United States Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended: December 31, 1996 Commission File Number: 0-23384
Inso Corporation
(Exact name of registrant as specified in its charter)
Delaware 04-3216243
(State or other jurisdiction (I.R.S. Employer Identification No.)
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)
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes: (X) No:
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Class Outstanding at March 14, 1997
Common Stock (par value $.01 per share) 14,320,138
As of March 14, 1997, the aggregate market value of voting stock held by
non-affiliates of the registrant was $531,635,123.
Documents Incorporated by Reference
Portions of the Registrant's Definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange
Commission, are incorporated by reference into Part III.
Inso Corporation
Form 10-K
Part I
Item 1. Business
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 and the World
Wide Web. 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. As of
December 31, 1996, the Company had nearly 500 OEM customers and over 800
direct corporate and government licensees.
The Company offers a diverse array of products and solutions targeting
multiple distribution channels and market segments within the software
industry. These products draw on the Company's core technologies and
competencies in the areas of computational linguistics and lexicography,
information base technology, document structure, and software engineering.
During 1996, the Company began to focus its product development efforts on
addressing customer needs in the areas of information creation, information
access and information distribution. The Company's Proofing Tools and
Information Products assist users in the creation of information, and its
Information Management Tools provide access to information, while its
Electronic Publishing Solutions are designed to solve the problem of
information distribution.
Information Creation
The Company's information creation products include its Proofing Tools
software programs and related databases which correct 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(TM),
the industry-standard spelling correction system; International
ProofReader(TM), a multilingual proofreading system available in 10 languages
that addresses numerous classes of writing errors and style problems; and
CorrectText(R) Grammar Correction System, a leading English grammar
correction technology used in word processors. Examples of products using the
Company's Proofing Tools include certain versions of Microsoft Corporation's
Word and Office; Lotus Development Corporation's WordPro, SmartSuite, and
Notes; and Netscape Communications Corporation's Navigator.
The Company's newest Proofing Tool, CorrectEnglish(TM), is a writing system
that targets 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.
During 1996, the Company released initial versions of the CorrectEnglish(TM)
products for native speakers of Chinese and updated versions for native
speakers of Japanese and Spanish, and began development on a line of end-user
products based upon the CorrectEnglish(TM) technology, which the Company
expects to begin releasing in 1997. The Company also released the
CyberSpell(TM) Internet Proofreading product during 1996.
The Company's information creation product line also includes its Information
Products, which utilize 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 basis for additional Information Products. The Information
Products line includes more than 90 reference titles, including The Columbia
Encyclopedia, Fifth Edition; The Concise Columbia Electronic Encyclopedia;
and the American Heritage(R) 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(R) almanacs and the A&E(R) 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
InterGO; AT&T New Media Services' AT&T Business Network; and Bloomberg,
L.P.'s THE BLOOMBERG.
Information Access
The Company's information access products include its Information Management
Tools, which are based on the Company's search and indexing enhancement
technologies and its file-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, local area networks (LANs), wide area networks
(WANs), and the World Wide Web. The products include IntelliScope(R) Search
Enhancer, a multilingual tool that performs linguistic analysis;
IntelliScope(R) Query Expander, an interactive search expansion and
refinement utility; and IntelliScope(R) Retrieval Enhancer. During 1996,
the Company released new versions of IntelliScope(R) Search Enhancer,
including the first Japanese version, and the first versions of
IntelliScope(R) Query Expander and IntelliScope(R) Retrieval Enhancer. The
Company also invested in substantial new development efforts designed to
result in the release of additional products in 1997.
The Company's Information Management Tools include the Outside In(R) OEM
viewing technology and the Quick View Plus(R) end-user product, an
application that provides corporations and consumers with the ability to
view, export, copy, and print files originating in over 200 applications.
On January 9, 1996, the Company acquired all the outstanding stock of
ImageMark Software Labs, Inc., ("ImageMark") now Inso Kansas City
Corporation ("Inso Kansas City"). (See "Acquisition of ImageMark".) As a
result, the Company substantially expanded its product offerings and
development capabilities in the interpretation, filtering, and publishing
of graphical data and document types. Inso Kansas City's graphical
file-filtering technologies are available to OEMs through ImageStream(R)
graphics filters, a product that permits the importing and exporting of
more than 60 charting, presentation, and graphical file types and to end-users
through ImageStream(R) for Microsoft(R) Office, an application that permits
graphical images from over 30 applications to be imported directly into
Microsoft(R) Office documents. During 1996, the Company released new
versions of both Outside In(R) and Quick View Plus(R), incorporating
substantial technical enhancements as well as support for over 30 additional
file types. In addition, during 1996 the Company released a new version of
ImageStream(R), incorporating substantial improvements in the coverage of
graphical document and data types.
On February 6, 1997, the Company acquired the intellectual property and other
assets of Adobe Systems, Inc.'s document access and conversion business,
formerly known as Mastersoft, including the Word for Word(R) document
conversion technology, the Viewer 95(R) OEM file access and display
technologies, and the end-user products formerly marketed under the name
Adobe File Utilities. (See "Acquisition of Mastersoft".) The acquisition
of these assets also included related customer agreements. The Mastersoft
products are being integrated with the Company's Information Management Tools
product line and the Mastersoft business will operate as part of Inso Chicago
Corporation ("Inso Chicago"). Some examples of OEM products using the
Company's Information Management Tools include Microsoft Corporation's
Windows 95; Fulcrum Technology, Inc.'s SearchServer; Novell, Inc.'s GroupWise;
Digital Equipment Corporation's AltaVista; and Lotus Development
Corporation's Notes and cc: Mail.
Information Distribution
The Company's information distribution products include its Electronic
Publishing Solutions, which consist of an array of products designed to meet
the electronic publishing needs of software developers and end-users in a
wide variety of situations. The Company's products serve various electronic
publishing needs, from individual document access to the distribution of
large and technically complex data sets to thousands of users using multiple
media. These products are designed for use in both closed network and open
access environments, such as the Internet and the World Wide Web. During
1996, the Company began implementation of an Electronic Publishing Solutions
initiative to provide its customers with a broad spectrum of software
solutions through the integration of its complementary proprietary
technologies and core competencies. The Company anticipates that it will
continue to make significant investments in product development and
marketing programs to support this initiative during 1997.
On July 16, 1996, the Company acquired all of the outstanding capital stock of
Electronic Book Technologies, Inc., ("EBT") now Inso Providence Corporation
("Inso Providence"), a leading supplier of electronic publishing tools and
solutions that form the core of the Company's Electronic Publishing Solutions
product category. (See "Acquisition of EBT".) The Company's Electronic
Publishing Solutions feature the DynaText(R) publishing system, which is
composed of automated and interactive tools used to create structured
content from commonly used word processing and page makeup systems, as well
as 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. Following the acquisition
of Inso Providence, the Company released a new version of the DynaText(R)
product, as well as the first version of the DynaBase(TM) web site management
system. During 1996, the Company expanded the scope of its Electronic
Publishing Solutions through the development of HTML Export, a server product
which converts any of more than 200 document types to hypertext mark-up
language on demand. HTML Export is expected to be released during the first
quarter of 1997.
Acquisition of EBT
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. 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. 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 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 resulted in a charge of $34,300,000 to the
Company's earnings in the third quarter of 1996. In connection with the
acquisition, EBT was renamed Inso Providence Corporation and currently
operates under the Inso name. Inso Providence Corporation is a leading
developer of electronic publishing tools and solutions.
Acquisition of ImageMark
On January 9, 1996, the Company acquired all the outstanding stock of
ImageMark for $5,500,000 in cash. In August 1996, ImageMark exceeded certain
performance measures as set forth in the stock purchase agreement.
As a result, an additional $950,000 was paid in early 1997. The transaction
was 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. Following
the acquisition, ImageMark changed its name to Inso Kansas City Corporation
and currently operates under the Inso name. Inso Kansas City is a leading
supplier of charting, graphics, and presentation file filters and converters
to the software industry.
Acquisition of Mastersoft
On February 6, 1997, the Company acquired the intellectual property and other
assets of Adobe's document access and conversion business, formerly known as
Mastersoft, for $2,965,000 in cash. The transaction will be accounted for
as a purchase. The Mastersoft business is operating as part of Inso Chicago
under the Inso name.
International Operations
During 1996, in part as a result of the acquisition of Inso Providence, the
Company substantially expanded the scope of its international operations.
The Company's international operations primarily support direct and indirect
distribution of products to corporate, government, and end-user customers.
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. As of December 31, 1996, the Company had nearly 500
OEM customers and over 800 direct corporate and government licensees. 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 and traditional
reseller and distributor channels.
The Company's sales and marketing organization, consisting of 114
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. Approximately $15,315,000 of the Company's revenues during
1996 originated with customers outside the United States. (See Note 1 of
"Notes to Consolidated Statements" for additional information with respect
to the Company's export revenues.)
Customers
For the year ended December 31, 1996, Microsoft accounted for 35% of the
Company's revenues compared to 52% for the year ended December 31, 1995
(50%, if certain revenue earned from royalty audits is excluded). 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 the Company'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
the Company'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). The Company's revenues for the last six months of
1996 included certain such Usage Fees. The Company expects that the level
of revenue that the Company will receive from Microsoft in 1997 will
decline from the level received in 1996. The Company expects that revenues
received from Microsoft will decline significantly after 1997.
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, during 1996 the
Company made significant investments in research and development in new
products for use on or in conjunction with the Internet and the World Wide
Web, including the HTML Export Electronic Publishing Solutions product and
the CyberSpell(TM) Proofing Tool. 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 1996, 1995, and 1994, the Company's
expenditures for developing new products and product enhancements were
$19,084,000, $10,170,000, and $7,079,000, respectively. These expenditures
represented 27%, 23%, and 30%, respectively, of total revenues for those
periods. Of these amounts, $2,865,000, $1,364,000, and $1,352,000,
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.
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 faces competition
from Microsoft and could face competition from any other OEM customer that
has or may 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's
viewing and conversion products compete with offerings from an affiliate of
FTP Software and from other proprietary file viewing products. 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 market for Electronic Publishing Solutions is characterized by a number
of large participants offering full or partial solutions, based on both
proprietary formats and open standards-based formats. Participants
in this market include Adobe and its affiliates, an affiliate of Reed
Elsevier, Quark, and SoftQuad. In addition, there are a number of smaller
organizations serving segments of the Electronic Publishing Solutions market.
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
expects that as it broadens its Electronic Publishing Solutions
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 are 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 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 and Information Management 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 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 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 December 31, 1996, the Company had 417 employees, including 244 in
research and development, 114 in sales and marketing, and 59 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.
Item 2. Property
The Company's corporate headquarters is located in Boston, Massachusetts where
the Company leases approximately 101,000 square feet of space. This lease
has a term that expires on November 30, 2005, and includes options on
42,000 square feet of contiguous space at both fixed and market rates. The
Company has exercised this option with respect to approximately 17,000 square
feet of this space, and expects to occupy this additional space in the summer
of 1997. In addition, in 1996 the Company entered into an agreement to lease
an additional approximately 42,000 square feet of space at its current location
and also expects to occupy this space in the summer of 1997. Inso Chicago
leases approximately 11,300 square feet of space in downtown Chicago,
Illinois. This lease has a term that expires in October 2006, and includes
options on 5,000 square feet of contiguous space at fixed and market rates.
Inso Providence leases approximately 26,000 square feet of space in
Providence, Rhode Island. On March 6, 1997, Inso Providence entered into a
lease for approximately 38,270 square feet of space at another location in
Providence. This lease has a term that expires in March 2007, and includes
options on contiguous space at a fixed rate. The Company has leases for
office space in Kansas City, Missouri and Scottsdale, Arizona for
certain of its product development operations. In addition, the Company
leases office spaces in the United States and overseas for its worldwide
marketing and sales activities. The Company does not own any real
property.
The Company believes that the space currently under lease to the Company is
adequate for its current needs and that suitable additional or substitute
space will be available as needed to accommodate further physical expansion
of the Company's operations and for additional sales offices.
Item 3. Legal Proceedings
The Company has, from time to time, become a party to claims and lawsuits in
the ordinary course of business. The Company is not a party to any
litigation that it believes would have a material adverse impact on its
business.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Company
Linda J. Barnes, who is 39 years old, 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.
Robert Carroll, who is 49 years old, has been Vice President, Corporate
Development of the Company since January 1997. Prior to joining the Company,
Mr. Carroll was a Principal of Roscommon Ltd. from December 1994 until
January 1997. Prior to that time, Mr. Carroll held the position of President
and Chief Executive Officer of two high technology companies, AE Research
Corporation and Intractec Systems, Inc. from January 1989 to December 1994
and December 1986 to December 1988, respectively. Prior to that time,
Mr. Carroll was the Chief Operating Officer of Computract, Inc. from October
1983 to October 1986.
Paul F. Henderson, who is 39 years old, has been Vice President of Marketing
of the Company since July 1996. Prior to joining the Company, Mr. Henderson
was Vice President of Marketing of Centerline Software, Inc. from February
1995 until July 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 July 1987 to January 1995.
Bruce G. Hill, who is 33 years old, 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.
Elaine R. LeBlanc, who is 42 years old, has been Vice President and General
Manager of Inso Boston since February 1997. Ms. LeBlanc joined the Company
in November 1996 as Director of Product Management for Information Products.
Prior to joining the Company, Ms. LeBlanc was Senior Vice President of
Aimtech Corporation, a developer of multimedia authoring tools. Ms. LeBlanc
joined Aimtech in January 1991 as Vice President of Marketing and was
promoted to Senior Vice President in 1993. Previously, Ms. LeBlanc was
Director of Marketing for The Softbridge Group from September 1988 until
July 1990 and a co-founder and Vice President of Layered, Inc. from 1982 to
1988.
Kirby A. Mansfield, who is 42 years old, 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.
Graham Marshall, who is 49 years old, has been Vice President, General
Manager of Inso Providence since January 1997. Prior to joining the
Company, Mr. Marshall held various key international electronic publishing
positions within Reed Elsevier beginning in 1981. Mr. Marshall held the
positions of Managing Director of Butterworth Asia from September 1996 to
January, 1997, President of Butterworth Legal Publishers from April 1995 to
September 1996, and manager of business units in the United Kingdom, United
States, and Asia from January 1988 to April 1995.
Sunanda Mathai, who is 45 years old, 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.
Michael E. Melody, who is 53 years old, has been Vice President, Strategic
Planning and Operations of the Company since January 1997. Mr. Melody was
Vice President and General Manager of Information Products of the Company
from March 1996 until January 1997. 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.
Jeffrey J. Melvin, who is 36 years old, has been Vice President, Worldwide
Sales and Service of the Company since January 1997. Mr. Melvin was Vice
President and General Manager of Tools and Technologies of the Company from
October 1995 to January 1997, Vice President of Sales and Marketing
of the Company from January 1995 to October 1995 and Vice President and
Director of Sales from the Company's inception to January 1995. 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.
Carol J. Mitchell, who is 50 years old, 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.
Scott D. Norder, who is 31 years old, has been Vice President, General Manager
of Inso's Chicago and Kansas City operations since January 1997. Mr. Norder
became Vice President and General Manager of Inso Chicago in June 1995. Mr.
Norder was Vice President of Engineering for Systems Compatibility
Corporation, now Inso Chicago, from April 1991 to June 1995. Prior to that
time Mr. Norder held key leadership positions within the development
organization of Systems Compatibility Corporation since 1987.
Elaine S. Ouellette, who is 39 years old, has been Vice President, Human
Resources of the Company since November 1996. Prior to joining the Company,
Ms. Ouellette was Director of the Human Resource Services Division at
International Data Group, Inc. from January 1990 until November 1996. Ms.
Ouellette joined International Data Group in 1988 as Manager of Human
Resources for the International Data Corporation Subsidiary. Prior to that,
Ms. Ouellette held various positions in human resources at Data General
Corporation beginning in 1982.
Betty J. Savage, who is 38 years old, 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.
Steven R. Vana-Paxhia, who is 49 years old, 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.
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Common Stock of the Company trades on the Nasdaq National Market of The
Nasdaq Stock Market under the symbol "INSO." The following table sets forth
the high and low sale prices of the Company's Common Stock for the fiscal
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>
1996 1995
<S> <C> <C> <C> <C>
Quarter Ended High Low High Low
March 31 $50.25 $31.25 $25.88 $16.53
June 30 68.00 45.75 32.50 24.13
September 30 58.50 39.25 36.25 29.38
December 31 63.25 34.00 47.50 27.25
</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.
As of March 14, 1997, the Company's Common Stock was held by 480 holders of
record. The Company has paid no dividends on its common stock since its
formation and has no current plans to do so.
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Statement of Operations Data
Years Ended December 31
(In thousands except
per share amounts) 1996<F1> 1995<F1> 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Net revenues $70,534 $43,387 $23,463 $13,757 $9,487
Gross profit 62,225 37,595 20,389 11,887 7,853
Purchased in-process
research and development 38,700 5,500 0 0 0
Total operating expenses 76,302 26,017 11,856 7,501 5,245
Operating (loss) income (14,077) 11,578 8,533 4,386 2,608
(Loss) income before
provision for income taxes(11,073) 13,046 8,852 4,386 2,608
Provision for income taxes 10,207 7,052 3,189 1,811 1,054
Net (loss) income (21,280) 5,994 5,663 2,575 1,554
Primary (loss) earnings
per share <F2> ($ 1.61) $ .49 $ .48 $ .22 $ .13
Fully diluted (loss)
earnings per share <F2> ($1.61) $ .47 $ .47 $ .22 $ .13
<CAPTION>
Balance Sheet Data
Years Ended December 31
(In thousands) 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $84,261 $55,460 $15,522 $1,802 ($ 58)
Deferred income tax
benefit, net 4,930 3,847 4,175 0 0
Total assets 136,272 91,129 33,494 6,373 3,328
Stockholders' equity <F3> 113,413 75,163 27,614 3,238 1,036
<FN>
<F1>
The Company's 1995 results include the operations of Systems Compatibility
Corporation since its acquisition on April 1, 1995. The Company's 1996
results include the operations of Electronic Book Technologies, Inc. and
ImageMark Software Labs since their acquisition dates of July 16, 1996 and
January 9, 1996, respectively. (See Note 5 of "Notes to Consolidated
Financial Statements".)
<F2>
Assumes that the 11,560,000 shares of common stock outstanding immediately
after the Company's initial public offering were outstanding throughout 1992
and 1993.
<F3>
Stockholders' equity prior to 1994 represents Houghton Mifflin's net asset
investment in the Company during the time the Company operated as a division
of Houghton Mifflin.
</FN>
</TABLE>
Item 7. 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 when such obligations are met.
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. Revenue 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.
The Company generates a significant portion of its revenues from customers
outside the United States. Such revenues totaled $15,315,000, $5,673,000,
and $4,216,000 for the years ended December 31, 1996, 1995, and 1994,
respectively. The Company believes that a substantial amount of products are
shipped internationally by its domestic OEM customers. Accordingly, the
actual use of the Company's products by overseas end-users is higher than
the export revenues reported for accounting purposes in the Company's
"Notes to Consolidated Financial Statements." 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 transacted primarily
in U.S. dollars. Therefore, the Company believes that it is not exposed to
any significant risk with respect to changing currency exchange rates in
connection with its business with international OEMs. 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. (See "Future
Operating Results".)
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 5 of the "Notes to 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 made available for general release to customers. The
royalty cost includes direct royalty obligations as well as the amortization
of royalty advances.
The following table sets forth, for the periods indicated, certain
operating data expressed as a percentage of revenues.
<TABLE>
<CAPTION>
Percentage of Revenues
Years Ended December 31
1996 1995 1994
<S> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0%
Cost of revenues 11.8 13.3 13.1
----- ----- -----
Gross profit 88.2 86.7 86.9
Operating expenses:
Sales and marketing 16.9 12.1 11.4
Product development 23.0 20.3 24.4
General and administrative 13.4 14.9 14.7
Purchased in-process research
and development 54.9 12.7
----- ----- -----
Total operating expenses 108.2 60.0 50.5
----- ----- -----
Operating (loss) income (20.0) 26.7 36.4
Net investment income 4.3 3.4 1.3
----- ----- -----
(Loss) income before provision
for income taxes (15.7) 30.1 37.7
Provision for income taxes 14.5 16.3 13.6
------ ----- ----
Net (loss) income (30.2)% 13.8% 24.1%
----- ----- -----
----- ----- -----
</TABLE>
Year Ended December 31, 1996, Compared to Year Ended December 31, 1995
Revenues for 1996 increased $27,147,000, or 62.6%, to $70,534,000 compared to
$43,387,000 for 1995. Revenues for 1995 included $1,500,000 of revenue
earned from royalty audits. Excluding that revenue, the 1996 total increased
68.4% over 1995. Revenues in 1996 included revenues from the acquisition of
Electronic Book Technologies, Inc., now Inso Providence, and ImageMark
Software Labs, Inc., now Inso Kansas City, described in Note 5 of the "Notes
to Consolidated Financial Statements," since their acquisition dates of July
16, 1996, and January 9, 1996, respectively. Revenues from Inso Providence and
Inso Kansas City accounted for approximately 15% of the total revenues in
1996. Royalty revenues increased 36.8%, excluding 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 164 at
December 31, 1996 from 110 at December 31, 1995. The increase in the number
of licensees making royalty payments reflects new licensees resulting from
the Inso Kansas City acquisition, as well as royalty flow from existing
licensees who have earned their prepaid minimum royalties. Nonrefundable and
recurring royalties from the Company's CorrecText(R) Grammar Correction
System, Outside In(R) viewing technology, and ImageStream(R) graphics filters
contributed substantially to the revenue gains. Nonrefundable royalty
revenues for 1996 increased 87.7%, reflecting the addition of 191 new OEM
licenses in 1996 compared to 149 new OEM licenses in 1995. New licenses for
1996 included Netscape Communications Corporation, Corel Corporation, Open
Text Corporation, Verity, Inc., and Alta Vista. New products released
during 1996 were CyberSpell(TM), InWords(TM), SciWords(TM), BizWords(TM),
IntelliScope(R) Query Expander, IntelliScope(R) Retrieval Enhancer, and
ImageStream(R) for Microsoft(R) Office. The Company also released additional
language versions for its IntelliScope(R) and CorrectEnglish(TM) ESL writing
system products. In addition, new versions of Quick View Plus(R) and the
IntelliFinder(R) Reference Engine as well as electronic versions of The 1996
Information Please(R) Sports Almanac, The 1996 Information Please(R) Almanac,
and The 1997 Information Please(R) Business Almanac were released in 1996.
Gross profit as a percentage of revenues was 88.2% in 1996 compared to 86.7%
in 1995. Royalty costs decreased as a percentage of revenues as a result of
a greater proportion of 1996 revenues being derived from the Outside In(R),
Quick View Plus(R), and ImageStream(R) products, which carry lower royalty
burdens. Amortization expense for capitalized software and intangibles
increased due to the release of new products described above as well as
amortization of costs related to the Inso Kansas City and Inso Providence
acquisitions.
Sales and marketing expenses consist primarily of salaries, commissions, and
bonuses for sales, marketing, and technical support personnel and promotional
expenses. Sales and marketing expenses for 1996 increased 127.0% to
$11,924,000 from $5,253,000 for 1995, reflecting increased staff due to the
Company's acquisitions, entry into new markets (corporate and consumer), staff
additions in product marketing to support the higher levels of sales, and
higher commissions due to increased revenues. Sales and marketing expenses
increased as a percentage of sales to 16.9% for 1996 compared to 12.1% for
1995. The increase as a percentage of sales is due primarily to the sales
and marketing efforts at Inso Providence.
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 84.2% to $16,219,000 for
1996 from $8,806,000 for 1995. The increase in product development costs was
primarily due to investments in CorrectEnglish(TM) ESL writing system products,
IntelliScope(R) products, Quick View Plus(R), CyberSpell(TM), DynaBase(TM),
DynaText(R) products, and various reference works. As a percentage of
revenues, product development expenses increased to 23.0% for 1996 from 20.3%
for 1995. The increase as a percentage of revenues was primarily
attributable to development efforts at Inso Providence. The Company's total
product development costs, including capitalized costs, were $19,084,000,
or 27.1% of revenues, for 1996, compared to $10,170,000, or 23.4% of revenues,
for 1995.
General and administrative expenses in 1996 increased 46.5% to $9,459,000 from
$6,458,000 in 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 decreased as a percentage of revenues to 13.4%
for 1996 compared to 14.9% for 1995.
The acquisition of Inso Kansas City and Inso Providence, included the purchase
of certain technology under research and development, which resulted in
charges to the Company's 1996 consolidated results of $4,400,000, or $0.34
per share, and $34,300,000, or $2.62 per share, respectively.
The Company's effective tax rates for 1996 and 1995 were influenced by the
$38,700,000 Inso Kansas City and Inso Providence charges, and $5,500,000
Inso Chicago charges, respectively, for purchased technology under research
and development at the time of the acquisitions. The charges were not
deductible for tax purposes. Excluding the charges, the Company's effective
tax rate in 1996 declined to 36.9% compared to 38.0% in 1995 as a result of
tax planning initiatives undertaken by the Company in late 1995 and 1996.
Excluding the Inso Kansas City, Inso Providence, and Inso Chicago research and
development charges noted above, net income and earnings per share for the
years ended December 31, 1996 and 1995 would have been $17,420,000 and $1.24
per share and $11,494,000 and $0.94 per share, respectively.
Year Ended December 31, 1995, Compared to Year Ended December 31, 1994
Revenues for 1995 increased $19,924,000, or 84.9%, to $43,387,000, including
$1,500,000 of revenue earned from royalty audits, compared to $23,463,000
for 1994. Revenues in 1995 included revenues from the acquisition of Systems
Compatibility Corporation, now Inso Chicago, described in Note 5 of the
"Notes to Consolidated Financial Statements," since the acquisition date of
April 1, 1995. Revenues from Inso Chicago accounted for approximately 20%
of the total in 1995. Royalty revenues increased 71.1%, including the
revenue 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 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(R) and International
CorrectSpell(TM), contributed substantially to the revenue gains.
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 language versions for its
International CorrectSpell(TM), IntelliScope(R), International
ProofReader(TM), CorrectEnglish(TM), and concise electronic thesaurus. Also
released during 1995 were new versions of Quick View Plus(R),
IntelliFinder(R), and Dutch, French, Italian, and Spanish bilingual
dictionary databases, as well as electronic versions of The 1996 Information
Please(R) Business Almanac and The 1996 Information Please(R) Entertainment
Almanac.
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(TM), International ProofReader(TM), concise electronic
thesaurus, and IntelliScope(R); numerous reference works; and a new version
of Quick View Plus(R); as well as amortization of costs related to the Inso
Chicago acquisition and rights related to the Information Please(R)
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(R), Outside In(R),
and Quick View Plus(R) products, which carry lower royalty burdens.
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 for 1995 increased
96.2% to $5,253,000 from $2,677,000 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 expenses consist primarily of personnel costs and, to a
lesser extent, fees paid for outside software development and consulting
services. Product development expenses increased 53.8% to $8,806,000 for
1995 from $5,727,000 for 1994. The increase in product development costs
was primarily due to investments in CorrectEnglish(TM), International
ProofReader(TM), IntelliScope(R), Quick View Plus(R), IntelliFinder(R),
CyberSpell(TM), IntelliScope(R) Query Expander, and various reference works.
As a percentage of revenues, product development expenses decreased to 20.3%
in 1995 from 24.4% for 1994. The decrease as a percentage of revenues was
primarily attributable to personnel expenses comprising a lower percentage
of revenues in 1995 compared to 1994. This decrease was partially offset by
capitalized development costs for IntelliScope(R), CorrectEnglish(TM),
Quick View Plus(R), IntelliScope(R) Query Expander, concise electronic
thesaurus, and bilingual dictionary databases that approximated 1994 in
terms of dollars but represented a lower percentage of development expenses
(13.4% in 1995 versus 19.1% in 1994). The Company's total product
development costs, including capitalized costs, were $10,170,000, or 23.4%
of revenues, for 1995, compared to $7,079,000, or 30.2% of revenues, for 1994.
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.
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 $.44 per share.
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.
Excluding the Inso Chicago research and development charge noted above, net
income and earnings per share would have been $11,494,000 and $.94 per share,
respectively.
Liquidity and Capital Resources
The Company's operating activities have provided cash of approximately
$17,452,000, $19,720,000, and $6,852,000 in 1996, 1995, and 1994,
respectively. Cash, cash equivalents, and marketable securities as of
December 31, 1996 totaled $81,226,000. The Company believes that current
funds and funds expected to be generated from operations will be sufficient
to finance the Company's operations through the foreseeable future.
The Company's investing activities have used cash of $70,265,000, $36,611,000,
and $6,415,000, in 1996, 1995, and 1994, respectively. Of these amounts,
$2,865,000, $1,364,000, and $1,352,000, respectively, were for capitalized
product development costs as discussed above. The increase in investing
activities reflects net investments in marketable securities totaling
$21,549,000 and two acquisitions completed during 1996 for an aggregate of
$42,448,000 in cash. Also, contributing to the increased investing
activities was additional investment in leasehold improvements, hardware, and
software necessitated by the Company's growth.
On January 9, 1996, the Company acquired all of the outstanding capital stock
of ImageMark Software Labs, Inc., now Inso Kansas City, for $5,500,000 from
available cash. The Company also caused Inso Kansas City to enter into
employment and noncompetition agreements with two key executives and made
aggregate payments from available cash of $1,000,000 under those agreements.
In August, 1996, Inso Kansas City exceeded certain performance measures as
set forth in the purchase agreement. As a result, an additional $950,000
was paid on February 13, 1997 to the former stockholders of Inso Kansas City.
On July 16, 1996, the Company acquired all of the outstanding capital stock
of EBT, now Inso Providence Corporation, for $38,400,000 from available cash.
In connection with the acquisition, the Company purchased certain technology
under research and development valued at $34,300,000. All significant
expenditures necessary to develop the research and development into
commercially viable products had been incurred by the Company as of
December 31, 1996. The Company is 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 acquisition also included estimated costs of approximately
$2,200,000 for direct transaction costs and costs relating to the elimination
of excess and duplicative activities as a result of the merger. At
December 31, 1996, the Company had acquisition related accruals of
approximately $1,000,000. During 1997, payments against the accrual are
expected to include severance, cancellation of facility leases and other
contracts, and other out-of-pocket expenses. All payments are expected to be
made by June 30, 1997. There can be no assurance that the Company will not
incur additional charges in subsequent periods to reflect costs associated
with the acquisitions or that management will be successful in its efforts
to integrate the operations of the two companies.
On February 6, 1997, the Company acquired the Mastersoft line of products and
related technologies from Adobe Systems Incorporated for approximately
$2,965,000 from available cash.
The Company's financing activities provided cash of $49,858,000, $40,268,000,
and $13,421,000 in 1996, 1995, and 1994, respectively. In November, 1996,
the Company completed a public offering of 1,200,000 shares of the Company's
Common Stock, which provided net proceeds of approximately $56,444,000. On
February 1, 1996, the Company repaid outstanding promissory notes of
$6,037,000 issued in connection with the acquisition of Inso Chicago. The
Company also repaid $2,222,000 of existing indebtedness of Inso Providence
assumed in the acquisition. The Company has no long-term debt and, as of
December 31, 1996, had working capital of $84,261,000.
The Company had available to it a deferred income tax benefit in the amount
of $8,746,000 as of December 31, 1996, which is recorded at the net amount of
$3,880,000 after deduction of a valuation allowance in the amount of
$4,866,000. This benefit primarily 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 the initial public offering
discussed in Note 1 of "Notes to Consolidated Financial Statements." The tax
benefit is subject to statutory realization ratably over a remaining
twelve-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 fifteen-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.
Future Operating Results
This report contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing,
the words "believes," "anticipates," "plans," "expects," and similar
expressions are intended to identify forward-looking statements. There are a
number of factors of which the Company is aware that may cause the Company's
actual results to vary materially from those forecasted or projected in any
such forward-looking statement. The following are certain, but not
necessarily all, of the factors that the management of the Company currently
believes could cause the Company's actual operating results to be
materially less than forecasted or projected in any forward-looking
statement.
The Company received 35% of its revenues in 1996 from Microsoft. The economic
terms of the Company's current agreement, which was amended in 1995, with
Microsoft with respect to the Company's Proofing Tools products expire at
the end of 1997. The Company anticipates that the economic terms of that
agreement will not be renewed on terms favorable to the Company, and that
revenues received from Microsoft will decline significantly after 1997.
The Company receives the majority of its revenue 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, while 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. These factors could result in decreased
revenues from OEMs.
The Company now receives a substantial portion of its revenues from direct and
indirect sales efforts aimed at major corporations, government agencies, and
consumers. The marketing and distribution of products to end-users, either
by the Company or by value-added 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
results of operations. The Company intends to expand this activity
through greater sales efforts and the introduction of new products for
corporate use, which could further increase the level of sales and marketing
expenditures relative to revenues. The Company anticipates that a
substantial portion of its future revenue growth will come from corporate,
government, and consumers sales, which could result in lower operating
margins in future periods.
The Company's ability to remain competitive in the computer software industry
is dependent on the services of a number of key management and technical
personnel, principally software engineers, linguists, and database
specialists. 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 operating results.
The Company has historically operated in narrow market segments that have
attracted fewer substantial participants than the general market for
software applications. As the Company develops products for end-users,
particularly in the Information Management Tools and Electronic Publishing
Solutions markets, the Company anticipates that it will experience increased
competition, both as to quality and price, from substantial entities with
greater resources than those of the Company.
It is possible that certain of the major operating system developers,
including Microsoft, may add features and functionality to such operating
systems, including future versions of Windows(R) 95 and Windows NT(R), that
may compete with the Company's products or with those of its other OEM
customers. The concentration of the market for operating systems makes it
difficult or impossible for the Company or its other OEM customers to compete
on a price basis because purchasers of operating systems would be required
to purchase products as part of the operating system that compete with
those of the Company. In addition, certain OEM customers, such as
Microsoft, may choose to internally develop products that compete with
those of the Company in order to reduce their costs.
The Company has experienced growth that could place a significant strain on
its resources. 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 market for mergers and acquisitions of software companies and
information databases could make it more difficult for the Company to
achieve projected or forecasted revenue or net income growth in future
periods. The Company's ability to manage any future growth and integrate any
newly-acquired business will require it to continue to improve its
operations and its financial and management information systems, and to
motivate and effectively manage its employees. There is no assurance that
the Company will be able to integrate and manage successfully businesses or
assets that it has acquired or may acquire in the future. If the Company's
management is unable to manage such growth effectively, the quality of the
Company's products; its ability to identify, hire, and retain key personnel;
and its results of operations could be materially adversely affected.
The Company's ability to achieve revenue and net income growth with respect
to its Information Products product line is dependent to a large degree on
the Company's ability to create and 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 adversely affect revenues and operating income.
The Company has increased the marketing of its products directly to end-users
outside the United States and has experienced a substantial increase in
revenue from foreign sources in 1996. The majority of this growth
is attributable to increased sales of products to corporate and consumer
customers in foreign markets. The marketing of products directly to
end-users outside the United States 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.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements and supplementary data are
included under Item 14 of this Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required to be furnished pursuant to this item is set forth
under the caption "Executive Officers of the Company" in Part I hereof and
under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's proxy statement ("Proxy
Statement"), to be furnished to stockholders in connection with the
solicitation of proxies for use at the 1997 Annual Meeting of Stockholders
and is incorporated herein by reference.
Item 11. Executive Compensation
The information required to be furnished pursuant to this item is set forth
under the captions "Director's Compensation," "Compensation Committee
Interlocks and Insider Participation," "Summary Compensation Table," "Stock
Option Grants," "Aggregated Option Exerciser and Year-End Option Table," and
"Severance Agreements" in the Proxy Statement and is incorporated herein by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required to be furnished pursuant to this item is set forth
under the caption "Security Ownership" in the Proxy Statement and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required to be furnished pursuant to this item is set forth
under the caption "Certain Transactions" in the Proxy Statement and is
incorporated herein by reference.
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)1. Consolidated Financial Statements
The consolidated financial statements listed in the accompanying Index
to Consolidated Financial Statements and Financial Statement
Schedule are filed as part of this Annual Report.
2. Consolidated Financial Statement Schedule
The consolidated financial statement schedule listed in the
accompanying Index to Financial Statements and Financial Statement
Schedule is filed as part of this Annual Report.
3. Exhibits
The exhibits listed in the accompanying Exhibit Index are filed as
part of this Annual Report.
(b) Reports on Form 8-K filed in the fourth quarter of 1996
None.
Signatures
Pursuant to the requirements of Section 13 or 15(d) 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: March 14, 1997 /s/ Steven R. Vana-Paxhia
-------------------------
Steven R. Vana-Paxhia
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 14, 1997 /s/ Steven R. Vana-Paxhia
-------------------------
Steven R. Vana-Paxhia
President, Chief Executive Officer, and
Director
Date: March 14, 1997 /s/ Betty J. Savage
-------------------
Betty J. Savage
Vice President and Chief Financial Officer
Date: March 14, 1997 /s/ Linda J. Barnes
-------------------
Linda J. Barnes
Vice President and Controller
(Chief Accounting Officer)
Date: March 14, 1997 /s/ Joseph A. Baute
-------------------
Joseph A. Baute, Director
Date: March 14, 1997 /s/ J. P. Barger
----------------
J. P. Barger, Director
Date: March 14, 1997 /s/ Samuel H. Fuller
--------------------
Samuel H. Fuller, Director
Date: March 14, 1997 /s/ John Guttag
--------------
John Guttag, Director
Date: March 14, 1997 /s/ Stephen O. Jaeger
--------------------
Stephen O. Jaeger, Director
Date: March 14, 1997 /s/ Joanna T. Lau
-----------------
Joanna T. Lau, Director
Date: March 14, 1997 /s/ Ray Stata
-------------
Ray Stata, Director
Date: March 14, 1997 /s/ William J. Wisneski
-----------------------
William J. Wisneski, Director
Item 14(a). Index to Consolidated Financial Statements and Financial
Statement Schedule
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the years ended December 31, 1996,
1995, and 1994
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995, and 1994
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996, 1995, and 1994
Notes to Consolidated Financial Statements
Supplementary information:
Unaudited Quarterly Operating Results
Schedule for the years ended December 31, 1996, 1995, and 1994:
Schedule II - Valuation and Qualifying Accounts
All other schedules have been omitted since the required information is not
present, or the amounts are not sufficient to require submission of the
schedule, or because the information required is included in the
consolidated financial statements.
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, 1996 and 1995 and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included
the financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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, 1996 and 1995, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ ERNST & YOUNG LLP
----------------------
ERNST & YOUNG LLP
Boston, Massachusetts
January 31, 1997, except for Note 11, as to
which the date is February 6, 1997
<TABLE>
<CAPTION>
Inso Corporation
Consolidated Balance Sheets
December 31, 1996 and 1995
December 31
(In thousands except share amounts) 1996 1995
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $34,280 $37,235
Marketable securities 46,946 25,397
Accounts receivable, net allowances of
$1,352 in 1996 and $790 in 1995 21,144 8,264
Income tax receivable 1,970
Other current assets 1,313 530
------ ------
Total current assets 105,653 71,426
Property and equipment, net 5,303 2,257
Royalty advances and other assets, net 3,564 980
Product development costs, net of
accumulated amortization of $9,418 in
1996 and $6,775 in 1995 7,168 3,229
Intangible assets, net of accumulated
amortization of $3,246 in 1996 and
$1,491 in 1995 9,654 9,390
Deferred income tax benefit, net 4,930 3,847
----- -----
Total Assets $136,272 $91,129
-------- -------
-------- -------
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,877 $ 413
Accrued liabilities 2,379 1,472
Accrued salaries, commissions, and
bonuses 4,085 2,094
Acquisition related liabilities 1,995
Unearned revenue 2,431 875
Royalties payable 1,916 1,461
Due to Houghton Mifflin Company 749 314
Promissory notes 6,037
Current income taxes payable 883
Deferred income taxes 5,960 2,417
----- -----
Total current liabilities 21,392 15,966
Long-term acquisition related liabilities 1,467
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000
shares authorized; none issued
Common stock, $.01 par value; 50,000,000 and
25,000,000 shares authorized in 1996 and
1995, respectively; 14,293,249 and
12,965,700 shares issued in 1996
and 1995, respectively 143 130
Capital in excess of par value 123,472 64,096
(Accumulated deficit) retained earnings (9,623) 11,657
-------- ------
113,992 75,883
Unamortized value of restricted shares (521) (669)
Treasury stock, at cost, 5,075 and 4,975
shares in 1996 and 1995, respectively (58) (51)
-------- -------
Total stockholder's equity 113,413 75,163
-------- -------
Total Liabilities and Stockholders' Equity $136,272 $91,129
-------- -------
-------- -------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Inso Corporation
Consolidated Statements of Operations
Years Ended December 31, 1996, 1995, and 1994
(In thousands except per share amounts) 1996 1995 1994
<S> <C> <C> <C>
Net revenues $70,534 $43,387 $23,463
Cost of revenues 8,309 5,792 3,074
------- ------- -------
Gross profit 62,225 37,595 20,389
Operating expenses:
Sales and marketing 11,924 5,253 2,677
Product development 16,219 8,806 5,727
General and administrative 9,459 6,458 3,452
Purchased in-process research
and development 38,700 5,500
------ ------ ------
Total operating expenses 76,302 26,017 11,856
------ ------ ------
Operating (loss) income (14,077) 11,578 8,533
Net investment income 3,004 1,468 319
(Loss) income before provision
for income taxes (11,073) 13,046 8,852
Provision for income taxes 10,207 7,052 3,189
------ ------ ------
Net (loss) income ($21,280) $ 5,994 $ 5,663
------ ----- -----
------ ----- -----
Primary (loss) earnings per share ($ 1.61) $ 0.49 $ 0.48
------ ---- ----
------ ---- ----
Fully diluted (loss) earnings per share ($ 1.61) $ 0.47 $ 0.47
------ ---- ----
------ ---- ----
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Inso Corporation
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995, and 1994
(In thousands of dollars) 1996 1995 1994
<S> <C> <C> <C>
Cash flows from (used in)
operating activities:
Net (loss) income ($21,280) $ 5,994 $ 5,663
Adjustments to reconcile net (loss)
income to net cash provided by
operating activities:
Depreciation 2,064 1,059 542
Amortization 4,768 2,980 962
Deferred income taxes 4,547 1,473 696
Purchased in-process research and
development 38,700 5,500
------ ----- ---
28,799 17,006 7,863
Changes in operating assets and
liabilities:
Accounts receivable (12,566) 189 (3,226)
Royalty advances (327) 414 (779)
Accounts payable and accrued
liabilities (42) 1,861 1,941
Current income taxes 1,739 695 93
Royalties payable 463 266 310
Due to Houghton Mifflin Company 435 (589) 773
Other assets and liabilities (1,049) (122) (123)
------- ----- -----
Net cash provided by operating
activities 17,452 19,720 6,852
Cash flows from (used in) investing
activities:
Property and equipment expenditures (3,393) (2,211) (1,040)
Capitalized product development costs (2,865) (1,364) (1,352)
Acquisitions, net of cash acquired and
issuance of promissory notes (42,448) (4,184)
Purchase of rights of Information
Please(R) Almanacs (10) (3,455)
Net change in marketable securities (21,549) (25,397)
Software license (4,023)
-------- -------- -------
Net cash used in investing activities (70,265) (36,611) (6,415)
Cash flows from (used in) financing
activities:
Net proceeds from issuance of common
stock 58,124 40,628 47,467
Payment to Houghton Mifflin Company
and transfer of net assets (34,155)
Principal stockholder's contribution to
capital 130
Purchases of treasury stock (7) (30) (21)
Repayment of promissory notes (6,037) (330)
Repayment of Electronic Book
Technologies debt (2,222)
------- ------- --------
Net cash provided by financing
activities 49,858 40,268 13,421
------ ------ ------
Net increase (decrease) in cash and
cash equivalents (2,955) 23,377 13,858
Cash and cash equivalents at beginning of
the period 37,235 13,858 0
------ ------ -----
Cash and cash equivalents at end of
the period $34,280 $37,235 $13,858
------ ------ ------
------ ------ ------
Supplementary information:
Income taxes paid $ 4,081 $ 5,017 $ 2,312
----- ----- -----
----- ----- -----
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
<CAPTION>
Inso Corporation
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1996, 1995, and 1994
Common Stock Capital
(In --------------- in (Accumu- Unamortized
thousands Amount excess lated value of
except $.01 of deficit) restrict- Treasury Stock
share par par Retained ed --------------
amounts Shares value value earnings shares Shares Amount Total
<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 benefit
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
Issuance
of shares
pursuant
to Employee
Stock
Purchase
Plan 21,399 658 658
Net proceeds
from
public
offering 1,200,000 12 56,432 56,444
Stock
options
exercised 98,950 1 1,021 1,022
Issuance of
restricted
shares 1,200 48 (48) 0
Other
issuances
and
repurchases 6,000 223 100 (7) 216
Amortization
of
restricted
shares 196 196
Tax benefit
of stock
option
exercises 994 994
Net loss (21,280) (21,280)
--------- --- -------- -------- --- --- --- --------
Balance at
December
31, 1996 14,293,249 $143 $123,472 ($9,623) ($521) 5,075 ($58) $113,413
---------- ---- -------- -------- ------ ----- ----- --------
---------- ---- -------- -------- ------ ----- ----- --------
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
Inso Corporation
Notes to Consolidated Financial Statements
Note 1. Summary of Significant Accounting Policies
Basis of Presentation
Inso Corporation (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. Simultaneously 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 Note 7.)
Nature of Operations
The Company is a 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. 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, revenues are
recognized when such obligations are met. 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. 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
from product sales are recognized upon shipment. 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.)
Fair Value of Financial Instruments
The Company's cash equivalents, marketable securities, and accounts
receivables are carried at cost which approximates fair value.
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 $2,643,000, $1,308,000, and $588,000 for the years ended 1996,
1995, and 1994, respectively, is 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 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 1996, 1995, and 1994, Microsoft Corporation accounted for 35%, 52%, and
55% of revenues, respectively. The Company's 1995 revenues from Microsoft
include $1,500,000 of revenue earned from royalty audits. The economic terms
of the Company's agreement with Microsoft, which was amended in 1995, with
respect to the Company's Proofing Tools products expire at the end of 1997.
The Company anticipates that the economic terms of that agreement will not be
renewed on terms favorable to the Company, and that revenues received from
Microsoft will decline significantly for periods after 1997.
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 $15,315,000, $5,673,000, and
$4,216,000 for the years ended December 31, 1996, 1995, and 1994,
respectively. International sales to Canada were 11%, 4%, and 3% in 1996,
1995, and 1994, respectively. No other foreign country accounted for more
than 10% of total sales in any period. Substantially all export sales have
been consummated by the Company's United States operation.
Stock-Based Compensation
The Company has elected to account for its stock-based compensation plans
following Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related interpretations rather than the
alternative fair value accounting provided under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123). Accordingly, no compensation expense has been recognized by the
Company for its stock option plans and its stock purchase plan.
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 March 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 for 1995
and 1994 and the modified treasury stock method for 1996. Computations of
earnings per share do not include common stock equivalents where the effect
would be antidilutive. The primary weighted average number of common and
equivalent shares outstanding was 13,214,000 in 1996, 12,228,000 in 1995,
and 11,798,000 in 1994. The fully diluted weighted average number of common
and equivalent shares outstanding was 13,214,000 in 1996, 12,839,000 in 1995,
and 11,946,000 in 1994.
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 1996 presentation.
Note 2. Investments
The Company's available-for-sale investments carried at cost, which
approximates fair value, and included in cash equivalents and marketable
securities are as follows:
<TABLE>
<CAPTION>
December 31
(In thousands of dollars) 1996 1995
<S> <C> <C>
Commercial paper $20,000 $26,950
Corporate notes 37,273 9,707
Money market funds 4,855 9,697
Tax-exempt municipal bonds 8,726
United States agency bonds 6,989 4,993
Asset-backed securities 9,957 1,971
------ ------
Total $79,074 $62,044
------- -------
------- -------
</TABLE>
Interest on securities classified as available-for-sale of $2,887,000,
$1,208,000, and $321,000 is included in net investment income in 1996, 1995,
and 1994, respectively. Dividend income, included in net investment income,
for securities classified as available-for-sale was $22,000 and $269,000 in
1996 and 1995, respectively.
During the year ended December 31, 1996, available-for-sale securities with a
value of $48,813,000 were sold. The gross realized gains and losses on
those sales were immaterial to the Company's financial statements. During
the years ended December 31, 1996 and 1995, purchases of available-for-sale
securities were $249,221,000 and $220,212,000, respectively. Maturities of
available-for-sale securities were $186,525,000 and $147,845,000 for the
years ended December 31, 1996 and 1995, respectively.
The Company's available-for-sale securities have the following maturities:
<TABLE>
<CAPTION>
December 31
(In thousands of dollars) 1996 1995
<S> <C> <C>
Due in one year or less $55,461 $50,366
Due within two years 23,613 11,678
------ ------
Total $79,074 $62,044
------ ------
------ ------
</TABLE>
Note 3. Property and Equipment
<TABLE>
<CAPTION>
Property and equipment at December 31 are summarized as follows:
(In thousands of dollars) 1996 1995
<S> <C> <C>
Leasehold improvements $ 767 $ 476
Computer equipment and software 10,294 3,880
Furniture and fixtures 1,153 711
------ -----
12,214 5,067
Less accumulated amortization
and depreciation (6,911) (2,810)
------- -------
$5,303 $2,257
------- -------
------- -------
Note 4. Common Stock
On November 5, 1996, the Company completed a public offering of 1,200,000
shares of the Company's common stock, which provided the Company with net
proceeds of approximately $56,444,000.
On August 2, 1995, the Company completed a public offering of 600,000
shares (1,200,000 shares adjusted for stock dividend in September 1995) of
the Company's common stock, which provided the Company with net proceeds of
approximately $39,300,000.
In September 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. All references in the financial statements to the average
number of shares outstanding and related prices, per share amounts, stock plan
data, and benefit plan data have been retroactively restated to reflect
this transaction.
Note 5. Acquisitions and License Agreements
Electronic Book Technologies, Inc.
On July 16, 1996, the Company acquired all of the outstanding capital stock of
privately held Electronic Book Technologies, Inc. ("EBT"), now Inso
Providence Corporation ("Inso Providence"). 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
earnings for the quarter ended September 30, 1996, of $34,300,000, or $2.62
per share. The charge was not deductible for tax purposes.
The acquisition also included estimated costs of approximately $2,200,000 for
direct transaction costs and costs relating to the elimination of excess and
duplicative activities as a result of the merger. During 1996, charges
against the accrual consisted of the following: $550,000 of professional fees
consisting principally of appraisal, legal, and accounting fees; $475,000 of
employee severance for elimination of duplicate functions and closure of
duplicate and excess operations; $110,000 of lease and other facility costs
for closed operations; and $65,000 of other out-of-pocket expenses related
to the acquisition. Employee terminations were essentially in the areas of
sales, marketing, and product development. At December 31, 1996, the
Company has acquisition related accruals of approximately $1,000,000 included
in accrued acquisition related liabilities on the accompanying balance sheet.
During 1997, payments against the accrual are expected to include severance,
cancellation of facility leases and other contracts, and other out-of-pocket
expenses. All payments are expected to be made prior to June 30, 1997.
ImageMark Software Labs, Inc.
On January 9, 1996, the Company acquired all of the outstanding stock of
privately held ImageMark Software Labs, Inc., now Inso Kansas City
Corporation ("Inso Kansas City"), for a purchase price of $5,500,000.
The purchase price was paid from available cash. The Company also caused, at
the time of acquisition, Inso Kansas City to enter into employment and
noncompetition agreements with two key executives and made aggregate
payments of $1,000,000 under those agreements. 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, 1996 of $4,400,000, or $0.34 per share. The charge was not
deductible for tax purposes. Intangible assets of approximately $351,000
were recorded at the time of the acquisition and are being amortized on a
straight-line basis over their estimated useful lives of seven years.
Amounts capitalized in connection with the employment and noncompetition
agreements are being amortized on a straight-line basis over three years.
In August, 1996, Inso Kansas City exceeded certain performance measures as
set forth in the stock purchase agreement. As a result, the Company is
obligated to pay an additional $950,000 to the former stockholders of Inso
Kansas City, which is reflected in acquisition related liabilities on the
accompanying balance sheet. The additional consideration is being amortized
on a straight-line basis over the useful life remaining in the original
seven years.
Unaudited pro forma revenue, net (loss) income, and (loss) earnings per share
shown below for the years ended December 31, 1996 and 1995 assumes the
acquisition of Electronic Book Technologies, Inc. and ImageMark Software
Labs, Inc., described above occurred on January 1, 1996 and 1995, respectively:
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31
(unaudited)
(In thousands of dollars except per share amounts) 1996 1995
<S> <C> <C>
Revenue $78,204 $60,300
Net (loss) income ($23,735) $ 4,857
(Loss) earnings per share ($ 1.80) $ 0.40
</TABLE>
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 recorded as part of the acquisition and are being amortized
on a straight-line basis over their estimated useful lives of seven years.
In connection with the acquisitions of Electronic Book Technologies, Inc.,
ImageMark Software Labs, Inc., and Systems Compatibility Corporation the
Company engaged an independent appraiser to estimate the fair market value
of the assets acquired, to serve as a basis for the allocation of the
purchase price.
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 6. 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.
The provision for income taxes comprised the following:
<TABLE>
<CAPTION>
Years Ended December 31
(In thousands of dollars) 1996 1995 1994
<S> <C> <C> <C>
Current:
Federal $4,918 $4,239 $1,818
Foreign 165 230 190
State 540 1,108 401
----- ----- -----
Total current 5,623 5,577 2,409
Deferred:
Federal 4,360 1,320 710
State 224 155 70
----- ----- -----
Total deferred 4,584 1,475 780
----- ----- -----
$10,207 $7,052 $3,189
------- ------ ------
------- ------ ------
</TABLE>
A reconciliation of income tax expense to the statutory federal income tax
rate was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
(In thousands of dollars) 1996 1995 1994
<S> <C> <C> <C>
Federal statutory rate ($3,876) 35.00% $4,566 35.00% $3,010 34.00%
State income taxes, net
of federal effect 497 (4.49) 775 5.94 311 3.51
Change in valuation
allowance (340) 3.07 (328) (2.51) (302) (3.41)
Purchased in-process
research and development 13,545 (122.32) 1,925 14.75
Amortization of intangible
assets acquired through
stock purchase 564 (5.09) 264 2.02
Research and development
credit (187) 1.69 (294) (2.25) (26) (.29)
Other 4 (.04) 144 1.10 196 2.21
------- ---- ----- ----- ---- ------
Total $10,207 (92.18)% $7,052 54.05% $3,189 36.02%
------- -------- ------ ------ ------ ------
------- -------- ------ ------ ------ ------
</TABLE>
Significant components of the Company's net deferred income tax assets/
(liabilities) were as follows:
<TABLE>
<CAPTION>
Years Ended December 31
(In thousands of dollars) 1996 1995 1994
<S> <C> <C> <C>
Net deferred tax assets:
Intangible assets $8,746 $9,456 $10,165
Valuation allowance (4,866) (4,808) (5,135)
Capitalized development costs (907) (860) (827)
Deferred state taxes 1,310
Compensation expense 361
Other 286 59 (28)
----- ----- -------
4,930 3,847 4,175
Net deferred tax liabilities:
Deferred income 8,371 2,883 1,511
Compensation expense (1,339)
Accrued liabilities not currently
deductible for tax (927)
Other (145) (466) (241)
------ ----- -----
5,960 2,417 1,270
------ ----- -----
Net deferred income tax assets/
(liabilities) ($1,030) $1,430 $2,905
------ ----- -----
------ ----- -----
</TABLE>
The deferred income tax asset 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 $4,866,000 (which
includes net operating losses and other deductions subject to limitations
in future years) and $4,808,000 at December 31, 1996 and 1995, 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 7. 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, 1996, 1995, and
1994, were royalties to Houghton Mifflin for the licensing of this database
content amounting to $1,189,000, $700,000, and $754,000, 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.
During 1996 and 1995, the book rights for the series of Information Please(R)
Almanacs were licensed back to Houghton Mifflin. (See Note 5.) In connection
with the book right licensing arrangement, the Company recognized
approximately $700,000 and $1,000,000 in 1996 and 1995, respectively for
initial guaranteed royalties. As of December 31, 1996 and 1995, $575,000 and
$750,000, respectively were included in accounts receivable on the
accompanying balance sheet for unpaid amounts in connection with the book
right licensing arrangement.
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. Effective
upon the completion of the initial public offering described in Note
1, the Company and Houghton Mifflin entered into an Administration and
Services Agreement ("Services Agreement") under which Houghton Mifflin
provided directly some of the general services discussed above
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.
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. 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 and expense equal to the value of common stock at
the time of transfer.
Note 8. Stock Compensation Plans
Stock Incentive Plans
The Company has reserved 3,000,000 shares for issuance under the 1993 Stock
Incentive Plan ("1993 Plan"). In May 1996, the stockholders approved
certain amendments to the 1993 Plan and approved the adoption of the 1996
Stock Incentive Plan ("1996 Plan"). The Company has reserved 2,000,000 shares
for issuance under the 1996 Plan. The 1993 Plan and the 1996 Plan ("the
Plans") provide for the issuance of incentive stock options, non-qualified
stock options, unrestricted stock, restricted stock, and performance
share awards. Under the Plans, both incentive options and non-qualified
options may be granted to employees and consultants. 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 Plans also provide 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
Directors. The term for incentive stock option grants may not exceed 10 years
from the date of grant. Options granted to purchase common stock and
restricted stock awarded under the Plans become fully vested and exercisable
in full upon a change in control, whether or not vested or exercisable in
accordance with their terms.
In May 1996, the stockholders approved the 1996 Non-employee Director Plan
("Director Plan") which provides for the automatic grant of non-qualified
stock options and unrestricted stock to members of the Board of Directors
who are not employees of the Company. The Company has reserved 250,000 shares
for issuance under the Director Plan. The Director Plan provides for an
initial grant of options to each Non-employee Director to purchase 20,000
shares of Common Stock at the fair market value on the date that such
Non-employee Director first becomes a director of the Company; an annual grant
of a non-qualified stock option to purchase 5,000 shares of Common Stock at
the fair market value on the date of the Corporation's annual meeting; and
an award of 1,000 shares of the Company's Unrestricted Stock on January 27
of each year. The term for the option grants may not exceed 10 years from the
date of grant. Options granted to purchase common stock and restricted stock
awarded under the Director Plan become fully vested and exercisable in full
upon a change in control, whether or not vested or exercisable in accordance
with their terms.
The following table summarizes the stock option activity under the 1993 Plan,
the 1996 Plan, and the Director Plan:
<TABLE>
<CAPTION>
Weighted
Available Options Average
for Grant Outstanding Price
<S> <C> <C> <C>
1994
Authorized 1,000,000
Granted (806,964) 806,964 $ 9.53
Exercised (9,000) $ 7.50
Forfeited 3,000 (3,000) $ 7.50
Restricted stock grant (47,036) $11.75
------- ------- ------
At December 31, 1994 149,000 794,964 $ 9.56
1995
Additional authorized 2,000,000
Granted (1,494,250) 1,494,250 $24.27
Exercised (77,000) $11.84
Forfeited 53,000 (53,000) $17.05
Restricted stock grant (14,000) $24.00
--------- --------- ------
At December 31, 1995 693,750 2,159,214 $19.48
1996
Additional authorized 2,250,000
Granted (2,262,800) 2,262,800 $41.97
Exercised (98,950) $ 9.64
Forfeited 297,100 (297,100) $33.92
Restricted stock grant (1,200) $39.75
Unrestricted stock grant (6,000) $37.50
--------- --------- ------
At December 31, 1996 970,850 4,025,964 $31.30
--------- --------- ------
--------- --------- ------
</TABLE>
At December 31, 1996, 1995, and 1994, options to purchase 459,023, 331,482,
and 96,371 shares, respectively were exercisable. The weighted average
exercise price for options exercisable at December 31, 1996, 1995, and 1994
were $11.87, $9.77, and $9.62, respectively.
Related information for options outstanding and exercisable as of December
31, 1996 under the Plans is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options
Exercisable
------------------------------- ------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Ranges of Exercise Prices Shares Life Price Shares Price
<S> <C> <C> <C> <C> <C>
$ 7.50 - $11.75 487,714 7.3 $ 8.48 344,223 $ 8.55
$ 13.18 - $20.40 601,300 8.0 16.36 82,300 13.26
$ 27.75 - $41.00 1,867,150 9.2 34.71 15,000 31.00
$ 42.75 - $54.25 1,069,800 9.5 44.16 17,500 54.25
--------- ------
Total 4,025,964 8.9 $31.30 459,023 $11.87
--------- --- ------ ------- -----
--------- --- ----- ------- -----
</TABLE>
The market value of the 1,200, 14,000, and 47,036 restricted shares awarded
in 1996, 1995, and 1994 of $48,000, $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 vesting periods which range from three to five years. Amortization
totaled $196,000, $173,000, and $46,000 for the years ending December 31,
1996, 1995, and 1994, respectively.
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 when rounded to the next highest quarter percentage. A
total of 200,000 shares of common stock have been reserved under this plan.
Activity in the plan was as follows:
<TABLE>
<CAPTION>
Weighted
Average
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 $12.26
------
Available for issuance at December 31, 1995 161,122
1996
Purchased during 1996 21,399 $30.74
------
Available for issuance at December 31, 1996 139,723
-------
-------
</TABLE>
In January 1997, for the six-month period ended December 31, 1996, 13,964
shares were issued at $34.00 per share.
Fair Value
Pro forma information regarding net (loss) income and (loss) earnings per share
is required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock plans based on the fair value method
provided under SFAS 123. The fair value for the options described below was
estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions for awards in 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Risk-free interest rate 6.43% 6.39%
Expected life 4.3 years 4.6 years
Expected volatility 45% 38%
Expected dividends 0.0% 0.0%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restriction and are
fully transferable. In addition, option valuation models require the input
of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
The total value of the awards granted during the years ending
December 31, 1996 and 1995 were computed as approximately $23,600,000 and
$8,260,000 respectively, which would be amortized over the vesting
period of the options. As a result of the phase-in period allowed under SFAS
123, the effects on reported net income for 1996 and 1995 will not likely be
representative of the effects in future years. The weighted average fair
value of awards granted in 1996 and 1995 was estimated to be $18.56 and
$10.26, respectively. If the Company had accounted for these awards in
accordance with fair value accounting proscribed under SFAS 123, the
Company's pro forma net (loss) income and (loss) earnings per share would
have been as follows:
<TABLE>
<CAPTION>
(In thousands of dollars Years Ended December 31
except per share amounts) 1996 1995
<S> <C> <C>
Pro forma net (loss) income ($25,549) $ 5,217
Pro forma primary (loss) earnings per share ($ 1.93) $ 0.43
Pro forma fully diluted (loss) earnings
per share ($ 1.93) $ 0.41
</TABLE>
Note 9. 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 1996, 1995, and 1994, the Company's
total contribution amounted to approximately $472,000, $197,000, and $180,000,
respectively. The total 1994 Company contribution was matched in common
stock of 10,336 shares during 1995.
Note 10. Lease Commitments
The Company has various lease agreements for office space under operating
leases that expire in 2007. 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, 1996, future minimum lease commitments for noncancelable
leases are as follows:
<TABLE>
<S> <C>
1997 2,676,000
1998 2,749,000
1999 2,685,000
2000 2,623,000
2001 2,643,000
Thereafter 11,683,000
</TABLE>
Rent expense, including the amounts under the Use and Occupancy Agreement
with Houghton Mifflin described in Note 7, was approximately $1,448,000 and
$836,000 in 1996 and 1995, respectively.
Note 11. Subsequent Event
On February 6, 1997, the Company acquired certain assets of Mastersoft, a
division of Adobe Systems, Inc. for $2,965,000 in cash. Mastersoft is a
provider of electronic publishing-related file access, viewing, and
conversion technologies. The transaction will be accounted for as a purchase.
The acquisition includes certain technology under research and development,
which will be written off with a one-time charge, estimated to be
approximately $1,800,000, to the Company's consolidated 1997 first quarter
earnings.
<TABLE>
<CAPTION>
Inso Corporation
Unaudited Quarterly Operating Results
(In thousands except
per share amounts) March 31 June 30 September 30 December 31 Total
<S> <C> <C> <C> <C> <C>
1996
Revenues $12,461 $15,144 $19,257 $23,672 $70,534
Gross profit 10,818 12,944 16,938 21,525 62,225
Net income (loss) (1,279) 4,001 (29,950) 5,948 (21,280)
Earnings (loss)
per share ($ 0.10) $ 0.29 ($ 2.29) $ 0.40 ($1.61)
1995
Revenues $ 7,553 $10,372 $11,255 $14,207 43,387
Gross profit 6,331 9,078 9,969 12,217 37,595
Net income 1,712 (3,075) 2,843 4,514 5,994
Earnings per share $ 0.14 ($ 0.25) $ 0.22 $ 0.34 $ 0.49
</TABLE>
As a result of common shares issued during 1996 and 1995, the sum of the
earnings per share for the four quarters of 1996 and 1995, which are based on
the weighted average shares outstanding during each quarter, does not equal
earnings per share for the respective year, which is based on the weighted
average shares outstanding during the year. See Note 4 to the "Consolidated
Financial Statements".
The second quarter of 1995 includes an acquisition charge of $5,500,000, or
$0.44 per share, for certain purchased technology under research and
development by Systems Compatibility Corporation at the time of
the April 1, 1995, acquisition. Note 5 to the "Consolidated Financial
Statements" describes the transaction.
The first quarter of 1996 includes an acquisition charge of $4,400,000, or
$0.34 per share, for certain purchased technology under research and
development by ImageMark Software Labs, Inc. at the time of the January 9,
1996, acquisition. Note 5 to the "Consolidated Financial Statements"
describes the transaction.
The third quarter of 1996 includes an acquisition charge of $34,300,000, or
$2.62 per share, for certain purchased technology under research and
development by Electronic Book Technologies, Inc. at the time of
the July 16, 1996, acquisition. Note 5 to the "Consolidated Financial
Statements" describes the transaction.
Revenues for the fourth quarter of 1995 include $1,500,000, or $0.06 per
share, of revenue earned from royalty audits for periods prior to 1995.
<TABLE>
<CAPTION>
Inso Corporation
Schedule II - Valuation and Qualifying Accounts
Years ended December 31, 1996, 1995, and 1994
Balance at Additions Balance
beginning charged to costs Amounts at end
of year and expenses written off of year
<S> <C> <C> <C> <C>
1996
Allowance for accounts
receivable $1,137,000 $780,000 ($123,000) $1,794,000
1995
Allowance for accounts
receivable $ 636,000 $775,000 ($274,000) $1,137,000
1994
Allowance for accounts
receivable $ 332,000 $501,400 ($197,400) $ 636,000
</TABLE>
Item 14(a)3. Exhibit Index
Exhibit Description
3.1 Certificate of Incorporation of the Company, as amended, *
incorporated by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the twelve month period
ended December 31, 1995.
3.2 By-laws of the Company, incorporated by reference to Exhibit *
3.2 to the Company's Annual Report on Form 10-K for the twelve
month period ended December 31, 1995.
4. Proof of Common Stock Certificate of the Company, incorporated *
by reference to Exhibit 4 to the Registration Statement No.
33-73996 on Form S-1 filed with the Commission on January 12,
1994 (the "Form S-1").
10.1 Microsoft Software Publishing Agreement, dated April 25, 1990, *
as amended, by and between Houghton Mifflin Company (as
predecessor to the Company) and Microsoft Corporation,
incorporated by reference to Exhibit 10.4 to the Form S-1.**
xx10.2 Inso Corporation 1993 Stock Purchase Plan, incorporated by *
reference to Exhibit 10.2 to the Form S-1.
xx10.3 Inso Corporation 1993 Stock Incentive Plan, as amended, *
incorporated by reference to Exhibit 10.4 to the Company's
Report on Form 10-K for the twelve month period ended December
31, 1995.
xx10.4 Inso Corporation 1996 Stock Incentive Plan
xx10.5 Inso Corporation 401(k) Plan, incorporated by reference to *
Exhibit 4.4 to the Registration Statement No. 33-77304 on
Form S-8 filed with the Commission on April 4, 1994.
10.6 Office Lease, dated November 30, 1994, by and between the *
Company and MBL Life Assurance Corporation as incorporated by
reference to Exhibit 10.6 to the Company's Annual Report on
Form 10-K for the twelve month period ended December 31, 1995.
10.7 Lease to Premises, dated December 27, 1995, by and between *
Inso Chicago Corporation and International Business Machines
Corporation, as incorporated by reference to Exhibit 10.7 to
the Company's Report on Form 10-K for the twelve month period
ended December 31, 1995.
21. List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
* Incorporated herein by reference.
** Confidential treatment has been granted as to this document through
Amendment IX.
xx Management contract or compensatory plan or arrangement filed herewith, or
incorporated by reference, in response to Item 14(a)3 of the instructions
to Form 10-K.
INSO CORPORATION
1996 STOCK INCENTIVE PLAN
1. Purpose
The purpose of this 1996 Stock Incentive Plan (the "Plan") of INSO Corporation,
a Delaware corporation (the "Company"), is to advance the interests of the
Company by enhancing its ability to attract and retain key employees,
consultants and others who are in a position to contribute to the Company's
future growth and success.
2. Definitions
"Award" means any Option, Stock Appreciation Right, Performance Shares,
Restricted Stock or Unrestricted Stock awarded under the Plan.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as amended from time to time.
"Committee" means a committee of not less than two members of the Board
appointed by the Board to administer the Plan, each of whom shall be a
"disinterested person" within the meaning of Rule 16b-3 under the Exchange
Act ("Rule 16b-3").
"Common Stock" means the Common Stock, .01 par value per share, of the Company.
"Company" means INSO Corporation and, except where the context otherwise
requires, all present and future subsidiaries of INSO Corporation as defined
in Section 424(f) of the Code.
"Designated Beneficiary" means the beneficiary designated by a Participant, in
a manner determined by the Board, to receive amounts due or exercise rights
of the Participant in the event of the Participant's death. In the absence
of an effective designation by a Participant, Designated Beneficiary shall
mean the Participant's estate.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from time
to time.
"Fair Market Value" means, with respect to Common Stock or any other property,
the fair market value of such property as determined by the Board in good
faith or in the manner established by the Board from time to time.
"Incentive Stock Option" means an option to purchase shares of Common Stock
awarded to a Participant under Section 6 which is intended to meet the
requirements of Section 422 of the Code or any successor provision.
"Nonstatutory Stock Option" means an option to purchase shares of Common Stock
awarded to a Participant under Section 6 which is not intended to be an
Incentive Stock Option.
"Option" means an Incentive Stock Option or a Nonstatutory Stock Option.
"Participant" means a person selected by the Board to receive an Award under
the Plan.
"Performance Shares" mean shares of Common Stock which may be earned by the
achievement of performance goals established for a Participant under Section
8.
"Reporting Person" means a person subject to Section 16 of the Exchange Act or
any successor provision.
"Restricted Period" means the period of time selected by the Board during
which shares subject to a Restricted Stock Award may be repurchased by or
forfeited to the Company.
"Restricted Stock" means sharpreciation Right" or "SAR" means a right to
receive any excess in Fair Market Value of shares of Common Stock over the
exercise price of the Award granted to a Participant under Section 7.
"Unrestricted Stock" means shares of Common Stock awarded to a Participant
under Section 9(c).
3. Administration
The Plan will be administered by the Board. The Board shall have authority
to make Awards and to adopt, amend and repeal such administrative rules,
guidelines and practices relating to the Plan as it shall deem advisable
from time to time, and to interpret the provisions of the Plan. The Board's
decisions shall be final and binding. No member of the Board shall be
liable for any action or determination relating to the Plan made in good
faith. To the extent permitted by applicable law, the Board may delegate to
one or more executive officers of the Company the power to make Awards to
Participants who are not Reporting Persons and all determinations under the
Plan with respect thereto, provided that the Board shall fix the maximum
amount of such Awards to be made by such executive officers and a maximum
amount for any one Participant. To the extent permitted by applicable law,
the Board may appoint a Committee to administer the Plan and, in such event,
all references to the Board in the Plan shall mean such Committee or the
Board. All decisions by the Board or the Committee pursuant to the Plan shall
be final and binding on all persons having or claiming any interest in the
Plan or in any Award.
4. Eligibility
All of the Company's employees, officers, consultants and advisors who are
expected to contribute to the Company's future growth and success, other
than persons who have irrevocably elected not to be eligible, are eligible
to be Participants in the Plan. Incentive Stock Options may be awarded only
to persons eligible to receive Incentive Stock Options under the Code.
5. Stock Available for Awards
(a) Subject to adjustment under subsection (b) below, Awards may be made
under the Plan for up to 2,000,000 shares of Common Stock. If any Award in
respect of shares of Common Stock expires or is terminated unexercised or is
forfeited for any reason or settled in a manner that results in fewer shares
outstanding than were initially awarded, the shares subject to such Award or
so surrendered, as the case may be, to the extent of such expiration,
termination, forfeiture or decrease, shall again be available for award
under the Plan, subject, however, in the case of Incentive Stock Options, to
any limitation required under the Code and provided that shares made
available pursuant to this sentence shall be available for Awards to
Reporting Persons only to the extent consistent with Rule 16b-3.
Shares issued under the Plan may consist in whole or in part of authorized
but unissued shares or treasury shares.
(b) In the event that the Board, in its sole discretion, determines that any
stock dividend, extraordinary cash dividend, recapitalization,
reorganization, merger, consolidation, split-up, spin-off, combination or
other similar transaction affects the Common Stock such that an adjustment is
required in order to preserve the benefits or potential benefits intended to
be made available under the Plan, then the Board, subject, in the case of
Incentive Stock Options, to any limitation required under the Code, shall
equitably adjust any or all of (i) the number and kind of shares in respect of
which Awards may be made under the Plan, (ii) the number and kind of shares
subject to outstanding Awards, and (iii) the award,
exercise or conversion price with respect to any of the foregoing, and if
considered appropriate, the Board may make provision for a cash payment with
respect to an outstanding Award.
(c) The Board may grant Awards under the Plan in substitution for stock and
stock based awards held by employees of another corporation who concurrently
become employees of the Company as a result of a merger or consolidation of
the employing corporation with the Company (or a subsidiary of the Company)
or the acquisition by the Company (or a subsidiary of the Company) of property
or stock of the employing corporation. The substitute Awards shall be
granted on such terms and conditions as the Board considers appropriate in
the circumstances.
(d) Subject to adjustment under Section 5(b), the maximum number of shares with
respect to which an Award may be granted to any employee under the Plan shall
not exceed 300,000 per calendar year (subject to adjustment pursuant to
Section 5(b)). For purposes of calculating such maximum number, (i) an
Award shall continue to be treated as outstanding notwithstanding its
repricing, cancellation or expiration and (ii) the repricing of an
outstanding Award or issuance of a new Award in substitution for a canceled
Award shall be deemed to constitute the grant of a new additional Award
separate from the original grant of the Award that is repriced or canceled.
6. Stock Options
(a) General
(i) Subject to the provisions of the Plan, the Board may award Incentive Stock
Options and Nonstatutory Stock Options and determine the number of shares of
Common Stock to be covered by each Option, the option price of such Option
and the conditions and limitations applicable to the exercise of such Option.
The terms and conditions of Incentive Stock Options shall be subject to and
comply with Section 422 of the Code, or any successor provision, and any
regulations thereunder.
(ii) The Board shall establish the exercise price at the time each Option is
awarded. In the case of Incentive Stock Options, such price shall not be
less than 100% of the Fair Market Value of the Common Stock on the date of
grant; and in the case of Nonstatutory Stock Options, such price shall not
be less than 85% of the Fair Market Value of the Common Stock on the date of
grant.
(iii) Each Option shall be exercisable at such times and subject to such
terms and conditions as the Board may specify in the applicable Award or
thereafter. The Board may impose such conditions with respect to the
exercise of Options, including conditions relating to applicable federal or
state securities laws, as it considers necessary or advisable.
(iv) Options granted under the Plan may provide for the payment of the
exercise price by delivery of cash or check in an amount equal to the
exercise price of such Options or, to the extent permitted by the Board at
or after the award of the Option, by (A) delivery of shares of Common Stock
owned by the optionee for at least six months (or such shorter period as is
approved by the Board), valued at their Fair Market Value, (B) delivery of a
promissory note of the optionee to the Company on terms determined by the
Board, (C) delivery of an irrevocable undertaking by a broker to deliver
promptly to the Company sufficient funds to pay the exercise price or
delivery of irrevocable instructions to a broker to deliver promptly to the
Company cash or a check sufficient to pay the exercise price, (D) payment of
such other lawful consideration as the Board may determine, or (E) any
combination of the foregoing.
(v) The Board may at any time accelerate the time at which all or any part of
an Option may be exercised.
(b) Incentive Stock Options
Options granted under the Plan which are intended to be Incentive Stock Options
shall be subject to the following additional terms and conditions:
(i) All Incentive Stock Options granted under the Plan shall,
at the time of grant, be specifically designated as such in the option
agreement covering such Incentive Stock Options. The Option exercise
period shall not exceed ten years from the date of grant.
(ii) If any employee to whom an Incentive Stock Option is to
be granted under the Plan is, at the time of the grant of such
option, the owner of stock possessing more than 10% of the total
combined voting power of all classes of stock of the Company
(after taking into account the attribution of stock ownership
rule of Section 424(b) and of the Code), then the following
special provisions shall be applicable to the Incentive Stock
Option granted to such individual:
(x) The purchase price per share of the Common Stock subject to such
Incentive Stock Option shall not be less than 110% of the Fair Market Value
of one share of Common Stock at the time of grant; and
(y) The option exercise period shall not exceed five years from the date of
grant.
(iii) For so long as the Code shall so provide, options granted to any
employee under the Plan (and any other incentive stock option plans of the
Company) which are intended to constitute Incentive Stock Options shall not
constitute Incentive Stock Options to the extent that such options, in the
aggregate, become exercisable for the first time in any one calendar year for
shares of Common Stock with an aggregate Fair Market Value (determined as of
the respective date or dates of grant) of more than $100,000.
(iv) No Incentive Stock Option may be exercised unless, at the time of such
exercise, the Participant is, and has been continuously since the date of
grant of his or her Option, employed by the Company, except that:
(x) an Incentive Stock Option may be exercised within the period of three
months after the date the Participant ceases to be an employee of the Company
(or within such lesser period as may be specified in the applicable option
agreement), provided, that the agreement with respect to such Option
may designate a longer exercise period and that the exercise after such
three-month period shall be treated as the exercise of a Nonstatutory Stock
Option under the Plan;
(y) if the Participant dies while in the employ of the Company, or within
three months after the Participant ceases to be such an employee, the
Incentive Stock Option may be exercised by the Participant's Designated
Beneficiary within the period of one year after the date of death (or within
such lesser period as may be specified in the applicable Option agreement);
and
(z) if the Participant becomes disabled (within the meaning of Section
22(e)(3) of the Code or any successor provision thereto) while in the employ
of the Company, the Incentive Stock Option may be exercised within the
period of one year after the date of death (or within such lesser period
as may be specified in the applicable Option agreement).
For all purposes of the Plan and any Option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of
the Income Tax Regulations (or any successor regulations). Notwithstanding
the foregoing provisions, no Incentive Stock Option may be exercised after
its expiration date.
(v) Incentive Stock Options shall not be assignable or transferable by the
person to whom they are granted, either voluntarily or by operation of law,
except by will or the laws of descent and distribution, and, during the life
of the optionee, shall be exercisable only by the optionee.
7. Stock Appreciation Rights
(a) The Board may grant SARs entitling recipients on exercise of the SAR to
receive an amount, in cash or Common Stock or a combination thereof (such
form to be determined by the Board), determined in whole or in part by
reference to appreciation in the Fair Market Value of the Common Stock
between the date of the Award and the exercise of the Award. A SAR shall
entitle the Participant to receive, with respect to each share of Common
Stock as to which the SAR is exercised, the excess of the share's Fair Market
Value on the date of exercise over its Fair Market Value on the date the SAR
was granted. The Board may also grant SARs that provide that, following a
change in control of the Company (as defined by the Board at the time of the
Award), the holder of such SAR will be entitled to receive, with
respect to each share of Common Stock subject to the SAR, an amount equal to
the excess of a specified value (which may include an average of values) for
a share of Common Stock during a period preceding such change in control over
the Fair Market Value of a share of Common Stock on the date the SAR was
granted.
(b) SARs may be granted in tandem with, or independently of, Options granted
under the Plan. A SAR granted in tandem with an Option which is not an
Incentive Stock Option may be granted either at or after the time the
Option is granted. A SAR granted in tandem with an Incentive Stock Option
may be granted only at the time the Option is granted.
(c) When SARs are granted in tandem with Options, the following provisions
will apply:
(i) The SAR will be exercisable only at such time or times, and to the
extent, that the related Option is exercisable and will be exercisable in
accordance with the procedure required for exercise of the related Option.
(ii) The SAR will terminate and no longer be exercisable upon the
termination or exercise of the related Option, except that a SAR granted
with respect to less than the full number of shares covered by an Option
will not be reduced until the number of shares as to which the related Option
has been exercised or has terminated exceeds the number of shares not covered
by the SAR.
(iii) The Option will terminate and no longer be exercisable upon the
exercise of the related SAR.
(iv) The SAR will be transferable only with the related Option.
(v) A SAR granted in tandem with an Incentive Stock Option may be exercised
only when the market price of the Common Stock subject to the Option exceeds
the exercise price of such Option.
(d) A SAR not granted in tandem with an Option will become exercisable at such
time or times, and on such conditions, as the Board may specify.
(e) The Board may at any time accelerate the time at which all or any part
of the SAR may be exercised.
8. Performance Shares
(a) The Board may make Performance Share Awards entitling recipients to
acquire shares of Common Stock upon the attainment of specified performance
goals. The Board may make Performance Share Awards independent of or in
connection with the granting of any other Award under the Plan. The
Board in its sole discretion shall determine the performance goals
applicable under each such Award, the periods during which performance is to
be measured, and all other limitations and conditions applicable to
the awarded Performance Shares; provided, however, that the Board may rely on
the performance goals and other standards applicable to other performance
plans of the Company in setting the standards for Performance Share Awards
under the Plan.
(b) Performance Share Awards and all rights with respect to such Awards may
not be sold, assigned, transferred, pledged or otherwise encumbered.
(c) A Participant receiving a Performance Share Award shall have the rights
of a stockholder only as to shares actually received by the Participant
under the Plan and not with respect to shares subject to an Award but not
actually received by the Participant. A Participant shall be entitled to
receive a stock certificate evidencing the acquisition of shares of Common
Stock under a Performance Share Award only upon satisfaction of all
conditions specified in the agreement evidencing the Performance Share Award.
(d) The Board may at any time accelerate or waive any or all of the goals,
restrictions or conditions imposed under any Performance Share Award.
9. Restricted and Unrestricted Stock
(a) The Board may grant Restricted Stock Awards entitling recipients to
acquire shares of Common Stock, subject to the right of the Company to
repurchase all or part of such shares at their purchase price (or to require
forfeiture of such shares if purchased at no cost) from the recipient in the
event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable Restricted Period or Restricted
Periods established by the Board for such Award. Conditions for
repurchase (or forfeiture) may be based on continuing employment or service or
achievement of pre-established performance or other goals and objectives.
(b) Shares of Restricted Stock may not be sold, assigned, transferred,
pledged or otherwise encumbered, except as permitted by the Board, during the
applicable Restricted Period. Shares of Restricted Stock shall be evidenced
in such manner as the Board may determine. Any certificates issued in
respect of shares of Restricted Stock shall be registered in the name of the
Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with
the Company (or its designee). At the expiration of the Restricted Period,
the Company (or such designee) shall deliver such certificates to the
Participant or if the Participant has died, to the Participant's Designated
Beneficiary.
(c) The Board may, in its sole discretion, grant (or sell at a purchase
price determined by the Board, which shall not be lower than 85% of Fair
Market Value on the date of sale) to Participants shares of Common Stock
free of any restrictions under the Plan ("Unrestricted Stock").
(d) The purchase price for each share of Restricted Stock and Unrestricted
Stock shall be determined by the Board of Directors. Such purchase price
may be paid in the form of past services or such other lawful consideration
as is determined by the Board.
(e) The Board may at any time accelerate the expiration of the Restricted
Period applicable to all, or any particular, outstanding shares of
Restricted Stock.
10. General Provisions Applicable to Awards
(a) Applicability of Rule 16b-3. Those provisions of the Plan which make an
express reference to Rule 16b-3 shall apply to the Company only at such time
as the Company's Common Stock is registered under the Exchange Act, or any
successor provision, and then only to Reporting Persons.
(b) Reporting Person Limitations. Notwithstanding any other provision of
the Plan, to the extent required to qualify for the exemption provided by
Rule 16b-3, (i) any Option, SAR, Performance Share Award or other similar
right related to an equity security issued under the Plan to a Reporting
Person shall not be transferable other than by will or the laws of descent
and distribution or pursuant to a qualified domestic relations order as
defined by the Code or Title I or the Employee Retirement Income Security
Act ("ERISA"), or the rules thereunder, and shall be exercisable during the
Participant's lifetime only by the Participant or the Participant's guardian
or legal representative, and (ii) the selection of a Reporting Person
as a Participant and the terms of his or her Award shall be determined only
in accordance with the applicable provisions of Rule 16b-3.
(c) Documentation. Each Award under the Plan shall be evidenced by an
instrument delivered to the Participant specifying the terms and conditions
thereof and containing such other terms and conditions not inconsistent with
the provisions of the Plan as the Board considers necessary or advisable.
Such instruments may be in the form of agreements to be executed by both the
Company and the Participant, or certificates, letters or similar documents,
acceptance of which will evidence agreement to the terms thereof and of this
Plan.
(d) Board Discretion. Except as otherwise provided by the Plan, each type
of Award may be made alone, in addition to or in relation to any other type
of Award. The terms of each type of Award need not be identical, and the
Board need not treat Participants uniformly. Except as otherwise provided
by the Plan or a particular Award, any determination with respect to an
Award may be made by the Board at the time of award or at any time
thereafter.
(e) Termination of Status. Subject to the provisions of Section 6(b)(iv),
the Committee shall determine the effect on an Award of the disability,
death, retirement, authorized leave of absence or other termination of
employment or other status of a Participant and the extent to which, and the
period during which, the Participant's legal representative, guardian or
Designated Beneficiary may exercise rights under such Award.
(f) Change in Control.
(i) Upon the occurrence of a Change in Control, (A) each option outstanding
under the Plan immediately prior to the effective date of such Change in
Control shall become automatically exercisable in full, and (B) each
outstanding share of Restricted Stock will immediately become free of all
restrictions and conditions.
(ii) A "Change in Control" shall be deemed to have occurred only upon the
occurrence of any of the following events:
(A) any "person," as such term is used in Sections 13(d) and 14(d) of the
Exchange Act, (other than the Company, any trustee or other fiduciary
holding securities under an employee benefit plan of the Company, any
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportion as their ownership of stock of the Company
or an Exempt Person) is or becomes the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly,
of securities of the Company representing 33 1/3% or more of the combined
voting power of the Company's then outstanding securities (other than as a
result of the acquisition of such securities directly from the Company);
(B) during any period of two consecutive years (not including any period
prior to the execution of this Agreement), individuals who at the beginning
of such period constitute the Board, and any new director (other than a
director designated by a person who has entered into an agreement with the
Company to effect a transaction described in paragraph (A), (C) or (D) of this
Subsection) whose election by the Board or nomination for election by the
Company's stockholders was approved by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors at the
beginning of the period or whose election or nomination for election was
previously so approved cease for any reason to constitute at least a
majority thereof; or
(C) the stockholders of the Company approve a merger or consolidation of
the Company with any other corporation, other than (1) a merger or
consolidation which would result in the voting securities of
the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities
of the surviving entity) more than 50% of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation or (2) a merger or
consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no person (as hereinabove defined), other
than a person holding more than 50% of the combined voting power of the
Company's then outstanding securities immediately prior to such
recapitalization, acquires more than 50% of the combined voting power
of the Company's then outstanding securities; or
(D) the stockholders of the Company approve a plan of complete liquidation
of the Company or an agreement for the sale or disposition by the Company
of all or substantially all of the Company's assets.
(iii) "Exempt Person" means Houghton Mifflin Company ("HMC"), provided HMC
shall cease to be an Exempt Person if and when, following a Change in Control
(as defined above but substituting "Houghton Mifflin Company" for the
"Company" as used therein) of HMC, HMC, directly or indirectly, acquires
beneficial ownership of any additional shares of the Company's capital stock.
(g) Withholding. The Participant shall pay to the Company, or make
provision satisfactory to the Board for payment of, any taxes required by
law to be withheld in respect of Awards under the Plan no later than the
date of the event creating the tax liability. In the Board's discretion,
and subject to such conditions as the Board may establish, such tax
obligations may be paid in whole or in part in shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued
at their Fair Market Value. The Company may, to the extent permitted by law,
deduct any such tax obligations from any payment of any kind otherwise due
to the Participant.
(h) Foreign Nationals. Awards may be made to Participants who are foreign
nationals or employed outside the United States on such terms and conditions
different from those specified in the Plan as the Board considers necessary
or advisable to achieve the purposes of the Plan or comply with applicable
laws.
(i) Amendment of Award. The Board may amend, modify or terminate any
outstanding Award, including substituting therefor another Award of the same
or a different type, changing the date of exercise or realization and
converting an Incentive Stock Option to a Nonstatutory Stock Option, provided
that the Participant's consent to such action shall be required unless the
Board determines that the action, taking into account any related action,
would not materially and adversely affect the Participant.
(j) Cancellation and New Grant of Options. The Board of Directors shall
have the authority to effect, at any time and from time to time, with the
consent of the affected optionees, (i) the cancellation of any or all
outstanding Options under the Plan and the grant in substitution therefor of
new Options under the Plan covering the same or different numbers of shares
of Common Stock and having an option exercise price per share which may be
lower or higher than the exercise price per share of the canceled Options or
(ii) the amendment of the terms of any and all outstanding Options under the
Plan to provide an option exercise price per share which is higher or lower
than the then current exercise price per share of such outstanding Options.
(k) Conditions on Delivery of Stock. The Company will not be obligated to
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan (i) until all
conditions of the Award have been satisfied or removed, (ii) until, in the
opinion of the Company's counsel, all applicable federal and state laws and
regulations have been complied with, (iii) if the outstanding Common Stock is
at the time listed on any stock exchange, until the shares to be
delivered have been listed or authorized to be listed on such exchange upon
official notice of issuance, and
(iv) until all other legal matters in connection with the issuance and
delivery of such shares have been approved by the Company's counsel. If the
sale of Common Stock has not been registered under the Securities Act of
1933, as amended, the Company may require, as a condition to exercise of the
Award, such representations or agreements as the Company may consider
appropriate to avoid violation of such Act and may require that the
certificates evidencing such Common Stock bear an appropriate legend
restricting transfer.
11. Miscellaneous
(a) No Right To Employment or Other Status. No person shall have any claim
or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or
service for the Company. The Company expressly reserves the right at any time
to dismiss a Participant free from any liability or claim under the Plan,
except as expressly provided in the applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the applicable
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed
under the Plan until he or she becomes the record holder thereof.
(c) Exclusion from Benefit Computations. No amounts payable upon exercise
of Awards granted under the Plan shall be considered salary, wages or
compensation to Participants for purposes of determining the amount or nature
of benefits that Participants are entitled to under any insurance, retirement
or other benefit plans or programs of the Company.
(d) Effective Date and Term. No Award granted under the Plan shall become
effective until the Plan shall have been approved by the Company's
stockholders. If such stockholder approval is not obtained within twelve
months after the date of the Board's adoption of the Plan, no Options
previously granted under the Plan shall be deemed to be Incentive Stock
Options and no Incentive Stock Options shall be granted thereafter.
No Award may be made under the Plan after March 7, 2006, but Awards previously
granted may extend beyond that date.
(e) Amendment of Plan. The Board may amend, suspend or terminate the Plan
or any portion thereof at any time, provided that no amendment shall be made
without stockholder approval if such approval is necessary to comply with
any applicable tax or regulatory requirement, including any requirements
for compliance with Rule 16b-3. Amendments requiring stockholder approval shall
become effective when adopted by the Board of Directors, but no Incentive
Stock Option granted after the date of such amendment shall become
exercisable (to the extent that such amendment to the Plan was required to
enable the Company to grant such Incentive Stock Option to a particular
Participant) unless and until such amendment shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within
twelve months of the Board's adoption of such amendment, any Incentive Stock
Options granted on or after the date of such amendment shall terminate to the
extent that such amendment to the Plan was required to enable the Company to
grant such option to a particular Participant.
(f) Governing Law. The provisions of the Plan shall be governed by and
interpreted in accordance with the laws of the State of Delaware.
Adopted by the Board of Directors
on March 7, 1996.
Approved by the stockholders
on May 2, 1996.
Exhibit 21
List of Subsidiaries
Corporation Jurisdiction
Inso Chicago Corporation Illinois, USA
Inso Corporation, Ltd. England
Inso Dallas Corporation Delaware, USA
Inso Foreign Sales Corporation Barbados, USA
Inso Kansas City Corporation Missouri, USA
Inso (Overseas) Corporation Delaware, USA
Inso Providence Corporation Delaware, USA
Inso Technology Corporation Illinois, USA
Inso Securities Corporation Massachusetts, USA
Electronic Book
Technologies Massachusetts, Inc. Massachusetts, USA
Electronic Book Technologies
International, Inc. Delaware, USA
Electronic Book Technologies, S.A. Switzerland
Electronic Book Technologies, SARL France
Electronic Book Technologies
Australia Pty, Ltd. New South Wales, Australia
Electronic Book Technologies KK Tokyo, Japan
Electronic Book Technologies
Canada, Ltd. Ontario, Canada
Electronic Book Technologies
FSC, Inc. Barbados, USA
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, 333-06847 and
333-06845) pertaining to the Inso Corporation, 1993 Stock Purchase Plan,
1993 Stock Incentive Plan, 401(k) Plan, 1996 Non-employee Director Plan and
1996 Stock Incentive Plan of our report dated January 31, 1997, except for
Note 11, as to which the date is February 6, 1997, with respect to the
consolidated finacial statements and schedule of Inso Corporation included
in the Annual Report (Form 10-K) for the year ended December 31, 1996.
/s/ ERNST & YOUNG LLP
-----------------------
ERNST & YOUNG LLP
Boston, Massachusetts
March 20, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER
31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 34,280
<SECURITIES> 46,946
<RECEIVABLES> 22,496
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0
0
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</TABLE>
