regulations is followed, to prepare and timely
file with the Commission under Rule 424(b) of the Rules and Regulations
a Prospectus in a form approved by the Representatives containing
information previously omitted at the time of effectiveness of the
Registration Statement in reliance on Rule 430A of the Rules and
Regulations, (B) not file any amendment to the Registration Statement
or supplement to the Prospectus or document incorporated by reference
therein of which the Representatives shall not previously have been
advised and furnished with a copy or to which the Representatives shall
have reasonably objected in writing or which is not in compliance with
the Rules and Regulations and (C) file on a timely basis all reports
and any definitive proxy or information statements required to be filed
by the Company with the Commission subsequent to the date of the
Prospectus and prior to the termination of the offering of the Shares
by the Underwriters.
(b) The Company will advise the Representatives promptly (A)
when the Registration Statement or any post-effective amendment thereto
shall have become effective, (B) of receipt of any comments from the
Commission, (C) of any request of the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any
additional information, and (D) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or the use of the Prospectus or of the institution of any
proceedings for that purpose. The Company will use its best efforts to
prevent the issuance of any such stop order preventing or suspending
the use of the Prospectus and to obtain as soon as possible the lifting
thereof, if issued.
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<PAGE> 11
(c) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws
of such jurisdictions as the Representatives may reasonably have
designated in writing and will make such applications, file such
documents, and furnish such information as may be reasonably required
for that purpose, provided the Company shall not be required to
qualify as a foreign corporation or to file a general consent to
service of process in any jurisdiction where it is not now so
qualified or required to file such a consent. The Company will, from
time to time, prepare and file such statements, reports, and other
documents, as are or may be required to continue such qualifications
in effect for so long a period as the Representatives may reasonably
request for distribution of the Shares.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company
will deliver to, or upon the order of, the Representatives during the
period when delivery of a Prospectus is required under the Act, as many
copies of the Prospectus in final form, or as thereafter amended or
supplemented, as the Representatives may reasonably request. The
Company will deliver to the Representatives at or before the Closing
Date, four signed copies of the Registration Statement and all
amendments thereto including all exhibits filed therewith, and will
deliver to the Representatives such number of copies of the
Registration Statement (including such number of copies of the
exhibits filed therewith that may reasonably be requested), and of
all amendments and supplements thereto, as the Representatives may
reasonably request.
(e) The Company will comply with the Act and the Rules and
Regulations, and the Exchange Act, and the rules and regulations of the
Commission thereunder, so as to permit the completion of the
distribution of the Shares as contemplated in this Agreement and the
Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer, any event shall occur
as a result of which, in the judgment of the Company or in the
reasonable opinion of the Underwriters, it becomes necessary to amend
or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances existing at the time the Prospectus
is delivered to a purchaser, not misleading, or, if it is necessary at
any time to amend or supplement the Prospectus to comply with any law,
the Company promptly will prepare and file with the Commission an
appropriate amendment to the Registration Statement or supplement to
the Prospectus so that the Prospectus as so amended or supplemented
will not, in the light of the circumstances when it is so delivered, be
misleading, or so that the Prospectus will comply with applicable law.
(f) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not
later than 15 months after the effective date of the Registration
Statement, an earning statement (which need not be audited) in
reasonable detail, covering a period of at least 12 consecutive months
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<PAGE> 12
beginning after the effective date of the Registration Statement, which
earning statement shall satisfy the requirements of Section 11(a) of
the Act and Rule 158 of the Rules and Regulations and will advise you
in writing when such statement has been so made available.
(g) The Company will, for a period of five years from the
Closing Date, deliver to the Representatives copies of annual reports
and copies of all other documents, reports and information furnished by
the Company to its stockholders or filed with any securities exchange
pursuant to the requirements of such exchange or with the Commission
pursuant to the Act or the Exchange Act. The Company will deliver to
the Representatives similar reports with respect to significant
subsidiaries, as that term is defined in the Rules and Regulations,
which are not consolidated in the Company's financial statements.
(h) No offering, sale, short sale or other disposition of any
shares of Common Stock of the Company or other securities convertible
into or exchangeable or exercisable for shares of Common Stock or
derivative of Common Stock (or agreement for such) will be made for a
period of [90] days after the date of this Agreement, directly or
indirectly, by the Company otherwise than hereunder or with the prior
written consent of Alex. Brown & Sons Incorporated.
(i) The Company will use its best efforts to list, subject to
notice of issuance, the Shares on The NASDAQ Stock Market.
(j) The Company has caused each officer and director of the
Company, and Houghton Mifflin Company to furnish to you, on or prior to
the date of this agreement, a letter or letters ("Lockup Agreements"),
in form and substance satisfactory to the Underwriters, pursuant to
which each such person shall agree not to offer, sell, sell short or
otherwise dispose of any shares of Common Stock of the Company or other
capital stock of the Company, or any other securities convertible,
exchangeable or exercisable for Common Shares or derivative of Common
Shares owned by such person or request the registration for the offer
or sale of any of the foregoing (or as to which such person has the
right to direct the disposition of) for a period of 90 days after the
date of this Agreement, directly or indirectly, except with the prior
written consent of Alex. Brown & Sons Incorporated, except that
Houghton Mifflin Company may sell up to 75,000 shares of Common Stock
of the Company in open market transactions and subject to certain
restrictions.
(k) The Company shall apply the net proceeds of its sale of
the Shares as set forth under the caption "Use of Proceeds" in the
Prospectus and shall file such reports with the Commission with respect
to the sale of the Shares and the application of the proceeds therefrom
as may be required in accordance with Rule 463 under the Act.
(l) The Company shall not invest, or otherwise use the
proceeds received by the Company from its sale of the Shares in such a
manner as would require the
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<PAGE> 13
Company or any of the Subsidiaries to register as an investment company
under the Investment Company Act of 1940, as amended (the "1940 Act").
(m) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a
registrar for the Common Stock.
(n) The Company will not take, directly or indirectly, any
action designed to cause or result in, or that has constituted or might
reasonably be expected to constitute, the stabilization or manipulation
of the price of any securities of the Company.
5. COSTS AND EXPENSES.
------------------
The Company will pay all costs, expenses and fees incident to
the performance of the obligations of the Company under this Agreement,
including, without limiting the generality of the foregoing, the
following: accounting fees of the Company; the fees and disbursements
of counsel for the Company; the cost of printing and delivering to, or
as requested by, the Underwriters copies of the Registration Statement,
Preliminary Prospectuses, the Prospectus, this Agreement, the
Underwriters' Invitation Letter, the Listing Application, the Blue Sky
Survey and any supplements or amendments thereto; the filing fees of
the Commission; the filing fees and expenses (including legal fees and
disbursements) incident to securing any required review by the National
Association of Securities Dealers, Inc. (the "NASD") of the terms of
the sale of the Shares; the Listing Fee of the NASDAQ Stock Market; and
the expenses, including the fees and disbursements of counsel for the
Underwriters, incurred in connection with the qualification of the
Shares under State securities or Blue Sky laws. The Company agrees to
pay all costs and expenses of the Underwriters, including the fees and
disbursements of counsel for the Underwriters, incident to the offer
and sale of directed shares of the Common Stock by the Underwriters to
employees and persons having business relationships with the Company
and its Subsidiaries. The Company shall not, however, be required to
pay for any of the Underwriters expenses (other than those related to
qualification under NASD regulation and State securities or Blue Sky
laws) except that, if this Agreement shall not be consummated because
the conditions in Section 6 hereof are not satisfied, or because this
Agreement is terminated by the Representatives pursuant to Section 11
hereof, or by reason of any failure, refusal or inability on the part
of the Company to perform any undertaking or satisfy any condition of
this Agreement or to comply with any of the terms hereof on its part to
be performed, unless such failure to satisfy said condition or to
comply with said terms be due to the default or omission of any
Underwriter, then the Company shall reimburse the several Underwriters
for reasonable out-of-pocket expenses, including fees and disbursements
of counsel, reasonably incurred in connection with investigating,
marketing and proposing to market the Shares or in contemplation of
performing their obligations hereunder; but
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<PAGE> 14
the Company shall not in any event be liable to any of the several
Underwriters for damages on account of loss of anticipated profits from
the sale by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
---------------------------------------------
The several obligations of the Underwriters to purchase the
Firm Shares on the Closing Date and the Option Shares, if any, on the
Option Closing Date, if any, are subject to the accuracy, as of the
Closing Date or the Option Closing Date, as the case may be, of the
representations and warranties of the Company contained herein, and to
the performance by the Company of its covenants and obligations
hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective
amendments thereto shall have become effective and any and all filings
required by Rule 424 and Rule 430A of the Rules and Regulations shall
have been made, and any request of the Commission for additional
information (to be included in the Registration Statement or otherwise)
shall have been disclosed to the Representatives and complied with to
their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to
time, shall have been issued and no proceedings for that purpose shall
have been taken or, to the knowledge of the Company, shall be
contemplated by the Commission and no injunction, restraining order, or
order of any nature by a Federal or state court of competent
jurisdiction shall have been issued as of the Closing Date which would
prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, the opinion of
Hale and Dorr, counsel for the Company dated the Closing Date or the
Option Closing Date, as the case may be, addressed to the Underwriters
(and stating that it may be relied upon by counsel to the
Underwriters) to the effect that:
(i) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of
the State of Delaware, with corporate power and authority to
own or lease its properties and conduct its business as
described in the Registration Statement; each of the
Subsidiaries has been duly organized and is validly existing
as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with corporate power and
authority to own or lease its properties and conduct its
business as described in the Registration Statement; the
Company and each of the Subsidiaries are duly qualified to
transact business in all jurisdictions in which the conduct of
their business requires such qualification, or in which the
failure to qualify would have a materially adverse effect upon
the business of the Company and the Subsidiaries taken as a
whole; and the outstanding shares of capital stock of each of
the Subsidiaries have been duly authorized and
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<PAGE> 15
validly issued and are fully paid and non-assessable and are
owned by the Company or a Subsidiary; and, to the best of such
counsel's knowledge, the outstanding shares of capital stock
of each of the Subsidiaries is owned free and clear of all
liens, encumbrances and equities and claims, and no options,
warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any
obligations into any shares of capital stock or of ownership
interests in the Subsidiaries are outstanding.
(ii) The Company has authorized and outstanding capital
stock as set forth under the caption "Capitalization" in the
Prospectus; the authorized shares of the Company's Common
Stock have been duly authorized; the outstanding shares of the
Company's Common Stock have been duly authorized and validly
issued and are fully paid and non-assessable; all of the
Shares conform to the description thereof and to the
statements relating thereto contained in the Prospectus (and
to the extent such statements purport to summarize provisions
of the statutes and instruments referred to therein, fairly
summarize such provisions in all material respects); the
certificates for the Shares, assuming they are in the form
filed with the Commission, are in due and proper form; the
shares of Common Stock, including the Option Shares, if any,
to be sold by the Company pursuant to this Agreement have been
duly authorized and will be validly issued, fully paid and
non-assessable when issued and paid for as contemplated by
this Agreement; and no preemptive rights of stockholders exist
with respect to any of the Shares or the issue or sale
thereof.
(iii) Except as described in or contemplated by the
Prospectus, to the knowledge of such counsel, there are no
outstanding securities of the Company convertible or
exchangeable into or evidencing the right to purchase or
subscribe for any shares of capital stock of the Company and
there are no outstanding or authorized options, warrants or
rights of any character obligating the Company to issue any
shares of its capital stock or any securities convertible or
exchangeable into or evidencing the right to purchase or
subscribe for any shares of such stock; and except as
described in the Prospectus, to the knowledge of such counsel,
no holder of any securities of the Company or any other person
has the right, contractual or otherwise, which has not been
satisfied or effectively waived, to cause the Company to sell
or otherwise issue to them, or to permit them to underwrite
the sale of, any of the Shares or the right to have any Common
Shares or other securities of the Company included in the
Registration Statement or the right, as a result of the filing
of the Registration Statement, to require registration under
the Act of any shares of Common Stock or other securities of
the Company.
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<PAGE> 16
(iv) The Registration Statement has become effective
under the Act and, to the best of the knowledge of such
counsel, no stop order proceedings with respect thereto have
been instituted or are pending or threatened under the Act.
(v) The Registration Statement, the Prospectus and each
amendment or supplement thereto and document incorporated by
reference therein comply as to form in all material respects
with the requirements of the Act or the Securities Exchange
Act of 1934, as amended, as applicable and the applicable
rules and regulations thereunder (except that such counsel
need express no opinion as to the financial statements and
related schedules included or incorporated by reference
therein). The conditions for the use of Form S-3, set forth in
the General Instructions thereto, have been satisfied.
(vi) Such counsel does not know of any contracts or
documents required to be filed as exhibits to or incorporated
by reference in the Registration Statement or described in the
Registration Statement or the Prospectus which are not so
filed, incorporated by reference or described as required, and
such contracts and documents as they are summarized in the
Registration Statement or the Prospectus are fairly summarized
in all material respects.
(vii) Such counsel knows of no material legal or
governmental proceedings pending or threatened against the
Company or any of the Subsidiaries except as set forth in the
Prospectus.
(viii) The execution and delivery of this Agreement and
the consummation of the transactions herein contemplated do
not and will not conflict with or result in a breach of any of
the terms or provisions of, or constitute a default under, the
Charter or By-laws of the Company, or any agreement or
instrument known to such counsel to which the Company or any
of the Subsidiaries is a party or by which the Company or any
of the Subsidiaries may be bound.
(ix) This Agreement has been duly authorized, executed
and delivered by the Company.
(x) No approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory,
administrative or other governmental body is necessary in
connection with the execution and delivery of this Agreement
and the consummation of the transactions herein contemplated
(other than as may be required by the NASD or as required by
State securities and Blue Sky laws as to which such counsel
need express no opinion) except such as have been obtained or
made, specifying the same.
16
<PAGE> 17
(xi) The Company is not, and will not become, as a
result of the consummation of the transactions contemplated by
this Agreement, and application of the net proceeds therefrom
as described in the Prospectus, required to register as an
investment company under the 1940 Act.
In rendering such opinion Hale and Dorr may rely as to matters
governed by the laws of states other than Delaware or Federal laws on
local counsel in such jurisdictions, provided that in each case Hale
and Dorr shall state that they believe that they and the Underwriters
are justified in relying on such other counsel. In addition to the
matters set forth above, such opinion shall also include a statement to
the effect that nothing has come to the attention of such counsel which
leads them to believe that (i) the Registration Statement, at the time
it became effective under the Act (but after giving effect to any
modifications incorporated therein pursuant to Rule 430A under the Act)
and as of the Closing Date or the Option Closing Date, as the case may
be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to
make the statements therein not misleading, and (ii) the Prospectus, or
any supplement thereto, on the date it was filed pursuant to the Rules
and Regulations and as of the Closing Date or the Option Closing Date,
as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are
made, not misleading (except that such counsel need express no view as
to financial statements, schedules and statistical information
therein). With respect to such statement, Hale and Dorr may state that
their belief is based upon the procedures set forth therein, but is
without independent check and verification.
(c) The Representatives shall have received from Skadden,
Arps, Slate, Meagher & Flom, special counsel for the Underwriters, an
opinion dated the Closing Date or the Option Closing Date, as the case
may be, with respect to the incorporation of the Company, the validity
of the Shares or the Option Shares, as the case may be, the
Registration Statement, the Prospectus and other related matters as
the Underwriters may require, and the Company shall have furnished to
such counsel such documents as they request for the purpose of
enabling them to pass upon such matters. In rendering such opinion
Underwriter's special counsel may rely as to all matters governed
other than by the laws of the State of Delaware or Federal laws on the
opinion of counsel referred to in Paragraph (b) of this Section 6. In
addition to the matters set forth above, such opinion shall also
include a statement to the effect that nothing has come to the
attention of such counsel which leads them to believe that (i) the
Registration Statement, or any amendment thereto, as of the time it
became effective under the Act (but after giving effect to any
modifications incorporated therein pursuant to Rule 430A under the
Act) as of the Closing Date or the Option Closing Date, as the case
may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or
17
<PAGE> 18
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date or the
Option Closing Date, as the case may be, contained an untrue statement
of a material fact or omitted to state a material fact, necessary in
order to make the statements, in the light of the circumstances under
which they are made, not misleading (except that such counsel need
express no view as to financial statements, schedules and statistical
information therein). With respect to such statement, Underwriter's
special counsel may state that their belief is based upon the
procedures set forth therein, but is without independent check and
verification.
(d) The Representatives shall have received at or prior to the
Closing Date from Skadden, Arps, Slate, Meagher & Flom a memorandum or
summary, in form and substance satisfactory to the Representatives,
with respect to the qualification for offering and sale by the
Underwriters of the Shares under the State securities or Blue Sky
laws of such jurisdictions as the Representatives may reasonably have
designated to the Company.
(e) You shall have received, on each of the dates hereof, the
Closing Date and the Option Closing Date, as the case may be, a letter
dated the date hereof, the Closing Date or the Option Closing Date, as
the case may be, in form and substance satisfactory to you, of Ernst &
Young LLP confirming that they are independent public accountants
within the meaning of the Act and the applicable published Rules and
Regulations thereunder and stating that in their opinion the financial
statements and schedules examined by them and included in the
Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published
Rules and Regulations; and containing such other statements and
information as is ordinarily included in accountants' "comfort letters"
to Underwriters with respect to the financial statements and certain
financial and statistical information contained in the Registration
Statement and Prospectus.
(f) The Representatives shall have received on the Closing
Date or the Option Closing Date, as the case may be, a certificate or
certificates of the President and Chief Executive Officer and Vice
President, Chief Financial Officer and Treasurer of the Company to the
effect that, as of the Closing Date or the Option Closing Date, as the
case may be, each of them severally represents as follows:
(i) The Registration Statement has become effective
under the Act and no stop order suspending the effectiveness
of the Registration Statement has been issued, and no
proceedings for such purpose have been taken or are, to their
knowledge, contemplated by the Commission;
(ii) The representations and warranties of the Company
contained in Section 1 hereof are true and correct as of the
Closing Date or the Option Closing Date, as the case may be;
18
<PAGE> 19
(iii) All filings required to have been made pursuant to
Rules 424 or 430A under the Act have been made;
(iv) Each has carefully examined the Registration
Statement and the Prospectus and, in his or her opinion, as of
the effective date of the Registration Statement, the
statements contained in the Registration Statement were true
and correct, and such Registration Statement and Prospectus
did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein
not misleading, and since the effective date of the
Registration Statement, no event has occurred which should
have been set forth in a supplement to or an amendment of the
Prospectus which has not been so set forth in such supplement
or amendment; and
(v) Since the respective dates as of which information
is given in the Registration Statement and Prospectus, there
has not been any material adverse change or any development
involving a prospective material adverse change in or
affecting the condition, financial or otherwise, of the
Company and its Subsidiaries taken as a whole or the earnings,
business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company
and the Subsidiaries taken as a whole, whether or not arising
in the ordinary course of business.
(g) The Company shall have furnished to the Representatives
such further certificates and documents confirming the representations
and warranties, covenants and conditions contained herein and related
matters as the Representatives may reasonably have requested.
(h) The Firm Shares and Option Shares, if any, have been
approved for designation upon notice of issuance on the NASDAQ Stock
Market.
(i) The Lockup Agreements described in Section 4(j) are in
full force and effect.
The opinions and certificates mentioned in this Agreement
shall be deemed to be in compliance with the provisions hereof only if
they are in all material respects satisfactory to the Representatives
and to special counsel for the Underwriters.
If any of the conditions hereinabove provided for in this
Section 6 shall not have been fulfilled when and as required by this
Agreement to be fulfilled, the obligations of the Underwriters
hereunder may be terminated by the Representatives by notifying the
Company of such termination in writing or by telegram at or prior to
the Closing Date or the Option Closing Date, as the case may be.
19
<PAGE> 20
In such event, the Company and the Underwriters shall not be
under any obligation to each other (except to the extent provided in
Sections 5 and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE COMPANY.
--------------------------------------------
The obligations of the Company to sell and deliver the portion
of the Shares required to be delivered as and when specified in this
Agreement are subject to the conditions that at the Closing Date or the
Option Closing Date, as the case may be, no stop order suspending the
effectiveness of the Registration Statement shall have been issued and
in effect or proceedings therefor initiated or threatened.
8. INDEMNIFICATION.
---------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of the Act, against any losses, claims, damages or
liabilities to which such Underwriter or any such controlling person
may become subject under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions or proceedings in respect
thereof) arise out of or are based upon (i) any untrue statement or
alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or
any amendment or supplement thereto, or (ii) the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading; and will
reimburse each Underwriter and each such controlling person upon demand
for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating or
defending any such loss, claim, damage or liability, action or
proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter
or controlling person is a party to any action or proceeding; provided,
however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or
is based upon an untrue statement or alleged untrue statement, or
omission or alleged omission made in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or such amendment or
supplement, in reliance upon and in conformity with written information
furnished to the Company by or through the Representatives specifically
for use in the preparation thereof. This indemnity agreement will be in
addition to any liability which the Company may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify
and hold harmless the Company, each of its directors, each of its
officers who have signed the Registration Statement and each person, if
any, who controls the Company within the meaning of the Act, against
any losses, claims, damages or liabilities to which the Company or any
such director, officer or controlling person may become subject under
the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) arise out of
or are based upon (i) any
20
<PAGE> 21
untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus,
the Prospectus or any amendment or supplement thereto, or (ii) the
omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which
they were made; and will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer or
controlling person in connection with investigating or defending any
such loss, claim, damage, liability, action or proceeding; provided,
however, that each Underwriter will be liable in each case to the
extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission has been made in the
Registration Statement, any Preliminary Prospectus, the Prospectus or
such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by or through the
Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such
Underwriter may otherwise have.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of
which indemnity may be sought pursuant to this Section 8, such person
(the "Indemnified Party") shall promptly notify the person against whom
such indemnity may be sought (the "Indemnifying Party") in writing. No
indemnification provided for in Section 8(a) or (b) shall be available
to any party who shall fail to give notice as provided in this Section
8(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was materially
prejudiced by the failure to give such notice, but the failure to give
such notice shall not relieve the Indemnifying Party or parties from
any liability which it or they may have to the Indemnified Party for
contribution or otherwise than on account of the provisions of Section
8(a) or (b). In case any such proceeding shall be brought against any
Indemnified Party and it shall notify the Indemnifying Party of the
commencement thereof, the Indemnifying Party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with
any other Indemnifying Party similarly notified, to assume the defense
thereof, with counsel satisfactory to such Indemnified Party and shall
pay as incurred the fees and disbursements of such counsel related to
such proceeding. In any such proceeding, any Indemnified Party shall
have the right to retain its own counsel at its own expense.
Notwithstanding the foregoing, the Indemnifying Party shall pay as
incurred (or within 30 days of presentation) the fees and expenses of
the counsel retained by the Indemnified Party in the event (i) the
Indemnifying Party and the Indemnified Party shall have mutually agreed
to the retention of such counsel, (ii) the named parties to any such
proceeding (including any impleaded parties) include both the
Indemnifying Party and the Indemnified Party and representation of both
parties by the same counsel would be inappropriate due to actual or
potential differing interests between them or (iii) the Indemnifying
Party shall have failed to assume the defense and employ counsel
acceptable to the Indemnified Party within a reasonable period of
21
<PAGE> 22
time after notice of commencement of the action. It is understood that
the Indemnifying Party shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the
reasonable fees and expenses of more than one separate firm for all
such Indemnified Parties. Such firm shall be designated in writing by
you in the case of parties indemnified pursuant to Section 8(a) and by
the Company in the case of parties indemnified pursuant to Section
8(b). The Indemnifying Party shall not be liable for any settlement of
any proceeding effected without its written consent but if settled with
such consent or if there be a final judgment for the plaintiff, the
Indemnifying Party agrees to indemnify the Indemnified Party from and
against any loss or liability by reason of such settlement or judgment.
In addition, the Indemnifying Party will not, without the prior written
consent of the Indemnified Party, settle or compromise or consent to
the entry of any judgment in any pending or threatened claim, action or
proceeding of which indemnification may be sought hereunder (whether or
not any Indemnified Party is an actual or potential party to such
claim, action or proceeding) unless such settlement, compromise or
consent includes an unconditional release of each Indemnified Party
from all liability arising out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an Indemnified Party
under Section 8(a) or (b) above in respect of any losses, claims,
damages or liabilities (or actions or proceedings in respect thereof)
referred to therein, then each Indemnifying Party shall contribute to
the amount paid or payable by such Indemnified Party as a result of
such losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however,
the allocation provided by the immediately preceding sentence is not
permitted by applicable law then each Indemnifying Party shall
contribute to such amount paid or payable by such Indemnified Party in
such proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or
omissions which resulted in such losses, claims, damages or
liabilities, (or actions or proceedings in respect thereof), as well as
any other relevant equitable considerations. The relative benefits
received by the Company on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the
Company bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on
the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by
the Company on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
22
<PAGE> 23
The Company and the Underwriters agree that it would not be
just and equitable if contributions pursuant to this Section 8(d) were
determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations
referred to above in this Section 8(d). The amount paid or payable by
an Indemnified Party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to
above in this Section 8(d) shall be deemed to include any legal or
other expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations in
this Section 8(d) to contribute are several in proportion to their
respective underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement,
any Preliminary Prospectus, the Prospectus or any supplement or
amendment thereto, each party against whom contribution may be sought
under this Section 8 hereby consents to the jurisdiction of any court
having jurisdiction over any other contributing party, agrees that
process issuing from such court may be served upon him or it by any
other contributing party and consents to the service of such process
and agrees that any other contributing party may join him or it as an
additional defendant in any such proceeding in which such other
contributing party is a party.
(f) Any losses, claims, damages, liabilities or expenses for
which an Indemnified Party is entitled to indemnification or
contribution under this Section 8 shall be paid by the Indemnifying
Party to the Indemnified Party as such losses, claims, damages,
liabilities or expenses are incurred. The indemnity and contribution
agreements contained in this Section 8 and the representations and
warranties of the Company set forth in this Agreement shall remain
operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter, the Company, its directors or officers or
any persons controlling the Company, (ii) acceptance of any Shares and
payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any Underwriter, or to the Company, its
directors or officers, or any person controlling the Company, shall be
entitled to the benefits of the indemnity, contribution and
reimbursement agreements contained in this Section 8.
23
<PAGE> 24
9. DEFAULT BY UNDERWRITERS.
-----------------------
If on the Closing Date or the Option Closing Date, as the case
may be, any Underwriter shall fail to purchase and pay for the portion
of the Shares which such Underwriter has agreed to purchase and pay
for on such date (otherwise than by reason of any default on the part
of the Company, you, as the Representatives of the Underwriters, shall
use your reasonable efforts to procure within 36 hours thereafter one
or more of the other Underwriters, or any others, to purchase from the
Company such amounts as may be agreed upon and upon the terms set
forth herein, the Firm Shares or Option Shares, as the case may be,
which the defaulting Underwriter or Underwriters failed to purchase.
If during such 36 hours you, as such Representatives, shall not have
procured such other Underwriters, or any others, to purchase the Firm
Shares or Option Shares, as the case may be, agreed to be purchased by
the defaulting Underwriter or Underwriters, then (a) if the aggregate
number of shares with respect to which such default shall occur does
not exceed 10% of the Firm Shares or Option Shares, as the case may
be, covered hereby, the other Underwriters shall be obligated,
severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to
purchase hereunder, to purchase the Firm Shares or Option Shares, as
the case may be, which such defaulting Underwriter or Underwriters
failed to purchase, or (b) if the aggregate number of shares of Firm
Shares or Option Shares, as the case may be, with respect to which
such default shall occur exceeds 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the Company or you as the
Representatives of the Underwriters will have the right, by written
notice given within the next 36-hour period to the parties to this
Agreement, to terminate this Agreement without liability on the part
of the non-defaulting Underwriters or of the Company except to the
extent provided in Section 8 hereof. In the event of a default by any
Underwriter or Underwriters, as set forth in this Section 9, the
Closing Date or Option Closing Date, as the case may be, may be
postponed for such period, not exceeding seven days as you, as the
Representatives, may determine in order that the required changes in
the Registration Statement or in the Prospectus or in any other
documents or arrangements may be effected. The term "Underwriter"
includes any person substituted for a defaulting Underwriter. Any
action taken under this Section 9 shall not relieve any defaulting
Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
10. NOTICES.
-------
All communications hereunder shall be in writing and, except
as otherwise provided herein, will be mailed, delivered, telecopied or
telegraphed and confirmed as follows: if to the Underwriters, to Alex. Brown &
Sons Incorporated, 101 Federal Street, 15th Floor, Boston, Massachusetts 02110,
Attention: R. William Burgess, Jr.; with a copy to Alex. Brown & Sons
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention:
General Counsel; if to the Company to Bruce
24
<PAGE> 25
G. Hill, General Counsel, INSO Corporation, 31 St. James Avenue,
Boston, Massachusetts 02116-4101; with a copy to Hale and Dorr, 60
State Street, Boston, Massachusetts 02109, Attention: Mark Borden.
11. TERMINATION.
-----------
This Agreement may be terminated by you by notice to the
Company as follows:
(a) at any time prior to the earlier of (i) the time the
Shares are released by you for sale by notice to the Underwriters, or
(ii) 11:30 a.m. on the first business day following the date of this
Agreement;
(b) at any time prior to the Closing Date if any of the
following has occurred: (i) since the respective dates as of which
information is given in the Registration Statement and the Prospectus,
any material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Company and its Subsidiaries taken as a whole or the
earnings, business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company and its
Subsidiaries taken as a whole, whether or not arising in the ordinary
course of business, (ii) any outbreak or escalation of hostilities or
declaration of war or national emergency or other national or
international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, escalation, declaration,
emergency, calamity, crisis or change on the financial markets of the
United States would, in your reasonable judgment, make it impracticable
to market the Shares or to enforce contracts for the sale of the
Shares, or (iii) suspension of trading in securities generally on the
New York Stock Exchange or the American Stock Exchange or limitation on
prices (other than limitations on hours or numbers of days of trading)
for securities on either such Exchange, (iv) the enactment,
publication, decree or other promulgation of any statute, regulation,
rule or order of any court or other governmental authority which in
your opinion materially and adversely affects or may materially and
adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by United States or New York State
authorities, (vi) any downgrading in the rating of the Company's debt
securities by any "nationally recognized statistical rating
organization" (as defined for purposes of Rule 436(g) under the
Exchange Act); (vii) the suspension of trading of the Company's common
stock by the Commission on the NNM or (viii) the taking of any action
by any governmental body or agency in respect of its monetary or fiscal
affairs which in your reasonable opinion has a material adverse effect
on the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
25
<PAGE> 26
12. SUCCESSORS.
----------
This Agreement has been and is made solely for the benefit of
the Underwriters and the Company and their respective successors,
executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other
person will have any right or obligation hereunder. No purchaser of any
of the Shares from any Underwriter shall be deemed a successor or
assign merely because of such purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS.
------------------------------------
The Company and the Underwriters acknowledge and agree that
the only information furnished or to be furnished by any Underwriter to
the Company for inclusion in any Prospectus or the Registration
Statement consists of the information set forth in the last paragraph
on the front cover page (insofar as such information relates to the
Underwriters), legends required by Item 502(d) of Regulation S-K under
the Act and the information under the caption "Underwriting" in the
Prospectus.
14. MISCELLANEOUS.
-------------
The reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect
regardless of (a) any termination of this Agreement, (b) any
investigation made by or on behalf of any Underwriter or controlling
person thereof, or by or on behalf of the Company or its directors or
officers and (c) delivery of and payment for the Shares under this
Agreement.
This Agreement may be executed in two or more counterparts,
each of which shall be deemed an original, but all of which together
shall constitute one and the same instrument.
This Agreement shall be governed by, and construed in
accordance with, the laws of the Commonwealth of Massachusetts.
26
<PAGE> 27
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the several
Underwriters in accordance with its terms.
Very truly yours,
INSO CORPORATION
By
---------------------------------
Name:
----------------------------
Title:
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
ALEX. BROWN & SONS INCORPORATED
ADAMS, HARKNESS & HILL, INC.
MONTGOMERY SECURITIES
As Representatives of the several Underwriters
By: Alex. Brown & Sons Incorporated
By
------------------------------------------
Name:
Title:
27
<PAGE> 28
EXHIBIT A
List of Subsidiaries of the Company
-----------------------------------
INSO Chicago Corporation
INSO Corporation, Ltd.
INSO Dallas Corporation
INSO Foreign Sales Corporation
INSO Kansas City Corporation
INSO (Overseas) Corporation (formerly InfoSoft International (Overseas), Inc.)
INSO Providence Corporation
INSO Securities Corporation
INSO Technology Corporation
Electronic Book Technologies Massachusetts, Inc.
Electronic Book Technologies International, Inc.
Electronic Book Technologies, SA
Electronic Book Technologies, SARL
Electronic Book Technologies Australia Pty, Ltd.
Electronic Book Technologies KK
Electronic Book Technologies Canada, Ltd.
Electronic Book Technologies FSC, Inc.
28
<PAGE> 29
SCHEDULE I
SCHEDULE OF UNDERWRITERS
Number of Firm Shares
Underwriter to be Purchased
----------- ---------------------
Alex. Brown & Sons Incorporated [ ]
Adams, Harkness & Hill, Inc. [ ]
Montgomery Securities [ ]
---------
Total 1,200,000
---------
29
<PAGE> 30
SCHEDULE II
SCHEDULE OF OPTION SHARES
Maximum Number Percentage of
of Option Shares Total Number of
Name of Seller to be Sold Option Shares
- -------------- ---------------- ---------------
Alex. Brown & Sons
Incorporated
Adams, Harkness & Hill,
Inc.
Montgomery Securities
------ ----
Total 100%
------ ----
30
<PAGE> 1
Exhibit 5
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HALE AND DORR
Counsellors at Law
60 State Street
Boston, Massachusetts 02109
617-526-6000 * Fax 617-526-5000
September 25, 1996
INSO Corporation
31 St. James Avenue
Boston, MA 02116
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-3 (the "Registration Statement"), filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended, relating to the public offering of an aggregate of 1,380,000 shares
(including 180,000 shares subject to an over-allotment option granted to the
Underwriters (as defined below)) of Common Stock, $.01 par value per share (the
"Shares"), of INSO Corporation, a Delaware corporation (the "Company"), which
will be sold by the Company to the Underwriters pursuant to an underwriting
agreement (the "Underwriting Agreement") among the Company and Alex. Brown &
Sons Incorporated, Adams, Harkness & Hill, Inc. and Montgomery Securities (the
"Underwriters").
We have acted as counsel for the Company in connection with the sale by the
Company of the Shares. We have examined copies of the Registration Statement and
all exhibits thereto, and all documents incorporated by reference therein, all
as filed with the Commission. We have also examined and relied upon the original
or copies of minutes of meetings of the Board of Directors of the Company, a
copy of the By-Laws of the Company, as amended, and a copy of the Certificate of
Incorporation of the Company, as amended.
Based upon the foregoing, we are of the opinion that the Shares have been
duly authorized and that, when issued and sold by the Company in accordance with
the terms of the Underwriting Agreement, will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion as part of the Registration
Statement and to the use of our name therein and in the related Prospectus under
the caption "Legal Matters."
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INSO Corporation
September 25, 1996
Page 2
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares while the Registration Statement is in effect.
Very truly yours,
HALE AND DORR
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EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 1, 1996, in the Registration Statement
(Form S-3) and related prospectus of INSO Corporation for the registration of
1,380,000 shares of its common stock.
We also consent to the incorporation by reference therein of our report
dated February 1, 1996 with respect to the financial statement schedule of INSO
Corporation for years ended December 31, 1995, 1994 and 1993 included in the
Annual Report (Form 10-K) for 1995 filed with the Securities and Exchange
Commission.
ERNST & YOUNG LLP
Boston, Massachusetts
September 19, 1996
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EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3) and related Prospectus of INSO Corporation for
the registration of 1,380,000 shares of common stock and to the incorporation by
reference therein of our report dated August 2, 1996, with respect to the
consolidated financial statements of Electronic Book Technologies, Inc. for the
years ended December 31, 1995 and 1994 included in the Current Report on Form
8-K/A of INSO Corporation dated September 17, 1996, filed with the Securities
and Exchange Commission.
ERNST & YOUNG LLP
Providence, Rhode Island
September 19, 1996
