<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No.1 on
FORM 10-Q/A
(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: 000-23384
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INSO CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-3216243
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
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 No X
-------- --------
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
1 of 19
<PAGE>
INSO CORPORATION
AMENDMENT NO. 1 ON FORM 10-Q/A
AMENDED FILING OF FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1998
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
Subsequent to the filing of its Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998 with the Securities and Exchange Commission, Inso
Corporation (the "Company") discovered certain errors and irregularities that
ultimately affected the timing and dollar amount of previously reported revenues
from license transactions for the three and nine month periods ended September
30, 1998. As a result of these errors and irregularities, the Company has
restated revenues and the results of operations in its interim financial
statements for the three and nine months ended September 30, 1998 (see Note 1 to
the Unaudited Condensed Consolidated Financial Statements).
The Company, in consultation with its independent accountants, also has
determined to adjust the amounts originally allocated to acquired in-process
research and development for the acquisition of ViewPort Development AB for the
nine months ended September 30, 1998 to reflect the new methodology set forth in
the September 15, 1998 letter from the Securities and Exchange Commission Staff
to the American Institute of Certified Public Accountants (see Note 1 to the
Unaudited Condensed Consolidated Financial Statements).
In addition to the above, the Company reclassified for 1998 and 1997 certain
service and support costs from sales and marketing expense to cost of revenues.
Unless otherwise stated, information in the originally filed Form 10-Q is
presented as of the original filing date, and has not been updated in this
amended filing. Quarterly financial statement information and related
disclosures included in this amended filing reflect, where appropriate, changes
as a result of the restatements.
2
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INSO CORPORATION
FORM 10-Q INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
Part I. Financial Information - Restated
Item 1. Financial Information
Condensed Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Operations
Nine Months Ended September 30, 1998 and 1997 6
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1998 and 1997 7
Notes to Condensed Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-18
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 19
Exhibit Index
</TABLE>
3
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PART I - FINANCIAL INFORMATION - RESTATED
ITEM 1. FINANCIAL STATEMENTS
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
------------ -----------
ASSETS (Restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,625 $ 18,512
Marketable securities 64,772 61,945
Accounts receivable, net 24,444 25,889
Income tax receivable 610 0
Other current assets 2,628 1,817
------------ -----------
Total current assets 116,079 108,163
Property and equipment, net 6,699 7,073
Product development costs, net 13,140 9,015
Intangible assets, net 4,108 4,714
Other assets, net 6,295 3,201
Deferred income tax benefit, net 2,528 5,917
------------ -----------
TOTAL ASSETS $ 148,849 $ 138,083
------------ -----------
------------ -----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 5,985 $ 3,899
Accrued salaries, commission and bonuses 4,613 5,478
Acquisition related liabilities 0 1,482
Unearned revenue 5,285 3,522
Royalties payable 36 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 19,622 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 (7,583) (10,063)
------------ -----------
131,420 118,270
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 129,227 115,478
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 148,849 $ 138,083
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
4
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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
------------ -----------
(Restated)
<S> <C> <C>
Net revenues $ 14,139 $ 20,462
Cost of revenues 2,621 2,385
------------ -----------
Gross profit 11,518 18,077
Operating expenses
Sales and marketing 5,575 6,077
Product development 4,751 6,089
General and administrative 3,624 3,888
Purchased in-process research and development 7,500 0
------------ -----------
Total operating expenses 21,450 16,054
------------ -----------
Operating (loss) income (9,932) 2,023
Non-operating income:
Net investment income 1,446 1,142
------------ -----------
(Loss) income before provision for income taxes (8,486) 3,165
Provision (benefit) for income taxes (364) 1,176
------------ -----------
Net (loss) income $ (8,122) $ 1,989
------------ -----------
------------ -----------
Basic (loss) earnings per share $ (0.53) $ 0.14
------------ -----------
------------ -----------
Diluted (loss) earnings per share $ (0.53) $ 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.
5
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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
------------ -----------
(Restated)
<S> <C> <C>
Net revenues $ 45,462 $ 59,582
Cost of revenues 7,441 7,307
------------ -----------
Gross profit 38,021 52,275
Operating expenses
Sales and marketing 16,269 16,380
Product development 14,899 16,862
General and administrative 12,602 11,109
Restructuring expenses 5,848
Purchased in-process research and development 8,100 5,400
------------ -----------
Total operating expenses 51,870 55,599
------------ -----------
Operating loss (13,849) (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 1,643 (406)
(Benefit) provision for income taxes (837) 1,870
------------ -----------
Net income (loss) $ 2,480 $ (2,276)
------------ -----------
------------ -----------
Basic earnings (loss) per share $ 0.17 $ (0.16)
------------ -----------
------------ -----------
Diluted earnings (loss) per share $ 0.16 $ (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.
6
<PAGE>
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
------------ -----------
(Restated)
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ 2,480 $ (2,276)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 6,976 6,398
Purchased in-process research and development 8,100 5,400
Deferred income taxes 1,105 (3,496)
Restructuring expenses 5,045
Gain on sale of linguistic software net assets (12,012)
------------ -----------
6,649 11,071
Changes in operating assets and liabilities:
Accounts receivable (38) (303)
Accounts payable and accrued liabilities (4,107) (234)
Current income taxes (794) 5,449
Royalties payable (1,230) (478)
Due to Houghton Mifflin Company (396) (458)
Other assets and liabilities (628) 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 $ 2,620
-----------
-----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
7
<PAGE>
INSO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 1998
Note 1. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the filing of its Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998 with the Securities and Exchange
Commission, the Company discovered certain errors and irregularities
during its year end audit that ultimately affected the timing and
dollar amount of previously reported revenues. In January and
February 1999, the Company performed an investigation, including
additional procedures to determine the extent of the errors and
irregularities. As a result of these procedures and information now
known or disclosed, the Company has concluded that certain
transactions were improperly reported as revenue for the three and
nine month periods ended September 30, 1998. As a result, the Company
has restated revenues and the results of operations in its interim
financial statements for the three and nine month periods ended
September 30, 1998.
In its investigation, the Company discovered irregularities that
relate primarily to side agreements and other terms and conditions
with a number of foreign distributors that have resulted or could
result in significant concessions or allowances that were not
known or accounted for when the revenue was previously
reported as earned.
The Company, in consultation with its independent accountants, also
has adjusted the amounts originally allocated to acquired in-process
research and development for the acquisition of ViewPort Development
AB for the nine months ended September 30, 1998 to reflect the new
methodology set forth in the September 15, 1998 letter from the
Securities and Exchange Commission Staff to the American Institute of
Certified Public Accountants. As a result, the Company has decreased
the amount of the purchase price allocated to acquired in-process
research and development and increased the amount allocated to
technology, other intangibles, and goodwill. Specifically, the
Company reduced the amount of the previously reported charge for
in-process research and development from $2,100,000 to $600,000,
increased purchased technology by $200,000, increased other
intangibles by $230,000, and increased goodwill by $1,070,000.
In addition to the above, the Company reclassified for 1998 and 1997
certain service and support costs from sales and marketing expense to
cost of revenues.
As a result of the foregoing, the Company's consolidated revenues and
results of operations for the three and nine month periods ended
September 30, 1998 and its financial position at September 30, 1998
have been restated as follows:
8
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<TABLE>
<CAPTION>
For the three months For the nine months
ended September 30, 1998 ended September 30, 1998
STATEMENT OF OPERATIONS DATA: (AS REPORTED) (RESTATED) (AS REPORTED) (RESTATED)
- -----------------------------------------------------------------------------------------------------------
(in thousands, expect per share amounts)
<S> <C> <C> <C> <C>
Net revenues $18,707 $14,139 $52,552 $45,462
Cost of revenues 1,933 2,621 5,604 7,441
Gross profit 16,774 11,518 46,948 38,021
Purchased in-process research and development 7,500 7,500 9,600 8,100
Sales and marketing expenses 6,244 5,575 18,010 16,269
Total operating expenses 22,048 21,450 54,925 51,870
Operating loss (5,274) (9,932) (7,977) (13,849)
Provision (benefit) for taxes 1,360 (364) 1,891 (837)
Net (loss) income (5,188) (8,122) 5,624 2,480
Basic (loss) earnings per share ($0.34) ($0.53) $0.38 $0.17
------- ------- ------- -------
------- ------- ------- -------
Diluted (loss) earnings per share ($0.34) ($0.53) $0.36 $0.16
------- ------- ------- -------
------- ------- ------- -------
<CAPTION>
As of September 30, 1998
BALANCE SHEET DATA: (As reported) (Restated)
- -----------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Accounts receivable $31,917 $24,444
Total current assets 122,942 116,079
Product development costs, net 13,037 13,140
Intangible assets, net 2,995 4,108
Total assets 154,896 148,849
Unearned revenue 6,069 5,285
Total current liabilities 22,525 19,622
Total stockholders' equity 132,371 129,227
</TABLE>
For the three and nine-month periods ended September 30, 1997, the Company
reclassified $459,000 and $1,382,000, respectively for certain service and
support costs from sales and marketing expense to cost of revenues.
9
<PAGE>
Note 2. 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 3. 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 4. 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 5. 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
10
<PAGE>
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 6. 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 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
September 30, 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 $600,000, or $0.04 per share. Intangible assets of $1,829,000
were recorded at the time of the acquisition and are being amortized
on a straight-line basis over their estimated useful lives of ranging
from one to 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.
11
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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 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
$2,965,000 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 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, $600,000 relating to ViewPort
Development AB, and $700,000 relating to Henderson Software, Inc.
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, 1998 September 30, 1997
------------------ ------------------
(Restated) (Restated)
<S> <C> <C>
Net revenues $48,735,000 $ 63,620,000
Net income (loss) $ 661,000 $(12,764,000)
Diluted earnings (loss) per share $ 0.04 $ (0.89)
</TABLE>
Note 7. 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.
12
<PAGE>
Note 8. 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.
13
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As a result of the restatement of the Company's financial statements for the
interim periods in 1998, certain information contained in this item related
to such periods have changed from that which appeared in the Company's
originally filed Form 10-Q for those periods.
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Revenues for the three months ended September 30, 1998 decreased $6,323,000,
or 31%, to $14,139,000 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 increased by approximately 10% to $14,139,000 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 and distribution
product sales represented approximately 59% of the revenue total for the
quarter ended September 30, 1998 and a 5% 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 $6,559,000, or 36%, from $18,077,000 for the three
months ended September 30, 1997 to $11,518,000 for the three months ended
September 30, 1998. Excluding the gross profit associated with the assets
sold to Lernout & Hauspie, gross profit increased $198,000, or 2%, to
$11,518,000 for the three months ended September 30, 1998 from $11,320,000
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 81% for the three months ended September 30, 1998
compared to 88% 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 and increased fulfillment costs
in 1998.
Total operating expenses increased $5,396,000 to $21,450,000 for the three
months ended September 30, 1998 from $16,054,000 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 $555,000, or 4%, to $13,950,000 for
the three months ended September 30, 1998 compared to $13,395,000 for the
three months ended September 30, 1997.
Sales and marketing expenses decreased $502,000 to $5,575,000 for the three
months ended September 30, 1998 from $6,077,000 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 $264,000 for three months ended September 30, 1998 compared to the
three months ended September 30, 1997. Sales and marketing expenses were 39%
of revenues for the three months ended September 30, 1998 compared to 45% for
the three months ended September 30, 1997, excluding the sales and marketing
expenses associated with the assets sold to Lernout & Hauspie. The decline in
absolute dollars 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 revenue at a higher rate than the increase in sales
and marketing expenses.
14
<PAGE>
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 34% of revenues for the three months ended September 30, 1998
compared to 32% of revenues for the three months ended September 30, 1997. The
increase in product development expenses as a percentage of revenues is due to
the aforementioned increased investment in viewing and information sharing and
distribution products.
General and administrative expenses decreased $264,000 to $3,624,000 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 $240,000, or 7%, 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 26% of revenues for
the three months ended September 30, 1998 and 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 loss and loss per share for the quarter ending September
30, 1998 would have been $622,000 and $0.04 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 $14,120,000,
or 24%, to $45,462,000 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 increased
approximately 15% to $38,484,000 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 and distribution product sales represented approximately
45% of the revenue total for the nine months ended September 30, 1998 and
grew by 11% over the nine months ended September 30, 1997. Additionally, of
the total revenues for the nine months ended September 30, 1998, less than 5%
were revenues from the acquisitions of MediaBank, ViewPort Development, and
Henderson Software, Inc.
Gross profit decreased $14,254,000, or 27%, from $52,275,000 for the nine months
ended September 30, 1997 to $38,021,000 for the nine months ended September 30,
1998. Excluding the gross profit associated with the assets sold to Lernout &
Hauspie, gross profit increased $3,077,000, or 11%, to $31,962,000 for the nine
months ended September 30, 1998 from $28,885,000 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 83% for
the nine months ended September 30, 1998 compared to 87% for the nine months
ended September 30, 1997. The decrease in gross profit percentage in 1998 as
compared to 1997 was primarily due to an increase in amortization expense for
capitalized software, increase in cost of service revenues and increased
fulfillment costs in 1998.
15
<PAGE>
Total operating expenses decreased $3,729,000 to $51,870,000 for the nine months
ended September 30, 1998 from $55,599,000 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 $8,100,000 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 $5,132,000, or 14%, to $41,207,000 for the nine months ended September
30, 1998 compared to $36,075,000 for the nine months ended September 30, 1997.
Sales and marketing expenses decreased $111,000, or 1%, to $16,269,000 for the
nine months ended September 30, 1998 from $16,380,000 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
$177,000, or 1%, for the nine months ended September 30, 1998 compared to the
nine months ended September 30, 1997. The increase is the result of 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 41% of revenues for the nine months
ended September 30, 1998 compared to 47% 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 acquisitions. The Company's product development costs, excluding the
product development expenses associated with the assets sold to Lernout &
Hauspie, were 35% 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 $1,493,000 to $12,602,000 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 $1,866,000, or 18%, 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 costs and
facilities costs. General and administrative expenses, excluding the expenses
associated with the assets sold to Lernout & Hauspie, were 31% of revenues for
the nine months ended September 30, 1998 and 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 $8,100,000 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%.
16
<PAGE>
Excluding the $12,012,000 ($0.77 per share) gain on sale of the assets sold to
Lernout & Hauspie and the $8,100,000 ($0.53 per share) write-off related to the
MediaBank and ViewPort Development AB in-process research and development
charge, net loss and loss per share for the nine months ending September 30,
1998 would have been $1,432,000 and $0.10, 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 timing of payments on accounts
payable, accrued liabilities, royalties payable and income taxes in 1998 as well
as the overall lower level of earnings 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.
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.
As of September 30, 1998, the Company had working capital of $96,457,000. 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.
17
<PAGE>
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 it 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 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 and 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.
18
<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 27 Restated 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: March 31, 1999 /s/ Betty J. Savage
---------------------------------
Betty J. Savage
Vice President and Chief Financial Officer
Date: March 31, 1999 /s/ Patricia A. Michaels
---------------------------------
Patricia A. Michaels
Corporate Controller
(Chief Accounting Officer)
19
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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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.
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