UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
AMENDMENT ONE
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-23384
INSO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3216243
(State or other (I.R.S. Employer Identification No.)
jurisdiction of
incorporation or organization)
31 St. James Avenue, Boston, MA 02116
(Address of principal executive offices) (Zip Code)
(617) 753 - 6500
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes (X) No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at May 12, 1997
Common Stock (par value $.01 per share) 14,340,638
<PAGE>
INSO CORPORATION
FORM 10-Q INDEX
Part I. Financial Information
Item 1. Consolidated Balance Sheets
March 31, 1997 and December 31, 1996
Consolidated Statements of Operations
Three Months Ended March 31, 1997 and 1996
Consolidated Statements of Cash Flows
Three Months Ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
<PAGE>
INSO CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1997 and December 31, 1996
(Unaudited, in thousands except share amounts)
<TABLE>
<CAPTION>
March 31 December 31
ASSETS 1997 1996
--------- ---------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 30,013 $ 34,280
Marketable securities 50,646 46,946
Accounts receivable, net 20,359 21,144
Income tax receivable 188 1,970
Other current assets 1,849 1,313
-------- --------
Total current assets 103,055 105,653
Property and equipment, net 5,844 5,303
Royalty advances and other assets, net 3,542 3,564
Product development costs, net 8,739 7,168
Intangible assets, net 9,368 9,654
Deferred income tax benefit, net 4,930 4,930
-------- -------
TOTAL ASSETS $ 135,478 $ 136,272
-------- -------
-------- -------
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
-----------------------------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued liabilities $ 3,853 $ 4,256
Accrued salaries, commissions and bonuses 2,202 4,085
Acquisition related liabilities 1,967 1,995
Unearned revenue 2,652 2,431
Royalties payable 1,604 1,916
Due to Houghton Mifflin Company 344 749
Deferred income taxes 5,960 5,960
-------- -------
Total current liabilities 18,582 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;
14,328,713 and 14,293,249 shares issued
in 1997 and 1996, respectively 143 143
Capital in excess of par value 124,394 123,472
Accumulated deficit (7,115) (9,623)
-------- -------
117,422 113,992
Unamortized value of restricted shares (468) (521)
Treasury stock, at cost, 5,075 shares
in 1997 and 1996 (58) (58)
-------- -------
Total stockholders' equity 116,896 113,413
-------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 135,478 $ 136,272
-------- -------
-------- -------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
INSO CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Net revenues $ 19,062 $ 12,461
Cost of revenues 1,575 1,643
-------- -------
Gross profit 17,487 10,818
Operating expenses:
Sales and marketing 4,364 1,690
Product development 4,605 2,975
General and administrative 2,733 1,996
Purchased in-process research and
development 1,800 4,400
-------- -------
Total operating expenses 13,502 11,061
-------- -------
Operating income (loss) 3,985 (243)
Net investment income 1,082 805
Income before provision for -------- -------
income taxes 5,067 562
Provision for income taxes 2,559 1,841
-------- -------
Net income (loss) $ 2,508 $ (1,279)
-------- -------
-------- -------
Primary earnings (loss) per share $ 0.18 $ (0.10)
-------- -------
-------- -------
Weighted average shares outstanding 15,470 13,019
-------- -------
-------- -------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
INSO CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Unaudited, in thousands of dollars)
<TABLE>
<CAPTION>
1997 1996
--------- --------
<S> <C> <C>
Cash flows from (used in) operating
activities:
Net income (loss) $ 2,508 $ (1,279)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 2,663 1,293
Purchased in-process research
and development 1,800 4,400
--------- --------
6,971 4,414
Changes in operating assets and
liabilities:
Accounts receivable 1,112 (734)
Royalty advances and other assets (142) (196)
Accounts payable and accrued
liabilities (2,091) (660)
Current income taxes 1,782 1,658
Royalties payable (312) (350)
Due to Houghton Mifflin Company (405) 102
Other assets and liabilities (453) (937)
--------- -------
Net cash provided by operating activities 6,462 3,297
Cash flows from (used in) investing
activities:
Property and equipment expenditures (1,025) (526)
Capitalized product development costs (2,237) (480)
Acquisitions, net of cash acquired (4,240) (6,492)
Net purchase of marketable securities (3,857) (8,916)
-------- -------
Net cash used in investing activities (11,359) (16,414)
Cash flows from (used in) financing
activities:
Net proceeds from issuance of common stock 630 1,187
Purchases of treasury stock (6)
Repayment of promissory notes (6,037)
-------- -------
Net cash provided by (used in) financing
activities 630 (4,856)
-------- -------
Net decrease in cash and cash equivalents (4,267) (17,973)
Cash and cash equivalents at beginning
of period 34,280 37,235
-------- --------
Cash and cash equivalents at end of period $ 30,013 $ 19,262
-------- -------
-------- -------
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
INSO CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1997
Note 1. Basis of Presentation
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.
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 for the three months
ended March 31, 1997 and 1996 is not material.
Note 3. Acquisitions
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. In connection with the acquisition, the Company paid
approximately $27,800,000 in July 1996. In addition, $10,600,000 was paid in
October 1996 in connection with the purchase of shares of EBT stock issued
upon the exercise of EBT stock options which survived the closing. All
payments relating to the EBT acquisition were made from the Company's
available cash. The Company is also obligated to pay an additional
$1,467,000 to the former principal stockholder of EBT in January 1998.
In the event that certain 1997 Inso Providence financial and operating
goals are met, contingent payments up to an additional $5,300,000 will be
paid by the Company.
The transaction was accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition. The
purchase price has been allocated on the basis of the estimated fair market
value of the assets acquired and liabilities assumed. The acquisition
included the purchase of certain technology under research and development,
which resulted in a charge to the Company's consolidated results for the
quarter ended September 30, 1996, of $34,300,000 or $2.62 per share. The
charge was not deductible for tax purposes.
Unaudited pro forma net revenues, net income (loss) and net income (loss)
per share shown below for the three months ended March 31, 1997 and 1996
assumes the acquisitions of Electronic Book Technologies, Inc. and Mastersoft
described above occurred on January 1, 1997 and 1996, respectively:
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1997 March 31, 1996
---------------- ------------------
<S> <C> <C>
Net Revenues $19,355,000 $16,055,000
Net Income (loss) $ 2,554,000 $(2,139,000)
Net Income (loss)
per share $ 0.18 $ (0.16)
</TABLE>
Note 4. Subsequent Events
On April 23, 1997, the Company acquired Level Five Research, Inc. from
Information Builders, Inc. for $5,000,000 using available cash. The
transaction will be accounted for as a purchase and includes certain
technology under research and development, which is to be written off with
a charge, estimated between $3,500,000 and $4,500,000, to the
Company's consolidated results for the quarter ended June 30, 1997.
Level Five Research, Inc. is a developer of software and systems that apply
intelligent technologies to data access management.
On April 23, 1997, the Company entered into an agreement for the further
development and marketing of the Information Please(R) Almanac product line
forming 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, 10 of the Company's technical and editorial staff
members will become employees of the newly formed Partnership. The Company
retains certain usage rights to Information Please Almanac content, as well
as a 19.8% ownership position in the new venture.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended March 31, 1997 Compared to Three Months
Ended March 31, 1996
Revenues for the quarter ended March 31, 1997 increased $6,601,000, or
53.0%, to $19,062,000 compared to $12,461,000 for the quarter ended
March 31, 1996. Revenues in 1997 included revenues from the acquisition
of Electronic Book Technologies, Inc. and Mastersoft. Royalty revenues
increased 27.1% primarily due to higher earnings from existing licenses of
CorrecText(R) Grammar Correction System; Outside In(R) viewing technology;
IntelliScope(R); and Mastersoft's Viewer 95. Non-refundable royalty
revenues increased 44.2%, reflecting new licenses of International
ProofReader(TM) for Java, HTML Export, Outside In(R) viewing technology, and
Mastersoft's Viewer 95. Direct and retail sales for the quarter ended
March 31, 1997 nearly tripled the revenues from the quarter ended
March 31, 1996. Sales of Quick View Plus(TM), ImageStream(R)
for Microsoft Office, and DynaText(R) contributed to the increase in direct
and retail revenues.
Gross profit increased $6,669,000, or 61.6%, from $10,818,000 for the three
months ended March 31, 1996, to $17,487,000 for the three months ended
March 31, 1997. Gross profit as a percentage of revenues for the
three months ended March 31, 1997 was 91.7% compared to 86.8% for the three
months ended March 31, 1996. The increase in gross profit percentage was
primarily attributable to higher revenues from Outside In(R), Mastersoft's
Viewer 95, and DynaText(R), which carry lower royalty burdens.
Total operating expenses increased $2,441,000 to $13,502,000 for the three
months ended March 31, 1997 from $11,061,000 for the three months ended
March 31, 1996. Included in total operating expenses for the quarter
ended March 31, 1997 was an acquisition charge of $1,800,000 for
certain purchased technology under research and development by Mastersoft
at the time of the February 6, 1997 acquisition. Additionally, included in
the total operating expenses for the quarter ended March 31, 1996 was an
acquisition charge of $4,400,000 for certain purchased technology
under research and development by ImageMark Software Labs, Inc. at the time
of the January 9, 1996 acquisition. Sales and marketing expenses
increased $2,674,000 to $4,364,000 for the three months ended March 31, 1997.
The increase reflects increased costs for staff additions due to the Company's
acquisitions, entry into new markets (corporate and consumer), staff additions
in product management to support the higher level of sales and higher
commissions due to increased revenues. Sales and marketing expenses were
22.9% of revenues for the three months ended March 31, 1997 compared to
13.6% for the three months ended March 31, 1996. Product development
expenses increased $1,630,000 from $2,975,000 for the three months ended
March 31, 1996 to $4,605,000 for the three months ended March 31, 1997. The
increase in product development costs was primarily due to investments in
DynaBase(TM), DynaText(R), CleanSpeak(TM), Outside In(R), HTML Export, and
various IntelliScope(R) products. The Company's total product development
costs, including capitalized costs, were $6,842,000, or $35.9% of revenues
for the three months ended March 31, 1997 compared to $3,455,000, and 27.7%,
of revenues for the three months ended March 31, 1996. New products
released during the quarter included CleanSpeak(TM), Outside In(R), HTML
Export, International Proofreader(TM) for JAVA, and NativeEnglish(TM).
General and administrative expense increased $737,000 to $2,733,000 for the
three months ended March 31, 1997 compared to $1,996,000 for the three
months ended March 31, 1996. This increase was due to goodwill amortization
related to the Company's acquisitions as well as increases in personnel and
general expenses required to support the growth in the Company's operations.
The Company's effective tax rate was influenced by the $1,800,000 Mastersoft
research and development charge discussed above. Excluding the charge, the
Company's effective tax rate for the three months ended March 31, 1997
remained consistent at 37% with the three months ended March 31, 1996,
excluding the charge in the period also.
Excluding the $1,800,000 ($0.13 per share) Mastersoft research and development
charge noted above, net income and earnings per share would have been
$4,308,000, and $0.30, respectively.
Liquidity and Capital Resources
The Company's operating activities provided cash of $6,462,000 for the three
months ended March 31, 1997 compared to $3,297,000 for the three months
ended March 31, 1996. The increased contribution from operating
activities of $3,165,000 was due to increased income as adjusted for
depreciation, amortization and the acquisition related charge, and increased
collections on accounts receivables offset by incentive compensation paid
in 1997 for 1996 performance.
The Company's investing activities used cash of approximately $11,359,000 for
the three months ended March 31, 1997 compared to $16,414,000 for the three
months ended March 31, 1996. The decrease reflects a decline in investment
activity for marketable securities of $5,059,000 offset by the acquisition of
certain assets of Adobe Systems Incorporated's Mastersoft division for
$2,965,000 in cash; increased investment in product development costs of
$1,757,000; and payment of $950,000 to the former stockholders of ImageMark
Software Labs, Inc. for exceeding certain performance measures set forth in
the stock purchase agreement. During 1997, the Company also expects to
increase its investment in leasehold improvements due to physical expansion
of several of the Company's offices.
The Company's financing activities provided cash of $630,000 for the three
months ended March 31, 1997 compared to using cash of approximately
$4,856,000 for the three months ended March 31, 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, in April 1995.
As of March 31, 1997, the Company had working capital of $84,473,000.
Total cash, cash equivalents, and marketable securities at March 31,
1997 were $80,659,000. 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 statement. 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; increased reliance on
corporate and direct distribution channels; market acceptance of new
products; consolidation in the OEM business; and adverse economic changes in
the markets in which the Company does business.
<PAGE>
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 11 Statement re Computation of Earnings Per Share
Exhibit 27 Financial Data Schedule
(b) Report on Form 8-K
Registrant filed no reports on Form 8-K during the quarter
ended March 31, 1997.
<PAGE>
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: May 15, 1997 /s/ Betty J. Savage
-------------------
Betty J. Savage
Vice President and Chief
Financial Officer
Date: May 15, 1997 /s/ Patricia A. Michaels
-------------------
Patricia A. Michaels
Director of Accounting and
Finance
(Chief Accounting Officer)
<PAGE>
Exhibit Index
Exhibit No. Description
11 Statement re Computation of Earnings Per Share
27 Financial Data Schedule
INSO CORPORATION
EXHIBIT 11- STATEMENT RE COMPUTATION OF EARNINGS PER SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended March 31
1997 1996
----------- -----------
<S> <C> <C>
Primary Earnings Per Share
Weighted average common shares
outstanding 14,313 13,019
Net effect of dilutive common
equivalent shares based on the
modified treasury stock method
for 1997 and the treasury stock
method for 1996 1,157 0
------ ------
Total 15,470 13,019
Net income (loss) $ 2,508 $(1,279)
Assumed interest income, net of tax
effect, under modified treasury
stock method 282 0
------ -------
Net income (loss) available to common
shareholders $ 2,790 $(1,279)
------ --------
Primary net income (loss) per share $ 0.18 $ (0.10)
------ --------
------ --------
Fully Diluted Earnings Per Share
Weighted average common shares
outstanding 14,313 13,019
Net effect of dilutive common
equivalent shares based on the
modified treasury stock method
for 1997 and the treasury stock
method for 1996 1,157 0
------ ------
Total 15,470 13,019
Net income (loss) $ 2,508 $(1,279)
Assumed interest income, net of tax
effect, under modified treasury
stock method 282 0
------ ------
Net income (loss) available to
common shareholders $ 2,790 $(1,279)
------ -------
Fully diluted net income (loss)
per share $ 0.18 $ (0.10)
------ -------
------ -------
</TABLE>
<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 REFERNCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 30,013
<SECURITIES> 50,646
<RECEIVABLES> 20,359
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 103,055
<PP&E> 5,844
<DEPRECIATION> 0
<TOTAL-ASSETS> 135,478
<CURRENT-LIABILITIES> 18,582
<BONDS> 0
0
0
<COMMON> 143
<OTHER-SE> 116,753
<TOTAL-LIABILITY-AND-EQUITY> 135,478
<SALES> 19,062
<TOTAL-REVENUES> 19,062
<CGS> 0
<TOTAL-COSTS> 1,575
<OTHER-EXPENSES> 13,502
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 5,067
<INCOME-TAX> 2,559
<INCOME-CONTINUING> 2,508
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,508
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
