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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
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or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 0-23384
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INSO CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 04-3216243
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
31 St. James Avenue, Boston, MA 02116
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(Address of principal executive offices) (Zip Code)
(617) 753-6500
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 7, 1997
- --------------------------------------- -------------------------------
Common Stock (par value $.01 per share) 14,397,245
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INSO CORPORATION
FORM 10-Q INDEX
Page No.
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Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7-10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-14
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
Exhibit Index
2
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INSO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 and DECEMBER 31, 1996
(Unaudited, in thousands except share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30 December 31
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 30,735 $ 34,280
Marketable securities 52,246 46,946
Accounts receivable, net 22,112 21,144
Income tax receivable 1,970
Other current assets 2,634 1,313
-------- --------
Total current assets 107,727 105,653
Property and equipment, net 6,495 5,303
Product development costs, net 8,917 7,168
Intangible assets, net 5,062 9,654
Other assets, net 4,482 3,564
Deferred income tax benefit, net 9,110 4,930
-------- --------
TOTAL ASSETS $141,793 $136,272
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 3,710 $ 4,256
Accrued salaries, commissions and bonuses 4,341 4,085
Acquisition related liabilities 1,556 1,995
Unearned revenue 8,042 2,431
Royalties payable 1,381 1,916
Due to Houghton Mifflin Company 329 749
Current income taxes payable 3,479
Deferred income taxes 5,960 5,960
-------- --------
Total current liabilities 28,798 21,392
Long-term acquisition related liabilities 1,467
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued
Common stock, $.01 par value; 50,000,000 shares
authorized; 14,377,661 and 14,293,249 shares issued in
1997 and 1996, respectively 144 143
Capital in excess of par value 125,086 123,472
Accumulated deficit (11,899) (9,623)
-------- --------
113,331 113,992
Unamortized value of restricted shares (278) (521)
Treasury stock, at cost 5,075 shares in 1997 and 1996 (58) (58)
-------- --------
Total stockholders' equity 112,995 113,413
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $141,793 $136,272
======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements
3
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INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 and 1996
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Net revenues $20,462 $ 19,257
Cost of revenues 1,926 2,319
------- --------
Gross profit 18,536 16,938
Operating expenses
Sales and marketing 6,536 3,269
Product development 6,089 4,530
General and administrative 3,888 2,797
Purchased in-process research and development 0 34,300
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Total operating expenses 16,513 44,896
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Operating income (loss) 2,023 (27,958)
Net investment income 1,142 572
------- --------
Income (loss) before provision for income taxes 3,165 (27,386)
Provision for income taxes 1,176 2,564
------- --------
Net income (loss) $ 1,989 $(29,950)
======= ========
Primary earnings (loss) per share $ 0.14 $ (2.29)
======= ========
Weighted average shares outstanding 14,364 13,082
======= ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
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INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 and 1996
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
1997 1996
------- --------
<S> <C> <C>
Net revenues $59,582 $ 46,862
Cost of revenues 5,925 6,162
------- --------
Gross profit 53,657 40,700
Operating expenses
Sales and marketing 17,762 7,227
Product development 16,862 10,792
General and administrative 11,109 6,735
Restructuring expenses 5,848
Purchased in-process research and development 5,400 38,700
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Total operating expenses 56,981 63,454
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Operating loss (3,324) (22,754)
Net investment income 2,918 2,104
------- --------
Loss before provision for income taxes (406) (20,650)
Provision for income taxes 1,870 6,578
------- --------
Net loss $(2,276) $(27,228)
======= ========
Primary loss per share $ (0.16) $ (2.09)
======= ========
Weighted average shares outstanding 14,339 13,057
======= ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
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INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 and 1996
(Unaudited, in thousands of dollars)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net loss $ (2,276) $(27,228)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 6,398 4,554
Deferred income taxes (3,496)
Purchased in-process research and development 5,400 38,700
Restructuring expenses 5,045
-------- --------
11,071 16,026
Changes in operating assets and liabilities:
Accounts receivable (303) (5,608)
Royalty advances and other assets (683) (426)
Accounts payable and accrued liabilities (234) 1,758
Current income taxes 5,449 4,013
Royalties payable (478) 395
Net due to affiliates (458) 27
Other assets and liabilities 4,215 (1,188)
-------- --------
Net cash provided by operating activities 18,579 14,997
Cash flows from (used in) investing activities:
Property and equipment expenditures (3,447) (2,400)
Capitalized product development costs (5,215) (1,807)
Acquisitions, net of cash acquired (9,642) (32,686)
Net purchase of marketable securities (5,300) 2,983
-------- --------
Net cash used in investing activities (23,604) (33,910)
Cash flows from (used in) financing activities:
Net proceeds from issuance of common stock 1,480 1,635
Purchases of treasury stock (6)
Repayment of promissory notes (6,037)
Repayment of Electronic Book Technologies, Inc. debt (2,188)
-------- --------
Net cash provided by (used in) financing activities 1,480 (6,596)
-------- --------
Net decrease in cash and cash equivalents (3,545) (25,509)
Cash and cash equivalents at beginning of period 34,280 37,235
-------- --------
Cash and cash equivalents at end of period $ 30,735 $ 11,726
======== ========
Supplementary Information:
Investment in Information Please LLC $ 2,620
========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
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INSO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1997
Note 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. All
normal and recurring adjustments that are, in the opinion of
management, necessary for a fair presentation of the results for the
interim periods have been included. Operating results for the
three-and nine-month periods ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the
year ending December 31, 1997.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission
for the fiscal year ended December 31, 1996.
Note 2. RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" (SFAS 128). SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997, including interim
periods and earlier application is not permitted. The pro forma effect
of adopting SFAS 128 for the three and nine months ended September 30,
1997 and 1996 is not material.
Note 3. ACQUISITIONS
LEVEL FIVE RESEARCH, INC.
On April 22, 1997, the Company acquired all of the outstanding capital
stock of Level Five Research, Inc. from Information Builders, Inc. for
$5,000,000 using available cash. The Company also caused, at the time
of acquisition, Level Five Research, Inc. to enter into noncompetition
agreements with key executives and made aggregate payments of $300,000
in cash under those agreements. Level Five Research, Inc., now Inso
Florida Corporation, is a developer of software and systems that apply
intelligent technologies to data access management. The transaction
was accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition. The
purchase price has been allocated on the basis of the estimated fair
market value of the assets acquired and liabilities assumed. The
acquisition included the purchase of certain technology under research
and development, which resulted in a charge to the Company's
consolidated results for the quarter ended June 30, 1997 of
$3,600,000, or $0.25 per share. Intangible assets of approximately
$825,000 were recorded at the time of the acquisition and are being
amortized on a straight-line basis over their estimated useful lives
of five years. Amounts capitalized in connection with the
noncompetition agreements are being amortized on a straight-line basis
over three years.
7
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MASTERSOFT
On February 6, 1997, the Company acquired the intellectual property
and certain other assets of Adobe Systems Incorporated's document
access and conversion business, formerly known as Mastersoft, for
$2,965,000 using available cash. The transaction was accounted for as
a purchase and has been included in the consolidated financial
statements since the date of acquisition. The purchase price has been
allocated on the basis of the estimated fair market value of the
assets acquired and liabilities assumed. The acquisition included the
purchase of certain technology under research and development, which
resulted in a charge to the Company's consolidated results for the
quarter ended March 31, 1997 of $1,800,000, or $0.13 per share.
Intangible assets of approximately $135,000 were recorded at the time
of the acquisition and are being amortized on a straight-line basis
over their estimated useful lives of five years.
ELECTRONIC BOOK TECHNOLOGIES, INC.
On July 16, 1996, the Company acquired all of the outstanding stock of
privately held Electronic Book Technologies, Inc. ("EBT"), now Inso
Providence Corporation. In connection with the acquisition, the
Company paid approximately $27,800,000 in July 1996. In addition,
$10,600,000 was paid in October 1996 in connection with the purchase
of shares of EBT stock issued upon the exercise of EBT stock options
which survived the closing. All payments relating to the EBT
acquisition were made from the Company's available cash. The Company
is also obligated to pay an additional $1,467,000 to the former
principal stockholder of EBT in January 1998. In the event that
certain 1997 Inso Providence financial and operating goals are met,
contingent payments up to an additional $5,300,000 will be paid by the
Company.
The transaction was accounted for as a purchase and has been included
in the consolidated financial statements since the date of
acquisition. The purchase price has been allocated on the basis of the
estimated fair market value of the assets acquired and liabilities
assumed. The acquisition included the purchase of certain technology
under research and development, which resulted in a charge to the
Company's consolidated results for the quarter ended September 30,
1996, of $34,300,000, or $2.62 per share. The charge was not
deductible for tax purposes.
Unaudited pro forma net revenues, net loss and net loss per share
shown below for the nine months ended September 30, 1997 assumes the
acquisitions of Mastersoft and Level Five Research, Inc. occurred on
January 1, 1997 and for the nine months ended September 30, 1996
assumes the acquisitions of Electronic Book Technologies, Inc.,
Mastersoft, and Level Five Research, Inc. occurred on January 1, 1996.
Therefore, the nine months ended September 30, 1996, presented below,
include the write-off of certain purchased technology under research
and development of $1,800,000 relating to Mastersoft and $3,600,000
relating to Level Five Research, Inc.:
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Net Revenues $60,038,000 $ 56,101,000
Net loss $(2,701,000) $(36,251,000)
Net loss per share $ (0.19) $ (2.78)
</TABLE>
8
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Note 4. INFORMATION PLEASE LLC
On April 23, 1997, the Company entered into an agreement for the
further development and marketing of the Information Please(R) Almanac
Product line, with Information Please LLC (the "Partnership"). The
Company transferred ownership of the Information Please brand and the
intellectual properties that comprise the almanac product line to the
Partnership. In addition, some of the Company's technical and
editorial staff members became employees of the Partnership. The
Company retained certain usage rights to Information Please Almanac
content, as well as a 19.8% ownership position in the new venture. As
of September 30, 1997, the Company's investment in Information Please
LLC approximated $2,600,000 and is included in other assets on the
accompanying balance sheet.
Note 5. RESTRUCTURING CHARGES
In June 1997, the Company adopted a plan of restructuring aimed at a
continuing focus on strategic products while reducing costs and
streamlining the organization. The plan primarily affected the
Company's Information Products and certain of its Information
Management Tools products. As a result of the restructuring plan, the
Company recorded $5,848,000 of expenses. The charge included $320,000
of severance for 17 employees in development; $315,000 of estimated
lease obligations, net of estimated sublease income, for the impact of
affected leases; $3,353,000 for the write-off of capitalized software
and other assets; and $1,860,000 for the write-off of prepaid
royalties. At September 30, 1997, the Company had approximately
$600,000 of accruals relating to the aforementioned restructuring
charges.
Note 6. SHAREHOLDERS' RIGHTS PLAN
On July 11, 1997, the Board of Directors of Inso Corporation adopted a
Shareholders' Rights Plan and declared a dividend distribution of one
preferred stock purchase right (a "Right") for each outstanding share
of the Company's Common Stock to stockholders of record at the close
of business on July 24, 1997 (the "Record Date"). Each Right entitles
the registered holder to purchase from the Company a unit consisting
of one one-thousandth of a share (a "Unit") of Series A Junior
Participating Preferred Stock, $0.01 par value per share (the
"Preferred Stock"), at a purchase price of $145 in cash per Unit (the
"Purchase Price"), subject to adjustment. The description and terms of
the Rights are set forth in a Rights Agreement dated as of July 11,
1997 (the "Rights Agreement") between the Company and State Street
Bank & Trust Company, as Rights Agent. The Rights will become
exercisable after a person or group has acquired or obtained the right
to acquire beneficial ownership of 20% or more of the outstanding
common stock, or following the commencement of a tender or exchange
offer that would result in a person or group owning 30% or more of the
shares of common stock. Generally, if any person becomes the
beneficial owner of 20% or more of the shares of Common Stock of the
Company, except pursuant to a tender or exchange offer for all shares
at a fair price as determined by the outside Board members, each Right
not owned by the 20% or more stockholder will enable its holder to
purchase that number of shares of the Company's Common Stock, in lieu
of preferred stock, which equals the exercise price of the Right
divided by one-half of the current market price of such Common Stock
at the date of the occurrence of the event.
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Note 6. SHAREHOLDERS' RIGHTS PLAN (CONTINUED)
In addition, if the Company is involved in a merger or other business
combination transaction with another person or group in which it is
not the surviving corporation or in connection with which its Common
Stock is changed or converted, or it sells or transfers 50% or more of
it assets or earning power to another person, each Right that has not
previously been exercised will entitle its holder to purchase that
number of shares of Common Stock of such other person which equals the
exercise price of the Right divided by one-half of the current market
price of such Common Stock at the date of the occurrence of the event.
In general, the Company may redeem the Rights in whole at a price of
$0.01 per Right at any time prior to the tenth day after a person or
group acquires 20% or more of the outstanding common stock. The Rights
will expire in July, 2007.
Note 7. STOCK OPTION EXCHANGE PROGRAM
On August 6, 1997, the Board of Directors approved a stock option
exchange program (the "Exchange Program") pursuant to which full-time
permanent employees holding stock options under the 1993 Stock
Incentive Plan and the 1996 Stock Incentive Plan (the "Plans") were
given the opportunity to exchange the unexercised portion of such
options (the "Existing Options") under the Plans for new options (the
"New Options") on a basis of four shares of common stock for every
five shares covered by the Existing Options. As a result of the
Exchange Program, options for approximately 528,000 shares were
surrendered by eligible employees. The exercise price of the New
Options was equal to the market value of the Company's common stock on
the date of grant ($12.00). Additionally, certain officers were
eligible to participate in the Exchange Program for an exercise price
of $18.00. The New Options have the same contractual life, vesting
schedule, and other terms as the Existing Options canceled in exchange
therefore. Additionally, during the exchange program, certain
employees exchanged non-qualified options for incentive stock options
covering 835,000 shares. The Directors were excluded from the Exchange
Program.
10
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ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Revenues for the quarter ended September 30, 1997 increased $1,205,000, or 6.3%,
to $20,462,000 compared to $19,257,000 for the quarter ended September 30, 1996.
Approximately 31% of the revenues in 1997 included revenues from the acquisition
of Electronic Book Technologies, Inc., Mastersoft, and Level Five Research, Inc.
Direct and retail sales from Quick View Plus(R) and DynaText(R) significantly
contributed to the third quarter increase in revenues as compared to the third
quarter of 1996, resulting in direct and distribution sales of 43.2% of total
revenues. Non-refundable royalty advances decreased 5.5% and royalty revenues
decreased 30.0% for the third quarter of 1997, as compared to the same quarter
in 1996. Non-refundable advances and royalty revenues for the third quarter of
1997 continue to be affected by weakness in the OEM markets as well as a decline
in royalty revenues from Microsoft Corporation.
Gross profit increased $1,598,000, or 9.4%, from $16,938,000 for the three
months ended September 30, 1996 to $18,536,000 for the three months ended
September 30, 1997. Gross profit as a percentage of revenues for the three
months ended September 30, 1997 was 90.6% compared to 88.0% for the three months
ended September 30, 1996. The increase in gross profit percentage was primarily
attributable to higher revenues from Outside In(R) and DynaText(R), which carry
lower royalty burdens.
Total operating expenses decreased $28,383,000 to $16,513,000 for the three
months ended September 30, 1997 from $44,896,000 for the three months ended
September 30, 1996. Included in total operating expenses for the quarter ended
September 30, 1996 was an acquisition charge of $34,300,000 for certain
purchased technology under research and development by Electronic Book
Technologies, Inc. at the time of the July 16, 1996 acquisition. Excluding the
1996 acquisition charge of $34,300,000, operating expenses increased $5,917,000,
or 55.8%, for the third quarter of 1997 compared to the third quarter of 1996.
Sales and marketing expenses increased $3,267,000 to $6,536,000 for the three
months ended September 30, 1997. The increase reflected increased costs for
staff additions, the Company's emphasis on new markets (corporate and consumer),
and new expenses from acquired companies. Sales and marketing expenses were
31.9% of revenues for the three months ended September 30, 1997 compared to
17.0% for the three months ended September 30, 1996. The higher percentage in
1997 resulted primarily from entry into new markets and the launch of new
products. Product development expenses increased $1,559,000 from $4,530,000 for
the three months ended September 30, 1996 to $6,089,000 for the three months
ended September 30, 1997. The increase in product development costs was
primarily due to the Company's investments in viewing, conversion and other
information sharing and distribution products. The Company's total product
development costs, including capitalized costs, were $7,363,000, or 36.0% of
revenues, for the three months ended September 30, 1997 compared to $5,472,000,
or 28.4% of revenues, for the three months ended September 30, 1996. The
increase in total product development costs was primarily due to investments in
DynaBase(R), DynaText(R), DynaWeb(R), NativeEnglish(TM), and other products.
General and administrative expenses increased $1,091,000 to $3,888,000 for the
three months ended September 30, 1997 compared to $2,797,000 for the three
months ended September 30, 1996. This increase was primarily due to goodwill
amortization related to the Company's acquisitions as well as increases in
personnel and general expenses required to support the growth in the Company's
operations.
The Company's effective tax rate for the three months ended September 30, 1997
remained consistent at 37% with the three months ended September 30, 1996,
excluding the 1996 acquisition charge of $34,300,000 for certain purchased
technology under research and development by Electronic Book Technologies, Inc.
11
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NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
Revenues for the nine months ended September 30, 1997 increased $12,720,000, or
27.1%, to $59,582,000 compared to $46,862,000 for the nine months ended
September 30, 1996. Approximately 24% of revenues in 1997 included revenues from
the acquisition of Electronic Book Technologies, Inc., Mastersoft, and Level
Five Research, Inc. Direct and retail sales from Quick View Plus(R) and
DynaText(R) significantly contributed to the increase in revenues for the nine
months ended September 30, 1997 as compared to the nine months ended September
30, 1996, resulting in direct and distribution sales of 35.8% of total revenues.
Non-refundable royalty advances decreased 6.8% for the nine months ended
September 30, 1997, as compared to the same period in 1996. Royalty revenues for
the nine months ended September 30, 1997 decreased 5.0% as compared to the nine
months ended September 30, 1996. Non-refundable advances and royalty revenues
were both adversely affected in 1997 by weakness in the OEM markets as well as a
decline in royalty revenues from Microsoft Corporation
Gross profit increased $12,957,000, or 31.8%, from $40,700,000 for the nine
months ended September 30, 1996 to $53,657,000 for the nine months ended
September 30, 1997. Gross profit as a percentage of revenues for the nine months
ended September 30, 1997 was 90.1% compared to 86.9% for the nine months ended
September 30, 1996. The increase in gross profit percentage was primarily
attributable to higher revenues from Outside In(R), DynaText(R), and
Mastersoft's Viewer 95, which carry lower royalty burdens.
Total operating expenses decreased $6,473,000 to $56,981,000 for the nine months
ended September 30, 1997 from $63,454,000 for the nine months ended September
30, 1996. Included in total operating expenses for the nine months ended
September 30, 1997 were acquisition charges of $5,400,000 for certain purchased
technology under research and development by Mastersoft and Level Five Research,
Inc. at the time of their 1997 acquisitions. Also included in the total
operating expenses for the nine months ended September 30, 1997 were
restructuring expenses of $5,848,000 relating to the Company's Information
Products and certain of its Information Management Tools products. Included in
total operating expenses for the nine months ended September 30, 1996 were
acquisition charges of $38,700,000 for certain purchased technology under
research and development by Electronic Book Technologies, Inc. and ImageMark
Software Labs, Inc. at the time of their 1996 acquisitions. Excluding the 1997
and 1996 aforementioned expenses, operating expenses increased $20,979,000 or
84.7% for the nine months ended September 30, 1997 compared to the nine months
ended September 30, 1996. All of the Company's 1997 operating expenses as a
percent of revenue were effected by decline in non-refundable royalty advances
and royalty revenues, as discussed above.
Sales and marketing expenses increased $10,535,000 to $17,762,000 for the nine
months ended September 30, 1997. The increase reflects increased costs for staff
additions, emphasis on new markets (corporate and consumer), new expenses from
acquired companies, and higher commissions due to increased revenues. Sales and
marketing expenses were 29.8% of revenues for the nine months ended September
30, 1997 compared to 15.4% for the nine months ended September 30, 1996. The
higher percentage in 1997 results from entry into new markets and launch of new
products. Product development expenses increased $6,070,000 from $10,792,000 for
the nine months ended September 30, 1996 to $16,862,000 for the nine months
ended September 30, 1997. The increase in product development costs was
primarily due to the Company's investments in viewing, conversion and other
information sharing and distribution products. The Company's total product
development costs, including capitalized costs, were $22,077,000, or 37.1% of
revenues, for the nine months ended September 30, 1997 compared to $12,599,000,
or 26.9% of revenues, for the nine months ended September 30, 1996. The increase
in total product development costs was primarily due to investments in
DynaBase(R), DynaText(R), CleanSpeak(TM), Outside In(R) HTML Export, DynaWeb(R),
NativeEnglish(TM), and other products. General and administrative expenses
increased $4,374,000 to $11,109,000 for the nine months ended September 30, 1997
compared to $6,735,000 for the nine months ended September 30, 1996. The
12
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increase in general and administrative expenses was primarily due to goodwill
amortization related to the Company's acquisitions as well as increases in
personnel and general expenses required to support the growth in the Company's
operations.
In June 1997, the Company adopted a plan of restructuring aimed at a continuing
focus on strategic products while reducing costs and streamlining the
organization. As part of the restructuring, the Company substantially reduced
its spending on products in slower growing markets and redirected its resources
to those products with larger market opportunities. The plan primarily affects
the Company's Information Products and certain of its Information Management
Tools products. As a result of the restructuring plan, the Company recorded
$5,848,000 of expenses. The charge included $320,000 of severance for 17
employees in development; $315,000 of estimated lease obligations, net of
estimated sublease income, for the impact of affected leases; $3,353,000 for the
write-off of capitalized software and other assets; and $1,860,000 for the
write-off of prepaid royalties.
The Company's effective tax rate was influenced by the purchased in-process
research and development charges discussed above. Excluding these charges, the
Company's effective tax rate for the nine months ended September 30, 1997 was
37.4% compared to 36.4% for the nine months ended September 30, 1996, excluding
the charge in that period also. The Company's effective tax rate increased due
to acquired companies.
Excluding the $5,400,000 ($0.38 per share) Mastersoft and Level Five Research,
Inc. purchased in-process research and development charges and restructuring
expenses of $3,684,000, net of income taxes, ($0.26 per share), net income and
earnings per share would have been $6,808,000, and $0.47, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash of $18,579,000 for the nine
months ended September 30, 1997 compared to $14,997,000 for the nine months
ended September 30, 1996. The increased contribution from operating activities
of $3,582,000 was primarily due to collection on income taxes receivable and
cash received for unearned revenue.
The Company's investing activities used cash of $23,604,000 for the nine months
ended September 30, 1997 compared to $33,910,000 for the nine months ended
September 30, 1996. The decrease of $10,306,000 was due to payment of the 1996
acquisition of Electronic Book Technologies, Inc. for a net of $26,184,000 and
the 1996 acquisition of ImageMark Software Labs for a net of $6,492,000, offset
by the 1997 increase in investment activity for marketable securities of
$8,283,000; the 1997 acquisition of certain assets of Adobe Systems
Incorporated's Mastersoft division for $2,965,000; the 1997 acquisition of Level
Five Research, Inc. for $5,300,000; the 1997 increased investment in product
development costs of $3,408,000; an increase of $1,047,000 in property and
equipment expenditures in 1997; and the 1997 payment of $950,000 to the former
stockholders of ImageMark Software Labs, Inc. for exceeding certain performance
measures set forth in the stock purchase agreement. Additionally, the Company is
obligated to pay an additional $1,467,000 to the former principal stockholder of
Inso Providence in January, 1998. Furthermore, in the event that certain 1997
Inso Providence financial and operating goals are met, contingent payments up to
an additional $5,300,000 will be paid by the Company to the former stockholders
of Electronic Book Technologies, Inc.
The Company's financing activities provided cash of $1,480,000 for the nine
months ended September 30, 1997 compared to using cash of $6,596,000 for the
nine months ended September 30, 1996. On February 1, 1996, the Company repaid
the outstanding promissory notes of $6,037,000 issued in connection with the
acquisition of Systems Compatibility Corporation, (now Inso Chicago
Corporation). Additionally, in the third quarter of 1996, the Company repaid all
of the outstanding debt of Electronic Book Technologies, Inc.
13
<PAGE> 14
In June 1997, the Company adopted a plan of restructuring aimed at a continuing
focus on strategic products while reducing costs and streamlining the
organization. As part of the restructuring, the Company substantially reduced
its spending on products in slower growing markets and redirected its resources
to those products with larger market opportunities. The plan primarily affects
the Company's Information Products and certain of its Information Management
Tools products. As a result of the restructuring plan, the Company recorded
$5,848,000 of expenses. The charge included $320,000 of severance, $315,000
estimated lease obligations, $3,353,000 for the write-off of capitalized
software and other assets and $1,860,000 of write-offs of prepaid royalties. Of
the total restructuring expenses recorded, the total remaining actual cash
outlays to be made by the Company approximates $600,000. The Company believes a
substantial portion of these amounts will be paid by December 31, 1997.
As of September 30, 1997, the Company had working capital of $78,929,000. Total
cash, cash equivalents, and marketable securities at September 30, 1997 were
$82,981,000. The Company believes that funds available, together with funds
expected to be generated from operations, will be sufficient to finance the
Company's operations through the foreseeable future.
FUTURE OPERATING RESULTS
This report, and other reports, proxy statements and other communications to
stockholders, as well as oral statements by the Company's officers or its
agents, may contain forward-looking statements with respect to, among other
things, the Company's future revenues, operating income or earnings per share.
Please refer to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996 for a description of certain factors which may cause the
Company's actual results to vary materially from those forecasted or projected
in any such forward-looking statements. Among the factors which may cause the
Company's actual results to differ materially from historical results are the
following: competitive pressures including price pressures; declining royalty
revenues from Microsoft Corporation which are expected to decrease substantially
for periods after December 31, 1997; increased reliance on corporate and direct
distribution channels; longer and less predictable sales cycles associated with
sales of complex solutions to corporate and government customers; market
acceptance of new products; consolidation in the OEM business; adverse economic
changes in the markets in which the Company does business; difficulties
integrating operations and personnel of acquired businesses; and declining
operating margins as a result of decreased royalty revenues.
14
<PAGE> 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following are filed as exhibits to this Form 10-Q
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
Registrant filed one (1) report on Form 8-K during the
quarter ended September 30, 1997.
(i) Current Report on Form 8-K dated July 11, 1997
reporting the adoption of the Shareholders' Rights Plan
filed with the Securities and Exchange Commission on
July 16, 1997
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Inso Corporation
----------------
Registrant
Date: November 7, 1997 /s/ Betty J. Savage
-----------------------------------------
Betty J. Savage
Vice President and Chief Financial Officer
Date: November 7, 1997 /s/ Patricia A. Michaels
-----------------------------------------
Patricia A. Michaels
Corporate Controller
(Chief Accounting Officer)
15
<PAGE> 16
Exhibit Index
Exhibit No. Description
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME FILED AS
PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-1-1997
<PERIOD-END> SEP-30-1997
<CASH> 30,735
<SECURITIES> 52,246
<RECEIVABLES> 22,112
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 107,727
<PP&E> 6,495
<DEPRECIATION> 0
<TOTAL-ASSETS> 141,793
<CURRENT-LIABILITIES> 28,798
<BONDS> 0
0
0
<COMMON> 144
<OTHER-SE> 112,851
<TOTAL-LIABILITY-AND-EQUITY> 141,793
<SALES> 59,582
<TOTAL-REVENUES> 59,582
<CGS> 0
<TOTAL-COSTS> 5,925
<OTHER-EXPENSES> 56,981
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (406)
<INCOME-TAX> 1,870
<INCOME-CONTINUING> (2,276)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,276)
<EPS-PRIMARY> (0.16)
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