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 April 30, 1999
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
INSO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3216243
(State or other jurisdiction (I.R.S. Employer Identification 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 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 June 10, 1999
Common Stock 15,606,020
(par value $.01 per share)
INSO CORPORATION
FORM 10-Q INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
April 30, 1999, January 31, 1999 and December 31,
1998
Condensed Consolidated Statements of Operations
Three Months Ended April 30, 1999 and 1998 and one
month ended January 31, 1999
Condensed Consolidated Statements of Cash Flows
Three Months Ended April 30, 1999 and 1998 and one
month ended January 31, 1999
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Part I. Financial Information
Item I. Financial Statements
INSO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 30, 1999, JANUARY 31, 1999 AND DECEMBER 31, 1998
(Unaudited, in thousands except share and per share amounts)
<TABLE>
<CAPTION>
April 30 January 31 December 31
1999 1999 1998
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents 5,504 9,517 9,502
Marketable securities 32,795 36,573 44,555
Restricted marketable
securities 6,526 6,526 6,526
Accounts receivable, net 19,398 24,471 27,588
Prepaid expenses and
other current assets 3,085 3,846 5,223
------ ------ ------
Total current assets 67,308 80,933 93,394
Property and equipment, net 9,113 9,679 9,865
Product development
costs,net 20,946 21,807 21,322
Excess of costs over net
assets acquired, net 20,357 21,324 19,891
Other intangible assets, net 10,320 10,915 10,783
Long-term accounts
receivable, net 2,511 2,901 2,901
Licensed technology and
advances, net 4,886 5,335 2,408
Investment in Information
Please LLC 2,655 2,655 2,655
----- ----- -----
TOTAL ASSETS $138,096 155,549 163,219
------- ------- -------
------- ------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 1,548 2,121 2,207
Accrued liabilities 14,975 13,075 9,771
Accrued salaries,
commissions and bonuses 8,482 5,300 6,444
Acquisition related
liabilities 13,131 14,624 16,551
Unearned revenue 16,882 14,555 13,542
Royalties payable 1,039 1,248 1,615
Capital leases, current
portion 913 974 987
------ ------ ------
Total current liabilities 56,970 51,897 51,117
Unearned revenue 2,127 2,622 2,478
Capital leases, net of
current portion 181 375 450
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; 15,512,340,
15,515,840, and 15,506,640
shares issued at
April 30, 1999, January 31,
1999 and December 31,
1998, respectively 155 155 155
Capital in excess of
par value 140,206 140,288 140,130
Accumulated deficit (60,308) (38,323) (29,632)
-------- -------- -------
80,053 102,120 110,653
Unamortized value of
restricted shares (18) (102) (116)
Notes Receivable from Stock
Purchase Agreements (1,159) (1,305) (1,305)
Treasury stock, at cost,
5,075 shares at
April 30, 1999,
January 31, 1999 and
December 31, 1998. (58) (58) (58)
------ ------ -------
Total stockholders'
equity 78,818 100,655 109,174
------ ------ -------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 138,096 155,549 163,219
------- ------ -------
------- ------ -------
See accompanying notes to unaudited condensed consolidated
financial statements
</TABLE>
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share amounts)
<TABLE>
<CAPTION>
ONE
THREE MONTHS ENDED MONTH ENDED
APRIL 30, JANUARY 31,
1999 1998 1999
---- ---- -----
<S> <C> <C> <C>
Revenues:
Product licenses $ 6,169 $ 14,914 $ 1,819
Service 5,325 1,572 1,289
----- ----- -----
Total revenues 11,494 16,486 3,108
Cost of revenues:
Cost of product
licenses 3,110 2,049 2,332
Cost of service 3,197 492 1,015
----- ----- -----
Total cost of
revenues 6,307 2,541 3,347
----- ----- -----
Gross profit (loss) 5,187 13,945 (239)
Operating expenses:
Sales and marketing 8,599 5,587 2,725
Product development 7,954 5,432 2,535
Amortization of
intangible assets 1,361 300 304
General and
administrative 6,245 4,389 2,741
Special charges 3,454 0 0
Purchased in-process
research and
development 0 600 500
----- ---- -----
Total operating
expenses 27,613 16,308 8,805
------ ------ -----
Operating loss (22,426) (2,363) (9,044)
Non-operating income:
Net investment
income 441 703 353
Gain on sale of
linguistic software
net assets 0 12,012 0
------- ------- ---
(Loss) income before
provision for
income taxes (21,985) 10,352 (8,691)
Benefit for income
taxes 0 (390) 0
------ ------ -----
Net (loss)income*$ (21,985) $ 10,742 $ (8,691)
-------- ------- -------
-------- ------- -------
Basic (loss) earnings
per share $ (1.42) $ 0.73 $ (0.56)
------- ------ -----
------- ------ -----
Diluted (loss) earnings
per share $ (1.42) $ 0.71 $ (0.56)
------ ----- -----
------ ----- -----
Weighted Average Shares Outstanding:
Basic 15,509 14,750 15,506
Diluted 15,509 15,195 15,506
</TABLE>
* Net (loss) income equals comprehensive (loss) income for
each period presented.
See accompanying notes to unaudited condensed consolidated
financial statements.
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands of dollars)
<TABLE>
<CAPTION>
ONE MONTH
ENDED
THREE MONTHS ENDED APRIL 30, JANUARY 31,
1999 1998 1999
<S> <C> <C> <C>
Cash flows from (used in)
operating activities:
Net income (loss) $ (21,985) $ 10,742 $ (8,691)
Adjustments to reconcile net
income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,238 2,486 2,621
Purchased in-process research
and develop 0 600 500
Deferred income taxes 0 3,084 0
Gain on sale of linguistic
software net assets 0 (12,012) 0
------ ------- -------
(17,747) 4,900 (5,570)
Changes in operating assets and liabilities:
Accounts receivable 5,463 4,896 3,419
Accounts payable and accrued
liabilities 4,826 (2,056) 1,724
Royalties payable (209) (946) (367)
Due to Houghton Mifflin Company 0 (379) 0
Other assets and liabilities 2,219 (500) (1,621)
----- ----- -----
Net cash (used in) provided by
operating activities (5,448) 5,915 (2,415)
Cash flows from (used in) investing activities:
Property and equipment
expenditures (470) (1,564) (169)
Capitalized product development
costs (1,026) (1,191) (391)
Acquisitions, net of cash
acquired (993) (2,426) (4,992)
Net purchase of marketable
securities 3,778 6,676 7,982
Proceeds from the sale of
linguistic software net assets 0 10,103 0
----- ------ -----
Net cash provided in investing
activities 1,289 11,598 2,430
Cash flows from (used in) financing activities:
Net proceeds from issuance of
common stock 0 1,643 0
Proceeds from the payment of notes
receivable underlying
Stock Purchase Agreements 146 0 0
----- -- --
Net cash provided by
financing activities 146 1,643 0
----- ----- --
Net increase (decrease) in cash and
cash equivalents (4,013) 19,156 15
Cash and cash equivalents at beginning
of period 9,517 8,827 9,502
----- ----- ----
Cash and cash equivalents at end of
period $ 5,504 $ 27,983 $ 9,517
----- ------ ------
----- ------ ------
</TABLE>
See accompanying notes to unaudited condensed consolidated
financial statements.
INSO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited)
April 30, 1999
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-month period ended April 30, 1999 are not necessarily
indicative of the results that may be
expected for the fiscal year ending January 31, 2000.
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, 1998.
In November 1998, the Board of Directors approved a change in the
Company's fiscal year to February 1 through January 31, effective
for the twelve-month period ending January 31, 2000. Through
December 31, 1998, the Company reported results on a calendar
year basis. As such, all quarterly
comparative information has been recast to reflect the change in
the fiscal year-end. The condensed consolidated financial statements
also include the unaudited condensed consolidated balance sheet,
statement of operations and cash flows as of and for the one-
month period ended January 31, 1999.
Note 2. Recent Accounting Pronouncements
In 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public
Accountants issued Statement of Position 98-9 (SOP 98-9)
"Modification of SOP 97-2, Software
Revenue Recognition with respect to Certain Transactions"
effective for fiscal years beginning after
March 15, 1999. SOP 98-9 defines vendor-specific objective
evidence of fair value in connection with
software revenue recognition. The adoption of SOP 98-9 is not
expected to have a material impact on
the Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued
Statement of Accounting Standards No.
133 (SFAS 133), "Accounting for Derivative Instruments and
Hedging Activities" effective for fiscal
years beginning after June 15, 1999. SFAS 133 provides a
comprehensive and consistent standard for
the recognition and measurement of derivatives and hedging
activities. The Company does not believe
that the adoption of this standard will have a material impact on
its financial position or results of
operations.
Note 3. Earnings Per Share
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 445,000
shares for the three months ended April 30, 1998. Options to
purchase shares of common stock, for the
three months ended April 30, 1999 and the one-month period ended
January 31, 1999, were not included
in the computation of diluted earnings per share because the
effect would be antidilutive.
Note 4. Commitments and Contingencies
During February 1999, certain putative class action lawsuits were
filed against the Company and certain of its officers and employees by
purported representatives of a class of the Company's current and
former stockholders in the U.S. District Court for the District
of Massachusetts, claiming violations of
the Federal securities laws based on alleged misrepresentations
regarding the Company's anticipated
revenues and earnings and interim financial statements for the
first three quarters of fiscal 1998. The
lawsuits were filed following the Company's announcement on
February 1, 1999 that it planned to restate its previously reported
revenues for the first three quarters of 1998. The lawsuits seek
unspecified damages. The plaintiffs have sought to consolidate the
above lawsuits into one consolidated action. The
claims are subject to meritorious defenses
that the Company plans to assert during
the lawsuit. The Company cannot predict the ultimate resolution
of these actions at this time, and there can be no assurance that the
litigation will not have a material adverse impact on the Company's
financial condition and results of operations.
The Company entered into a distribution agreement in the fourth
quarter of fiscal year 1998 with an international reseller that
provided the reseller with guaranteed levels of net receipts, as
defined by the agreement, for specified geographic areas (primarily
Australia, New Zealand, and certain countries in the
Far East), of $2,000,000 for each calendar year ended December
31, 1999 and 2000. At December 31, 1998, the Company recorded a charge
of $4,000,000 as management did not believe that the distributor
would be able to achieve the defined level of net receipts from
the agreement territory in either year.
The Company has outstanding irrevocable stand-by letters of
credit with terms of one to two years totaling $4,004,000 at April 30,
1999 supporting this guarantee. The Company had restricted marketable
securities totaling $6,526,000 at April 30, 1999 supporting the
letters of credit.
Note 5. Acquisitions
AIS Software S.A.
On January 12, 1999, the Company acquired AIS Software S.A. ("AIS
Software") from Berger-Levrault S.A., a French publisher, for
approximately $3,000,000 using available cash. AIS Software, based in
Paris, France is the developer of Balise, an SGML and XML
transformation tool and scripting language, as well as Dual Prism, a
Web-based XML and SGML publishing system. 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 a 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 one-month period ended January
31, 1999 of $500,000 or $0.03 per share. Intangible assets totaling
$2,700,000 were recorded at the time of the acquisition and are
being amortized on a straight-line basis over their estimated useful
lives, ranging from two to five years.
Venture Labs, Inc.
On December 22, 1998, the Company acquired all of the outstanding
stock of privately held Venture Labs Inc. and its subsidiary Paradigm
Development Corporation (collectively "Paradigm") for a total
value of $4,800,000. Paradigm is the developer of Java file
filtering and viewing technology for both
OEM and direct corporate use. In connection with the
acquisition, the Company paid $4,300,000 in
December 1998 using available cash and assumed certain
liabilities. The transaction was accounted for
as a purchase and included the purchase of certain technology
under research and development, which resulted in a charge to the
Company's fiscal 1998 consolidated fourth quarter results of
$1,800,000. Intangible assets totaling $1,594,000 were recorded for
the acquisition as well as noncompetition
agreements with key executives for a total value of $1,500,000.
Sherpa Systems Corporation
In December 1998, the Company acquired all of the outstanding
stock of privately held Sherpa Systems
Corporation ("Sherpa"). 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 total consideration paid was $36,000,000
consisting of $28,700,000 of cash and warrants
to purchase 1,456,458 shares of the Company's common stock. The
warrants, at the time of the acquisition, were valued at $5.00 per
warrant, or $7,282,000. The warrants, which are fully exercisable,
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.
Subsequent to the Company's announcement on February 1, 1999 to
restate its financial results (see note 4), the Company began
discussions with the warrant holders to reprice the warrants or
exchange them for cash with the objective of meeting the intention
under the original agreement and to approximate the total consideration
under the original agreement. As a result, $7,282,000 is included
within acquisition-related liabilities on the accompanying
balance sheet.
The acquisition of Sherpa was accounted for as a purchase and the
results of operations of Sherpa have been included in the consolidated
financial statements since December 4, 1998. The purchase price has
been allocated on a preliminary basis (until the final closing
adjustments under the original agreement are resolved with the sellers)
based upon the estimated fair value of the assets acquired and the
liabilities assumed at December 4, 1998. The acquisition included the
purchase of certain technology under research and development, which
resulted in a charge to the Company's fiscal 1998 consolidated fourth
quarter results of $12,000,000. At the time of the acquisition,
the Company also caused Sherpa to enter into employment and
noncompetition agreements with key executives. The Company expects to
make aggregate payments of approximately $1,600,000 over the next
three years under those agreements. Additionally, other intangible
assets and capitalized software totaling $29,885,000 were recorded in
connection with the acquisition.
The acquisition also included estimated costs of approximately
$5,800,000 for direct transaction costs and costs relating to the
elimination of excess and duplicative activities as a result of the
merger. As of April 30, 1999, approximately $4,400,000 for such costs
remained in the accrual. Since December 31,
1998, payments against the accrual consisted of the following:
approximately $620,000 for employee severance for elimination of
duplicate functions and closure of duplicate and excess operations;
approximately $260,000 for professional fees consisting
principally of appraisal, legal, and accounting
fees; and other out-of-pocket expenses related to the
acquisition. Employee terminations were
essentially in the areas of sales, marketing and administrative
functions. Additionally, at April 30, 1999,
the Company reevaluated the estimated severance costs relating to
the elimination of excess and duplicative activities and reduced the
related accrual and goodwill by approximately $500,000. A
majority of the payments relating to the remaining accrual are
expected to be made prior to January 31, 2000.
MediaBank
On August 28, 1998, the Company acquired the intellectual
property and certain other assets of Bitstream Inc.'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 included the purchase of certain technology under research
and development, which resulted in a charge the Company's fiscal
1998 consolidated third quarter results of $7,500,000.
ViewPort Development AB
On March 12, 1998, the Company acquired all of the outstanding
capital stock of privately held ViewPort Development AB for $2,500,000
using available cash. The transaction was accounted for as a
purchase and included the purchase of certain technology under
research and development, which resulted in a charge to the Company's
fiscal 1998 consolidated first quarter results of $600,000.
Unaudited pro forma net revenues, net loss and loss per share
shown below for the three months ended
April 30, 1998 assumes the acquisition of AIS Software S.A.,
Venture Labs, Inc., Sherpa Systems
Corporation and ViewPort Development AB occurred on February 1,
1998. Therefore, the three months ended April 30, 1998, presented
below, includes the write-off of certain purchased technology under
research and development of $500,000 relating to the acquisition
of AIS Software S.A., $1,800,000 relating to the acquisition of Venture
Labs, Inc., $12,000,000 relating to the acquisition of Sherpa
Systems Corporation, and $7,500,000 relating to the acquisition
of MediaBank.
<TABLE>
<CAPTION>
Three months ended
April 30, 1998
<S> <C>
Net revenues $ 28,337,000
Net loss $ (16,378,000)
Diluted loss per share $ (1.11)
</TABLE>
Note 6. Sale of linguistic software net assets
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. 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, 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 fiscal quarter ended April 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 in the three months ended
April 30, 1998 as management deemed that it is more likely than not
that these assets would be realized.
Note 7. Operations by Industry Segment
The Company reported three segments in its Form 10-K for 1998:
Lexical and Linguistic, Dynamic Document Exchange ("DDE"), and
Electronic Publishing Solutions/Product Data Management
("EPS/PDM"). The Company evaluates performance and allocates
resources based on profit and loss before special charges, income
taxes, sales and marketing expenses, certain administrative expenses,
and interest earned on the Company's investments. The accounting
policies of the reportable segments are the same as those described in
the summary of significant accounting policies in the Company's Annual
Report on Form 10-K.
Three months ended April 30, 1999
<TABLE>
<CAPTION>
Lexical
and
(In thousands of dollars) Linguistic DDE EPS/PDM Totals
<S> <C> <C> <C> <C>
Revenues from external
customers $0 $5,366 $6,128 $11,494
Segment profit (loss) 0 2,564 (2,991) (427)
Segment assets 0 65,693 30,735 96,428
Three months ended
April 30, 1998 Lexical
and
(In thousands of dollars) Linguistic DDE EPS/PDM Totals
Revenues from external
customers $6,205 $7,248 $3,033 $16,486
Segment profit (loss) 4,584 5,086 (451) 9,219
Segment assets 0 39,165 13,562 52,727
</TABLE>
<TABLE>
<CAPTION>
Reconciliation Information
<S> <C> <C>
Profit or loss
(In thousands of dollars) 1999 1998
Total external profit or loss
for reportable segments $(427) $ 9,219
Purchased in-process research and development - (600)
Special charges (3,454) -
Gain on sale of linguistic software net assets - 12,012
Net investment income 441 703
Sales and marketing expenses (8,599) (5,587)
Unallocated corporate and other expenses (9,946) (5,395)
Consolidated (loss) income before provision ------- ------
for income taxes $(21,985) $ 10,352
------ ------
------ ------
</TABLE>
On April 29, 1999, the Company announced implementation of a new
division structure which management expects to be implemented by the
end of the second fiscal quarter. Commencing with the
second fiscal quarter Form 10-Q, the Company expects the
reportable segments to include: Information
Exchange Division, Content management and Internet Publishing
Division, and Product Information Management Division. Prior period
segment data will be restated to reflect the above changes.
Note 8. Special Charges and Restructuring
For the fiscal quarter ended April 30, 1999, the Company incurred
$3,454,000 of special charges. Of the
total amount incurred, approximately $1,000,000 related to
professional fees incurred in connection with
the Company's investigation of errors and irregularities and
restatement of its 1998 financial results and
approximately $2,000,000 related to severance and other costs
incurred for certain executive, management, and other staff terminations.
Additionally, the Company incurred approximately $500,000
relating to the closure of the Company's Kansas City location,
primarily for severance.
On April 29, 1999, the Company announced that it expects to adopt
a plan of restructuring in the second quarter of fiscal year 2000.
The plan is aimed at reducing current operating costs, as well as supporting
the Company's new divisional structure, which is expected to be
completed in the second quarter of fiscal year 2000. The Company's
proposed restructuring plan calls for the reduction of more than 20%
from staff levels at the end of fiscal year 1998, the closure
and/or combination of domestic and
international sales and administrative facilities and the write-
off of leasehold improvements and support
assets associated with these locations. The complete details,
costs and timing to implement the plan in
this fiscal year are expected to be announced upon final Board
approval before the end of the second fiscal quarter. A charge
to the second fiscal quarter's results of approximately $5,000,000
to $7,000,000 is currently estimated for the restructuring plan. In addition,
the Company is in the process of assessing
the strategic value of certain capitalized intangible and other
assets with an aggregate net carrying value
exceeding $5,000,000. This assessment is expected to be
completed concurrent with the adoption of the
restructuring plan and may result in a second quarter non-cash
charge in excess of $5,000,000.
Note 9. Subsequent Events
On June 2, 1999, the Company was informed that the United
States Securities and Exchange Commission has issued a Formal
Order of Private Investigation in connection with matters relating to the
Company's previously announced restatement of its 1998 financial
results (see note 4). The Company is
cooperating with the Securities and Exchange Commission.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended April 30, 1999 Compared to Three Months Ended
April 30, 1998
Revenues for the three months ended April 30, 1999 decreased
$4,992,000, or 30%, to $11,494,000 compared to
$16,486,000 for the three months ended April 30, 1998. Total
revenues for the fiscal quarter ended April 30, 1998
included revenues of $6,205,000 from the Company's former lexical
and linguistic operating segment, which was
sold to Lernout & Hauspie in April 1998. Excluding the revenues
associated with the assets sold to Lernout &
Hauspie, net revenues increased by approximately 12% for the
three months ended April 30, 1999 compared to the
three months ended April 30, 1998. Service revenues for the
three months ended April 30, 1999 increased
$3,753,000, or 239%, to $5,325,000 from $1,572,000 for the three
months ended April 30, 1998 primarily due to
the acquisition of Sherpa Systems Corporation in December 1998.
Additionally, of the total revenues in the three
months ended April 30, 1999, approximately 40% were revenues from
the acquisitions made since April 1998.
Revenues from the Dynamic Document Exchange segment declined by
approximately 26% from $7,248,000 in the
three months ended April 30, 1998 to $5,366,000 in the three
months ended April 30, 1999. The decline was
mainly due to lower volume with corporate customers of Quick View
Plus. Revenues from the Electronic
Publishing Solutions and Product Data Management segments
increased 102% from $3,033,000 in the three months
ended April 30, 1998 to $6,128,000 in the three months ended
April 30, 1999. The increase was primarily related to
the addition of the PDM products acquired with the Sherpa
acquisition in December 1998. Revenues from the
Lexical and Linguistic segment declined from $6,205,000 for the
three months ended April 30, 1998 to $0 for the
three months ended April 30, 1999 as a result of the sale of the
linguistic software net assets to Lernout & Hauspie
as mentioned above.
Gross profit decreased $8,758,000, or 63%, from $13,945,000 for
the three months ended April 30, 1998 to
$5,187,000 for the three months ended April 30, 1999. Excluding
the gross profit associated with the assets sold to
Lernout & Hauspie, gross profit decreased $2,995,000, or 37%,
from $8,182,000 for the three months ended April
30, 1998 to $5,187,000 for the three months ended April 30, 1999.
Gross profit, as a percentage of revenues,
excluding the gross profit associated with the assets sold to
Lernout & Hauspie, was 45% for the three months
ended April 30, 1999 compared to 80% for the three months ended
April 30, 1998. The decrease in gross profit
percentage in 1999 was due to an increase in amortization expense
for capitalized software and acquired license
technology. Additionally, the cost to provide service revenues
increased at a faster rate than the associated revenues
thereby contributing to the decline in gross margin percentage.
Total operating expenses increased $11,305,000 to $27,613,000 for
the three months ended April 30, 1999 from
$16,308,000 for the three months ended April 30, 1998. Included
in total operating expenses for the three months
ended April 30, 1999 were special charges of $3,454,000 for costs
relating to the Company's restatement of
financial results, termination of staff, and the closure of the
Company's Kansas City office. Included in total
operating expenses for the three months ended April 30, 1998 was
an acquisition charge of $600,000 for certain
purchased technology under research and development by Viewpoint
Development AB at the time of the
acquisition. Excluding the aforementioned charges as well as
the operating expenses associated with the assets sold
to Lernout & Hauspie, operating expenses increased $10,522,000,
or 77%, to $24,159,000 for the three months
ended April 30, 1999 as compared to $13,637,000 for the three
months ended April 30, 1998.
Sales and marketing expenses increased $3,012,000 to $8,599,000
for the three months ended April 30, 1999 from
$5,587,000 for the three months ended April 30, 1998. Excluding
the sales and marketing expenses associated with
the assets sold to Lernout & Hauspie, sales and marketing
expenses increased $3,406,000 for the three months
ended April 30, 1999 as compared to the three months ended April
30, 1998. Sales and marketing expenses were
75% of revenues for the three months ended April 30, 1999
compared to 51% for the three months ended April 30,
1998, excluding the sales and marketing expenses associated with
the assets sold to Lernout & Hauspie. The
increase in absolute dollars from April 30, 1998 was primarily
the result of higher expenses associated with the
Company's acquisitions and increased expenses associated with
customer communication, such as user group
conferences. The increase in sales and marketing expenses as a
percentage of revenues was due principally to the
increase in revenue at a lower rate than the increase in sales
and marketing expenses.
Product development expenses increased $2,522,000 from $5,432,000
for the three months ended April 30, 1998 to
$7,954,000 for the three months ended April 30, 1999. Excluding
the product development expenses associated
with the assets sold to Lernout & Hauspie, product development
expenses increased by $3,811,000, or 92%, for the
three months ended April 30, 1999 compared to the three months
ended April 30, 1998. The increase was due
primarily to the Company's 1998 acquisitions, particularly in the
area of Product Data Management products. The
Company's product development expenses, excluding the product
development expenses associated with the assets
sold to Lernout & Hauspie, were 69% of revenues for the three
months ended April 30, 1999 compared to 40% of
revenues for the three months ended April 30, 1998. The increase
in product development expenses as a percentage
of revenues was due to the aforementioned acquisition.
General and administrative expenses increased $1,856,000 to
$6,245,000 for the three months ended April 30, 1999
compared to $4,389,000 for the three months ended April 30, 1998.
Excluding the administrative expenses
associated with the assets sold to Lernout & Hauspie, general and
administrative expenses increased $2,244,000, or
56%, for the three months ended April 30, 1999 compared to the
three months ended April 30, 1998. The increase
in general and administrative expenses was primarily due to
additional costs for facilities, insurance, and personnel
due to the Company's 1998 acquisitions. General and
administrative expenses, excluding the expenses associated
with the assets sold to Lernout & Hauspie, were 54% of revenues
for the three months ended April 30, 1999 and
39% of revenues for the three months ended April 30, 1998.
The Company has not recorded a benefit for net operating losses
incurred during the three months ended April 30,
1999. For the three months ended April 30, 1998, the Company's
effective tax rate was influenced by the
$12,012,000 gain on sale of the assets sold to Lernout & Hauspie,
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 of assets to Lernout & Hauspie would be
recoverable and the in-process research and
development charge of $600,000 discussed above. Excluding these
special items, the Company's effective tax rate
for the three months ended April 30, 1998 was 37%.
Net loss and loss per share was $21,985,000, and $1.42 per share,
respectively, for the three months ended April 30,
1999 as compared to $670,000, and $0.05 per share, for the three
months ended April 30, 1998, excluding the gain
on the sale of the linguistic software net assets of $12,012,000,
and the $600,000 purchased in-process research and
development charge note above.
One Month Ended January 31, 1999 Compared to One Month Ended
January 31, 1998
Revenues for the one month ended January 31, 1999 increased $732,000,
or 31%, to $3,108,000 compared to $2,376,000 for the one month
ended January 31, 1998. Total revenues for the one month ended
January 31, 1999 included revenues of $747,000 from the Company's
former lexical and linguistic operating segment, which was
sold to Lernout & Hauspie in April 1998. Excluding the
revenues associated with the assets sold to Lernout & Hauspie, net
revenues increased by approximately 91% for the one month ended
January 31, 1999 compared to the one month ended January 31, 1998.
Service revenues for the one month ended January 31, 1999 increased
$861,000, or 201%, to $1,289,000 from $428,000 for the one month
ended January 31, 1998 primarily due to the acquisition of Sherpa
Systems Corporation in December 1998.
Gross profit decreased $1,692,000, or 116%, to a loss of $239,000 for the
one month ended January 31, 1999 from a gross profit of $1,453,000 for
the one month ended January 31, 1998. Excluding the gross profit
associated with the assets sold to Lernout & Hauspie, gross profit
decreased to a loss of $239,000 for the one month ended January 31, 1999
from a gross profit of $1,122,000 for the one month ended January 31, 1998.
The decrease in gross profit in 1999 was due to an increase in amortization
expense for capitalized software and acquired license technology.
Additionally, the cost to provide service revenues increased at a faster
rate than the associated revenues thereby contributing to the decline
in gross margin percentage.
Total operating expenses increased $3,580,000 to $8,805,000 for the one
month ended January 31, 1999 from $5,225,000 for the one month ended
January 31, 1998. Included in total operating expenses for the one
month ended January 31, 1999 was an acquisition charge of $500,000
for certain purchased technology under research and development by
AIS Software at the time of the acquisition. Excluding the 1999
in-process research and development charge as well as the 1998
operating expenses associated with the assets sold to Lernout &
Hauspie, operating expenses increased $3,572,000, or 75%, to
$8,305,000 for the one month ended Janaury 31, 1999 as compared
to $4,733,000 for the one month ended January 31, 1998. The
increase in 1999 as compared to 1998 is due primarily to the
Company's 1998 acquisitions, particularly in the area of Product
Data Management products, increased expenses associated with
customer communication and increased amortization of intangible assets.
Excluding the $500,000 1999 purchased in-process research and
development charge noted above, net loss was $8,191,000 for the one
month ended January 31, 1999 as compared to $2,177,000 for the one
month ended January 31, 1998.
Liquidity and Capital Resources
The Company's operating activities used cash of $5,448,000 for
the three months ended April 30, 1999 compared to
providing cash of $5,915,000 for the three months ended April 30,
1998. The decreased contribution from
operating activities of $11,363,000 was due principally to the
overall lower level of earnings in the three months ended
April 30, 1999.
The Company's operating activities used cash of $2,415,000 for the one
month ended January 31, 1999 compared to $2,061,000 for the one
month ended January 31, 1998. The decreased contribution from
operating activities of $354,000 was due to a lower level of earnings
offset by increased collections of accounts receivable and timing
of payments on accounts payable and accrued liabilities.
The Company's investing activities provided cash of $1,289,000
for the three months ended April 30, 1999
compared to $11,598,000 for the three months ended April 30,
1998. The decrease of $10,309,000 was due in large
part to the 1998 proceeds of $10,103,000 received from Lernout &
Hauspie for the sale of the Company's linguistic
software assets and a decline in net purchases of marketable
securities.
The Company's investing activities provided cash of $2,430,000 for the
one month ended January 31, 1999 compared to using cash of $7,983,000
for the one month ended January 31, 1998. The increase of $10,413,000
primarily relates to a decline in the net purchases of marketable
securities.
The Company's financing activities provided cash of $146,000 for
the three months ended April 30, 1999 compared
to $1,643,000 for the three months ended April 30, 1998. The
decrease of $1,497,000 primarily relates to a lower
level of stock option exercises.
The Company's financing activities provided cash of $0 for the one
month ended January 31, 1999 compared to $359,000 for the one
month ended January 31, 1998. The decrease primarily relates to
a lower level of stock option exercises.
As of April 30, 1999, the Company had working capital of
$10,338,000. Total cash, cash equivalents, and
marketable securities at April 30, 1999 were $44,825,000, which
includes restricted marketable securities of
$6,526,000 supporting outstanding letters of credit. 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.
On February 1, 1999, the Company announced that it would restate
its financial results for the quarters ended March
31, June 30, and September 30, 1998. Subsequent to the
announcement of the Company's intention to restate its
financial results, certain putative class action lawsuits were
filed against the Company and certain of its officers and
employees by purported representatives of a class of the
Company's current and former stockholders in the U.S.
District Court for the District of Massachusetts, claiming
violations of the Federal securities laws based on alleged
misrepresentations regarding the Company's anticipated revenue
and earnings and interim financial statements for
the first three quarters of fiscal 1998. The lawsuits seek
unspecified damages. The plaintiffs have sought to
consolidate the above lawsuits into one consolidated action. The
claims are subject to meritorious defenses that the
Company plans to assert during the lawsuit. The Company cannot
predict the ultimate resolution of these actions at
this time, and there can be no assurance that the litigation will
not have a material adverse impact on the Company's
financial condition and results of operations.
Additionally, while it is not feasible to predict the total
costs, the Company expects to incur significant professional
fees with respect to the shareholder litigation filed against the
Company subsequent to announcement of the
restatement.
On June 2, 1999, the Company was informed that the United States
Securities and Exchange Commission has issued
a Formal Order of Private Investigation in connection with
matters relating to the Company's previously announced
restatement of its 1998 financial results. The Company is
cooperating with the Securities and Exchange
Commission.
In December 1998, the Company acquired all of the outstanding
stock of privately held Sherpa Systems Corporation
for total consideration paid of $36,000,000 consisting of
$28,700,000 of available cash and warrants to purchase
1,456,458 shares of common stock. The warrants at the time of the
acquisition were valued at $5.00 per warrant, or
$7,282,000. 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. At the time of the
acquisition, the Company also caused Sherpa to enter
into employment and noncompetition agreements with key
executives. The Company expects to make aggregate
payments of approximately $1,600,000 over the next three years
under those agreements.
Subsequent to the Company's announcement on February 1, 1999
regarding the restatement of revenues for the first
three quarters of 1998, the Company initiated discussions with
warrant holders to reprice the warrants or exchange
them for cash with the objective of meeting the intention of the
original agreement. As a result, $7,282,000 is
included within acquisition-related liabilities on the
accompanying balance sheet.
The Sherpa acquisition also included estimated costs of
approximately $5,800,000 for direct transaction costs and
costs relating to the elimination of excess and duplicative
activities as a result of the merger. As of April 30, 1999,
approximately $4,400,000 for such costs remained in the accrual.
Since December 31, 1998, payments against the
accrual consisted of the following: approximately $620,000 for
employee severance for elimination of duplicate
functions and closure of duplicate and excess operations;
approximately $260,000 for professional fees consisting
principally of appraisal, legal, and accounting fees; and other
out-of-pocket expenses related to the acquisition.
Employee terminations were essentially in the areas of sales,
marketing and administrative functions. Additionally,
at April 30, 1999, the Company reevaluated the estimated
severance costs relating to the elimination of excess and
duplicative activities and reduced the related accrual and
goodwill by approximately $500,000. A majority of the
payments relating to the remaining accrual are expected to be
made prior to January 31, 2000.
On April 29, 1999, the Company announced that it expects to adopt
a plan of restructuring in the second quarter of
fiscal year 2000. The plan is aimed at reducing current
operating costs, as well as supporting the Company's new
divisional structure, which is expected to be completed in the
second fiscal quarter. The Company's proposed
restructuring plan calls for the reduction of more than 20% from
staff levels at the end of fiscal year 1998, the
closure and/or combination of domestic and international sales
and administrative facilities and the write-off of
leasehold improvements and support assets associated with these
locations. The complete details, costs and timing
to implement the plan in this fiscal year are expected to be
announced upon final Board approval before the end of
the second fiscal quarter of 2000. A charge to the second fiscal
quarter's results of approximately $5,000,000 to
$7,000,000 is currently estimated for the restructuring plan. In
addition, the Company is in the process of assessing
the strategic value of certain capitalized intangible and other
assets with an aggregate net carrying value exceeding
$5,000,000. This assessment is expected to be completed
concurrent with the adoption of the restructuring plan and
may result in a second quarter non-cash charge in excess of
$5,000,000.
In June 1998, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 133 (SFAS
133), "Accounting for Derivative Instruments and Hedging
Activities" effective for fiscal years beginning after June
15, 1999. SFAS 133 provides a comprehensive and consistent
standard for the recognition and measurement of
derivatives and hedging activities. The Company does not believe
that this standard will have a material impact on
the Company's financial position or results of operations.
In 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants
issued Statement of Position 98-9 (SOP 98-9) "Modification of SOP
97-2, Software Revenue Recognition with
respect to Certain Transactions" effective for fiscal years
beginning after March 15, 1999. SOP 98-9 defines vendor
specific objective evidence of fair value in connection with
software revenue recognition. The adoption of SOP 98-
9 is not expected to have a material impact on the Company's
financial position or results of operations.
Acquired In-Process Research and Development
In January 1999, the Company acquired AIS Software S.A. (AIS) for
approximately $3,000,000 using available
cash. The AIS acquisition included the purchase of certain
technology under research and development, which
resulted in a charge to the Company's consolidated results for
the one-month period ended January 31, 1999 of
$500,000. Additionally, the fiscal year 1998 acquisitions
included certain material purchased in-process research
and development charges for Venture Labs Inc, Sherpa Systems
Corporation, and MediaBank totaling $21,300,000.
These amounts were expensed as non-recurring charges on the
respective acquisition dates as the acquired
technology had not yet reached technological feasibility and
therefore had no alternative future uses. At the time of
the acquisitions, the Company engaged an independent appraiser to
estimate the fair market value of the assets
acquired, to serve as a basis for the allocation of the purchase
price.
The nature of the efforts required to develop the purchased in-
process technology into commercially viable products
principally relates to the completion of all planning, designing,
prototyping, verification, and testing activities
necessary to establish that each product can be produced to meet
its design specifications, including functions,
features, and technical performance requirements.
The values of the purchased in-process research and development
were based upon future revenues to be earned
upon commercialization of the products. These cash flows were
discounted back to their net present value. The
resulting projected net cash flows from such projects were based
on management's estimates of revenues and
operating profits related to such projects. The revenue
estimates used to value the in-process research and
development were based on estimates of relevant market sizes and
growth factors, expected trends in the related
technology, and the nature and expected timing of new product
introductions by the Company and its competitors.
The projected net cash flows were discounted to their present
value using the weighted average cost of capital
(WACC). The WACC calculation produces the average required rate
of return of an investment in an operating
enterprise, based on required rates of return from investments in
various areas of the enterprise.
The estimates used in valuing the in-process research and
development were based upon assumptions the Company
believed to be reasonable but which are inherently uncertain and
unpredictable. The assumptions may be
incomplete or inaccurate, and no assurance can be given that
unanticipated events and circumstances will not occur.
Accordingly, actual results may vary from the projected results.
Any such variances may adversely affect the sales
and profitability of future periods. Additionally, the value of
other intangible assets recorded at the time of the
respective acquisitions may become impaired.
AIS Software S.A.
The primary purchased in-process technology acquired in the AIS
acquisition was the DualPrism Web distribution
technology. This is a flexible server-based publishing
technology that allows data stored in a number of possible
repositories, file systems, relational databases and object
databases, to be served dynamically to a standard World
Wide Web browser. The Company estimates that this project was 80%
completed at the time of the acquisition. As
of April 30, 1999, the nature of the efforts required to develop
the purchase in-process technology into
commercially viable products was substantially completed.
Venture Labs, Inc.
The primary purchased in-process technologies acquired in the
Venture Labs, Inc. acquisition consisted of the Java filtering
and viewing projects. The Company estimates that the projects
were between 75% and 85% complete at the date of
the Venture Labs, Inc. acquisition. As of April 30, 1999, the
nature of the efforts required to develop the purchased
in-process technology into commercially viable products was
substantially completed.
Sherpa Systems Corporation
The primary purchased in-process technology acquired in the
Sherpa Systems Corporation acquisition was the
SherpaWorks Version 3 product. This technology is designed to
implement a three tier architecture which will
provide out-of-the-box, configurable Product Data Management
systems that are easy to use and that support open
standards based interfaces. SherpaWorks 3 is expected to
provide an open user interface framework that allows
application developers to implement an application or user role
specific interface. The Company estimates that this
project was approximately 85% complete at the date of the Sherpa
acquisition. As of April 30, 1999, the Company
estimates that approximately $2,000,000 to $3,000,000 will be
required to be expended to complete the remaining
development of this product.
MediaBank
The primary purchased in-process technologies acquired in the
MediaBank acquisition consisted of the new digital asset
management products, which were divided into two projects. The
first project was a media asset management
technology that provides support for standard query language
(SQL) databases, such as Oracle 7 and Microsoft's
SQL Server. In addition, this project also provides server
capabilities that allow users to manage and retrieve assets
stored in the asset management systems through a standard Web
browser. The Company estimates that this project
was 85% complete at the time of the MediaBank acquisition. As of
April 30, 1999, the nature of the efforts required
to develop the purchase in-process technology into commercially
viable products was substantially completed.
The second project provides content management capabilities based
on the contents of text embedded in popular
text formats that are stored in the database. In addition, the
second project provides support for DB2, a popular
relational database developed by IBM, and IBM's Digital Library
product. The Company estimates that this project
was 30% complete at the time of the MediaBank acquisition. As of
April 30, 1999, the Company estimates that
approximately $400,000 will be required to be expended to
complete the remaining development of this product.
Year 2000
Many components of computers and the programs that run on them
were designed with attention to only the last two
digits of the calendar year. Any equipment or program
recognizing only two digits may recognize a date using 00
as the year 1900 rather than the year 2000. Systems that do not
properly recognize such information could generate
erroneous data or cause a system to fail. The Year 2000 issue
creates risk for the Company from unforeseen
problems in its products or its own computer systems and from
third parties with whom the Company transacts
business worldwide. Failure of Year 2000 defects in the Company's
and/or third parties' computer systems or Year 2000
defects in the Company's products could have a material impact on
its ability to conduct business.
In late 1997, the Company commenced a phased Year 2000 Compliance
Plan (the "Plan") to assess, remediate, test,
and implement plans for all applications and products potentially
affected by the Year 2000 issue. To accelerate
overall completion, Plan activities are often concurrent rather
than serial, but all phases are expected to be
completed by the end of 1999. Specifically, the plan addresses
the software the Company sells and all software on
which it depends, the hardware, operating systems and software on
which the Company runs its business and the
third party services on which the Company also depends on. The
Company's costs to date have not been material to
the Company's operations and total costs of implementing the Plan
are not expected to be material to the
Company's fiscal year 2000 results. However, there can be no
assurances that the Company will not incur material
costs related to the Year 2000 issue, or that the Company's Year
2000 Compliance Plan will detect all potential
Year 2000 issues. Internal staff are the primary resources
working on the Plan, although the Company does not
anticipate having to defer any other information technology
("IT") projects in its effort to become Year 2000
compliant. The Company expects to fund the costs of completing
the Plan through its operating cash flows.
Inso Products
The Year 2000 issue could affect the products that the Company
licenses. All Inso products that it will continue to
sell has been tested for Year 2000 compliance. Additionally, the
Company has completed its assessment of the
products that it licenses as components of products that it
sells. The product compliance statements are listed on the
Company's Website, and where necessary, the Company is in the
process of informing customers of the proper
migration path to Year 2000 compliant versions. The Company's
products are not considered date dependent and
any work to bring the current versions of these products to Year
2000 compliance has been incorporated into the
normal update cycle. The cost of this effort has not been
material and the projected completion costs are not
expected to be material. However, there can be no assurances that
the Company will not incur material costs related
to the Year 2000 issue.
Inso Internal Systems, Facilities and External Vendors
The Company has inventoried certain of the hardware and
software on which it develops the products and runs
its internal systems. Inventoried items have been
categorized as compliant, compliant with patches, or not
compliant. The Company has begun addressing the items in the
compliant with patches category; schedules are in
place to upgrade these items. In some cases, the Company is
dependent upon vendors completing their patches to
meet the calendar year 1999 targeted completion date for
correcting these items. The Company has scheduled
retirement and/or replacement of non-compliant items. The cost of
this effort and the projected completion costs
have not been material. However, the Company may experience
material unanticipated problems and costs by
undetected errors of technology used in its internal IT and non-
IT systems.
The Company has contacted utility and facilities vendors on
which it depends. These vendors have provided
compliance statements certifying that they will be year 2000
compliant by the end of calendar year 1999. The
Company acknowledges that it is vulnerable, as are most
organizations, to the inability of these external
organizations to achieve Year 2000 readiness.
Contingency Plan
The Company's technical support group and its professional
services group will be made available to resolve any
product issues that may arise. The Company's information systems
group is developing a comprehensive checklist
to verify internal and external systems. There can be no
assurance that the Company's contingency plans will
adequately address all Year 2000 issues that may arise. The most
reasonable worst case scenario has not been
clearly identified.
The Company believes that an effective program to resolve the
Year 2000 issue in a timely manner is in place. As
noted above, the Company has not completed all phases of the Year
2000 Compliance Plan. Based upon current
information, the Company believes that the correction of the Year
2000 issues should not have a material adverse
effect on its financial position or results of operations.
However, there can be no assurances that the Company will
not incur material costs related to the Year 2000 issue.
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, 1998 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; inability to continue to
expand through acquisition; unexpected
restructuring costs; inability to expand a service organization
for enterprise-level solution selling; 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The Company's market risk disclosures set forth in its 1998
Annual Report filed on Form 10-K has not changed
significantly.
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
During February 1999, certain shareholders of Inso filed seven
putative class action lawsuits against the Company and certain of the
Company's officers and employees in the United States
District Court for the District of Massachusetts. The lawsuits
are captioned as follows: Michael Abramsky v. Inso Corporation, et al.,
Civ. Action No. 99-10193; Richard B. Dannenberg v. Inso
Corporation, et al., Civ. Action No. 99-10195; Jack Smith v. Inso
Corporation et al., Civ. Action No. 99-10208; Chavy Weisz v. Inso
Corporation, et al., Civ. Action No. 99-10200; Robert C.
Krauser v. Inso Corporation, et al., Civ. Action No. 99-10366;
Jean-Marie Larcheveque v. Inso Corporation, et al., Civ. Action No. 99-
10299; and Thomas C. McGrath v. Inso Corporation, et al., Civ. Action
No. 99-10389.
These lawsuits were filed following the Company's announcement on
February 1, 1999 that the Company planned to restate the revenues for
the first three quarters of 1998. Each of the
complaints assert claims for violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and
Exchange Commission as well as a claim for the violation of
Section 20(a) of the Exchange Act. The plaintiffs allege that
the defendants prepared and issued deceptive and materially false and
misleading statements to the investing public. They seek
unspecified damages. The plaintiffs have sought to consolidate the
above lawsuits into one consolidated action. The Company believes that
the claims are subject to meritorious defenses,
which plan to be asserted during the lawsuit. The Company cannot
predict the ultimate resolution of these actions at this time, and
there can be no assurance that the litigation will not have a
material adverse impact on the Company's financial condition and
results of operations.
On June 2, 1999, the Company was informed that the United States
Securities and Exchange Commission has issued a Formal Order of Private
Investigation in connection with matters
relating to the Company's previously announced restatement of its
1998 financial results.
The Company is also subject to various legal proceedings and
claims that arise in the ordinary course of business. The Company
currently believes that resolving these matters will not have a
material adverse impact on the financial condition or results of
operations.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following are filed as exhibits to this Form 10-Q
Exhibit 10-1 Agreement and Release between Michael
Melody and the Company dated April 2, 1999
Exhibit 27-1 Financial Data Schedule for the quarter
ended April 30, 1999
Exhibit 27-2 Financial Data Schedule for the quarter
ended April 30, 1998
(b) Reports on Form 8-K
Registrant filed two (2) reports on Form 8-K during the quarter
ended April 30, 1999.
(i) Current Report on Form 8-K dated April 29, 1999 reporting,
under Item 5 (other events) the Company's press release announcement
of revenue targets and potential restructuring plan for fiscal year 2000,
which was filed with the Securities and Exchange Commission on
April 29, 1999.
(ii) Current Report on Form 8-K dated March 25, 1999 reporting
under Item 5 (Other Events) the resignation of Steven R. Vana-Paxhia as
President and Chief Executive Officer and member of the
Board of Directors, the appointment of Stephen O. Jaeger as Chief
Executive Officer and Kirby Mansfield as President and Chief Operating
Officer, the resignation of J.P. Barger as a member of
the Board of Directors and the resignation of Betty J. Savage as
Vice President, Chief Financial Officer and Treasurer, which was filed
with the Securities and Exchange Commission April 29, 1999.
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: June 10, 1999 /s/ Stephen O. Jaeger
Stephen O. Jaeger
Chief Executive Officer
Date: June 10, 1999 /s/ Patricia A. Michaels
Patricia A. Michaels
Corporate Controller
(Chief Accounting Officer)
EXHIBIT INDEX
Exhibit No. Exhibit Description
Exhibit 10-1 Agreement and Release between Michael
Melody and the Company dated April 2, 1999
Exhibit 27-1 Financial Data Schedule for the quarter
ended April 30, 1999
Exhibit 27-2 Financial Data Schedule for the quarter
ended April 30, 1998
AGREEMENT AND RELEASE
This Agreement and Release ("Agreement") is being entered into
between Michael Melody (the "Employee") and Inso Corporation (the
"Company"), (collectively, the "Parties").
The complete terms of the Agreement are noted below:
1. For the purposes of this Agreement, the term the "Company"
shall refer to Inso Corporation and includes any affiliate or otherwise
related companies, and their current, former and future shareholders,
officers, representatives, agents, directors, employees, successors and
assigns.
2. For the purposes of the Agreement, "Employee" includes the
heirs, spouse, successors, legal representatives, agents and assigns of
the Employee.
3. The intent of this Agreement is to mutually, amicably and
finally resolve and compromise all issues and claims relating to the
Employee's employment by the Company and the termination thereof on
April 2, 1999 (the "Termination Date"). The execution of this
Agreement shall not in any way be considered an admission of any
liability on the part of the Company.
4. The Employee hereby resigns as an officer and employee of
the Company as of the Termination Date. The Company agrees to provide
the following severance benefits, to which the Employee agrees he or
she is not otherwise entitled, in return for the execution of this
Agreement:
A. The Company will pay total Severance Pay to the Employee in
the gross amount of $80,000, less applicable taxes, deductions, and
any amount owed to the Company by the Employee. This amount
is equivalent to 26 weeks of the Employee's base salary. This
Severance Pay will be payable in a lump sum payment.
5. The Employee agrees that the terms and conditions of this
Agreement are strictly confidential and shall not be disclosed to any
other persons except the employee's legal counsel, immediate family,
financial advisor, or as required by applicable law, and then on the
condition that they be instructed that they may not disclose the same
to others.
6. The Employee will be paid the full amount of any salary,
commission, accrued unused vacation and other payments and benefits due
to the Employee by virtue of his/her continued employment through the
Termination Date. Except for the foregoing, the Employee
understands he or she will not receive any additional payments or
benefits from the company other than those specified in paragraph 4
above.
7. The Employee agrees that upon execution of this agreement,
the Employee will return to the Company any and all property or
documents which the Employee created, helped to create, received or
acquired in the course of Employee's employment, or which otherwise
belong to the Company.
8. The Employee acknowledges that the Non-Disclosure Agreement,
which the Employee signed upon joining Inso, remains in full force and
effect.
9. In consideration for the payment and undertakings described
above, Employee does hereby completely remise, release and forever
discharge the Company from all claims, rights, demands, actions,
obligations, and causes of action of any and every kind, nature and
character, known or unknown, which Employee may now have, or has ever
had, against the Company arising from or in any way connected with or
incidental to the dealings between the parties hereto prior to the
effective date hereof. Without limiting the generality of the
foregoing, the Employee also specifically releases the Company from any
and all claims, demands and causes of action which have been or could
have been asserted as a result of Employee's employment with the
Company, separation from employment or other status with the Company,
including but not limited to all "wrongful discharge" claims; and all
claims relating to any contracts of employment, express or implied; any
covenant of good faith and fair dealing, express or implied; any tort
of any nature; any claims arising out of any federal, state, or
municipal statute or ordinance; any claims or
rights under the Title VII of the Civil Rights Act of 1964, as
amended by the Civil Rights Act of 1991, 42 U.S.C. s. 2000 et seq., the
Age Discrimination and Employment Act of 1967, 29 U.S.C. s. 621 et
seq., the Employee Retirement Income security Act of 1974, 29 U.S. C.
s. 1001, et seq., the Americans with Disabilities Act, 42 U. S. C. s.
12101 et seq., the Family and Medical Leave Act, The Massachusetts Fair
Employment Practices Law, M.G. L. C. 151B, 1 et seq., the California
Fair Employment and Housing Act, Cal. Govt. Code 12900 et seq., the
Missouri Human Rights Act, V.A.M.S. s. 213.010 et seq., or any
other State, and other laws and regulations relating to employment,
discrimination or civil rights and any and all claims for
attorney's fees and costs. Nothing contained in this section 10 shall
be interpreted to relieve the Employee of his responsibility to comply
with the Non-Disclosure Agreement, signed by the Employee.
10. Notwithstanding the Employee's resignation as an officer of
the Company, the Employee shall continue to be entitled to all rights
to indemnification for officers of the Company as set forth in the
bylaws of the Company.
11. The Employee acknowledges that he or she has been given
forty-five (45) days to consider this Agreement and has been advised to
consult with an attorney before signing.
12. This Agreement shall become effective on the eighth (8th)
day following the date on which it is signed by the Employee. The
Employee may revoke this Agreement in the seven-day period following
the date on which the Employee signs the Agreement by submitting a
written revocation to the Company. Any payments due under Paragraph 4
of this Agreement shall not be paid until the Effective Date of this
Agreement, except as otherwise agreed.
13. a) If the Employee was employed in the State of California,
this Agreement shall be deemed to have been executed and delivered
within the State of California and the rights and obligations of the
parties hereto shall be construed and enforced in accordance with and
governed by the laws of the State of California.
b) If the Employee was employed elsewhere, this Agreement shall
be deemed to have been executed and delivered within the
Commonwealth of Massachusetts and the rights and obligations of the
parties hereto shall be construed and enforced in accordance with and
governed by the laws of the Commonwealth of Massachusetts.
14. This Agreement constitutes the entire understanding and
agreement between and among the Parties with respect to the severance
and supersedes all prior and contemporaneous oral and written
negotiations, agreements, commitments or writings except as expressly
stated herein.
15. This Agreement shall be binding upon the Parties and may
not be abandoned, supplemented, changed or modified in any manner,
orally or otherwise, except by an instrument in writing of concurrent or
subsequent date signed by a duly authorized representative of the Parties.
This Agreement is binding upon and shall inure to the benefit of the
Parties and their respective agents, assigns, heirs, executors, successors
and administrators.
16. Should any provision of this Agreement be declared or be
determined by any court of competent jurisdiction to be illegal or invalid, the
validity of the remaining parts, terms, or provisions shall not be affected
thereby and said illegal and invalid part, term or provision shall be deemed
not to be a part of this Agreement.
EMPLOYEE EXPRESSLY WARRANTS THAT EMPLOYEE HAS READ
AND FULLY UNDERSTANDS THIS AGREEMENT; THAT EMPLOYEE
HAS HAD THE OPPORTUNITY TO FULLY DISCUSS AND REVIEW THE
TERMS OF THIS AGREEMENT WITH LEGAL COUNSEL; THAT
EMPLOYEE IS NOT EXECUTING THIS AGREEMENT IN RELIANCE ON
ANY PROMISES, REPRESENTATIONS OR INDUCEMENTS OTHER THAN
THOSE CONTAINED HEREIN; AND THAT EMPLOYEE IS EXECUTING
THIS AGREEMENT VOLUNTARILY, FREE OF ANY DURESS OR
COERCION.
/s/ Michael Melody Elaine Ouellette
- ------------------- -----------------
Michael Melody for Inso Corporation
DATED: April 2, 1999 DATED: April 2, 1999
<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>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> JAN-31-2000 JAN-31-1999
<PERIOD-END> APR-30-1999 APR-30-1998
<CASH> 5,504 27,983
<SECURITIES> 32,795 61,564
<RECEIVABLES> 19,398 18,918
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 67,308 123,889
<PP&E> 9,113 6,943
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 138,096 147,709
<CURRENT-LIABILITIES> 56,970 21,330
<BONDS> 0 0
0 0
0 0
<COMMON> 155 148
<OTHER-SE> 78,663 126,231
<TOTAL-LIABILITY-AND-EQUITY> 138,096 147,709
<SALES> 11,494 16,486
<TOTAL-REVENUES> 11,494 16,486
<CGS> 0 0
<TOTAL-COSTS> 6,307 2,541
<OTHER-EXPENSES> 27,613 16,308
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (21,985) 10,352
<INCOME-TAX> 0 (390)
<INCOME-CONTINUING> (21,985) 10,742
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (21,985) 10,742
<EPS-BASIC> (1.42) 0.73
<EPS-DILUTED> (1.42) 0.71
</TABLE>
