<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) July 16, 1996
INSO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 0-23384 04-3216243
(State or other jurisdiction of (Commission File (I.R.S. Employer
incorporation or organization) Number) Identification No.)
31 ST. JAMES AVENUE, 02116-4101
BOSTON, MASSACHUSETTS (Zip code)
(Address of principal executive offices)
(617) 753-6500
(Registrant's telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
<PAGE> 2
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired.
Financial statements of the business acquired are filed as Exhibit
99.1 hereto.
(b) Pro Forma Financial Information
Pro Forma financial information is filed as Exhibit 99.2 hereto.
(c) Exhibits
2.1 Merger Agreement dated July 1, 1996, by and among INSO
Corporation, CIP Acquisition Corporation, and Electronic Book
Technologies, Inc. (previously filed).
20.1 Press release, dated July 1, 1996 (previously filed)
23.1 Consent of Independent Auditors (filed herewith)
99.1 Financial Statements of Business Acquired (filed herewith)
99.2 Pro Forma Financial Information (filed herewith)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized this 17th day of September 1996.
INSO Corporation
By /s/ Bruce G. Hill
--------------------
Bruce G. Hill
Vice President, General Counsel and
Secretary
<PAGE> 3
EXHIBIT INDEX
Exhibit
No. Exhibit Description
- --- -------------------
2.1 Merger Agreement dated July 1, 1996, by and among INSO
Corporation, CIP Acquisition Corporation, and Electronic
Book Technologies, Inc. (previously filed).
20.1 Press release, dated July 1, 1996 (previously filed)
23.1 Consent of Independent Auditors (filed herewith)
99.1 Financial Statements of Business Acquired (filed herewith)
99.2 Pro Forma Financial Information (filed herewith)
<PAGE> 1
Exhibit 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Forms S-8 No. 33-77302, 33-83606, 33-77304, 33-93324, 33-06845 and 33-06847)
pertaining to the INSO Corporation 1993 Stock Purchase Plan, the INSO
Corporation 1993 Stock Incentive Plan, the INSO Corporation 401(k) Plan, the
INSO Corporation 1993 Stock Incentive Plan, the INSO Corporation 1996 Stock
Incentive Plan and the INSO Corporation 1996 Non-Employee Director Plan of our
report dated August 2, 1996, with respect to the consolidated financial
statements of Electronic Book Technologies, Inc. included in the current report
on Form 8-K/A of INSO Corporation dated September 17, 1996.
ERNST & YOUNG LLP
Providence, Rhode Island
September 12, 1996
<PAGE> 1
Exhibit 99.1
CONSOLIDATED FINANCIAL STATEMENTS
ELECTRONIC BOOK TECHNOLOGIES, INC.
YEARS ENDED DECEMBER 31, 1995 AND 1994
(INFORMATION AS OF JUNE 30, 1996 AND FOR THE
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 IS UNAUDITED)
<PAGE> 2
Report of Independent Auditors
The Board of Directors
Electronic Book Technologies, Inc.
We have audited the accompanying consolidated balance sheets of Electronic Book
Technologies, Inc. as of December 31, 1995 and 1994, and the related
consolidated statements of operations, changes in redeemable preferred stock and
stockholders' equity and cash flows for the years then ended. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Electronic Book
Technologies, Inc. at December 31, 1995 and 1994, and the consolidated results
of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Providence, Rhode Island
August 2, 1996
1
<PAGE> 3
Electronic Book Technologies, Inc.
<TABLE>
Consolidated Balance Sheets
<CAPTION>
JUNE 30 DECEMBER 31 DECEMBER 31
1996 1995 1994
-----------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 367,284 $1,355,931 $ 543,491
Accounts receivable, net of $150,243, $123,066
and $35,624 allowance for doubtful accounts
in 1996, 1995 and 1994, respectively 3,673,298 3,529,373 3,591,615
Advances to stockholders 69,809 73,278 45,103
Refundable income taxes 335,700 -- --
Deferred income taxes -- 90,686 21,229
Other current assets 221,077 238,904 104,055
-----------------------------------------
Total current assets 4,667,168 5,288,172 4,305,493
Property and equipment, at cost (Note 3):
Computer equipment 2,886,491 2,275,722 1,517,599
Computer software 474,966 414,180 261,219
Office equipment 81,055 57,153 23,641
Furniture and fixtures 140,062 138,563 87,379
Leasehold improvements 16,873 16,873 7,375
-----------------------------------------
3,599,447 2,902,491 1,897,213
Less accumulated depreciation and amortization 1,313,373 980,474 483,767
-----------------------------------------
2,286,074 1,922,017 1,413,446
Other assets:
Deferred income taxes 106,603 -- --
Software development costs, net of accumulated
amortization of $309,780, $231,894 and $101,117
in 1996, 1995 and 1994, respectively 595,047 258,434 239,211
Other, net 98,121 106,770 28,466
-----------------------------------------
Total other assets 799,771 365,204 267,677
-----------------------------------------
Total assets $7,753,013 $7,575,393 $5,986,616
=========================================
</TABLE>
2
<PAGE> 4
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31 DECEMBER 31
1996 1995 1994
-----------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $2,292,707 $1,228,663 $1,160,814
Accrued salaries, commissions and bonuses 725,404 443,057 615,933
Deferred income taxes 106,603 -- --
Income taxes payable -- 83,010 156,928
Unearned revenue 1,857,659 2,153,011 1,383,411
Current portion of long-term debt (Note 3) 1,726,159 341,342 251,113
-----------------------------------------
Total current liabilities 6,708,532 4,249,083 3,568,199
Deferred income taxes -- 121,686 85,229
Long-term debt (Note 3) -- 1,058,639 496,494
Commitments (Note 4)
Series B redeemable convertible preferred stock,
$.01 par value; 2,500 shares authorized, issued
and outstanding at June 30, 1996 and
December 31, 1995 (Note 6) 286,364 286,364 --
Stockholders' equity (Note 7):
Series A convertible preferred stock, $.01 par value;
2,000 shares authorized; 750 shares issued and
outstanding at June 30, 1996, December 31, 1995
and 1994, respectively; aggregate liquidation
preference of $540,225 at June 30, 1996 8 8 8
Common stock, $.01 par value; 6,000,000 shares
authorized; 2,863,786, 2,791,473 and 2,714,900
shares issued; 2,735,254, 2,667,093 and 2,594,900
shares issued and outstanding at June 30, 1996,
December 31, 1995 and 1994, respectively 28,638 27,915 27,149
Additional paid-in capital 269,679 206,816 145,018
Retained earnings 511,968 1,659,447 1,671,369
Cumulative translation adjustment (51,537) (31,176) --
-----------------------------------------
758,756 1,863,010 1,843,544
Less: Treasury stock, at cost (639) (618) (600)
Less: Deferred compensation -- (2,771) (6,250)
-----------------------------------------
Total stockholders' equity 758,117 1,859,621 1,836,694
-----------------------------------------
Total liabilities, redeemable preferred stock and
stockholders' equity $7,753,013 $7,575,393 $5,986,616
=========================================
</TABLE>
See accompanying notes.
3
<PAGE> 5
Electronic Book Technologies, Inc.
<TABLE>
Consolidated Statements of Operations
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30 DECEMBER 31
1996 1995 1995 1994
-------------------------- ---------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues:
Software sales $ 5,074,162 $4,492,863 $10,038,436 $ 8,922,219
Consulting and maintenance 2,414,706 1,626,993 3,775,675 2,177,914
-------------------------- ---------------------------
7,488,868 6,119,856 13,814,111 11,100,133
Cost of revenues:
Software sales 206,450 124,256 283,989 243,123
Consulting and maintenance 1,397,728 932,182 2,318,618 1,819,812
-------------------------- ---------------------------
1,604,178 1,056,438 2,602,607 2,062,935
-------------------------- ---------------------------
Gross profit 5,884,690 5,063,418 11,211,504 9,037,198
Operating expenses:
Research and development 3,291,736 2,297,734 4,746,155 3,113,081
Selling and marketing 3,113,868 2,334,808 4,975,423 2,995,543
General and administrative 910,750 721,778 1,426,064 1,048,020
-------------------------- ---------------------------
Total operating expenses 7,316,354 5,354,320 11,147,642 7,156,644
-------------------------- ---------------------------
Income (loss) from operations (1,431,664) (290,902) 63,862 1,880,554
Other income (expense):
Interest expense, net (54,170) (18,304) (36,420) (57,121)
-------------------------- ---------------------------
Income (loss) before provision
for income taxes (1,485,834) (309,206) 27,442 1,823,433
Provision (benefit) for income
taxes (Note 5) (338,355) (60,000) (10,000) 525,000
-------------------------- ---------------------------
Net income (loss) $(1,147,479) $ (249,206) $ 37,442 $ 1,298,433
========================== ===========================
</TABLE>
See accompanying notes.
4
<PAGE> 6
Electronic Book Technologies, Inc.
<TABLE>
Consolidated Statements of Changes in Redeemable Preferred Stock and Stockholders' Equity
<CAPTION>
DOLLARS SHARES ISSUED
------------ ------------------------------------
SERIES B
REDEEMABLE SERIES A
CONVERTIBLE CONVERTIBLE
PREFERRED PREFERRED COMMON TREASURY
STOCK STOCK STOCK STOCK
----------- -------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 $ -- 750 2,712,400 120,000
Exercise of stock options -- -- 2,500 --
Amortization of deferred compensation -- -- -- --
Net income -- -- -- --
-------- ------------------------------------
Balance at December 31, 1994 -- 750 2,714,900 120,000
Exercise of stock options -- -- 76,573 --
Issuance of Preferred stock, Series B 237,000 -- -- --
Accretion of Preferred stock, Series B 49,364 -- -- --
Repurchase of common stock -- -- -- 4,380
Amortization of deferred compensation -- -- -- --
Translation adjustments -- -- -- --
Net income -- -- -- --
-------- ------------------------------------
Balance at December 31, 1995 286,364 750 2,791,473 124,380
Unaudited:
- ---------
Exercise of stock options -- -- 72,313 --
Repurchase of common stock -- -- -- 4,152
Amortization of deferred compensation -- -- -- --
Translation adjustments -- -- -- --
Net loss -- -- -- --
-------- ------------------------------------
Balance at June 30, 1996 $286,364 750 2,863,786 128,532
======== ====================================
<CAPTION>
DOLLARS
------------------------------------------------------------------------------------
SERIES A
CONVERTIBLE ADDITIONAL CUMULATIVE
PREFERRED COMMON PAID-IN RETAINED TRANSLATION TREASURY
STOCK STOCK CAPITAL EARNINGS ADJUSTMENT STOCK
------------------------------------------------------------------------------------
Balance at December 31, 1993 $8 $27,124 $144,105 $ 372,936 $ -- $(600)
Exercise of stock options -- 25 913 -- -- --
Amortization of deferred compensation -- -- -- -- -- --
Net income -- -- -- 1,298,433 -- --
-----------------------------------------------------------------------------------
Balance at December 31, 1994 8 27,149 145,018 1,671,369 -- (600)
Exercise of stock options -- 766 61,798 -- -- --
Issuance of Preferred stock, Series B -- -- -- -- -- --
Accretion of Preferred stock, Series B -- -- -- (49,364) -- --
Repurchase of common stock -- -- -- -- (18)
Amortization of deferred compensation -- -- -- -- --
Translation adjustments -- -- -- (31,176) --
Net income -- -- -- 37,442 -- --
------------------------------------------------ ----------------------------------
Balance at December 31, 1995 8 27,915 206,816 1,659,447 (31,176) (618)
Unaudited:
- ---------
Exercise of stock options -- 723 62,863 -- -- --
Repurchase of common stock -- -- -- -- -- (21)
Amortization of deferred compensation -- -- -- -- -- --
Translation adjustments -- -- -- (20,361) --
Net loss -- -- -- (1,147,479) -- --
-----------------------------------------------------------------------------------
Balance at June 30, 1996 $8 $28,638 $269,679 $ 511,968 $(51,537) $(639)
===================================================================================
<CAPTION>
DOLLARS
------------------------------
DEFERRED STOCKHOLDERS'
COMPENSATION EQUITY
------------------------------
<S> <C> <C>
Balance at December 31, 1993 $(10,426) $ 533,147
Exercise of stock options -- 938
Amortization of deferred compensation 4,176 4,176
Net income -- 1,298,433
---------------------------
Balance at December 31, 1994 (6,250) 1,836,694
Exercise of stock options -- 62,564
Issuance of Preferred stock, Series B -- --
Accretion of Preferred stock, Series B -- (49,364)
Repurchase of common stock -- (18)
Amortization of deferred compensation 3,479 3,479
Translation adjustments -- (31,176)
Net income -- 37,442
---------------------------
Balance at December 31, 1995 (2,771) 1,859,621
Unaudited:
- ---------
Exercise of stock options -- 63,586
Repurchase of common stock -- (21)
Amortization of deferred compensation 2,771 2,771
Translation adjustments -- (20,361)
Net loss -- (1,147,479)
---------------------------
Balance at June 30, 1996 $ -- $ 758,117
===========================
</TABLE>
See accompanying notes.
5
<PAGE> 7
Electronic Book Technologies, Inc.
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30 DECEMBER 31
1996 1995 1995 1994
------------------------- ---------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $(1,147,479) $(249,206) $ 37,442 $1,298,433
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 416,324 273,826 638,638 360,387
Provision for uncollectible accounts 27,177 29,237 87,442 25,624
Deferred income taxes (31,000) -- (33,000) 20,000
Amortization of deferred compensation
expense 2,771 2,088 3,479 4,176
Increase (decrease) in cash from changes in
operating assets and liabilities:
Accounts receivable (171,102) 644,323 (25,200) (2,182,095)
Other current assets and deposits 21,107 (139,353) (195,371) (84,536)
Accounts payable and accrued liabilities 1,329,329 159,999 (136,203) 1,036,168
Income taxes payable, net (418,710) (253,748) (73,918) 139,531
Unearned revenue (295,352) 89,376 769,600 995,724
------------------------- ---------------------------
Net cash provided by (used in) operating
activities (266,935) 556,542 1,072,909 1,613,412
INVESTING ACTIVITIES
Capital expenditures (696,956) (463,338) (1,005,278) (976,164)
Software development costs (414,499) (10,000) (150,000) (155,094)
Organization costs -- (3,191) (57,111) --
------------------------- ---------------------------
Net cash used in investing activities (1,111,455) (476,529) (1,212,389) (1,131,258)
FINANCING ACTIVITIES
Repurchase of common stock (21) -- (18) --
Proceeds from issuance of preferred stock -- -- 237,000 --
Proceeds from sale of common stock 63,586 20,125 62,564 938
Proceeds from subordinated notes payable 500,000 -- 600,000 --
Proceeds from long-term borrowings -- 350,787 350,787 93,565
Principal payments on long-term debt (173,822) (140,060) (298,413) (198,667)
------------------------- ---------------------------
Net cash provided by (used in) financing
activities 389,743 230,852 951,920 (104,164)
------------------------- ---------------------------
Net increase (decrease) in cash and cash
equivalents (988,647) 310,865 812,440 377,990
Cash and cash equivalents at beginning of
year 1,355,931 543,491 543,491 165,501
------------------------- ---------------------------
Cash and cash equivalents at end of
period $ 367,284 $ 854,356 $ 1,355,931 $ 543,491
========================= ===========================
Supplemental disclosures:
Cash paid (received) during the year for:
Interest $ 70,522 $ 45,319 $ 83,188 $ 64,265
========================= ===========================
Income taxes $ (54,286) $ 185,750 $ 96,918 $ 364,890
========================= ===========================
</TABLE>
See accompanying notes.
6
<PAGE> 8
Electronic Book Technologies, Inc.
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
(Information as of June 30, 1996 and for the
six months ended June 30, 1996 and 1995 is unaudited)
1. BUSINESS DESCRIPTION
Electronic Book Technologies, Inc. (the Company) is a global software technology
supplier of integrated CD-ROM/Web publishing solutions for the professional
information publisher.
On July 1, 1996, the Company entered into a Merger agreement with INSO
Corporation (the buyer or INSO) effective July 16, 1996. Under the agreement
INSO will pay cash of approximately $39,800,000 (less the amount payable in
redemption of outstanding shares of Series A and B preferred stock) in exchange
for all the capital stock of the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL STATEMENTS
The consolidated balance sheet at June 30, 1996, the consolidated statements of
operations and statements of cash flows for the six months ended June 30, 1996
and 1995 and the consolidated statements of changes in redeemable preferred
stock and stockholders' equity for the six months ended June 30, 1996 are
unaudited, but, in the opinion of management, include all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
results for these interim periods. As permitted by Article 10 of Regulation S-X,
the accompanying financial statements do not include all the information and
footnotes required by generally accepted accounting principles for the interim
financial statements presented. The results of operations for the six months
ended June 30, 1996 are not necessarily indicative of results to be expected for
the entire year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries. Upon consolidation, all material intercompany
accounts and transactions are eliminated.
7
<PAGE> 9
Electronic Book Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include funds held in liquid investments with original
maturities of three months or less.
USE OF ESTIMATES
The preparation of the 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.
PROPERTY AND EQUIPMENT
Depreciation on property and equipment is computed using straight line for
financial reporting purposes and accelerated methods for income tax purposes
over useful lives ranging from five to seven years. Amortization of purchased
software is computed using the straight-line method over a three year period.
SOFTWARE DEVELOPMENT COSTS
The Company capitalizes certain software development costs not under contract
with customers in accordance with Statement of Financial Accounting Standards
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed" (the Statement). Capitalization of software development
costs begins upon the establishment of technological feasibility as defined in
the Statement. The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software development costs requires
considerable judgment by management with respect to certain external factors,
including, but not limited to, anticipated future gross revenues, estimated
economic life and changes in software and hardware technologies. Software
development costs are amortized on a straight-line method over a three-year
period. Amortization of software development costs was $130,777 and $72,238 for
the years ended December 31, 1995 and 1994, respectively.
8
<PAGE> 10
Electronic Book Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK BASED COMPENSATION
The Company accounts for its stock compensation arrangements under the
provisions of APB 25, "Accounting for Stock Issued to Employees."
REVENUE RECOGNITION
Revenue from software licenses is recognized upon delivery of the software to
the customer. Revenues from software maintenance fees are recognized ratably
over the term of the contractual agreements, generally one year. Revenues from
consulting engagements are recognized as revenue when the work is performed.
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains reserves for potential credit
losses, which have not been material to the Company's financial position or
results of operations. Sales to international customers accounted for 29% and
22% of total sales during 1995 and 1994, respectively. Sales to one customer
accounted for approximately 11% of the Company's revenue in 1994.
INCOME TAXES
The Company utilizes the liability method to account for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
PENDING PRONOUNCEMENTS
In March 1995, the FASB issued Statement of Financial Accounting Standards No.
121 ("SFAS 121"), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, which establishes accounting standards for
measuring the impairment of long-lived assets. The Company expects to adopt the
Statement after the consummation of the merger as described in Note 1. The
Company does not believe the effect of the adoption to be material.
9
<PAGE> 11
Electronic Book Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
3. DEBT
<TABLE>
Debt consists of the following:
<CAPTION>
JUNE 30 DECEMBER 31 DECEMBER 31
1996 1995 1994
---------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Subordinated note payable to a financial
institution, monthly interest
payments at prime plus 4%; principal
due at maturity, March 31, 1997;
subordinated to working capital line
of credit and term debt $600,000 $600,000 $ --
Subordinated notes payable (see
description below) 500,000 -- --
Secured promissory notes, interest at
8.17%-10.54%; monthly principal and
interest payments ranging from
$22,589-$11,408 through March 1998;
secured by certain equipment. 308,631 444,234 323,570
Term note, interest at prime plus 1.25%
(9.5% at June 30, 1996); monthly
principal payment of $4,170 plus
interest through October 1998 with
the balance of $103,970 due in
November 1998; secured by
substantially all of the Company's
assets. 220,730 245,667 295,706
Rhode Island Small Business Loan Fund,
interest at 5.4%; monthly principal
and interest payments of $1,905
through April 1998; secured by
certain fixed assets. 39,828 50,058 69,692
</TABLE>
10
<PAGE> 12
Electronic Book Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
<TABLE>
3. DEBT (CONTINUED)
<CAPTION>
JUNE 30 DECEMBER 31 DECEMBER 31
1996 1995 1994
------------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Subordinated promissory note payable
to stockholders 32,280 35,332 35,332
Other 24,690 24,690 23,307
----------------------------------------------
1,726,159 1,399,981 747,607
Less current portion (1,726,159) (341,342) (251,113)
----------------------------------------------
$ -- $1,058,639 $ 496,494
==============================================
</TABLE>
The term loan agreement and the secured promissory notes each contain, among
other things, covenants relative to maintenance of the Company's debt to
tangible net worth ratio and minimum tangible net worth requirements.
<TABLE>
Aggregate annual maturities of the Company's debt are as follows:
<CAPTION>
DECEMBER 31
1995
-----------
<S> <C>
1996 $341,342
1997 870,716
1998 187,923
----------
Total debt $1,399,981
==========
</TABLE>
In 1996, the Company entered into a separate subordinated loan agreement. The
agreement provides the Company with the ability to issue installment notes of
$250,000 up to an aggregate principal balance of $2,000,000. The notes mature
one year from the date of issuance and carry an annual interest rate of prime
plus 4%, payable at maturity. The agreement also requires the Company to issue
warrants for 1 share of common stock for every $20 dollars in term notes issued.
At June 30, 1996, the Company had $500,000 and 25,000 warrants outstanding under
this agreement. In July 1996, the Company borrowed an additional $500,000 and
issued an additional 25,000 warrants under the agreement. The warrants are
exercisable at a price of $5.03 per share through June, 2000.
11
<PAGE> 13
Electronic Book Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
3. DEBT (CONTINUED)
The Company has a working capital line of credit with a bank totaling $750,000.
The amount of availability is limited based upon levels of receivables. Interest
will be charged at the bank's prime rate plus 1.25%. The line of credit is
secured by substantially all of the assets of the Company, subject to a prior
lien on certain fixed assets granted to the Rhode Island Small Business Loan
Fund Corporation. There were no borrowings under this agreement during 1996,
1995 or 1994. The line matures in August 1996.
The carrying amount of debt approximates its fair value. Subsequent to the
acquisition as described in Note 1, the Company intends to repay all of its
outstanding obligations (of which $820,730 was in default at June 30, 1996) and,
accordingly at June 30, 1996, has classified all outstanding debt as current.
4. COMMITMENTS
The Company leases its current operating facility under a noncancelable
operating lease agreement which may be terminated by the Company upon six
months' notice. The Company also leases office space for its various sales
offices. Total rent expense was $592,899 and $261,252 for the years ended
December 31, 1995 and 1994, respectively.
5. INCOME TAXES
<TABLE>
Significant components of the provision (benefit) for income taxes are as
follows:
<CAPTION>
YEAR ENDED
DECEMBER 31
1995 1994
-----------------------
<S> <C> <C>
Current:
Federal $(29,000) $350,000
State 2,000 135,000
Foreign 50,000 20,000
-----------------------
Total current 23,000 505,000
Deferred:
State (33,000) 20,000
-----------------------
Total deferred (33,000) 20,000
-----------------------
$(10,000) $525,000
=======================
</TABLE>
As of December 31, 1995, the Company has a federal research and development
credit carryforward of $310,000 which will expire beginning in 2009 through
2010.
12
<PAGE> 14
Electronic Book Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
<TABLE>
Significant components of the Company's deferred tax liabilities and assets are
as follows:
<CAPTION>
DECEMBER 31
1995 1994
--------------------------
<S> <C> <C>
Deferred tax liabilities
Tax over book depreciation $166,956 $76,498
Software development costs, net 73,699 81,329
State taxes 61,213 64,000
Other 3,785 4,153
--------------------------
Total deferred tax liabilities 305,653 225,980
Deferred tax assets
Vacation pay 77,095 46,668
Bad debts 41,842 12,112
R&D credit and other tax credits 431,165 88,050
Net operating loss carryforwards -- --
Other 19,743 44,684
--------------------------
Total deferred tax assets 569,845 191,514
Valuation allowance (295,192) (29,534)
--------------------------
Net deferred tax assets 274,653 161,980
--------------------------
Net deferred tax liabilities $ 31,000 $64,000
==========================
</TABLE>
13
<PAGE> 15
Electronic Book Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
5. INCOME TAXES (CONTINUED)
<TABLE>
A reconciliation of the aggregate income tax provision to the U.S. statutory rate is as follows:
<CAPTION>
DECEMBER 31
1995 1994
--------------------------
<S> <C> <C>
Federal income tax at the statutory rate $ 9,330 $ 619,967
Permanent differences:
Nondeductible expenses and exemptions 6,791 (23,978)
Temporary differences:
State income tax, net of federal effect 2,172 102,000
Change in valuation allowance 265,658 (55,466)
Effect of alternative minimum tax 58,401 --
Research and development credit (343,115) (202,000)
Effect of foreign tax rate differential (7,836) 3,847
Other, net (1,401) 80,630
--------------------------
Effective income tax $(10,000) $ 525,000
==========================
</TABLE>
6. REDEEMABLE PREFERRED STOCK
As of December 31, 1995, the Company had outstanding 2,500 shares of Series B
redeemable, convertible, cumulative, nonvoting preferred stock at $100 per
share, net of issuance costs. In the event of voluntary or involuntary
liquidation, the assets of the Company available for distribution to the holders
of the Company's common stock shall be used to pay first, the holders of the
Series A convertible preferred stock (see Note 7), and then the holders of the
Series B redeemable convertible preferred stock, for an amount per share based
upon a liquidation schedule (Liquidation Preference) in accordance with the
preferred stock agreement.
The holders of the Series B redeemable convertible preferred stock shall be
entitled to receive, when and if declared by the board of directors, dividends
on a cumulative basis for an amount per share based upon a dividend schedule in
accordance with the preferred stock agreement. This dividend schedule calls for
a minimum dividend of 10% of the share cost, compounded annually and may
increase as a result of the revenue performance of the Company's Japanese
subsidiary, Electronic Book Technologies K.K. As of December 31, 1995,
cumulative unpaid dividends on the Series B redeemable convertible preferred
stock amounted to $36,364.
14
<PAGE> 16
Electronic Book Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
6. REDEEMABLE PREFERRED STOCK (CONTINUED)
Each share of the Series B redeemable convertible preferred stock may
voluntarily convert into shares of common stock upon (i) a public offering or
(ii) issuance of an additional $3 million in common stock or equivalents. The
conversion rate shall be equal to the Liquidation Preference noted in the
agreement in effect as of the date of such event multiplied by the number of
shares held by such holder and divided by the price per share of the common
stock or equivalent paid by the purchasers of such securities from the Company
in such an event. The Company may, at any time, call for redemption of all
shares of the Series B redeemable convertible preferred stock at a redemption
price per share equal to the Liquidation Preference in effect at such time.
Holders of Series B redeemable convertible preferred stock may, at any time
after December 31, 1997, redeem such shares at a redemption price which
approximates the Liquidation Preference.
The carrying amount of redeemable preferred stock approximates its fair value.
7. STOCKHOLDERS' EQUITY
During 1994, the board of directors approved a 2 for 1 stock split effected as a
dividend, payable to holders of record of common stock at the close of business
on October 1, 1994. In conjunction with the stock split, the shareholders
authorized an increase in the number of authorized shares of common stock from
2,000,000 to 6,000,000.
As of December 31, 1995, the Company had outstanding 750 shares of Series A
convertible, noncumulative, nonvoting preferred stock which sold for $100 per
share, net of issuance costs. The holders of the Series A convertible preferred
stock shall be entitled to receive, when and if declared by the board of
directors, dividends on a noncumulative basis at the annual rate of $8.00 per
share. As of December 31, 1995, no dividends have been declared.
Each share of the Series A convertible preferred stock shall be automatically
converted into shares of common stock upon (i) a $1.5 million public offering or
(ii) issuance of additional $1.5 million in common stock or equivalents. The
conversion rate shall be equal to the Liquidation Preference noted in the
agreement in effect as of the date of such event multiplied by the number of
shares held by such holder and divided by the price per share of the common
stock or equivalent paid by the purchasers of such securities from the Company
in such an event. The Company may, at any time, call for redemption of all
shares of the Series A convertible preferred at a redemption price per share
equal to the Liquidation Preference in effect at such time.
15
<PAGE> 17
Electronic Book Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
8. INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN
The Company has an incentive and nonstatutory stock option plan (the Plan) under
which incentive stock options (incentive options) and nonstatutory stock options
(nonstatutory options) may be granted to officers and key employees of the
Company and any subsidiary. Nonstatutory options may also be granted to
individuals providing services to or acting as directors of the Company or any
subsidiary. As of December 31, 1995, the Company had reserved 2,000,000 shares
of common stock for the exercise of stock options.
The Plan provides certain guidelines as to the purchase price per share as
follows: the purchase price for incentive options shall not be less than the
fair market value of the common stock on the date the option is granted (110% of
the fair market value in the case of a greater-than-10% stockholder). The price
at which shares may be purchased pursuant to nonstatutory options shall be
specified by the board of directors at the time the option is granted, but shall
not be less than the par value of shares of common stock.
Under its present terms, the Plan will expire in 2003. The term of each option
is ten years (five years in the case of an Incentive Option granted to a
greater-than-10% stockholder) or such shorter period as may be determined by the
board of directors. Options are exercisable in installments specified by the
Company in the stock option agreement.
<TABLE>
The following stock options were outstanding under the Plan:
<CAPTION>
NUMBER OF
OPTIONS PRICE PER SHARE
-----------------------------
<S> <C> <C>
Balance at December 31, 1993 818,232 $.375 - $.875
Granted 309,450 $.875 - $2.00
Exercised (2,500) $.375
Forfeited (10,800) $.375 - $.875
----------------------------
Balance at December 31, 1994 1,114,382 $.375 - $2.00
Granted 791,050 $2.00 - $2.20
Exercised (76,573) $.375 - $ .85
Forfeited (22,712) $.375 - $2.00
----------------------------
Balance at December 31, 1995 1,806,147 $.375 - $2.20
============================
</TABLE>
At December 31, 1995, options to purchase 862,185 shares were exercisable under
the Plan.
16
<PAGE> 18
Electronic Book Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
8. INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN (CONTINUED)
In addition to options issued under the Plan, at December 31, 1995, the Company
has outstanding ten-year, nonstatutory options to purchase 456,850 shares of the
Company's common stock at an exercise price of $2.00 per share. At December 31,
1995, options to purchase 222,600 shares were exercisable under this grant.
Under the merger agreement, as described in Note 1, vesting schedules were
accelerated such that an additional 26,514 options were exercisable prior to the
merger date and an additional 197,192 options will become exercisable at
September 30, 1996. All remaining stock options were canceled as a result of the
transaction.
Shares of common stock reserved for future issuances of outstanding preferred
stock, options and warrants at December 31, 1995 was 2,003,250.
9. EMPLOYEE BENEFITS
The Company has a defined contribution retirement plan (the Plan) covering
substantially all employees. The Plan is a combined profit sharing and 401(k)
plan. Employee contributions to the Plan are limited to 15 percent of employee
salaries and may be matched at the discretion of the Company. The Company did
not make any discretionary contributions to the Plan in 1995 or 1994.
10. INTERNATIONAL OPERATIONS
<TABLE>
A summary of financial information for the Company's business units is as
follows:
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
----------------------
(In thousands)
<S> <C> <C>
Revenues:
United States $11,643 $10,574
Canada 153 80
Asia/Pacific Rim 724 --
Europe 1,294 446
----------------------
$13,814 $11,100
======================
</TABLE>
17
<PAGE> 19
Electronic Book Technologies, Inc.
Notes to Consolidated Financial Statements (continued)
<TABLE>
10. INTERNATIONAL OPERATIONS (CONTINUED)
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
-----------------------
(In thousands)
<S> <C> <C>
Income before taxes:
United States $(142) $1,776
Canada 10 7
Asia/Pacific Rim 34 --
Europe 125 40
--------------------
$ 27 $1,823
====================
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
---------------------
(In thousands)
<S> <C> <C>
Assets:
United States $6,855 $5,873
Canada 20 9
Asia/Pacific Rim 270 --
Europe 430 105
---------------------
$7,575 $5,987
=====================
</TABLE>
18
<PAGE> 1
Exhibit 99.2
INSO CORPORATION
PRO FORMA COMBINED CONDENSED BALANCE SHEET AND STATEMENTS OF OPERATIONS
(UNAUDITED)
Background Information
On July 16, 1996, INSO Corporation, a Delaware corporation (the "Company" or
"INSO") purchased privately held Electronic Book Technologies, Inc. a Delaware
corporation ("EBT"). The acquisition was in the form of a merger of a subsidiary
of the Company into EBT.
The Company paid an aggregate of approximately $27,800,000 in cash at the
closing from the Company's cash on hand. In addition, certain stock options of
EBT survived the closing (the "Surviving Options") and if exercised, the
Company has the right and obligation to purchase shares issuable upon such
exercises, for an additional aggregate amount of approximately $10,400,000,
which is also expected to be paid from the Company's cash on hand. The
transaction will be accounted for as a purchase and provides for additional
payments of approximately $1,500,000 to the principal stockholder of EBT
eighteen months after the closing date and contingent payments up to an
additional $5,300,000 in the event that certain EBT financial and operating
goals are met.
The acquisition includes certain technology under research and development,
which is to be written-off with a charge of $34,300,000, to the Company's
consolidated 1996 third quarter earnings.
EBT is a leading international provider of integrated CD-ROM/Web publishing
solutions for serious corporate and commercial publishers. EBT markets its
products to original equipment manufacturers of computer software and to major
corporations and government entities.
Basis of Accompanying Unaudited Pro Forma Combined Condensed Financial
Statements
The results of EBT's operations will be included in the Company's operating
results beginning July 16, 1996, the closing date of the acquisition. The
Unaudited Pro Forma Combined Condensed Balance Sheet assumes that the
acquisition of EBT, including the payment for the underlying stock of the
Surviving Options, occurred on June 30, 1996. The Unaudited Pro Forma Combined
Condensed Statements of Operations combines the historical results of
operations of INSO and EBT for the year ended December 31, 1995 and the six
months ended June 30, 1996 assuming the acquisition occurred on January 1, 1995
and January 1, 1996, respectively. The unaudited pro forma combined condensed
financial statements do not reflect cost savings and synergies which might be
achieved from the merger.
<PAGE> 2
INSO CORPORATION
PRO FORMA COMBINED CONDENSED BALANCE SHEET AND STATEMENTS OF OPERATIONS
(UNAUDITED)
The Unaudited Pro Forma Combined Condensed Balance Sheet includes the effect of
the write-off of certain technology under research and development of
$34,300,000. However, the Unaudited Pro Forma Combined Condensed Statements of
Operations do not consider the write-off of this technology or other
non-recurring charges which may result from the transaction and the integration
of EBT into the Company. The Company expects these to be charged to operations
during the quarter ended September 30, 1996.
The Unaudited Pro Forma Combined Condensed Balance Sheet includes direct
transaction costs associated with the merger. These direct costs consist of
legal and accounting services and appraisal fees. Additionally, the Unaudited
Pro Forma Combined Condensed Balance Sheet includes estimated costs relating to
the elimination of excess and duplicate activities as a result of the merger.
The actual allocation of the final purchase price may be different from that
reflected in the pro forma combined condensed financial statements. There can be
no assurance that INSO will not incur additional charges in subsequent quarters
to reflect costs associated with the merger or that management will be
successful in their efforts to integrate the operations of the two companies.
Management believes that the assumptions used in preparing these unaudited pro
forma combined condensed financial statements provide a reasonable basis for
presenting all of the significant effects of the acquisition. These unaudited
pro forma combined condensed financial statements do not purport to be
indicative of the results which actually would have been obtained if the
acquisition had been effected on the date indicated or of those results which
may be achieved in the future. The pro forma combined condensed financial
statements should be read in conjunction with the consolidated financial
statements included in the INSO Corporation Annual Report on Form 10-K for the
year ended December 31, 1995.
<PAGE> 3
INSO CORPORATION
PRO FORMA COMBINED CONDENSED BALANCE SHEET AND STATEMENTS OF OPERATIONS
(UNAUDITED)
Pro Forma Adjustments
A summary of the Pro Forma Adjustments is set forth as follows:
(a) To record operating cash paid for all outstanding Common and Preferred
Stock, including the underlying common stock of the Surviving Options.
(b) To record cash received from the exercise of stock options.
(c) To adjust assets acquired to estimated fair market value.
(d) To record product development amortization expense using an amortization
period of 3 years.
(e) To record the write-off of certain purchased technology under research and
development.
(f) To eliminate EBT's redeemable preferred stock and stockholders' equity.
(g) To accrue additional merger consideration to be paid to the principal
stockholder of EBT within 18 months of the closing date.
(h) 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.
(i) To record dividend payable to the former stockholders of EBT.
(j) To record income tax receivable resulting from tax benefits associated with
the exercise of EBT stock options.
(k) 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.
(l) To adjust depreciation expense for the fair market value adjustment of the
related assets.
<PAGE> 4
EXHIBIT 99.2
INSO CORPORATION
<TABLE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
(AMOUNTS IN THOUSANDS)
<CAPTION>
INSO EBT
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
JUNE 30, 1996 JUNE 30, 1996 ADJUSTMENTS COMBINED
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
- ------
Current assets:
Cash, cash equivalents and marketable securities $55,910 $ 367 $(38,408) a $20,376
2,507 b
Accounts receivable, net 11,761 3,673 15,434
Other current assets 1,132 291 1,423
Refundable income taxes 336 3,325 j 3,661
------- ------ -------- -------
Total current assets 68,803 4,667 (32,576) 40,894
Property and equipment, net 3,250 2,286 (359) c 5,177
Royalty advances and other assets, net 2,304 98 2,402
Product development costs, net 4,085 595 2,017 c 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
======= ====== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 4,899 $3,018 $ 2,746 h $10,663
Dividend payable 1,898 i 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) k 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 g 1,467
Commitments and contingencies
Redeemable preferred stock 286 (286) f 0
Total stockholders' equity 80,464 758 (758) f 46,164
(34,300) e
------- ------ -------- -------
80,464 758 (35,058) 46,164
TOTAL LIABILITIES AND ------- ------ -------- -------
STOCKHOLDERS' EQUITY $91,729 $7,753 $(30,918) $68,564
======= ====== ======== =======
</TABLE>
<PAGE> 5
INSO CORPORATION
<TABLE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<CAPTION>
INSO EBT
HISTORICAL HISTORICAL
FOR THE FOR THE
YEAR ENDED YEAR ENDED PRO FORMA PRO FORMA
DECEMBER 31, 1995 DECEMBER 31, 1995 ADJUSTMENTS COMBINED
------------------ ----------------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues $43,387 $13,814 $57,201
Cost of revenues 5,792 2,603 $ 672 d 9,067
------- ------- ------ -------
Gross profit 37,595 11,211 (672) 48,134
Operating expenses:
Sales and marketing 6,570 4,976 (50) l 11,496
Product development 7,489 4,746 (50) l 12,185
General and administrative 6,458 1,426 (20) l 7,864
Purchased in-process research and development 5,500 5,500
------- ------- ------ -------
Total operating expenses 26,017 11,148 (120) 37,045
------- ------- ------ -------
Operating income (loss) 11,578 63 (552) 11,089
Net investment income (expense) 1,468 (36) 1,432
------- ------- ------ -------
Income (loss) before provision for income taxes 13,046 27 (552) 12,521
Income tax expense (benefit) 7,052 (10) 7,042
------- ------- ------ -------
Net income (loss) $ 5,994 $ 37 $ (552) $ 5,479
======= ======= ====== =======
Primary earnings (loss) per share $ 0.49 $ 0.00 $(0.05) $ 0.45
======= ======= ====== =======
Primary shares utilized in calculation of earnings
per share 12,228 12,228 12,228 12,228
Fully diluted earnings (loss) per share $ 0.47 $ 0.00 $(0.04) $ 0.43
======= ======= ====== =======
Fully diluted shares utilized in calculation of
earnings per share 12,839 12,839 12,839 12,839
</TABLE>
<PAGE> 6
INSO CORPORATION
<TABLE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<CAPTION>
INSO EBT
HISTORICAL HISTORICAL
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED PRO FORMA PRO FORMA
JUNE 30, 1996 JUNE 30, 1996 ADJUSTMENTS COMBINED
------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues $27,605 $ 7,488 $35,093
Cost of revenues 3,845 1,604 336 d 5,785
------- ------- ------ -------
Gross profit 23,760 5,884 (336) 29,308
Operating expenses:
Sales and marketing 4,927 3,113 (25) l 8,015
Product development 5,281 3,292 (25) l 8,548
General and administrative 3,951 911 (10) l 4,852
Purchased in-process research and development 4,400 4,400
------- ------- ------ -------
Total operating expenses 18,559 7,316 (60) 25,815
------- ------- ------ -------
Operating income (loss) 5,201 (1,432) (276) 3,493
Net investment income (expense) 1,533 (54) 1,479
------- ------- ------ -------
Income (loss) before provision for income taxes 6,734 (1,486) (276) 4,972
Income tax expense (benefit) 4,014 (338) 3,676
------- ------- ------ -------
Net (loss) income $ 2,720 $(1,148) $ (276) $ 1,296
======= ======= ====== =======
Earnings (loss) per share $ 0.20 $ (0.08) $(0.02) $ 0.09
======= ======= ====== =======
Shares utilized in calculation of earnings per share 13,690 13,690 13,690 13,690
</TABLE>
