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, 1998
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 jurisdiction (I.R.S. Employer Identifcation 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)
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 November 13, 1998
Common Stock (par value $.01 per share) 15,429,397
INSO CORPORATION
FORM 10-Q INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 1998 and 1997
Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
INSO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1998 and DECEMBER 31, 1997
(Unaudited, in thousands except share and per share amounts)
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 23,625 $ 18,512
Marketable securities 64,772 61,945
Accounts receivable, net 31,917 25,889
Other current assets 2,628 1,817
-------- --------
Total current assets 122,942 108,163
Property and equipment, net 6,699 7,073
Product development costs, net 13,037 9,015
Intangible assets, net 2,995 4,714
Other assets, net 6,695 3,201
Deferred income tax benefit, net 2,528 5,917
-------- --------
TOTAL ASSETS $ 154,896 $ 138,083
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 5,985 $ 3,899
Accrued salaries, commissions and bonuses 4,613 5,478
Acquisition related liabilities 0 1,482
Unearned revenue 6,069 3,522
Royalties payable 36 1,266
Due to Houghton Mifflin Company 0 396
Current income taxes payable 2,119 575
Deferred income taxes 3,703 5,987
-------- -------
Total current liabilities 22,525 22,605
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 shares authorized; 15,373,478
and 14,645,611 shares issued in
1998 and 1997, respectively 154 146
Capital in excess of par value 138,849 128,187
Accumulated deficit (4,439) (10,063)
------- --------
134,564 118,270
Unamortized value of restricted shares (174) (240)
Notes Receivable from Stock
Purchase Agreements (1,961) (2,494)
Treasury stock, at cost, 5,075 shares
in 1998 and 1997 (58) (58)
-------- ---------
Total stockholders' equity 132,371 115,478
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 154,896 $ 138,083
-------- ---------
-------- ---------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 and 1997
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Net revenues 18,707 20,462
Cost of revenues 1,933 1,926
-------- --------
Gross profit 16,774 18,536
Operating expenses
Sales and marketing 6,244 6,536
Product development 4,751 6,089
General and administrative 3,553 3,888
Purchased in-process research and development 7,500
-------- --------
Total operating expenses 22,048 16,513
-------- --------
Operating income (loss) (5,274) 2,023
Non-operating income:
Net investment income 1,446 1,142
-------- --------
Income (loss) before provision for income
taxes (3,828) 3,165
Provision for income taxes 1,360 1,176
--------- ---------
Net income (loss) (5,188) 1,989
--------- ----------
--------- ----------
Basic Earnings (loss) per share (0.34) 0.14
--------- ----------
--------- ----------
Diluted Earnings (loss) per share (0.34) 0.14
--------- ----------
--------- ----------
Weighted Average Shares Outstanding
Basic 15,255 14,364
Diluted 15,255 14,522
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Net revenues 52,552 59,582
Cost of revenues 5,604 5,925
------- -------
Gross profit 46,948 53,657
Operating expenses
Sales and marketing 18,010 17,762
Product development 14,899 16,862
General and administrative 12,416 11,109
Restructuring expenses 5,848
Purchased in-process research and development 9,600 5,400
-------- --------
Total operating expenses 54,925 56,981
-------- --------
Operating loss (7,977) (3,324)
Non-operating income:
Net investment income 3,480 2,918
Gain on sale of linguistic software net assets 12,012
-------- --------
Income (loss) before provision for income taxes 7,515 (406)
Provision for income taxes 1,891 1,870
-------- --------
Net income (loss) 5,624 (2,276)
-------- --------
-------- --------
Basic Earnings (loss) per share 0.38 (0.16)
-------- ---------
-------- ---------
Diluted Earnings (loss) per share 0.36 (0.16)
-------- ---------
-------- ---------
Weighted Average Shares Outstanding
Basic 14,942 14,339
Diluted 15,425 14,339
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997
(Unaudited, in thousands of dollars)
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ 5,624 $ (2,276)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 6,462 6,398
Purchased in-process research and development 9,600 5,400
Deferred income taxes 1,105 (3,496)
Restructuring expenses 5,045
Gain on sale of linguistic software net assets (12,012)
--------- --------
10,779 11,071
Changes in operating assets and liabilities:
Accounts receivable (7,511) (303)
Accounts payable and accrued liabilities (4,107) (234)
Current income taxes 1,935 5,449
Royalties payable (1,230) (478)
Due to Houghton Mifflin Company (396) (458)
Other assets and liabilities (14) 3,532
--------- --------
Net cash (used in) provided
by operating activities (544) 18,579
Cash flows from (used in) investing activities:
Property and equipment expenditures (2,835) (3,447)
Capitalized product development costs (3,314) (5,215)
Acquisitions, net of cash acquired (15,793) (9,642)
Net purchase of marketable securities (2,827) (5,300)
Proceeds from the sale of linguistic
software net assets 19,853
---------- --------
Net cash used in investing activities (4,916) (23,604)
Cash flows from (used in) financing activities:
Net proceeds from issuance of common stock 10,040 1,480
Proceeds from the payment of notes receivable
underlying Stock Purchase Agreements 533
--------- --------
Net cash provided by financing activities 10,573 1,480
--------- --------
Net increase (decrease) in cash and cash equivalents 5,113 (3,545)
Cash and cash equivalents at beginning of period 18,512 34,280
--------- ---------
Cash and cash equivalents at end of period $ 23,625 $ 30,735
--------- --------
--------- --------
Supplementary Information:
Investment in Information Please LLC $ 400 2,620
--------- --------
--------- --------
See accompanying notes to unaudited condensed consolidated financial
statements.
INSO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
September 30, 1998
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, 1998 are
not necessarily indicative of the results that may be expected for the
year ended December 31, 1998.
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, 1997.
Note 2. Earnings Per Share
In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards No.
128, "Earnings Per Share" (SFAS 128). SFAS 128 replaced the
calculation of primary and fully diluted earnings per share with basic
and diluted earnings per share. All earnings per share amounts for
all periods have been presented, and where appropriate, restated to
conform to the SFAS 128 requirements. Basic earnings per share is
calculated based on the weighted average number of common shares
outstanding. Diluted earnings per share includes the effect of
dilutive stock options representing 158,000 shares for the three months
ended September 30, 1997 and 483,000 shares for the nine months ended
September 30, 1998.
Note 3. Recent Accounting Pronouncements
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" (SFAS 130).
SFAS 130 establishes new rules for the reporting and display of
comprehensive income and its components in a full set of general-
purpose financial statements. The adoption of SFAS 130 did not
have a material impact on the Company's financial position or results
of operations for the three and nine-month periods ended September 30,
1998.
In March 1998, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants
issued Statement of Position 98-1 (SOP 98-1) "Accounting for the
Costs of Computer Software Developed or Obtained for Internal
Use". SOP 98-1 requires the capitalization of certain costs related to
the development of software for internal use. The adoption of SOP
98-1 did not have a material impact on the Company's financial
position or results of operations for the three and nine-month periods
ended September 30, 1998.
Note 4. Sale of linguistic software net assets
On April 23, 1998, the Company sold its linguistic software assets to
Lernout & Hauspie Speech Products N.V. for $19,500,000, plus an
additional amount for certain receivables net of certain liabilities.
Lernout & Hauspie paid the purchase price 50% in cash and 50% in the form
of a note that was converted into shares of Lernout & Hauspie common
stock in June 1998. The Company sold the Lernout & Hauspie
common stock in June 1998. Lernout & Hauspie paid for the other net assets
in cash. Included in the assets transferred to Lernout & Hauspie are
all of Inso's linguistic software products, including its proofing tools,
reference works, and information management tools, the Quest database
search technology acquired with the Level Five Research, Inc. 1997
acquisition, and all customer and supplier agreements related to those
products. In connection with the sale, the Company recorded direct
transaction costs; costs to write-off capitalized software and other
assets; estimated lease and facility costs; and other accruals for
costs directly associated with the sale. As a result, the Company reported
in the quarter ended June 30, 1998, a gain of $12,012,000. In addition,
the Company's valuation allowance on its deferred tax assets was reduced
by approximately $4,000,000 as management deemed that it is more likely
than not that these assets would be realized.
Note 5. Acquisitions
MediaBank
On August 28, 1998, the Company acquired the intellectual property and
certain other assets of Bitstream's MediaBank media asset management
system and related technologies for $11,900,000 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 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, 1998 of $7,500,000, or $0.49 per
share.
ViewPort Development AB
On March 12, 1998, the Company acquired all of the outstanding
capital stock of ViewPort Development AB for $2,500,000 using
available cash. ViewPort, through its wholly owned subsidiary
Synex Information AB, is a developer of browser engines and
application development toolkits for viewing Standard Generalized
Markup Language information. 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 the 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, 1998 of $2,100,000, or $0.14 per share.
Intangible assets of $130,000 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.
Henderson Software, Inc.
On November 24, 1997, the Company acquired all of the outstanding
capital stock of privately held Henderson Software, Inc. for $750,000
using available cash. Henderson Software is a provider of Computer
Graphics Metafile viewing and filtering solutions. 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 December 31,
1997 of $700,000, or $0.05 per share.
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. Level Five Research, Inc., which operated
as Inso Florida Corporation prior to the sale of its assets to Lernout &
Hauspie Speech Products N.V. (see Note 4 above), 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 acquisition included the purchase of certain technology under research
and development, which resulted in a charge to the Company's consolidated
research results for the quarter ended June 30, 1997 of $3,600,000, or
$0.25 per share.
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 $2,950,000 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 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.
Unaudited pro forma net revenues, net income (loss) and earnings (loss)
per share shown below for the nine months ended September 30, 1998
assumes the acquisition of MediaBank and ViewPort Development AB
occurred on January 1, 1998 and for the nine months ended September
30, 1997, assumes the acquisitions of MediaBank, ViewPort Development AB,
Henderson Software, Inc., Level Five Research Inc. and Mastersoft occurred
on January 1, 1997. Therefore, the nine months ended September 30, 1997,
presented below, includes the write-off of certain purchased
technology under research and development of $7,500,000 relating to
MediaBank, $2,100,000 relating to ViewPort Development AB and $700,000
relating to Henderson Software, Inc.
</TABLE>
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
---------------- ----------------
<S> <C> <C>
Net Revenues $55,825,000 $63,620,000
Net income (loss) $ 3,880,000 $(14,039,000)
Diluted earnings (loss)
per share $ 0.25 $ (0.98)
</TABLE>
Note 5. Accounting Policies
The Company adopted the straight-line depreciation method for all
property placed in service on or after January 1, 1998. Management
believes that the straight-line method of depreciation provides a
preferable matching between expected productivity and cost
allocation since the equipment's operating capacity and consumption
generally remains consistent over time. The change was not material
to operating results or the financial position of the Company.
Note 6. Subsequent Events
On November 11, 1998, the Company entered into a definitive agreement to
acquire all of the outstanding stock of Sherpa Systems Corporation.
Sherpa is a provider of product data management solutions that manage
mission-critical information through the product lifecycle process of
design, testing, manufacturing, and delivery. The transaction will be
accounted for as a purchase and will include the purchase of certain
technology under research and development. All of the outstanding shares
of Sherpa common stock will be exchanged for cash of approximately
$28,500,000 and 1,500,000 warrants. The warrants have a 24-month term
and the right to purchase shares of the Company's common stock at an
exercise price of $23.50 per share. The total value of the acquisition is
expected to be approximately $35,000,000. Completion of the transaction
is subject to certain conditions, including expiration or early termination
of the applicable waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended
September 30, 1997
Revenues for the three months ended September 30, 1998 decreased $1,755,000,
or 9%, to $18,707,000 compared to $20,462,000 for the three months ended
September 30, 1997. On April 23, 1998, the Company sold its linguistic
software assets to Lernout & Hauspie Speech Products N.V. (Lernout & Hauspie)
for $19,500,000, plus an additional amount for certain receivables net of
certain liabilities. Included in the assets transferred to Lernout & Hauspie
are all of Inso's linguistic software products, including its proofing tools,
reference works, and information management tools, the Quest database search
technology, and all customer and supplier agreements related to those
products. Excluding the revenues associated with the assets sold to
Lernout & Hauspie, net revenues grew approximately 46% to $18,707,000 for the
three months ended September 30, 1998 compared to $12,844,000 for the three
months ended September 30, 1997. Excluding the revenues associated with the
assets sold to Lernout & Hauspie, revenues from direct sales to
corporations represented 74% of the revenue total for the quarter
ended September 30, 1998 and a 60% increase over the quarter ended
September 30, 1997. Additionally, of the total revenues in 1998, less than
10% were revenues from the acquisitions of MediaBank, ViewPort Development
and Henderson Software, Inc.
Gross profit decreased $1,762,000, or 10%, from $18,536,000 for the three
months ended September 30, 1997 to $16,774,000 for the three months ended
September 30, 1998. Excluding the gross profit associated with the assets
sold to Lernout & Hauspie, gross profit increased $4,995,000, or 42%, to
$16,774,000 for the three months ended September 30, 1998 from $11,779,000
for the three months ended September 30, 1997. Gross profit as a percentage
of revenues, excluding the gross profit associated with the assets sold to
Lernout & Hauspie, was 90% for the three months ended September 30, 1998
compared to 92% for the three months ended September 30, 1997. The decrease
in gross profit percentage in 1998 was primarily due to an increase in
amortization expense for capitalized software in 1998.
Total operating expenses increased $5,535,000 to $22,048,000 for the three
months ended September 30, 1998 from $16,513,000 for the three months ended
September 30, 1997. Included in total operating expenses for the three
months ended September 30, 1998 was an acquisition charge of $7,500,000 for
certain purchased technology under research and development by MediaBank
media asset management system at the time of the 1998 acquisition.
Excluding that charge as well as the operating expenses associated with the
assets sold to Lernout & Hauspie, operating expenses increased $695,000, or
5%, to $14,548,000 for the three months ended September 30, 1998 compared to
$13,853,000 the three months ended September 30, 1997.
Sales and marketing expenses decreased $292,000 to $6,244,000 for the three
months ended September 30, 1998 from $6,536,000 for the three months ended
September 30, 1997. Excluding the sales and marketing expenses associated
with the assets sold to Lernout & Hauspie, sales and marketing expenses
declined slightly for the three months ended September 30, 1998 compared to
the three months ended September 30, 1997. Sales and marketing expenses
were 33% of revenues for the three months ended September 30, 1998 compared
to 49% for the three months ended September 30, 1997, excluding the sales
and marketing expenses associated with the assets sold to Lernout & Hauspie.
The decline from September 30, 1997 is the result of the reorganization of
the sales and marketing departments and changes in marketing initiatives.
The decline in sales and marketing expenses as a percentage of revenues
is due to the increase in revenues at a more rapid rate than sales and
marketing expenses.
Product development expenses decreased $1,338,000 from $6,089,000 for the
three months ended September 30, 1997 to $4,751,000 for the three months
ended September 30, 1998. Excluding the product development expenses
associated with the assets sold to Lernout & Hauspie, product development
costs increased by $579,000, or 14%, for the three months ended September
30, 1998 compared to the three months ended September 30, 1997. The
increase is due to the Company's increased investment in viewing and
information sharing and distribution products as well as increased product
development expenses for the Company's 1998 acquisitions. The Company's
product development costs, excluding the product development expenses
associated with the assets sold to Lernout & Hauspie, were 25% of revenues
for the three months ended September 30, 1998 compared to 32% of revenues
for the three months ended September 30, 1997. The decline in product
development expenses as a percentage of revenues is due to the increase in
revenues at a more rapid rate than product development expenses.
General and administrative expenses decreased $335,000 to $3,553,000 for the
three months ended September 30, 1998 compared to $3,888,000 for the three
months ended September 30, 1997. Excluding the administrative expenses
associated with the assets sold to Lernout & Hauspie, general and
administrative expenses increased $170,000, or 5%, for the three months ended
September 30, 1998 compared to the three months ended September 30, 1997.
The increase in general and administrative expenses was primarily due to
costs associated with the Company's facilities and amortization expenses due
to the Company's acquisitions. General and administrative expenses,
excluding the expenses associated with the assets sold to Lernout & Hauspie,
were 19% of revenues for the three months ended September 30, 1998 compared
to 26% for the three months ended September 30, 1997.
The 1998 in-process research and development charge discussed above influenced
the Company's effective tax rate for 1998. Excluding that charge, the
Company's effective tax rate for the three months ended September 30, 1998 and
1997 was 37%.
Excluding the $7,500,000 ($0.49 per share) purchased in-process research and
development charge, net income and earnings per share for the quarter
ended September 30, 1998 would have been $2,312,000 and $0.15 per share,
respectively, compared to $1,989,000, and $0.14 per share for the quarter
ended September 30, 1997.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended
September 30, 1997
Revenues for the nine months ended September 30, 1998 decreased $7,030,000,
or 12%, to $52,552,000 compared to $59,582,000 for the nine months ended
September 30, 1997. As mentioned above, on April 23, 1998, the Company sold
its linguistic software assets to Lernout & Hauspie. Excluding the revenues
associated with the assets sold to Lernout & Hauspie, net revenues grew
approximately 35% to $45,174,000 for the nine months ended September 30,
1998 compared to $33,340,000 for the nine months ended September 30, 1997.
Excluding the revenues associated with the assets sold to Lernout & Hauspie,
revenues from direct sales to corporations represented approximately
67% of the revenue total for the nine months ended September 30, 1998 and
grew by 44% over the nine months ended September 30, 1997.
Additionally, of the total revenues in 1998, less than 5% were revenues
from the acquisitions of MediaBank, ViewPort Development and Henderson
Software, Inc.
Gross profit decreased $6,709,000, or 13%, from $53,657,000 for the nine
months ended September 30, 1997 to $46,948,000 for the nine months ended
September 30, 1998. Excluding the gross profit associated with the assets
sold to Lernout & Hauspie, gross profit increased $10,222,000, or 34%, to
$40,489,000 for the nine months ended September 30, 1998 from $30,267,000
for the nine months ended September 30, 1997. Gross profit as a percentage
of revenues, excluding the gross profit associated with the assets sold to
Lernout & Hauspie, was 90% for the nine months ended September 30, 1998
compared to 91% for the nine months ended September 30, 1997.
Total operating expenses decreased $2,056,000 to $54,925,000 for the nine
months ended September 30, 1998 from $56,981,000 for the nine months ended
September 30, 1997. Included in the total operating expenses for the
nine months ended September 30, 1998 were acquisition charges of $9,600,000
for certain purchased technology under research and development by
MediaBank media asset management system and ViewPort Development AB at the
time of the 1998 acquisitions. 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 Level Five
Research, Inc. and Mastersoft products and technologies at the time of the
1997 acquisitions and restructuring expenses of $5,848,000 relating to the
Company's Information Products and certain of the Information Management
Tools product lines. Excluding the 1998 and 1997 aforementioned special
charges as well as the operating expenses associated with the assets sold
to Lernout & Hauspie, operating expenses increased $5,305,000, or 14%, to
$42,762,000 for the nine months ended September 30, 1998 compared to
$37,457,000 for the nine months ended September 30, 1997.
Sales and marketing expenses increased $248,000, or 1%, to $18,010,000 for
the nine months ended September 30, 1998 from $17,762,000 for the nine
months ended September 30, 1997. Excluding the sales and marketing expenses
associated with the assets sold to Lernout & Hauspie, sales and marketing
expenses increased $536,000, or 3%, for the nine months ended September
30, 1998 compared to the nine months ended September 30, 1997. The increase
is the result of the costs relating to the reorganization of the sales and
marketing departments. Excluding the sales and marketing expenses associated
with the assets sold to Lernout & Hauspie, sales and marketing expenses were
39% of revenues for the nine months ended September 30, 1998 compared to
51% for the nine months ended September 30, 1997. The decline in sales and
marketing expenses as a percentage of revenues is due to the increase in
revenues at a more rapid rate than the increase in sales and marketing
expenses.
Product development expenses decreased $1,963,000, or 12%, from $16,862,000
for the nine months ended September 30, 1997 to $14,899,000 for the nine
months ended September 30, 1998. Excluding the product development expenses
associated with the assets sold to Lernout & Hauspie, product development
costs increased by $3,089,000, or 30%, for the nine months ended September
30, 1998 compared to the nine months ended September 30, 1997. The increase
is primarily due to lower capitalized costs for the nine months ended
September 30, 1998 as compared to the same period in 1997 and
additional development expenses for the Company's 1998 acquistions. The
Company's product development costs, excluding the product development
expenses associated with the assets sold to Lernout & Hauspie, were 30% of
revenues for the nine months ended September 30, 1998 compared to 31% of
revenues for the nine months ended September 30, 1997.
General and administrative expenses increased $1,307,000 to $12,416,000 for
the nine months ended September 30, 1998 compared to $11,109,000 for the
nine months ended September 30, 1997. Excluding the administrative expenses
associated with the assets sold to Lernout & Hauspie, general and
administrative expenses increased $1,680,000, or 16%, for the nine months
ended September 30, 1998 compared to the nine months ended September 30,
1997. The 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 facilities costs. General and administrative
expenses, excluding the expenses associated with the assets sold to Lernout
& Hauspie, were 26% of revenues for the nine months ended September
30, 1998 compared to 31% for the nine months ended September 30, 1997.
The $12,012,000 gain on sale of the assets sold to Lernout & Hauspie in
April 1998, the reduction of valuation allowance of approximately $4,000,000
related to the Company deeming that it is more likely than not that certain
assets associated with the sale would be realized, and the 1998 in-process
research and development charges of $9,600,000 influenced the Company's
1998 effective tax rate. The Company's 1997 effective tax rate was also
influenced by the in-process research and development charges of $5,400,000
as discussed above. Excluding these special items, the Company's
effective tax rate for the nine months ended September 30, 1998 and 1997 was
37%.
Excluding the $12,012,000 ($0.77 per share) gain on sale of the assets sold to
Lernout & Hauspie and the $9,600,000 ($0.63 per share) write-off related to
the MediaBank and ViewPort Development AB in-process research and
development charge, net income and earnings per share for the nine months
ending September 30, 1998 would have been $3,212,000 and $0.21, respectively.
Excluding the 1997 $5,400,000 ($0.38 per share) Level Five Research, Inc.
and Mastersoft products and technologies purchased in process research and
development charge and restructuring expenses of $3,684,000, net of income
taxes ($0.26 per share) relating to the Company's Information Products and
certain of the Information Management Tools products, net income and earnings
per share for the nine months ended September 30, 1997 would have been
$6,808,000 and $0.46, respectively.
Liquidity and Capital Resources
The Company's operating activities used cash of $544,000 for the nine
months ended September 30, 1998 compared to providing cash of $18,579,000
for the nine months ended September 30, 1997. The decreased contribution
from operating activities of $19,123,000 was primarily due to an increase
in accounts receivable in 1998 and the timing of payments on accounts
payable, accrued liabilities, and income taxes in 1998.
The Company's investing activities used cash of $4,916,000 for the nine
months ended September 30, 1998 compared to $23,604,000 for the nine
months ended September 30, 1997. The decrease of $18,688,000 was due to
the 1998 proceeds of $19,853,000 received from Lernout & Hauspie for
the sale of the Company's linguistic software assets; a decrease in
capitalized product development costs; and a decline in net purchases
of marketable securities offset by an increase in acquisition activity.
The investing activity in 1998 also included the payment of $1,467,000 to
the former principal stockholder of Inso Providence.
The Company's financing activities provided cash of $10,573,000 for the nine
months ended September 30, 1998 compared to $1,480,000 for the nine months
ended September 30, 1997. The increase of $9,093,000 primarily relates to
an increase in the proceeds received from stock option exercises and
proceeds from repayment of notes receivable underlying Stock Purchase
Agreements.
On November 11, 1998, the Company entered into a definitive agreement to
acquire all of the outstanding stock of Sherpa Systems Corporation. The
transaction will be accounted for as a purchase and will include the
purchase of certain technology under research and development. All of the
outstanding shares of Sherpa common stock will be exchanged for cash of
approximately $28,500,000 and 1,500,000 warrants. The warrants have a 24-
month term and the right to purchase shares of the Company's common stock
at an exercise price of $23.50 per share. The total value of the
acquisition is expected to be approximately $35,000,000. Completeion of the
transaction is subject to certain conditions, including expiration or
early termination of the applicable waiting period under the Hart-Scott-
Rodino Antitrust Improvement Act.
As of September 30, 1998, the Company had working capital of $100,417,000.
Total cash, cash equivalents, and marketable securities at September 30, 1998
were $88,397,000. 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.
Year 2000 Issues
The Company's plan to resolve its Year 2000 issues for both its internal
systems as well as the products it sells involves the following four
phases: assessment, remediation, testing, and implementation. The
Company is performing all four phases concurrently and expects to be
finished by mid 1999. The Company will primarily utilize internal
resources to complete its plan. The total costs to date for the Company
have not been material. The Company believes that the incremental costs
of bringing its internal systems into compliance will not be materially
greater than its ongoing costs of maintaining and upgrading the systems.
In addition, based on a review of its product lines, the Company does not
believe that any of the products that is has sold and will continue to
sell requires remediation to be year 2000 compliant.
The Company's management believes it has an effective program in place
to resolve the Year 2000 issue in a timely manner. As noted above, the
Company has not completed all four phases of its Year 2000 plan. Based
upon current information, the Company believes that the completion of the
Year 2000 issues should not have a material adverse effect on the
Company, its financial position, or results of operations. However,
there can be no assurances.
The Company will determine if contingency plans are needed for any aspect
of the business with respect to the Year 2000 issues (including most
reasonable likely worst case Year 2000 scenarios) and if so will create
those contingency plans in 1999.
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, earnings per
share or cash flows. Please refer to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1997 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; increased reliance on direct
distribution channels which results in lower operating margins; increased
personnel costs and competition for experienced personnel; market acceptance
of products based on eXtensible Markup Language and Standard Generalized
Markup Language; consolidation in the OEM business and potential competition
from OEM customers; adverse economic changes in the markets in which the
Company does business; difficulties integrating operations and personnel of
acquired businesses; and increasing reliance on international markets. As
a result of the sale of the linguistic software assets to Lernout & Hauspie
Speech Products N.V., the Company does not expect to receive significant
revenues from Microsoft Corporation in future periods.
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 no reports on Form 8-K during the quarter
ended September 30, 1998.
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 13, 1998 /s/ Betty J. Savage
-------------------
Betty J. Savage
Vice President and Chief Financial Officer
Date: November 13, 1998 /s/ Patricia A. Michaels
------------------------
Patricia A. Michaels
Corporate Controller
(Chief Accounting Officer)
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