UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-23384
INSO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3216243
(State or other (I.R.S. Employer Identification No.)
jurisdiction of
incorporation or organization)
31 St. James Avenue, Boston, MA 02116
(Address of principal executive offices) (Zip Code)
(617) 753 - 6500
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports) and (2) has been subject
to such filing requirements for the past 90 days.
Yes (X) No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 11, 1997
Common Stock (par value $.01 per share) 14,367,045
<PAGE>
INSO CORPORATION
FORM 10-Q INDEX
Part I. Financial Information
Item 1. Condensed Consolidated Balance Sheets
June 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 1997 and 1996
Condensed Consolidated Statements of Operations
Six Months Ended June 30, 1997 and 1996
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
<PAGE>
INSO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 and DECEMBER 31, 1996
(Unaudited, in thousands except share amounts)
<TABLE>
<CAPTION>
June 30 December 31
ASSETS 1997 1996
--------- ---------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 22,463 $ 34,280
Marketable securities 54,042 46,946
Accounts receivable, net 22,399 21,144
Income tax receivable 1,970
Other current assets 1,713 1,313
-------- --------
Total current assets 100,617 105,653
Property and equipment, net 6,273 5,303
Product development costs, net 8,300 7,168
Intangible assets, net 5,740 9,654
Other assets, net 4,488 3,564
Deferred income tax benefit, net 9,110 4,930
-------- -------
TOTAL ASSETS $ 134,528 $ 136,272
-------- -------
-------- -------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities $ 5,734 $ 4,256
Accrued salaries, commissions and bonuses 3,399 4,085
Acquisition related liabilities 1,646 1,995
Unearned revenue 2,781 2,431
Royalties payable 1,786 1,916
Due to Houghton Mifflin Company 356 749
Current income taxes payable 2,393
Deferred income taxes 5,960 5,960
-------- -------
Total current liabilities 24,055 21,392
Long-term acquisition related liabilities 1,467
Stockholders' equity:
Preferred stock, $.01 par value;
1,000,000 shares authorized; none
issued
Common stock, $.01 par value;
50,000,000 shares authorized;
14,347,713 and 14,293,249 shares issued
in 1997 and 1996, respectively 143 143
Capital in excess of par value 124,692 123,472
Accumulated deficit (13,888) (9,623)
-------- -------
110,947 113,992
Unamortized value of restricted shares (416) (521)
Treasury stock, at cost, 5,075 shares
in 1997 and 1996 (58) (58)
-------- -------
Total stockholders' equity 110,473 113,413
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 134,528 $ 136,272
-------- -------
-------- -------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
<PAGE>
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1997 and 1996
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Net revenues $ 20,058 $ 15,144
Cost of revenues 2,424 2,200
-------- -------
Gross profit 17,634 12,944
Operating expenses:
Sales and marketing 6,862 2,268
Product development 6,168 3,288
General and administrative 4,488 1,941
Restructuring expenses 5,848
Purchased in-process research and
development 3,600
-------- -------
Total operating expenses 26,966 7,497
-------- -------
Operating income (loss) (9,332) 5,447
Net investment income 694 727
Income (loss) before provision for -------- -------
income taxes (8,638) 6,174
Provision for income taxes (1,865) 2,173
-------- -------
Net income (loss) $ (6,773) $ 4,001
-------- -------
-------- -------
Primary earnings (loss) per share $ (0.47) $ 0.29
-------- -------
-------- -------
Weighted average shares outstanding 14,339 13,877
-------- -------
-------- -------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
<PAGE>
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 and 1996
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Net revenues $ 39,120 $ 27,605
Cost of revenues 3,999 3,845
---------- ----------
Gross profit 35,121 23,760
Operating expenses:
Sales and marketing 11,226 3,958
Product development 10,773 6,264
General and administrative 7,221 3,937
Restructuring expenses 5,848
Purchased in-process research
and development 5,400 4,400
---------- ----------
Total operating expenses 40,468 18,559
---------- ----------
Operating income (loss) (5,347) 5,201
Net investment income 1,776 1,533
---------- ----------
Income (loss) before provision for
income taxes (3,571) 6,734
Provision for income taxes 694 4,014
---------- ----------
Net income (loss) $ (4,265) $ 2,720
---------- ----------
---------- ----------
Primary earnings (loss) per share $ (0.30) $ 0.20
---------- ---------
---------- ---------
Weighted average shares outstanding 14,326 13,690
---------- ---------
---------- ---------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
<PAGE>
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 and 1996
(Unaudited, in thousands of dollars)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Cash flows from (used in) operating
activities:
Net income (loss) $ (4,265) $ 2,720
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 4,179 2,759
Deferred income taxes (3,496)
Purchased in-process research
and development 5,400 4,400
Restructuring charges 5,045
--------- --------
6,863 9,879
Changes in operating assets and
liabilities:
Accounts receivable (458) (4,362)
Royalty advances and other assets (807) (239)
Accounts payable and accrued
liabilities 898 1,108
Current income taxes 4,363 1,516
Royalties payable (73) 293
Net due to affiliates (510) 32
Other assets and liabilities (66) (1,368)
--------- -------
Net cash provided by operating activities 10,210 6,859
Cash flows from (used in) investing
activities:
Property and equipment expenditures (2,336) (1,447)
Capitalized product development costs (3,941) (865)
Acquisitions, net of cash acquired (9,602) (6,492)
Net purchase of marketable securities (7,096) (24,201)
-------- -------
Net cash used in investing activities (22,975) (33,005)
Cash flows from (used in) financing
activities:
Net proceeds from issuance of common stock 948 1,266
Purchases of treasury stock (6)
Repayment of promissory notes (6,037)
-------- -------
Net cash provided by (used in) financing
activities 948 (4,777)
-------- -------
Net decrease in cash and cash equivalents (11,817) (30,923)
Cash and cash equivalents at beginning
of period 34,280 37,235
-------- --------
Cash and cash equivalents at end of period $ 22,463 $ 6,312
-------- -------
-------- -------
Supplementary Information:
Investment in Information Please LLC $ 2,620
--------
--------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
<PAGE>
INSO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
June 30, 1997
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
All normal and recurring adjustments that are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods
have been included. Operating results for the three- and six-month
periods ended June 30, 1997 are not necessarily indicative of the results
that may be expected for the year ended December 31, 1997.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K
filed with the Securities and Exchange Commission for the fiscal year ended
December 31, 1996.
Note 2. Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128).
SFAS 128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods and earlier application is not
permitted. The pro forma effect of adopting SFAS 128 for the three and
six months ended June 30, 1997 and 1996 is not material.
Note 3. Acquisitions
Level Five Research, Inc.
On April 22, 1997, the Company acquired all of the outstanding capital stock
of Level Five Research, Inc. from Information Builders, Inc. for $5,000,000
using available cash. The Company also caused, at the time of acquisition,
Level Five Research, Inc. to enter into noncompetition agreements with key
executives and made aggregate payments of $300,000 in cash under those
agreements. Level Five Research, Inc. is a developer of software and systems
that apply intelligent technologies to data access management. The
transaction was accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition. The
purchase price has been allocated on the basis of the estimated fair
market value of the assets acquired and liabilities assumed. 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, 1997 of $3,600,000, or $0.25 per share.
Intangible assets of approximately $825,000 were recorded at the time of
the acquisition and are being amortized on a straight-line basis over
their estimated useful lives of five years. Amounts capitalized in
connection with the noncompetition agreements are being amortized on
a straight-line basis over three years.
Mastersoft
On February 6, 1997, the Company acquired the intellectual property and
certain other assets of Adobe Systems Incorporated's document access and
conversion business, formerly known as Mastersoft, for $2,965,000 using
available cash. The transaction was accounted for as a purchase and has
been included in the consolidated financial statements since the date of
acquisition. The purchase price has been allocated on the basis of the
estimated fair market value of the assets acquired and liabilities assumed.
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 March 31, 1997 of $1,800,000, or $0.13 per
share. Intangible assets of approximately $135,000 were recorded at the
time of the acquisition and are being amortized on a straight-line basis
over their estimated useful lives of five years.
Electronic Book Technologies, Inc.
On July 16, 1996, the Company acquired all of the outstanding stock of
privately held Electronic Book Technologies, Inc. ("EBT") now Inso
Providence Corporation. In connection with the acquisition, the Company paid
approximately $27,800,000 in July 1996. In addition, $10,600,000 was paid in
October 1996 in connection with the purchase of shares of EBT stock issued
upon the exercise of EBT stock options which survived the closing. All
payments relating to the EBT acquisition were made from the Company's
available cash. The Company is also obligated to pay an additional
$1,467,000 to the former principal stockholder of EBT in January 1998.
In the event that certain 1997 Inso Providence financial and operating
goals are met, contingent payments up to an additional $5,300,000 will be
paid by the Company.
The transaction was accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition. The
purchase price has been allocated on the basis of the estimated fair market
value of the assets acquired and liabilities assumed. 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 September 30, 1996, of $34,300,000, or $2.62 per share. The
charge was not deductible for tax purposes.
Unaudited pro forma net revenues, net income (loss) and net income (loss)
per share shown below for the six months ended June 30, 1997 assumes the
acquisitions of Mastersoft and Level Five Research, Inc. occurred on
January 1, 1997 and for the six months ended June 30, 1996 assumes the
acquisitions of Electronic Book Technologies, Inc., Mastersoft, and
Level Five Research, Inc. occurred on January 1, 1996. Therefore, the
six-month periods presented below include the write-off of certain
purchased technology under research and development of $34,300,000
relating to Electronic Book Technologies, Inc., $1,800,000 relating to
Mastersoft, and $3,600,000 relating to Level Five Research, Inc.:
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1997 June 30, 1996
---------------- ------------------
<S> <C> <C>
Net Revenues $39,576,000 $36,345,000
Net Income (loss) $(4,690,000) $(39,128,000)
Net Income (loss)
per share $ (0.33) $ (3.00)
</TABLE>
Note 4. Information Please LLC
On April 23, 1997, the Company entered into an agreement for the further
development and marketing of the Information Please(R) Almanac Product
line, with Information Please LLC (the "Partnership"). The Company
transferred ownership of the Information Please brand and intellectual
properties that comprise the almanac product line to the Partnership.
In addition, 10 of the Company's technical and editorial staff members
became employees of the Partnership. The Company retained certain usage
rights to Information Please Almanac content, as well as a 19.8% ownership
position in the new venture. As of June 30, 1997, the Company's investment
in Information Please LLC approximated $2,600,000 and is included in other
assets on the accompanying balance sheet.
Note 5. Restructuring Charges
In June 1997, the Company adopted a plan of restructuring aimed at a
continuing focus on strategic products while reducing costs and streamlining
the organization. The plan primarily affects the Company's Information
Products and certain of its Information Management Tools products. As a
result of the restructuring plan, the Company recorded $5,848,000 of
expenses. The charge included $320,000 of severance for 17 employees in
development; $315,000 of estimated lease obligations, net of estimated
sublease income, for the impact of affected leases; $3,353,000 for the
write-off of capitalized software and other assets; and $1,860,000 for the
write-off of prepaid royalties.
Note 6. Subsequent Events
On July 11, 1997, the Board of Directors of the Company adopted a
Shareholders' Rights Plan and declared a dividend distribution of one
preferred stock purchase right (a "Right") for each outstanding share
of the Company's Common Stock to stockholders of record at the close of
business on July 24, 1997 (the "Record Date"). Each Right entitles the
registered holder to purchase from the Company a unit consisting of one
one-thousandth of a share (a "Unit") of Series A Junior Participating
Preferred Stock, $0.01 par value per share (the "Preferred Stock"), at a
purchase price of $145 in cash per Unit (the "Purchase Price"), subject
to adjustment. The description and terms of the Rights are set forth in
a Rights Agreement dated as of July 11, 1997 (the "Rights Agreement")
between the Company and State Street Bank & Trust Company, as Rights Agent.
The Rights will become exercisable after a person or group has acquired or
obtained the right to acquire beneficial ownership of 20% or more of the
outstanding Common Stock, or following the commencement of a tender or
exchange offer that would result in a person or group owning 30% or more
of the shares of Common Stock. Generally, if any person becomes the
beneficial owner of 20% or more of the shares of Common Stock of the
Company, except pursuant to a tender or exchange offer for all shares at
a fair price as determined by the outside Board members, each Right not
owned by the 20% or more stockholder will enable its holder to purchase
that number of shares of the Company's Common Stock, in lieu of
preferred stock, which equals the exercise price of the Right divided by
one-half of the current market price of such Common Stock at the date of
the occurance of the event. In addition, if the Company is involved in a
merger or other business combination transaction with another person or
group in which it is not the surviving corporation or in connection with which
its Common Stock is changed or converted, or it sells or transfers 50% or
more of its assets or earning power to another person, each Right that has
not previously been exercised will entitle its holder to purchase that
number of shares of Common Stock of such other person which equals the
exercise price of the Right divided by one-half of the current market
prices of such Common Stock at the date of the occurence of the event.
In general, the Company may redeem the Rights in whole at a price of
$0.01 per Right at any time prior to the tenth day after a person or
group acquires 20% or more of the outstanding common stock. The Rights
will expire in July, 2007.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended June 30, 1997 Compared to Three Months
Ended June 30, 1996
Revenues for the quarter ended June 30, 1997 increased $4,914,000, or
32.4%, to $20,058,000 compared to $15,144,000 for the quarter ended
June 30, 1996. Approximately 25% of the revenues in 1997 included revenues
from the acquisition of Electronic Book Technologies, Inc., Mastersoft,
and Level Five Research, Inc. Direct and retail sales from Quick View
Plus(R) and DynaText(R) signifigantly contributed to the second quarter
increase in revenues as compared to the second quarter of 1996, resulting
in direct and distribution sales of 41.8% of total revenues. Non-refundable
royalty advances decreased 30.8% and royalty revenues decreased 7.8% for
the second quarter of 1997, as compared to the same quarter in 1996. Non-
refundable advances and royalty revenues were adversely affected in the
second quarter of 1997 by weakness in the OEM markets served by the
Information Products and certain Information Management Tools products.
Gross profit increased $4,690,000, or 36.2%, from $12,944,000 for the three
months ended June 30, 1996 to $17,634,000 for the three months ended
June 30, 1997. Gross profit as a percentage of revenues for the
three months ended June 30, 1997 was 87.9% compared to 85.5% for the three
months ended June 30, 1996. The increase in gross profit percentage was
primarily attributable to higher revenues from Outside In(R) and
DynaText(R), which carry lower royalty burdens.
Total operating expenses increased $19,469,000 to $26,966,000 for the three
months ended June 30, 1997 from $7,497,000 for the three months ended
June 30, 1996. Included in total operating expenses for the quarter
ended June 30, 1997 was an acquisition charge of $3,600,000 for
certain purchased technology under research and development by Level Five
Research, Inc. at the time of the April 22, 1997 acquisition. Additionally,
included in the total expenses for the quarter ended June 30, 1997,
was restructuring expenses of $5,848,000 relating to the Company's
Information Products and certain of its Information Management Tools products.
All of the Company's 1997 operating expenses as a percent of revenue
were adversely affected by the decline in non-refundable royalty advances
and royalty revenues for the quarter ended June 30, 1997, as discussed above.
Sales and marketing expenses increased $4,594,000 to $6,862,000 for the
three months ended June 30, 1997. The increase reflects increased costs for
staff additions due to the Company's acquisitions, entry into new markets
(corporate and consumer), and staff additions in product marketing to support
the higher level of sales. Sales and marketing expenses were
34.2% of revenues for the three months ended June 30, 1997 compared to
15.0% for the three months ended June 30, 1996. The higher percentage
in 1997 results from entry into new markets and launch of new products.
Product development expenses increased $2,880,000 from $3,288,000 for the
three months ended June 30, 1996 to $6,168,000 for the three months ended
June 30, 1997. The increase in product development costs was primarily due
to the Company's investments in viewing, conversion and other information
sharing and distribution products. The Company's total product development
costs, including capitalized costs, were $7,872,000, or 39.2%, of revenues
for the three months ended June 30, 1997 compared to $3,673,000, or 24.3%,
of revenues for the three months ended June 30, 1996. General and
administrative expenses increased $2,547,000 to $4,488,000 for the
three months ended June 30, 1997 compared to $1,941,000 for the three
months ended June 30, 1996. This increase was due to goodwill amortization
related to the Company's acquisitions as well as increases in personnel and
general expenses required to support the growth in the Company's operations.
In June 1997, the Company adopted a plan of restructuring aimed at a
continuing focus on strategic products while reducing costs and
streamlining the organization. As part of the restructuring, the Company
substantially reduced its spending on products in slower growing markets
and redirected its resources to those products with larger market
opportunities. The plan primarily affects the Company's Information
Products and certain of its Information Management Tools products.
As a result of the restructuring plan, the Company recorded $5,848,000 of
expenses. The charge included $320,000 of severance for 17 employees in
development; $315,000 of estimated lease obligations, net of estimated
sublease income, for the impact of affected leases; $3,353,000 for the
write-off of capitalized software and other assets; and $1,860,000 for the
write-off of prepaid royalties.
The Company's effective tax rate was influenced by the $3,600,000 Level
Research, Inc. research and development charge discussed above. Excluding
the charge, the Company's effective tax rate for the three months ended
June 30, 1997 was 37% compared to 35.2% for the three months ended
June 30, 1996. The increase in the effective tax rate is due to the
Company's acquisitions.
Excluding the $3,600,000 ($0.25 per share) Level Five Research, Inc.
research and development charge and the restructuring charge of
$3,684,000, net of income taxes, ($0.26 per share), net income and
earnings per share would have been $510,000, and $0.04, respectively.
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenues for the six month ended June 30, 1997 increased $11,515,000, or
41.7%, to $39,120,000 compared to $27,605,000 for the six months ended
June 30, 1996. Approximately 15% of revenues in 1997 included revenues
from the acquisition of Electronic Book Technologies, Inc., Mastersoft,
and Level Five Research, Inc. Direct and retail sales from Quick View
Plus(R) and DynaText(R) signifigantly contributed to the increase in
revenues for the six months ended June 30, 1997 as compared to the six
months ended June 30, 1996, resulting in direct and distribution sales
of 31.9% of total revenues. Non-refundable royalty advances decreased
7.4% for the six months ended June 30, 1997, as compared to the same
period in 1996. Royalty revenue for the six months ended June 30, 1997
increased 10.2% as compared to the six months ended June 30, 1996
primarily due to increases in royalty revenues for CorrecText(R) Grammar
Correction System; Outside In(R) viewing technology; and Mastersoft's
Viewer 95. Non-refundable advances and royalty revenues were both adversely
affected in the second quarter of 1997 by weakness in the OEM markets
served by the Company's Information Products and certain Information
Management Tools products.
Gross profit increased $11,361,000, or 47.8%, from $23,760,000 for the six
months ended June 30, 1996 to $35,121,000 for the six months ended June
30, 1997. Gross profit as a percentage of revenues for the six months
ended June 30, 1997 was 89.8% compared to 86.1% for the six months
ended June 30, 1996. The increase in gross profit percentage was
primarily attributable to higher revenues from Outside In(R), DynaText(R),
and Mastersoft's Viewer 95, which carry lower royalty burdens.
Total operating expenses increased $21,909,000 to $40,468,000 for the six
months ended June 30, 1997 from $18,559,000 for the six months ended
June 30, 1996. Included in total operating expenses for the six months
ended June 30, 1997 were acquisition charges of $5,400,000 for certain
purchased technology under research and development by Mastersoft and
Level Five Research, Inc. at the time of their acquisitions. Also
included in the total operating expenses for the six months ended
June 30, 1997, was restructuring expenses of $5,848,000 relating to the
Company's Information Products and certain of its Information Management
Tools products. Included in the total operating expenses for the six
months ended June 30, 1996, was an acquisition charge of $4,400,000 for
certain purchased technology under research and development by ImageMark
Software Labs, Inc. at the time of the January 9, 1996 acquisition.
All of the Company's 1997 operating expenses as a percent of revenue
were adversely affected by non-refundable royalty advances and royalty
revenues, as discussed above.
Sales and marketing expenses increased $7,268,000 to $11,226,000 for the
six months ended June 30, 1997. The increase reflects increased costs
for staff additions due to the Company's acquisitions, entry into new
markets (corporate and consumer), staff additions in product marketing
to support the higher level of sales and higher commissions due to
increased revenues. Sales and marketing expenses were 28.7% of revenues
for the six months ended June 30, 1997 compared to 14.3% for the six
months ended June 30, 1996. The higher percentage in 1997 results from
entry into new markets and launch of new products. Product development
expenses increased $4,509,000 from $6,264,000 for the six months
ended June 30, 1996 to $10,773,000 for the six months ended June 30, 1997.
The increase in product development costs was primarily due to the
Company's investments in viewing, conversion and other information
sharing and distribution products. The Company's total product
development costs, including capitalized costs, were $14,714,000, or 37.6%,
of revenues for the six months ended June 30, 1997 compared to $7,129,000,
or 25.8%, of revenues for the six months ended June 30, 1996. The
increase in total product development was primarily due to investments
in DynaBase(R), DynaText(R), CleanSpeak(TM), Outside In(R) HTML Export,
DynaWeb(R), and other various products. General and administrative
expenses increased $3,284,000 to $7,221,000 for the six months ended
June 30, 1997 compared to $3,937,000 for the six months ended June 30,
1996. This increase was due to goodwill amortization related to the
Company's acquisitions as well as increases in personnel and general
expenses required to support the growth in the Company's operations.
In June 1997, the Company adopted a plan of restructuring aimed at a
continuing focus on strategic products while reducing costs and
streamlining the organization. As part of the restructuring, the Company
substantially reduced its spending on products in slower growing
markets and redirected its resources to those products with larger market
opportunities. The plan primarily affects the Company's Information
Products and certain of its Information Management Tools products. As a
result of the restructuring plan, the Company recorded $5,848,000 of
expenses. The charge included $320,000 of severance for 17 employees
in development; $315,000 of estimated lease obligations, net of
estimated sublease income, for the impact of affected leases; $3,353,000
for the write-off of capitalized software and other assets; and
$1,860,000 for the write-off of prepaid royalties.
The Company's effective tax rate was influenced by the $5,400,000 Mastersoft
and Level Five Research, Inc. research and development charges discussed
above. Excluding the charge, the Company's effective tax rate for the
six months ended June 30, 1997 was 37.9% compared to 36.1% for the six
months ended June 30, 1996, excluding the charge in that period also.
The Company's effective tax rate increased due to the acquisitions.
Excluding the $5,400,000 ($0.38 per share) Mastersoft and Level Five
Research, Inc. research and development charges and restructuring
charges of $3,684,000, net of income taxes, ($0.26 per share), net
income and earnings per share would have been $4,819,000, and $0.34,
respectively.
Liquidity and Capital Resources
The Company's operating activities provided cash of $10,210,000 for the six
months ended June 30, 1997 compared to $6,859,000 for the six months
ended June 30, 1996. The increased contribution from operating
activities of $3,351,000 was mainly due to increased collections on accounts
receivable and collection on income taxes receivable.
The Company's investing activities used cash of $22,975,000 for
the six months ended June 30, 1997 compared to $33,005,000 for the six
months ended June 30, 1996. The decrease reflects a decline in investment
activity for marketable securities of $17,105,000 offset by the acquisition
of certain assets of Adobe Systems Incorporated's Mastersoft division for
$2,965,000 in cash; the acquisition of Level Five Research, Inc. for
$5,300,000; increased investment in product development costs of
$3,076,000; and payment of $950,000 to the former stockholders of ImageMark
Software Labs, Inc. for exceeding certain performance measures set forth in
the stock purchase agreement. Additionally, the Company is obligated to
pay an additional $1,467,000 to the former principal stockholder of Inso
Providence in January, 1998. In the event that certain 1997 Inso Providence
financial and operating goals are met, contingent payments up to an
additional $5,300,000 will be paid by the Company to the former stockholders
of Electronic Book Technologies, Inc. Also, during 1997, the Company expects
to increase its investment in leasehold improvements due to physical
expansion of the Company's offices.
The Company's financing activities provided cash of $948,000 for the six
months ended June 30, 1997 compared to using cash of $4,777,000 for the
six months ended June 30, 1996. On February 1, 1996, the Company repaid
the outstanding promissory notes of $6,037,000 issued in connection with
the acquisition of Systems Compatibility Corporation, (now Inso Chicago
Corporation), in April 1995.
In June 1997, the Company adopted a plan of restructuring aimed at a
continuing focus on strategic products while reducing costs and streamlining
the organization. As part of the restructuring, the Company substantially
reduced its spending on products in slower growing markets and redirected
its resources to those products with larger market opportunities. The plan
primarily affects the Company's Information Products and certain of its
Information Management Tools products. As a result of the restructuring
plan, the Company recorded $5,848,000 of expenses. The charge included
$320,000 of severance, $315,000 estimated lease obligations, $3,353,000 for
the write-off of capitalized software and other assets and $1,860,000 of
write-offs of prepaid royalties. Of the total restructuring expenses
recorded, the actual cash outlays to be made by the Company aggregate
approximately $800,000. The Company believes a substantial portion of
these amounts will be paid by December 31, 1997.
As of June 30, 1997, the Company had working capital of $76,562,000.
Total cash, cash equivalents, and marketable securities at June 30,
1997 were $76,505,000. The Company believes that funds available, together
with funds expected to be generated from operations, will be sufficient to
finance the Company's operations through the foreseeable future.
Future Operating Results
This report, and other reports, proxy statements and other communications to
stockholders, as well as oral statements by the Company's officers or its
agents, may contain forward-looking statements with respect to, among other
things, the Company's future revenues, operating income or earnings per share.
Please refer to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 for a description of certain factors which may
cause the Company's actual results to vary materially from those forecasted
or projected in any such forward-looking statements. Among the factors which
may cause the Company's actual results to differ materially from historical
results are the following: competitive pressures including price pressures;
declining royalty revenues from Microsoft Corporation which are expected
to decrease substantially for periods after December 31, 1997;
increased reliance on corporate and direct distribution channels; longer
and less predictable sales cycles associated with sales of complex
solutions to corporate and government customers; market acceptance of new
products; consolidation in the OEM business; adverse economic changes in
the markets in which the Company does business; difficulties integrating
operations and personnel of acquired businesses; and declining operating
margins as a result of decreased royalty revenue.
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company on
May 1, 1997, at which a quorum was present, the stockholders
approved the following proposals by the number of shares of
common stock voted as noted:
Proposal #1- Election of three Class I directors until the
Company's 2000 Annual Meeting of Stockholders and until their
successors are elected and qualified.
Number of Shares
Voted For Withheld
Ray Stata 12,700,216 11,846
William J. Wisneski 12,699,795 12,267
Samuel H. Fuller 12,700,195 11,867
The following directors' terms of office continued after
the Annual Meeting of Stockholders:
Steven R. Vana-Paxhia
Stephen O. Jaeger
John Guttag
Joseph A. Baute
J.P. Barger
Joanna T. Lau
Proposal #2- Ratification of the selection of Ernst & Young LLP as
independent auditors of the Company for the fiscal year ended
December 31, 1997.
Number of Shares
For 12,709,176
Against 655
Abstain 2,231
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following are filed as exhibits to this Form 10-Q
Exhibit 27 Financial Data Schedule
(b) Report on Form 8-K
Registrant filed no reports on Form 8-K during the quarter
ended June 30, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSO Corporation
Registrant
Date: August 11, 1997 /s/ Betty J. Savage
-------------------
Betty J. Savage
Vice President and Chief
Financial Officer
Date: August 11, 1997 /s/ Patricia A. Michaels
------------------------
Patricia A. Michaels
Director of Accounting and
Finance
(Chief Accounting Officer)
Exhibit Index
Exhibit No. Description
27 Financial Data Schedule
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
THE CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME
FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERNCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 22,463
<SECURITIES> 54,042
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<COMMON> 143
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