UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 11, 1998
Common Stock (par value $.01 per share) 15,301,589
INSO CORPORATION
FORM 10-Q INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 1998 and 1997
Condensed Consolidated Statements of Operations
Six Months Ended June 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
signatures
Exhibit Index
INSO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 and DECEMBER 31, 1997
(Unaudited, in thousands except share amounts)
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,291 $ 18,512
Marketable securities 67,621 61,945
Accounts receivable, net 26,324 25,889
Income tax receivable 1,058 0
Other current assets 2,394 1,817
-------- --------
Total current assets 126,688 108,163
Property and equipment, net 6,945 7,073
Product development costs, net 8,598 9,015
Intangible assets, net 3,338 4,714
Other assets, net 4,800 3,201
Deferred income tax benefit, net 549 5,917
-------- --------
TOTAL ASSETS $ 150,918 $ 138,083
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities $ 5,581 $ 3,899
Accrued salaries, commissions and bonuses 6,458 5,478
Acquisition related liabilities 0 1,482
Unearned revenue 4,740 3,522
Royalties payable 30 1,266
Due to Houghton Mifflin Company 0 396
Current income taxes payable 0 575
Deferred income taxes 3,703 5,987
-------- -------
Total current liabilities 20,512 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; 14,908,656
and 14,645,611 shares issued in
1998 and 1997, respectively 149 146
Capital in excess of par value 132,293 128,187
Retained Earnings (Accumulated deficit) 749 (10,063)
------- --------
133,191 118,270
Unamortized value of restricted shares (233) (240)
Notes Receivable from Stock
Purchase Agreements (2,494) (2,494)
Treasury stock, at cost, 5,075 shares
in 1997 and 1996 (58) (58)
-------- ---------
Total stockholders' equity 130,406 115,478
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 150,918 $ 138,083
-------- ---------
-------- ---------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 and 1997
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Net revenues 16,213 20,058
Cost of revenues 1,401 2,424
-------- --------
Gross profit 14,812 17,634
Operating expenses
Sales and marketing 5,850 6,862
Product development 4,502 6,168
General and administrative 4,383 4,488
Restructuring expenses 0 5,848
Purchased in-process research and development 0 3,600
-------- --------
Total operating expenses 14,735 26,966
-------- --------
Operating income (loss) 77 (9,332)
Non-operating income:
Net investment income 1,117 694
Gain on sale of linguistic software
net assets 12,012
-------- --------
Income (loss) before provision for income
taxes 13,206 (8,638)
Provision for income taxes 443 (1,865)
--------- ---------
Net income (loss) 12,763 (6,773)
--------- ----------
--------- ----------
Basic Earnings (loss) per share 0.86 (0.47)
--------- ----------
--------- ----------
Diluted Earnings (loss) per share 0.82 (0.47)
--------- ----------
--------- ----------
Weighted Average Shares Outstanding
Basic 14,869 14,339
Diluted 15,641 14,339
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 and 1997
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Net revenues 33,845 39,120
Cost of revenues 3,671 3,999
------- -------
Gross profit 30,174 35,121
Operating expenses
Sales and marketing 11,766 11,226
Product development 10,148 10,773
General and administrative 8,863 7,221
Restructuring expenses 5,848
Purchased in-process research and development 2,100 5,400
-------- --------
Total operating expenses 32,877 40,468
-------- --------
Operating loss (2,703) (5,347)
Non-operating income:
Net investment income 2,034 1,776
Gain on sale of linguistic software net assets 12,012
-------- --------
Income (loss) before provision for income taxes 11,343 (3,571)
Provision for income taxes 531 694
-------- --------
Net income (loss) 10,812 (4,265)
-------- --------
-------- --------
Basic Earnings (loss) per share 0.73 (0.30)
-------- ---------
-------- ---------
Diluted Earnings (loss) per share 0.71 (0.30)
-------- ---------
-------- ---------
Weighted Average Shares Outstanding
Basic 14,785 14,326
Diluted 15,227 14,326
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 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) $ 10,812 $ (4,265)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 4,194 4,179
Purchased in-process research and development 2,100 5,400
Deferred income taxes 3,084 (3,496)
Restructuring expenses 5,045
Gain on sale of linguistic software net assets (12,012)
--------- --------
8,178 6,863
Changes in operating assets and liabilities:
Accounts receivable (212) (458)
Accounts payable and accrued liabilities (2,571) 898
Current income taxes (1,242) 4,363
Royalties payable (1,236) (73)
Due to Houghton Mifflin Company (396) (510)
Other assets and liabilities (848) (873)
--------- --------
Net cash provided by operating activities 1,673 10,210
Cash flows from (used in) investing activities:
Property and equipment expenditures (2,316) (2,336)
Capitalized product development costs (2,230) (3,941)
Acquisitions, net of cash acquired (3,893) (9,602)
Net purchase of marketable securities (5,676) (7,096)
Proceeds from the sale of linguistic
software net assets 19,853
---------- --------
Net cash provided (used) in investing activities 5,738 (22,975)
Cash flows from (used in) financing activities:
Net proceeds from issuance of common stock 3,368 948
--------- --------
Net cash provided by financing activities 3,368 948
--------- --------
Net increase (decrease) in cash and cash equivalents 10,779 (11,817)
Cash and cash equivalents at beginning of period 18,512 34,280
--------- ---------
Cash and cash equivalents at end of period $ 29,291 $ 22,463
--------- --------
--------- --------
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)
June 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 six-month periods ended June 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.
The following table sets forth the computation of basic and diluted
earnings per share.
</TABLE>
<TABLE>
<CAPTION>
For the three months
ended June 30,
1998 1997
---------------------
<S> <C> <C>
Numerator:
Numerator for basic and diluted
earnings per share:
Net income (loss) $12,763 ($6,773)
Denominator:
Denominator for basic earnings per
share-weighted average shares 14,869 14,339
Effect of dilutive securities:
Employee stock options 772
------ -------
Denominator for diluted earnings per share-
adjusted weighted-average shares 15,641 14,339
Basic earnings (loss) per share $0.86 ($0.47)
------ -------
------ -------
Earnings (loss) per share - assuming dilution $0.82 ($0.47)
------ -------
------ -------
For the six months
ended June 30,
1998 1997
-------------------------
<S> <C> <C>
Numerator:
Numerator for basic and diluted
earnings per share:
Net income (loss) $10,812 ($4,265)
Denominator:
Denominator for basic earnings per
share-weighted average shares 14,785 14,326
Effect of dilutive securities:
Employee stock options 442
------ ------
Denominator for diluted earnings per share-
adjusted weighted-average shares 15,227 14,326
Basic earnings (loss) per share $0.73 ($0.30)
------- -------
------- -------
Earnings (loss) per share - assuming dilution $0.71 ($0.30)
------- -------
------- -------
</TABLE>
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 six-month periods ended June 30,
1998.
In March 1998, The Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants (AcSEC)
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 six-month periods
ended June 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.
The purchase price was paid 50% in cash and 50% in the form of a
note which was converted into shares of Lernout & Hauspie common
stock in June 1998. The Company sold the Lernout & Hauspie
common stock in June 1998. The additional consideration for the
other net assets was paid 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 recoverable.
Note 5. Acquisitions
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.
Unaudited pro forma net revenues, net income (loss) and earnings (loss)
per share shown below for the six months ended June 30, 1998 assumes the
acquisition of ViewPort Development AB occurred on January 1,
1998 and for the six months ended June 30, 1997, assumes the
acquisitions of ViewPort AB and Henderson Software, Inc. occurred
on January 1, 1997. Therefore, the six months ended June 30, 1997,
presented below, includes the write-off of certain purchased
technology under research and development of $2,100,000 relating
to ViewPort Development AB and $700,000 relating to Henderson
Software, Inc.
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1998 June 30, 1997
---------------- ----------------
<S> <C> <C>
Net Revenues $33,962,000 $39,636,000
Net income (loss) $10,827,000 $(6,985,000)
Diluted earnings (loss) per share $ 0.71 $ (0.49)
</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. Shareholder Resolutions
On May 7, 1998, the Company's stockholders voted to increase the
number of shares authorized to be issued under the 1993 Stock
Purchase Plan from 200,000 to 450,000 shares.
On May 7, 1998, the Company's stockholders voted to increase the
number of shares authorized to be issued under the 1996 Stock
Incentive Plan from 2,000,000 to 5,000,000 shares.
On May 7, 1998, the Company's stockholders voted to increase the
number of shares authorized to be issued under the 1996 Non-
employee Director Plan from 250,000 to 415,000.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 Compared to Three Months Ended June 30,
1997
Revenues for the three months ended June 30, 1998 decreased $3,845,000, or
19%, to $16,213,000 compared to $20,058,000 for the three months ended June
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 37% to $15,683,000 for the
three months ended June 30, 1998 compared to $11,412,000 for the three months
ended June 30, 1997. Excluding the revenues associated with the assets sold
to Lernout & Hauspie, revenues from direct sales to corporations represented
nearly 70% of the revenue total for the quarter ended June 30, 1998 and grew
by over 30% over the quarter ended June 30, 1997. Additionally, of the total
revenues in 1998, less than 5% were revenues from the acquisitions of
ViewPort and Henderson Software, Inc.
Gross profit decreased $2,822,000, or 16%, from $17,634,000 for the three
months ended June 30, 1997 to $14,812,000 for the three months ended June
30, 1998. Excluding the gross profit associated with the assets sold to
Lernout & Hauspie, gross profit increased $4,230,000, or 42%, to $14,390,000
for the three months ended June 30, 1998 from $10,160,000 for the three
months ended June 30, 1997. Gross profit as a percentage of revenues,
excluding the gross profit associated with the assets sold to Lernout &
Hauspie, was 92% for the three months ended June 30, 1998 compared to 89% for
the three months ended June 30, 1997. The increase in gross profit
percentage was primarily due to an increase in revenues at a faster rate than
the related fulfillment costs.
Total operating expenses decreased $12,231,000 to $14,735,000 for the three
months ended June 30, 1998 from $26,966,000 for the three months ended June
30, 1997. Included in total operating expenses for the three months ended
June 30, 1997 was an acquisition charge of $3,600,000 for certain purchased
technology under research and development by Level Five Research, Inc. at the
time of the 1997 acquisition 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 1997 aforementioned special
charges as well as the operating expenses associated with the assets sold to
Lernout & Hauspie, operating expenses decreased $265,000, or 2%, to
$14,252,000 for the three months ended June 30, 1998 compared to
$14,517,000 the three months ended June 30, 1997.
Sales and marketing expenses decreased $1,012,000 to $5,850,000 for the three
months ended June 30, 1998 from $6,862,000 for the three months ended June
30, 1997. Excluding the sales and marketing expenses associated with the
assets sold to Lernout & Hauspie, sales and marketing expenses decreased
$839,000, or 13%, for the three months ended June 30, 1998 compared to the
three months ended June 30, 1997. The decrease is the result of 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 37% of revenues for the three months ended
June 30, 1998 compared to 58% for the three months ended June 30, 1997.
Product development expenses decreased $1,666,000 from $6,168,000 for the
three months ended June 30, 1997 to $4,502,000 for the three months ended
June 30, 1998. Excluding the product development expenses associated with
the assets sold to Lernout & Hauspie, product development costs increased by
$455,000, or 12%, for the three months ended June 30, 1998 compared to the
three months ended June 30, 1997. The increase is due to the Company's
increased investment in viewing and information sharing and distribution
products. The Company's product development costs, excluding the product
development expenses associated with the assets sold to Lernout & Hauspie,
were 27% of revenues for the three months ended June 30, 1998 compared to
33% of revenues for the three months ended June 30, 1997.
General and administrative expenses decreased $105,000 to $4,383,000 for the
three months ended June 30, 1998 compared to $4,488,000 for the three months
ended June 30, 1997. Excluding the administrative expenses associated with the
assets sold to Lernout & Hauspie, general and administrative expenses increased
$119,000, or 3%, for the three months ended June 30, 1998 compared to the
three months ended June 30, 1997. The increase in general and administrative
expenses was primarily due to costs associated with the Company's facilities.
General and administrative expenses, excluding the expenses associated with
the assets sold to Lernout & Hauspie, were 27% of revenues for the three months
ended June 30, 1998 compared to 36% for the three months ended June 30,
1997.
The Company's effective tax rate was influenced in 1998 by the gain on sale
of the assets sold to Lernout & Hauspie in April 1998 and the reduction
of the 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 recoverable, and in 1997 by the in-process research and
development charge of $3,600,000 discussed above. Excluding these special
items, the Company's effective tax rate for the three months ended
June 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, net income and earnings per share for the quarter ending
June 30, 1998 would have been $751,000 and $0.05, respectively. Excluding the
1997 $3,600,000 ($0.25 per share) Level Five Research, Inc. 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 quarter ended June 30,
1997 would have been $510,000 and $0.03, respectively.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
Revenues for the six months ended June 30, 1998 decreased $5,275,000, or
13%, to $33,845,000 compared to $39,120,000 for the six months ended June
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 29% to $26,467,000 for the six
months ended June 30, 1998 compared to $20,496,000 for the six months ended
June 30, 1997. Excluding the revenues associated with the assets sold to
Lernout & Hauspie, revenues from direct sales to corporations represented
over 60% of the revenue total for the six months ended June 30, 1998 and grew
by over 30% over the six months ended June 30, 1997. Additionally, of the
total revenues in 1998, less than 5% were revenues from the acquisitions of
ViewPort and Henderson Software, Inc.
Gross profit decreased $4,947,000, or 14%, from $35,121,000 for the six
months ended June 30, 1997 to $30,174,000 for the six months ended June 30,
1998. Excluding the gross profit associated with the assets sold to Lernout &
Hauspie, gross profit increased $5,227,000 or 28%, to $23,715,000 for the six
months ended June 30, 1998 from $18,488,000 for the six months ended June
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 six
months ended June 30, 1998 and 1997.
Total operating expenses decreased $7,591,000 to $32,877,000 for the six
months ended June 30, 1998 from $40,468,000 for the six months ended June
30, 1997. Included in the total operating expenses for the six months ended
June 30, 1998 was an acquisition charge of $2,100,000 for certain purchase
technology under research and development by ViewPort Development AB.
Included in total operating expenses for the six months ended June
30, 1997 were acquisition charges of $5,400,000 for certain purchased
technology under research and development by 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 $4,611,000 or 20% to $28,214,000 for the six
months ended June 30, 1998 compared to $23,603,000 the six months ended
June 30, 1997.
Sales and marketing expenses increased $540,000, or 5%, to $11,766,000 for
the six months ended June 30, 1998 from $11,226,000 for the six months ended
June 30, 1997. Excluding the sales and marketing expenses associated with the
assets sold to Lernout & Hauspie, sales and marketing expenses increased
$590,000, or 6%, for the six months ended June 30, 1998 compared to the six
months ended June 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 43% of revenues for the six
months ended June 30, 1998 compared to 52% for the six months ended
June 30, 1997.
Product development expenses decreased $625,000 from $10,773,000 for the
six months ended June 30, 1997 to $10,148,000 for the six months ended June
30, 1998. Excluding the product development expenses associated with the
assets sold to Lernout & Hauspie, product development costs increased by
$2,510,000 or 41% for the six months ended June 30, 1998 compared to the six
months ended June 30, 1997. The increase is primarily due to lower capitalized
costs for the Company for the six months ended June 30, 1998 as compared to
the same period in 1997. The Company's product development costs, excluding
the product development expenses associated with the assets sold to Lernout &
Hauspie, were 32% of revenues for the six months ended June 30, 1998
compared to 30% of revenues for the six months ended June 30, 1997.
General and administrative expenses increased $1,642,000 to $8,863,000 for the
six months ended June 30, 1998 compared to $7,221,000 for the six months
ended June 30, 1997. Excluding the administrative expenses associated with the
assets sold to Lernout & Hauspie, general and administrative expenses increased
$1,511,000, or 22%, for the six months ended June 30, 1998 compared to the six
months ended June 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 31% of revenues for the six months ended June
30, 1998 compared to 33% for the six months ended June 30, 1997.
The Company's effective tax rate was influenced in 1998 by the $12,012,000
gain on sale of the assets sold to Lernout & Hauspie in April 1998 and
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 recoverable, and the 1998
in-process research and development charge of $2,100,000 discussed above and
in 1997 by the in-process research and development charge of $5,400,000 as
discussed above. Excluding these special items, the Company's effective tax
rate for the six months ended June 30, 1998 was 37% as compared to 38% for
the six months ended June 30, 1997.
Excluding the $12,012,000 ($0.77 per share) gain on sale of the assets sold to
Lernout & Hauspie and the $2,100,000 ($0.14 per share) write-off related to the
ViewPort Development AB in-process research and development, net income
and earnings per share for the six months ending June 30, 1998 would have
been $900,000 and $0.06, respectively. Excluding the 1997 $3,600,000 ($0.25
per share) Level Five Research, Inc. purchased in process research and
development charge; $1,800,000 ($0.13 per share) write-off related to the
Mastersoft products and technologies 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 six months ended June 30, 1997 would have been $4,819,000 and $0.32,
respectively.
Liquidity and Capital Resources
The Company's operating activities provided cash of $1,673,000 for the six
months ended June 30, 1998 compared to $10,210,000 for the six months ended
June 30, 1997. The decreased contribution from operating activities of
$8,537,000 was primarily due to timing of payments on accounts payable,
accrued liabilities, and income taxes in 1998.
The Company's investing activities provided cash of $5,738,000 for the six
months ended June 30, 1998 compared to using cash of $22,975,000 for the six
months ended June 30, 1997. The increase of $28,713,000 was due to the 1998
proceeds of $19,853,000 received from Lernout & Hauspie for sale of the
Company's linguistic software assets; decrease in capitalized product
development costs; and decline 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 $3,368,000 for the six
months ended June 30, 1998 compared to $948,000 for the six months ended
June 30, 1997. The increase of $2,420,000 primarily relates to an increase in
the proceeds received from stock option exercises.
As of June 30, 1997, the Company had working capital of $106,176,000. Total
cash, cash equivalents, and marketable securities at June 30, 1998 were
$96,912,000. 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, 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 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company on
May 7, 1998, at which a quorum was present, the stockholders
approved the following proposals by the number of shares of
common stock voted as noted:
Proposal #1 - Election of three Class II directors to serve until the
Company's 2001 Annual Meeting of Stockholders and until
their successors are elected and qualified.
<TABLE>
<CAPTION>
Number of Shares
Voted For Withheld
---------- --------
<S> <C> <C>
Steven R. Vana-Paxhia 12,853,535 604,170
Stephen O. Jaeger 12,864,800 592,905
John Guttag 12,862,068 595,637
</TABLE>
The following directors' terms of office continued
after the Annual Stockholders' Meeting of
Stockholders:
Ray Stata
William J. Wisneski
Samuel H. Fuller
Ray Shepard
Joseph A. Baute
J.P. Barger
Joanna T. Lau
Proposal #2 - Approval and ratification of an amendment to
the Company's 1993 Stock Purchase Plan, which would
provide that the number of shares authorized to be issued
under the 1993 Stock Purchase Plan, be increased to 450,000
shares.
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
For 7,544,996
Against 291,565
Abstain 24,278
No Vote 5,596,866
</TABLE>
Proposal #3 - Approval and ratification of an amendment to
the Company's 1996 Stock Incentive Plan, which would
provide that the number of shares authorized to be issued
under the 1996 Stock Incentive Plan, be increased to
5,000,000 shares.
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
For 4,918,534
Against 2,911,006
Abstain 29,754
No Vote 5,598,411
</TABLE>
Proposal #4 - Approval and ratification of an amendment to
the Company's 1996 Non-employee Director Plan which
would provide that the number of shares authorized to be
issued under the 1996 Non-employee Director Plan be
increased to 415,000 shares.
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
For 5,389,418
Against 2,911,006
Abstain 31,174
No Vote 5,598,411
</TABLE>
Proposal #5 - Ratification of the selection of Ernst & Young
LLP as independent auditors of the Company for the fiscal year ended
December 31, 1998.
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C>
For 13,425,802
Against 13,385
Abstain 18,518
</TABLE>
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 (1) report on Form 8-K during the quarter
ended June 30, 1998.
(i) Current Report on Form 8-K reporting the sale on April
23, 1998 of the linguistic software assets to Lernout &
Hauspie Speech Products N.V., filed with the Securities and
Exchange Commission on May 7, 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: August 11, 1998 /s/ Betty J. Savage
-------------------
Betty J. Savage
Vice President and Chief Financial Officer
Date: August 11, 1998 /s/ Patricia A. Michaels
------------------------
Patricia A. Michaels
Corporate Controller
(Chief Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE 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
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 29,291
<SECURITIES> 67,621
<RECEIVABLES> 26,324
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 126,688
<PP&E> 6,945
<DEPRECIATION> 0
<TOTAL-ASSETS> 150,918
<CURRENT-LIABILITIES> 20,512
<BONDS> 0
0
0
<COMMON> 149
<OTHER-SE> 130,257
<TOTAL-LIABILITY-AND-EQUITY> 150,918
<SALES> 33,845
<TOTAL-REVENUES> 33,845
<CGS> 0
<TOTAL-COSTS> 3,671
<OTHER-EXPENSES> 32,877
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,343
<INCOME-TAX> 531
<INCOME-CONTINUING> 10,812
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,812
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.71
</TABLE>
