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
October 31, 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 X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at December 10, 1999
Common Stock 15,824,654
(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
October 31, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations
Three Months Ended October 31, 1999 and 1998
Condensed Consolidated Statements of Operations
Nine Months Ended October 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows
Nine Months Ended October 31, 1999 and 1998
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
<TABLE>
<CAPTION>
INSO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1999 AND DECEMBER 31, 1998
(Unaudited, in thousands except share and per share amounts)
October 31 December 31
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 14,840 9,502
Marketable securities 5,395 44,555
Restricted marketable securities 0 6,526
Accounts receivable, net 23,234 27,588
Note Receivable 5,600 0
Prepaid expenses and other current assets 3,309 5,223
----- -----
Total current assets 52,378 93,394
Property and equipment, net 6,808 9,865
Product development costs, net 14,493 21,322
Excess of costs over net assets acquired, net 9,172 19,891
Other intangible assets, net 5,327 10,783
Long-term accounts receivable, net 755 2,901
Licensed technology and advances, net 2,498 2,408
Investment in Information Please LLC 0 2,655
------ -------
TOTAL ASSETS 91,431 163,219
------ -------
------ -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 1,860 2,207
Accrued liabilities 12,990 9,771
Accrued salaries, commissions and bonuses 7,799 6,444
Acquisition related liabilities 1,320 16,551
Unearned revenue 13,362 13,542
Royalties payable 769 1,615
Capital leases, current portion 633 987
------ ------
Total current liabilities 38,733 51,117
Unearned revenue, non-current portion 371 2,478
Capital leases, non-current portion 215 450
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; 15,620,897 and 15,506,640 shares issued
at October 31, 1999 and December 31, 1998,
respectively 156 155
Capital in excess of par value 143,160 140,130
Accumulated deficit (90,137) (29,632)
------- -------
53,179 110,653
Unamortized value of restricted shares 0 (116)
Notes receivable from stock purchase agreements (1,009) (1,305)
Treasury stock, at cost, 5,075 shares in
1999 and 1998 (58) (58)
------ --------
Total stockholders' equity 52,112 109,174
------ --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 91,431 163,219
------ -------
------ -------
See accompanying notes to unaudited condensed consolidated financial
statements
</TABLE>
<TABLE>
<CAPTION>
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1999 and 1998
(Unaudited, in thousands except per share amounts)
1999 1998
---- ----
<S> <C> <C>
Revenues:
Product licenses $ 11,802 $ 12,830
Service 7,619 1,871
----- -----
Total revenues 19,421 14,701
Cost of revenues:
Cost of product licenses 2,307 2,145
Cost of service 2,843 688
----- -----
Total cost of revenues 5,150 2,833
----- -----
Gross profit 14,271 11,868
Operating expenses:
Sales and marketing 2,522 5,474
Product development 5,925 4,455
Amortization of intangible assets 1,033 386
General and administrative 4,824 3,263
Restructuring expenses 4,353 0
Special charges 24,256 0
Purchased in-process research and
development 0 7,500
------ -----
Total operating expenses 42,913 21,078
Operating loss (28,642) (9,210)
Non-operating income (expense):
Net investment income 270 1,419
Write-down of investment in
Information Please LLC 0 0
Gain on sale 14,549 0
------ -----
Loss before provision (benefit) for
income taxes (13,823) (7,791)
Provision (benefit) for income taxes 143 (108)
------- ------
Net loss * $ (13,966) $ (7,683)
-------- -------
-------- -------
Basic loss per share $ (0.89) $ (0.50)
------- -------
------- -------
Diluted loss per share $ (0.89) $ (0.50)
------- -------
------- -------
Weighted Average Shares Outstanding:
Basic 15,608 15,350
Diluted 15,608 15,350
* Net loss equals comprehensive loss for each period presented.
See accompanying notes to unaudited condensed consolidated financial
statements.
</TABLE>
<TABLE>
<CAPTION>
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1999 and 1998
(Unaudited, in thousands except per share amounts)
1999 1998
----- -----
<S> <C> <C>
Revenues:
Product licenses $ 31,189 $ 40,252
Service 19,093 4,643
------ ------
Total revenues 50,282 44,895
Cost of revenues:
Cost of product licenses 8,332 5,514
Cost of service 9,200 1,815
----- -----
Total cost of revenues 17,532 7,329
------ -----
Gross profit 32,750 37,566
Operating expenses:
Sales and marketing 18,075 16,093
Product development 20,919 14,174
Amortization of intangible assets 3,523 1,016
General and administrative 16,216 11,545
Restructuring expenses 11,068 0
Special charges 27,693 0
Purchased in-process research and
development 0 8,100
------ ------
Total operating expenses 97,494 50,928
------ ------
Operating loss (64,744) (13,362)
Non-operating income (expense):
Net investment income 1,256 3,630
Write-down of investment in
Information Please LLC (2,655) 0
Gain on sale 14,549 12,012
------ ------
(Loss) income before provision
(benefit) for income taxes (51,594) 2,280
Provision (benefit) for income taxes 220 (601)
------- -----
Net (loss) income * $ (51,814) $ 2,881
------- ------
------- ------
Basic (loss) earnings per share $ (3.33) $ 0.19
------- ----
------- ----
Diluted (loss) earnings per share $ (3.33) $ 0.19
------- ----
------- ----
Weighted Average Shares Outstanding:
Basic 15,569 15,020
Diluted 15,569 15,474
* Net (loss) income equals comprehensive (loss) income for each
period presented.
See accompanying notes to unaudited condensed consolidated
financial statements.
</TABLE>
<TABLE>
<CAPTION>
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 31, 1999 and 1998
(Unaudited, in thousands of dollars)
1999 1998
---- ----
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ (51,814) $ 2,881
Adjustments to reconcile net income (loss)
to net cash
provided by operating activities:
Depreciation and amortization 12,137 7,215
Purchased in-process research and development 0 8,100
Non-cash restructuring expenses 5,646 0
Non-cash special charges expenses 10,805 0
Write-down of investment in Information Please LLC 2,655 0
Deferred income taxes 0 1,105
Gain on sale (14,549) (12,012)
------ ------
(35,120) 7,289
Changes in operating assets and liabilities:
Accounts receivable 3,383 1,010
Accounts payable and accrued liabilities 1,298 (4,788)
Royalties payable (479) (1,284)
Due to Houghton Mifflin Company 0 (384)
Other assets and liabilities (1,575) (1,412)
------ -------
Net cash (used in) provided by
operating activities (32,493) 431
Cash flows from (used in) investing activities:
Property and equipment expenditures (1,140) (2,999)
Capitalized product development costs (2,535) (3,740)
Acquisitions, net of cash acquired 0 (14,326)
Payments related to 1998 acquisitions (5,440) 0
Net sale of marketable securities 37,704 4,536
Proceeds from the sale of assets 9,000 19,853
------ ------
Net cash provided in investing activities 37,589 3,324
Cash flows from financing activities:
Net proceeds from issuance of common stock 675 9,742
Proceeds from the payment of notes receivable
underlying Stock Purchase Agreements 296 533
Payments under capital lease obligations (744)
------- ------
Net cash provided by financing activities 227 10,275
------ ------
Net increase in cash and cash equivalents 5,323 14,030
Cash and cash equivalents at beginning of period 9,517 8,827
------ ------
Cash and cash equivalents at end of period $ 14,840 $ 22,857
------ ------
------ ------
Supplementary Information:
Note Receivable from the sale of assets $ 5,600
------
------
See accompanying notes to unaudited condensed consolidated financial
statements.
</TABLE>
INSO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
October 31, 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- and nine-month periods ended October 31,
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
and year to date comparative information has been recast
to reflect the change in the fiscal year-end.
Additionally, refer to the Company's Quarterly Report on
Form 10-Q for the quarter ended April 30, 1999 filed with
the Securities and Exchange Commission for 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 Company does not
believe that the adoption of this standard will have a
material impact on its financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board
issued Statement of Accounting Standards No. 133, as
amended by Statement of Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging
Activities" (collectively SFAS 133) effective for fiscal
years beginning after June 15, 2000. 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 (loss) 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 454,000 shares for the nine
months ended October 31, 1998. Options and warrants to
purchase shares of common stock, for the three months ended
October 31, 1999 and 1998 and for the nine months ended October 31,
1999, were not included in the computation of diluted loss
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 Company believes that the claims are subject
to meritorious defenses, they which plan to assert during
the lawsuit. On April 5, 1999, the seven class action
lawsuits that were filed against the Company were
consolidated into one lawsuit. On September 29, 1999 the
Company entered into an insurance agreement with a major
AAA-rated insurance carrier pursuant to which the
insurance carrier assumed complete financial responsibly
for the defense and ultimate resolution of the securities
class action suit. A charge to the Company's current year
fiscal consolidated third quarter results of $13,451,000
was taken in connection with the insurance agreement. The
charge is included in special charges in the accompanying
statement of operations.
The Company entered into a distribution agreement in the
fourth quarter of calendar year 1998 with an international
reseller that provided the reseller with guaranteed levels
of net cash 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 reseller would be able to achieve the defined level of
net receipts from the agreement territory in either year.
The Company had outstanding irrevocable stand-by letters
of credit with terms of one to two years totaling
$4,004,000 to support this guarantee. The Company also
had restricted marketable securities totaling $6,526,000
supporting the letters of credit.
On September 14, 1999, the Company negotiated a release of
the outstanding commitments with the international
reseller whereby the Company paid the international
reseller $606,000 from available cash and cancelled the
distribution agreement. Additionally, the stand-by
letters of credit were terminated thus allowing the
restriction on the marketable securities to be lifted.
Furthermore, as a result of the release, the Company took
a credit to sales and marketing expenses in the third
fiscal quarter of the current year of approximately
$3,093,000 for expenses that were recorded in the prior
fiscal year. Finally, a separate cash payment of
approximately $3,000,000 paid to the Company in January
1999 under a cancelled purchase order was repaid to the
international reseller at the time of execution of the
release of the 1998 distribution arrangement.
On June 2, 1999, the Company was informed that the United
States Securities and Exchange Commission 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. The Company
cannot predict the ultimate resolution of this action at
this time, and there can be no assurance that the
investigation will not have a material adverse impact on
the Company's financial condition and results of
operations. While it is not feasible to predict the total
costs, the Company expects to incur further professional
fees with respect to the Formal Order of Private
Investigation.
On June 9, 1999, the bankruptcy estates of Microlytics,
Inc. and Microlytics Technology Co., Inc. (together
"Microlytics") filed an adversary proceeding against the
Company in the United States Bankruptcy Court for the
Western District of New York. The complaint seeks
turnover of purported property of the estates and damages
for the Company's alleged breaches of a license from
Microlytics relating to certain computer software
databases and other information. The complaint seeks
damages of at least $11,750,000. On August 19, 1999, the
Company filed a motion to withdraw the case from the
Bankruptcy Court to the United States District Court for
the Western District of New York. The motion is pending.
Also, on August 19, 1999, the Company filed its Answer and
Demand for Jury Trial. The Company believes that the
claims are subject to meritorious defenses, which it plans
to assert during the lawsuit. The Company cannot predict
the ultimate resolution of this action at this time.
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. AIS Software operates as
part of the Company's Product Data Management Division
(see Note 6). 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.
Paradigm operates as part of the Company's Information
Exchange Division. 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. Sherpa
operates as part of the Company's Product Data Management
Division (see note 6). The total consideration paid at
the time of the acquisition was $36,000,000, consisting of
$28,700,000 of cash and warrants ("Original Warrants") to
purchase 1,456,458 shares of the Company's common stock.
The Original Warrants, at the time of the acquisition,
were valued at $5.00 per warrant, or $7,282,000. The
Original Warrants had 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 of its intention to restate its financial results
(see note 4), the Company began discussions with the
warrant holders to reprice the Original Warrants or
exchange them for cash with the objective of meeting the
intention under the original agreement. On June 22, 1999,
the Company entered into an agreement with the holders of
the Original Warrants that provided, among other things,
a) for the cancellation of all of the Original Warrants
held by such holders, b) the issuance to such holders of
new warrants to purchase their proportionate share of
1,000,000 shares of the Company's Common stock with a 36-
month term and an exercise price of $10.00 per share and
c) the payment to such holders of their proportionate
share of $3,000,000 in cash. The new warrants were valued
at $2.01 per warrant. As a result of the agreement, the
value of the consideration paid by the Company for the
Sherpa acquisition was reduced by approximately $2,100,000
with such amount recorded as a reduction to goodwill.
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
October 31, 1999, approximately $160,000 for such costs
remained in the accrual. Since December 31, 1998,
payments against the accrual consisted of the following:
approximately $1,530,000 for employee severance for
elimination of duplicate functions and closure of
duplicate and excess operations; approximately $400,000
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
October 31, 1999, the Company reevaluated the estimated
severance and other costs relating to the elimination of
excess and duplicative activities as well as costs
associated with certain contractual obligations which
existed at the time of the acquisition and reduced the
related accrual and goodwill by approximately $3,710,000.
The majority of the payments relating to the remaining
accrual are expected to be made prior to January 31, 2000.
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 totaling $1,597,000. The Company expects to
make remaining aggregate payments of approximately
$1,000,000 over the next two years under those agreements.
Additionally, other intangible assets and capitalized
software totaling $25,200,000 were recorded in connection
with the acquisition after consideration of adjustments
noted above.
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.
MediaBank operates as part of the Company's eBusiness
Technologies Division. 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. Intangible assets totaling
$4,460,000 were recorded at the time of the acquisition.
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.
ViewPort Development AB operated as part of the Company's
Product Data Management Division prior to its sale to
Enigma Information System Ltd. on October 29, 1999 (see
Note 8) 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 net loss
per share shown below for the nine months ended October
31, 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 nine months ended October 31, 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. and $12,000,000 relating to the acquisition of Sherpa
Systems Corporation.
<TABLE>
<CAPTION>
Nine months ended
October 31, 1998
----------------
<S> <C>
Net revenues $ 78,090,000
Net loss $ (23,048,000)
Diluted loss per share $ (1.53)
</TABLE>
Note 6. Restructuring Expenses
In October 1999, the Company adopted a plan of
restructuring aimed at reducing current operating costs at
the Company's Product Data Management ("PDM") division,
while retaining its technical assets and customer service
and support infrastructure. The Company's Board of Directors
also authorized management to pursue the potential sale
of the PDM Division. The restructuring plan
included a PDM workforce reduction of approximately 40%,
the consolidation of the PDM division's sales, service and
support organizations, the consolidation of PDM
development facilities and the abandonment of leasehold
improvements and support assets associated with these
locations. The plan also calls for a change in focus away
from certain development activities. Therefore, the
charge includes a write-down of licensed technology for
discontinued development activities to their estimated
future cash flows. As a result of the restructuring plan,
the Company recorded a charge of $4,290,000 to the current
year third fiscal quarter's results. The charge included
approximately $1,000,000 of severance for employees in
administrative, sales and development positions; $918,000
for the consolidation of sales, service and support
organizations and development facilities; and
$2,372,000 for write-down of licensed technology for
discontinued development activities and the write-off of
leasehold improvements and support assets associated with
closed locations. As of October 31, 1999, approximately
$1,920,000 remained in accrued liabilities relating to
this restructuring charge.
In July 1999, the Company adopted a plan of restructuring
aimed at reducing current operating costs, as well as
supporting the Company's new divisional structure. The
Company's restructuring plan included a 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
abandonment of leasehold improvements and support assets
associated with these locations. The plan also called for
a change in focus away from certain products. As a result
of the restructuring plan, the Company recorded a charge
of $6,234,000 to the second fiscal quarter's results. The
charge included approximately $2,000,000 of severance for
employees in administrative, sales and development
positions; $960,000 for the closure and/or combination of
domestic and international sales and administrative
facilities; and $3,274,000 for write-down of capitalized
product development costs and intangibles for certain
discontinued products and the write-off of leasehold
improvements and support assets associated with closed
locations. The capitalized product development costs and
intangibles were written-down to their estimated future
cash flows. As of October 31, 1999, approximately
$800,000 remained in accrued liabilities relating to this
restructuring charge.
In connection with the Company's July 1999 restructuring
plan, the Company incurred in the third fiscal quarter of
the current year approximately $65,000 of restructuring
charges for relocation costs as a result of the
combination of certain sales and administrative offices.
In addition to the above, the Company incurred
approximately $500,000 in the first fiscal quarter
relating to the closure of the Company's Kansas City
location, primarily for severance for terminated
employees.
Note 7. Special Charges
For the nine months ended October 31, 1999, the Company
has incurred $27,693,000 of special charges. Of the total
amount incurred, approximately $1,117,000 related to
professional fees incurred in connection with the
Company's investigation and restatement of its 1998
financial results, lawsuits and the Securities and
Exchange Commission investigation, approximately
$10,805,000 related to the write-down of intangible assets
and capitalized software costs, substantially all
attributable to the Company's PDM division to their
estimated future cash flows, approximately $13,451,000
related to the net premium costs for a major insurance
carrier to assume financial risk associated with the class
action litigation initiated against the Company in
February 1999 (see note 4) and approximately $2,320,000
related to severance and other costs incurred for certain
executive, management, and other staff terminations.
Note 8. Dispositions
On October 29, 1999, the Company sold its DynaText/DynaWeb
stand-alone technical document publishing component of its
PDM Division, along with its ViewPort browser technology
assets, for $14,750,000. The purchase was in the form of
a stock purchase by Enigma Information System Ltd. and its
subsidiary, Enigma Information Retrieval Systems, Inc.,
(collectively "Enigma") of all of the outstanding stock of
Inso Providence Corporation and ViewPort Development AB of
Stockholm, Sweden. The purchase price was paid $9,000,000
in cash and $5,600,000 in the form of a promissory note,
due and payable by April 30, 2000. The final payment of
the note is subject to final closing adjustments allowed
under the original agreement with Enigma. The promissory
note bears interest as follows: (i) if the promissory note
is paid by December 15, 1999, no interest shall be due or
payable, (ii) if the promissory note is paid after
December 15, 1999 but prior to January 31, 2000, interest
is at a rate of 6.5% per annum accrued from October 29,
1999 until the date on which the final payment is paid,
and (iii) if the promissory note is paid after January 31,
2000, interest at a rate of 6.5% per annum accrued from
October 29, 1999 through and until January 31, 2000 and
13.0% per annum accrued from February 1, 2000 through and
until the date on which the final payment is paid. The
promissory note is secured by a Stock Pledge Agreement of
the stock of Inso Providence Corporation. In connection
with the disposition, the Company retained the accounts
receivable directly associated with the DynaText/DynaWeb
and ViewPort browser technologies. Additionally, the
Company recorded direct transaction costs; costs to write-
off capitalized software and other assets; and other
accruals for costs directly associated with the sale. As
a result, the Company reported in the fiscal quarter ended
October 31, 1999 a gain of $14,549,000. The transaction
created a capital loss for federal tax purposes, which
will be carried forward to future periods.
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 were all of the Company'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 9. Other
The Company determined that the value of its investment in
Information Please LLC was impaired. This assessment was
based on the Company's review of Information Please LLC's
operating results and business plan and the Company's
anticipated future cash flows from its investment.
Accordingly, the investment was written down to its net
realizable value resulting in a charge of $2,655,000 in
the Company's second fiscal quarter.
Note 10. Operations by Industry Segment
The Company has three operating segments: Product Data
Management ("PDM"), eBusiness Technologies ("EBT"), and
Information Exchange ("IED"). A fourth operating segment,
Lexical and Linguistic, was sold to Lernout & Hauspie
Speech Products N.V. in April 1998 (see Note 11 below). On
April 29, 1999, the Company announced implementation of a
new division structure, which was implemented in the
second fiscal quarter. As such, all prior period segment
data has been recast to reflect the new division structure.
Each of the identified operating segments disclosed represent
the divisions for which the Company manages.
The PDM segment information below for all periods presented
includes the operations of the DynaText/DynaWeb and ViewPort
browser technologies sold to Enigma on October 29, 1999 (see
note 8 above). Additionally, on October 28, 1999, the
Company's Board of Directors authorized management to pursue
the potential sale of PDM Division (see note 6 above).
Each segment's profit and loss for the three and nine
months ended October 31, 1999, reflects all income and
losses except for the items shown in the reconciliation
information below. 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.
<TABLE>
Three months ended October 31, 1999
- -----------------------------------
Lexical
(In thousands and
of dollars) EBT IED PDM Linguistic Totals
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
Revenues from
external customers $4,428 $6,021 $8,972 $0 $19,421
Segment profit (loss) (2,243) 1,704 (271) 0 (810)
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
Three months ended October 31, 1998
- -----------------------------------
Lexical
(In thousands and
of dollars) EBT IED PDM Linguistic Totals
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------
Revenues from
external customer $3,867 $7,999 $2,835 $0 $14,701
Segment profit (loss) 276 2,741 (1,515) 0 1,502
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
Reconciliation Information
Profit or loss Three months ended
- -------------- ------------------
(In thousands of dollars) 1999 1998
<S> <C> <C>
- ------------------------------------------------------------------------
Total external profit (loss) for
reportable segments $ (810) $ 1,502
Special charges (24,256) -
Credit for termination of
international distributor agreement 3,093 -
Restructuring expenses (4,353) -
Net investment income 270 1,419
Gain on sale 14,549 -
Purchased in-process research and development - (7,500)
Unallocated corporate and other expenses (2,316) (3,212)
------ ------
Consolidated loss before provision (benefit) for
income taxes $(13,823) $ (7,791)
------- ------
------- ------
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
Nine months ended October 31, 1999
- ----------------------------------
Lexical
(In thousands and
of dollars) EBT IED PDM Linguistic Totals
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------
Revenues from
external customers $7,953 $19,131 $23,198 $0 $50,282
Segment profit (loss) (13,585) 5,008 (8,836) 0 (17,413)
Segment assets 20,662 45,598 36,249 0 99,509
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
Nine months ended October 31, 1998
- ----------------------------------
Lexical
(In thousands and
of dollars) EBT IED PDM Linguistic Totals
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------
Revenues from
external customers $7,006 $22,497 $9,141 $6,251 $44,895
Segment profit (loss) (1,439) 7,517 (3,818) 3,701 5,961
Segment assets 0 0 0 0 0
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
Reconciliation Information
Profit or loss Nine months ended
- -------------- -----------------
(In thousands of dollars) 1999 1998
<S> <C> <C>
- ----------------------------------------------------------------------
Total external profit (loss) for
reportable segments $ (17,413) $ 5,961
Purchased in-process research and
development - (8,100)
Special charges (27,693) -
Credit for termination of international
distributor agreement 3,093 -
Restructuring expenses (11,068) -
Net investment income 1,256 3,630
Write down of investment in Information
Please LLC (2,655) -
Gain on sale of assets 14,549 12,012
Unallocated corporate and other expenses (11,663) (11,223)
------- -------
Consolidated (loss) income before
provision (benefit) for income taxes $ (51,594) $ 2,280
------- -------
------- -------
- -----------------------------------------------------------------------
</TABLE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended October 31, 1999 Compared to Three Months
Ended October 31, 1998
Revenues for the three months ended October 31, 1999 increased
$4,720,000, or 32%, to $19,421,000 compared to $14,701,000 for
the three months ended October 31, 1998. Substantially all of the
revenue increase was attributable to acquisitions made by the
Company in last year's third and fourth fiscal quarters. Service
revenues for the three months ended October 31, 1999 increased
$5,748,000, or 307%, to $7,619,000 for the three months ended
October 31, 1999 from $1,871,000 for the three months ended
October 31, 1998 primarily due to the Company's fiscal year 1998
acquisitions.
Revenues from the eBusiness Technologies ("EBT") segment
increased 15% from $3,867,000 in the three months ended October
31, 1998 to $4,428,000 in the three months ended October 31,
1999. The increase was primarily related to increases in DynaBase
product and service revenue. Revenues from the Information
Exchange ("IED") segment decreased by approximately 25% from
$7,999,000 in the three months ended October 31, 1998 to
$6,021,000 in the three months ended October 31, 1999. The
decline in revenues in the IED division is primarily attributable
to lower revenues from the sales of Quick View Plus due to lower
volume from corporate customers. Revenues from the Product Data
Management ("PDM") segment increased by approximately 216% from
$2,835,000 in the three months ended October 31, 1998 to
$8,972,000 in the three months ended October 31, 1999. The
increase was primarily related to the addition of the PDM
products acquired with the Sherpa Systems Corporation ("Sherpa")
acquisition in December 1998.
Gross profit increased $2,403,000, or 20%, from $11,868,000 for
the three months ended October 31, 1998 to $14,271,000 for the
three months ended October 31, 1999. Gross profit as a percentage
of revenues was 73% for the three months ended October 31, 1999
compared to 81% for the three months ended October 31, 1998. The
decrease in gross margin in 1999 was primarily due to an increase
in amortization expense for capitalized software and acquired
license technology.
Total operating expenses increased $21,835,000 to $42,913,000 for
the three months ended October 31, 1999 from $21,078,000 for the
three months ended October 31, 1998. Included in total operating
expenses for the three months ended October 31, 1999 were special
charges of $24,256,000 for costs primarily relating to the write-
down of intangible assets and capitalized software costs
($10,805,000) substantially all attributable to the PDM division,
net premium costs for a major insurance carrier to assume
financial risk associated with the class action litigation
initiated against the Company in February 1999 ($13,451,000), and
restructuring expenses of $4,353,000 for costs primarily relating
to the Company's PDM division. Additionally, the operating
expenses for the three months ended October 31, 1999 includes a
credit of $3,093,000 to sales and marketing expenses for the
termination of a 1998 international distributor agreement.
Included in total operating expenses for the three months ended
October 31, 1998 was an acquisition charge of $7,500,000 for
certain purchased technology under research and development at
the time of the Company's acquisition of the MediaBank media
asset management system and related technologies. Excluding the
aforementioned charges, operating expenses increased $3,819,000,
or 28%, to $17,397,000, or 90% of revenues, for the three months
ended October 31, 1999 as compared to $13,578,000, or 92% of
revenues for the three months ended October 31, 1998. The
increase was primarily related to costs to support the Company's
1998 acquisitions.
Sales and marketing expenses decreased $2,952,000 to $2,522,000
for the three months ended October 31, 1999 from $5,474,000 for
the three months ended October 31, 1998. Sales and marketing
expenses for the three months ended October 31, 1999 included a
credit of $3,093,000 for the termination of a 1998 international
distributor agreement. Excluding the international distributor credit,
sales and marketing increased $141,000 to $5,615,000, or 29% of
revenues for the three months ended October 31, 1999 compared to
$5,474,000, or 37% of revenues for the three months ended October
31, 1998. The decrease in percentage of revenues from October
31, 1998 was primarily the result of revenues increasing faster
than associated selling costs.
Product development expenses increased $1,470,000 from $4,455,000
for the three months ended October 31, 1998 to $5,925,000 for the
three months ended October 31, 1999. The increase was due
primarily to the Company's investment in development particularly
in the EBT division as well as the 1998 acquisition of Sherpa.
The Company's product development expenses were 31% of revenues
for the three months ended October 31, 1999 compared to 30% of
revenues for the three months ended October 31, 1998.
General and administrative expenses increased $1,561,000 to
$4,824,000 for the three months ended October 31, 1999 compared
to $3,263,000 for the three months ended October 31, 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 were 25% of revenues for the three months ended October
31, 1999 and 22% of revenues for the three months ended October
31, 1998.
In October 1999, the Company adopted a plan of restructuring
aimed at reducing current operating costs at the Company's PDM
Division, while retaining its technical assets and customer
service and support infrastructure. The restructuring plan
includes a PDM workforce reduction of approximately 40%, the
consolidation of the PDM division's sales, service and support
organizations, the consolidation of PDM development facilities
and the abandonment of leasehold improvements and support assets
associated with these locations. The plan also calls for a
change in focus away from certain development activities.
Therefore, the charge includes a write-down of licensed
technology for discontinued development activities to their
estimated future cash flows. As a result of the restructuring
plan, the Company recorded a charge of $4,290,000 to the current
year third fiscal quarter's results. The charge included
approximately $1,000,000 of severance for employees in
administrative, sales and development positions; $918,000 for the
consolidation of sales, service and support organizations and
development facilities; and $2,372,000 for write-down of licensed
technology for discontinued development activities and the write-
off of leasehold improvements and support assets associated with
closed locations.
For the three months ended October 31, 1999, the Company incurred
$24,256,000 of special charges in addition to the restructuring
charges noted above. Of the total amount incurred, approximately
$10,805,000 related to the write-down of intangible assets and
capitalized software costs to their estimated future cash flows,
substantially all attributable to the Company's PDM division and
approximately $13,451,000 of net premium costs for a major
insurance carrier to assume financial risk associated with the
class action litigation initiated against the Company in February
1999 (see note 4 to the "Notes to Condensed Consolidated
Financial Statements").
For the three months ended October 31, 1999, the Company recorded
a gain of $14,549,000 for the sale of its DynaText/DynaWeb stand-
alone technical document publishing product and its ViewPort
browser technologies to Enigma Information System Ltd (see note 8
to the "Notes to Condensed Consolidated Financial Statements").
The Company has not recorded a benefit for net operating losses
incurred during the three months ended October 31, 1999 due to
certain provisions in the Internal Revenue Code concerning
changes in ownership and after evaluating the Company's
anticipated performance over its normal planning horizon. The
Company's effective tax rate for the three months ended October
31, 1998 was 37%.
Net loss and net loss per share were $2,999,000 and $0.19 per
share, respectively, for the three months ended October 31, 1999,
before net special items including charges, credits and gains
noted above, as compared to $183,000, and $0.01 per share, for
the three months ended October 31, 1998 excluding the in-process
research and development charge noted above.
Nine Months Ended October 31, 1999 Compared to Nine Months Ended
October 31, 1998
Revenues for the nine months ended October 31, 1999 increased
$5,387,000, or 12%, to $50,282,000 compared to $44,895,000 for
the nine months ended October 31, 1998. Total revenues for the
nine months ended October 31, 1998 included revenues of
$6,251,000 from the Company's former lexical and linguistic
operating segment, which was sold to Lernout & Hauspie Speech
Products N.V. in April 1998. Excluding the revenues associated
with the assets sold to Lernout & Hauspie, net revenues increased
by approximately 30% for the nine months ended October 31, 1999
compared to the nine months ended October 31, 1998. Service
revenues for the nine months ended October 31, 1999 increased
$14,450,000, or 311%, to $19,093,000 from $4,643,000 for the nine
months ended October 31, 1998, primarily due to the acquisition
of Sherpa in December 1998. Additionally, of the total revenues
in the nine months ended October 31, 1999, approximately 34% were
revenues from the acquisitions made since July 1998.
Revenues from the EBT segment increased 14% from $7,006,000 in
the nine months ended October 31, 1998 to $7,953,000 in the nine
months ended October 31, 1999. The increase was primarily related
to product and service revenue of the DynaBase product. Revenues
from the IED segment decreased by approximately 15% from
$22,497,000 in the nine months ended October 31, 1998 to
$19,131,000 in the nine months ended October 31, 1999. The
decline in revenues in the IED division is primarily attributable
to lower revenues from the sales of Quick View Plus due to lower
volume from the corporate customers. Revenues from the PDM
segment increased by approximately 154% from $9,141,000 in the
nine months ended October 31, 1998 to $23,198,000 in the nine
months ended October 31, 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 $6,251,000 for the nine
months ended October 31, 1998 to $0 for the nine months ended
October 31, 1999 as a result of the sale of the linguistic
software net assets to Lernout & Hauspie as mentioned above.
Gross profit decreased $4,816,000, or 13%, from $37,566,000 for
the nine months ended October 31, 1998 to $32,750,000 for the
nine months ended October 31, 1999. Excluding the gross profit
associated with the assets sold to Lernout & Hauspie, gross
profit decreased $855,000, or 3%, from $31,895,000 for the nine
months ended October 31, 1998 to $32,750,000 for the nine months
ended October 31, 1999. Gross profit as a percentage of
revenues, excluding the revenues and gross profit associated with
the assets sold to Lernout & Hauspie, was 65% for the nine months
ended October 31, 1999 compared to 83% for the nine months ended
October 31, 1998. The decrease in gross margin in 1999 was due in
part 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.
Total operating expenses increased $46,566,000 to $97,494,000 for
the nine months ended October 31, 1999 from $50,928,000 for the
nine months ended October 31, 1998. Included in total operating
expenses for the nine months ended October 31, 1999 were special
charges of $27,693,000 for costs relating to the Company's 1998
restatement of financial results, costs relating to the related
to the write-down of intangible assets and capitalized software
costs substantially all attributable to the PDM Division and net
premium costs for a major insurance carrier to assume financial
risk associated with the class action litigation initiated
against the Company in February 1999, and restructuring expenses
of $11,068,000 for costs relating to the Company's PDM division
and the Company's new divisional structure. Additionally, the
operating expenses for the nine months ended October 31, 1999
includes a credit of $3,093,000 to sales and marketing expenses
for the termination of a 1998 international distributor
agreement. Included in total operating expenses for the nine
months ended October 31, 1998 were acquisition charges of
$8,100,000 for certain purchased technology under research and
development by Viewpoint Development AB and MediaBank media asset
management system and related technologies at the time of their
acquisitions. Excluding the aforementioned charges as well as
the operating expenses associated with the assets sold to Lernout
& Hauspie, operating expenses increased $20,943,000, or 51%, to
$61,826,000, or 123% of revenues for the nine months ended
October 31, 1999 as compared to $40,883,000, or 106% of revenues
for the nine months ended October 31, 1998. The increase is
primarily due to the Company's 1998 acquisitions.
Sales and marketing expenses increased $1,982,000 to $18,075,000
for the nine months ended October 31, 1999 from $16,093,000 for
the nine months ended October 31, 1998. Sales and marketing
expenses for the nine months ended October 31, 1999 included a
credit of $3,093,000 for the termination of a 1998 international
distributor agreement. Excluding the credit noted above and the
expenses associated with the assets sold to Lernout & Hauspie,
sales and marketing expenses increased $5,470,000 to $21,168,000,
or 42% of revenues for the nine months ended October 31, 1999
compared to $15,698,000, or 41% of revenues for the nine months
ended October 31, 1998. The increase in absolute dollars from
October 31, 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.
Product development expenses increased $6,745,000 from
$14,174,000 for the nine months ended October 31, 1998 to
$20,919,000 for the nine months ended October 31, 1999.
Excluding the product development expenses associated with the
assets sold to Lernout & Hauspie, product development expenses
increased by $7,942,000, or 61%, for the nine months ended
October 31, 1999 compared to the nine months ended October 31,
1998. The increase was due primarily to the Company's investment
in development in the EBT division as well as the 1998
acquisitions, particularly in area of PDM products. The
Company's product development expenses, excluding the product
development expenses associated with the assets sold to Lernout &
Hauspie, were 42% of revenues for the nine months ended October
31, 1999 compared to 34% of revenues for the nine months ended
October 31, 1998. The increase in product development expenses
as a percentage of revenues was due to the aforementioned
acquisitions.
Amortization of intangible assets increased $2,507,000 to
$3,523,000 for the nine months ended October 31, 1999 from
$1,016,000 for the nine months ended October 31, 1998 due to the
1998 acquisitions.
General and administrative expenses increased $4,671,000 to
$16,216,000 for the nine months ended October 31, 1999 compared
to $11,545,000 for the nine months ended October 31, 1998.
Excluding the administrative expenses associated with the assets
sold to Lernout & Hauspie, general and administrative expenses
increased $5,048,000, or 45%, for the nine months ended October
31, 1999 compared to the nine months ended October 31, 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 32% of revenues for the nine months
ended October 31, 1999 and 29% of revenues for the nine months
ended October 31, 1998.
The Company has not recorded a benefit for net operating losses
incurred during the nine months ended October 31, 1999 due to
certain provisions in the Internal Revenue Code concerning
changes in ownership and after evaluating the Company's
anticipated performance over its normal planning horizon. For
the nine months ended October 31, 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
$8,100,000 discussed above. Excluding these special items, the
Company's effective tax rate for the nine months ended October
31, 1998 was 37%.
Net loss and net loss per share was $28,040,000 and $1.80 per
share, respectively, excluding the restructuring expenses of
$11,068,000, or $0.71 per share, the $27,693,000 or $1.78 per
share relating to the special charges incurred by the Company,
the $3,093,000, or $0.20 per charge credit to sales and marketing
expenses for the termination of a 1998 international distributor
agreement, the $14,549,000, or $0.93 per share gain on sale of
the Company's DynaText/DynaWeb stand-alone technical document
products and the $2,655,000, or $0.17 per share, for the write-
down of the Company's investment in Information Please LLC as
compared to $1,031,000, and $0.07 per share, for the nine months
ended October 31, 1998, excluding the gain on the sale of the
linguistic software net assets of $12,012,000 or $0.79 per share,
and the $8,100,000, or $0.53 per share for purchased in-process
research and development charges noted above.
Liquidity and Capital Resources
The Company's operating activities used cash of $32,493,000 for
the nine months ended October 31, 1999 compared to providing cash
of $431,000 for the nine months ended October 31, 1998. The
decreased contribution from operating activities of $32,924,000
was due principally to the overall lower level of earnings in the
nine months ended October 31, 1999 compared to the same period in
1998, net payment for the insurance agreement with a major AAA-
rated insurance carrier pursuant to which the insurance carrier
assumed complete financial responsibly for the defense and
ultimate resolution of the securities class action suit filed in
February 1999 (See Note 4 to the "Notes to Condensed Consolidated
Financial Statements"), payment for the termination of a 1998
international distributor agreement (see Note 4 to the "Notes to
Condensed Consolidated Financial Statements"), and the timing of
payments relating to accounts payable and accrued liabilities.
The Company's investing activities provided cash of $37,589,000
for the nine months ended October 31, 1999 compared to $3,324,000
for the nine months ended October 31, 1998. The increased
contribution of $34,265,000 was due to an increase in the sale of
marketable securities of $33,168,000, lower payments of
$8,886,000 relating to acquisitions, reduced investments in
property and equipment due to the Company's restructuring
activities and lower capitalized software costs offset by a
decrease in proceeds received from dispositions of $10,853,000.
The Company's financing activities provided cash of $227,000 for
the nine months ended October 31, 1999 compared to $10,275,000
for the nine months ended October 31, 1998. The decrease of
$10,048,000 primarily relates to a lower level of stock option
exercises and payments made under capitalized lease obligations.
On October 29, 1999, the Company sold its DynaText/DynaWeb stand-alone
technical document publishing component of its PDM Division, along with
its ViewPort browser technology assets, for $14,750,000. The purchase
was in the form of a stock purchase. The purchase price was paid
$9,000,000 in cash and $5,600,000 in the form of a promissory note, due
and payable by April 30, 2000. The final payment of the note is
subject to final closing adjustments allowed under the original
agreement with Enigma. The promissory note bears interest as follows:
(i) if the promissory note is paid by December 15, 1999 but prior to
January 31, 2000, interest is at a rate of 6.5% per annum accrued
from October 29, 1999 until the date on which the final payment is paid,
and (iii) if the promissory note is paid after January 31, 2000,
interest at a rate of 6.5% per annum accrued from October 29, 1999
through and until January 31, 2000 and 13.0% per annum accrued from
February 1, 2000 through and until the date on which the final payment is
paid. The promissory note is secured by a Stock Pledge Agreement of the
stock of Inso Providence Corporation.
As of October 31, 1999, the Company had working capital of
$13,645,000. Total cash, cash equivalents, and marketable
securities at October 31, 1999 were $20,235,000. 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.
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. The Company cannot predict the ultimate
resolution of this action at this time, and there can be no
assurance that the investigation 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 further
professional fees with respect to the Formal Order of Private
Investigation subsequent to announcement of the restatement.
On June 9, 1999, the bankruptcy estates of Microlytics, Inc. and
Microlytics Technology Co., Inc. (together "Microlytics") filed
an adversary proceeding against the Company in the United States
Bankruptcy Court for the Western District of New York. The
complaint seeks turnover of purported property of the estates and
damages for the Company's alleged breaches of a license from
Microlytics relating to certain computer software databases and
other information. The complaint seeks damages of at least
$11,750,000. On August 19, 1999, the Company filed a motion to
withdraw the case from the Bankruptcy Court to the United States
District Court for the Western District of New York. The motion
is pending. Also, on August 19, 1999, the Company filed its
Answer and Demand for Jury Trial. The Company believes that the
claims are subject to meritorious defenses, which it plans to
assert during the lawsuit. The Company cannot predict the
ultimate resolution of this action at this time.
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. At the time of the Sherpa
acquisition, the Company caused Sherpa to enter into employment
and noncompetition agreements with key executives. The Company
expects to make remaining payments of approximately $1,000,000
over the next two years under those agreements.
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 October 31, 1999, approximately
$160,000 for such costs remained in the accrual. Since December
31, 1998, payments against the accrual consisted of the
following: approximately $1,530,000 for employee severance for
elimination of duplicate functions and closure of duplicate and
excess operations; approximately $400,000 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 October
31, 1999, the Company reevaluated the estimated severance costs
relating to the elimination of excess and duplicative activities
as well as costs associated with certain contractual obligations,
which existed at the time of the acquisition, and reduced the
related accrual and goodwill by approximately $3,710,000. The
majority of the payments relating to the remaining accrual are
expected to be made prior to January 31, 2000 (see Note 5 to the
"Notes to Condensed Consolidated Financial Statements").
In October 1999, the Company adopted a plan of restructuring
aimed at reducing current operating costs in the Company's PDM
division, while retaining its technical assets and customer
service and support infrastructure. The restructuring plan
includes a PDM workforce reduction of approximately 40%, the
consolidation of the PDM division's sales, service and support
organizations, the consolidation of PDM development facilities
and the abandonment of leasehold improvements and support assets
associated with these locations. The plan also calls for a
change in focus away from certain development activities.
Therefore, the charge includes a write-down of licensed
technology for discontinued development activities to their
estimated future cash flows. As a result of the restructuring
plan, the Company recorded a charge of $4,290,000 to the current
year third fiscal quarter's results. The charge included
approximately $1,000,000 of severance for employees in
administrative, sales and development positions; $918,000 for the
consolidation of sales, service and support organizations and
development facilities; and $2,372,000 for write-down of licensed
technology for discontinued development activities and the write-
off of leasehold improvements and support assets associated with
closed locations. As of October 31, 1999, approximately
$1,920,000 remained in accrued liabilities relating to this
restructuring charge. The majority of the payments relating to
the remaining accrual are expected to be made prior to January
31, 2000 (see Note 6 to the "Notes to Condensed Consolidated
Financial Statements").
In July 1999, the Company adopted a plan of restructuring aimed
at reducing current operating costs, as well as supporting the
Company's new divisional structure. The Company's restructuring
plan included a 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 abandonment of leasehold improvements and support assets
associated with these locations. The plan also called for a
change in focus away from certain products. As a result of the
restructuring plan, the Company recorded a charge of $6,234,000
to the second fiscal quarter's results. The charge included
approximately $2,000,000 of severance for employees in
administrative, sales and development positions; $960,000 for the
closure and/or combination of domestic and international sales
and administrative facilities; and $3,274,000 for write-down of
capitalized product development costs and intangibles for certain
discontinued products and the write-off of leasehold improvements
and support assets associated with closed locations. The
capitalized product development costs and intangibles were
written-down to their estimated future cash flows. As of October
31, 1999, accrued liabilities of approximately $800,000 remained
relating to this restructuring charge. The remaining accrual
amount is expected to be paid by January 31, 2000 (see Note 6 to
the "Notes to Condensed Consolidated Financial Statements").
In June 1998, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 133, as amended by
Statement of Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities" (collectively SFAS
133) effective for fiscal years beginning after June 15, 2000.
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.
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 of $500,000
to the Company's consolidated results for the one-month period
ended January 31, 1999. Additionally, the Company's 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 October 31, 1999, the nature of the efforts
required to develop the purchased 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 October 31, 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. The Company has presently stopped development of
SherpaWorks 3 given management's plans for the PDM division and
its potential sale. As a result, it is not possible to estimate
the costs that will be required to be expended to complete the
remaining development work of SherpaWorks 3.
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 October 31, 1999, the nature of the efforts
required to develop the first project 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 October 31, 1999, the Company estimates that
approximately $200,000 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. 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. The Company's products that it will continue to sell
in the Year 2000 have 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 current 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. There are some of the
Company's customers using products or product versions that the
Company has not tested, and does not support, for Year 2000
compliance. The Company is encouraging these customers to
migrate to current products or versions that meet the Company's
Year 2000 compliance definition. In addition, the Company does
not intend to test any of its custom code for Year 2000
compliance.
The costs of these efforts have 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 all mission critical hardware and
software on which it develops the products and runs its internal
systems. All inventoried items have been categorized as
compliant, compliant with patches, or not compliant. The Company
has substantially completed addressing the items in the compliant
with patches category. The Company expects to complete the
upgrade of these items in advance of December 31, 1999. 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 all mission critical 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
While the Company has not developed a formalized contingency
plan, it has identified contingency measures representing those
areas, which are deemed to be most critical. These contingency
measures include short-term use of backup equipment or software,
developing manual workaround processes and alternative third
party suppliers for critical services and products.
Additionally, 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 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 but expects to complete it prior to December 31,
1999. 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;
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 have 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. On
April 5, 1999, the seven class action lawsuits that
were filed against the Company were consolidated into
one lawsuit entitled In Re Inso Corporation, Civil
Action No. 99-10193-WGY.
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 Company believes that the
claims are subject to meritorious defenses, they which
plan to assert during the lawsuit. On September 29,
1999 the Company entered into an insurance agreement
with a major AAA-rated insurance carrier pursuant to
which the insurance carrier assumed complete financial
responsibly for the defense and ultimate resolution of
the securities class action suit. A charge to the
Company's current year fiscal consolidated third
quarter results of $13,451,000 was taken in connection
with the insurance agreement.
On June 9, 1999, the bankruptcy estates of Microlytics,
Inc. and Microlytics Technology Co., Inc. (together
"Microlytics") filed an adversary proceeding against
the Company in the United States Bankruptcy Court for
the Western District of New York, Microlytics, Inc. and
Microlytics Technology Co., Inc. v Inso Corporation,
Adversary Proceeding No. 99-2177. The complaint seeks
turnover of purported property of the estates and
damages for the Company's alleged breaches of a license
from Microlytics relating to certain computer software
databases and other information. The complaint seeks
damages of at least $11,750,000. On August 19, 1999,
the Company filed a motion to withdraw the case from
the Bankruptcy Court to the United States District
Court for the Western District of New York. The motion
is pending. Also, on August 19, 1999, the Company
filed its Answer and Demand for Jury Trial. The
Company believes that the claims are subject to
meritorious defenses, which it plans to assert during
the lawsuit. The Company cannot predict the ultimate
resolution of this action 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 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 cannot predict the ultimate resolution of
this action at this time, and there can be no assurance
that the formal order of investigation will not have a
material adverse impact on the Company's financial
condition and results of operations.
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 2-1 Amendment No. 1 to Rights Agreement,
dated as of October 27, 1999, by and
between INSO Corporation and State
Street Bank & Trust Company,
incorporated by reference to Exhibit 2
to the Registrant's Registration
Statement of Form 8A/A, filed with the
Securities and Exchange Commission on
October 28, 1999.
Exhibit 2-2 Purchase and Sale Agreement dated
October 18, 1999,by and among Inso Corporation,
Inso Providence Corporation and ViewPort
Development AB and Enigma Information Systems Ltd.
and Enigma, Inc. and the First Amendment of the
Purchase and Sale Agreement dated as of
October 28, 1999 by and among Enigma
Information Systems Ltd. and Enigma
Information Retrieval Systems, Inc. and INSO
Corporation, Inso Providence Corporation and ViewPort
Development AB, incorporated by
reference to Exhibit 2-1 to the
Registrant's Current Report on Form 8-K
dated October 29, 1999, filed with the
Securities and Exchange Commission on
November 15, 1999.
Exhibit 10-1 Separation Agreement and Release by and
between Steven R. Vana-Paxhia and the
Company dated September 28, 1999.
Exhibit 10-2 Employment Agreement by and between
Stephen O. Jaeger and the Company
dated as of April 1, 1999.
Exhibit 10-3 Letter Agreement by and between Paul R.
Anderson and the Company dated as of
October 6, 1999.
Exhibit 10-4 Catastrophic Equity Protection Insurance
Policy Number 859-62-16 by and between
Illinois National Insurance Company and
the Company.
Exhibit 27-1 Financial Data Schedule for the
quarter ended October 31, 1999.
Exhibit 27-2 Financial Data Schedule for the quarter
ended October 31, 1999.
(b) Reports on Form 8-K
Registrant filed five (5) reports on Form 8-K during
the quarter ended October 31, 1999.
(i) Amendment to Form 8-K on Form 8-K/A dated December 4,
1998 reporting under Item 7 (Financial Statements, Pro
Forma Financial Information and Exhibits), containing
the financial statements of the acquired business
Sherpa Systems Corporation and pro-forma financial
information including an unaudited pro forma combined
balance sheet assuming the acquisition occurred on
September 30, 1998 and unaudited pro forma combined
statement of operations assuming the acquisition
occurred on January 1, 1998 and 1997, which was filed
with the Securities and Exchange Commission on
September 10, 1999.
(ii) Current Report on Form 8-K dated September 15, 1999
reporting under Item 5 (Other Events) the appointment
of Edward Terino as a member of the Board of Directors
of the Company and the resignation of Ray Shepard as a
member of the Board of Directors of the Company, which
was filed with the Securities and Exchange Commission
on September 22, 1999.
(iii) Current Report on Form 8-K dated September 30, 1999
reporting under Item 5 (Other Events) the purchase of
an insurance agreement with a major AAA-rated insurance
carrier pursuant to which the insurance carrier will
assume complete financial responsibility for the
defense and ultimate resolution of the securities class
action litigation initially filed in February 1999 on
behalf of certain purchases of the Company's common
stock, which was filed with the Securities and Exchange
Commission on October 14, 1999.
(iv) Current Report on Form 8-K dated October 19, 1999
reporting under Item 5 (Other Events) the definitive
agreement entered into by the Company for the sale of
its DynaText/DynaWeb Publishing Business to Enigma,
Inc., which was filed with the Securities and Exchange
Commission on October 26, 1999.
(v) Current Report on Form 8-K dated October 27, 1999
reporting under Item 5 (Other Events) Amendment No.1 to
the Shareholders' Rights Plan dated July 16, 1997,
which was filed with the Securities and Exchange
Commission on October 28, 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: December 13, 1999 /s/ Robert F. Dudley
----------------
Robert F. Dudley
Vice President and Chief Financial Officer
Date: December 13, 1999 /s/ Patricia A. Michaels
--------------------
Patricia A. Michaels
Vice President and Corporate Controller
(Chief Accounting Officer)
Exhibit Index
Exhibit Description
Exhibit 2-1 Amendment No. 1 to Rights Agreement,
dated as of October 27, 1999,
by and between INSO Corporation and
State Street Bank & Trust Company,
incorporated by reference to Exhibit 2
to the Registrant's Registration
Statement of Form 8A/A, filed with the
Securities and Exchange Commission on
October 28, 1999.
Exhibit 2-2 Purchase and Sale Agreement dated
October 18, 1999, by and among Inso Corporation,
Inso Providence Corporation and ViewPort
Development AB and Enigma Information Systems Ltd.
and Enigma, Inc. and the First Amendment of the
Purchase and Sale Agreement dated as of
October 28, 1999 by and among Enigma
Information Systems Ltd. and Enigma
Information Retrieval Systems, Inc. and INSO
Corporation, Inso Providence Corporation and ViewPort
Development AB, incorporated by reference to
Exhibit 2-1 to the Registrant's Current Report on Form 8-K
dated October 29, 1999, filed with the
Securities and Exchange Commission on November 15, 1999.
Exhibit 10-1 Separation Agreement and Release by and
between Steven R. Vana-Paxhia and the
Company dated September 28, 1999 (filed herewith).
Exhibit 10-2 Employment Agreement by and between
Stephen O. Jaeger and the Company
dated as of April 1, 1999 (filed herewith).
Exhibit 10-3 Letter Agreement by and between Paul R.
Anderson and the Company dated as of
October 6, 1999 (filed herewith).
Exhibit 10-4 Catastrophic Equity Protection Insurance
Policy Number 859-62-16 by and between
Illinois National Insurance Company and
the Company (filed herewith).
Exhibit 27-1 Financial Data Schedule for the
quarter ended October 31, 1999.
Exhibit 27-2 Financial Data Schedule for the quarter
ended October 31, 1999.
Separation Agreement and Release
This Separation Agreement and Release entered into this 28th
day of September, 1999, is made by and between Inso
Corporation (Inso Corporation, and all of its subsidiaries and
affiliates, shall be collectively referred to herein as "the
Company") and Steven R Vana-Paxhia ("the Executive"), and
constitutes the parties' agreement with respect to the
termination of the Executive's employment with the Company.
1. The Executive voluntarily resigns as an officer of the
Company effective April 1, 1999, ("the Resignation Date")
and as an employee of the Company on April 1, 2001 ("the
Termination Date") except as described in paragraph 2.
2. During the period between the Resignation Date and the
Termination Date ("the Interim Period"), the Executive
shall perform any special assignments reasonably
requested by the Chief Executive Officer or the Chief
Operating Officer at reasonable times and places mutually
agreeable to the parties. It is the intention of the
parties that such special assignments would not
unreasonably interfere with any future employment the
Executive may undertake with an employer other than the
Company. Between April 1, 1999 and April 1, 2001, the
Executive or his or her estate shall be paid at an
annualized rate of $258,000 - his base salary as in
effect on April 1, 1999 - (reduced by any amounts
received under any disability insurance program, or other
income replacement program available through the Company)
in accordance with the Company's normal and customary pay
practices for executive employees, subject to all
applicable federal and state income, payroll, and other
applicable tax withholding ("Base Salary").
Additionally, the Executive shall be reimbursed for
reasonable expenses, as determined by the Company,
related to the services requested by the Chief Executive
Officer or the Chief Operating Officer during the Interim
Period. The Executive shall also be reimbursed for other
reasonable parking and telephone expenses, as determined
by the Company, during the Interim Period.
3. Between April 1, 1999 and April 1, 2001 and subject to
the exceptions noted below, Executive and his family
shall be entitled to continue his or their participation
in the Company's medical, dental, and vision care benefit
plans to the same extent, and under the same conditions,
that he may be a participant in such plans on April 1,
1999 regardless of the intervening death of Executive;
provided however, such participation shall cease on the
earlier of: (a) April 1, 2001, and (b) the last day of
the month in which he or she may be covered by any plan,
program or arrangement, sponsored by another employer
offering substantially equivalent coverage. Additionally,
from April 1, 1999 to April 1, 2001, the Executive shall
be entitled to continue his or her participation in the
Company's 401K plan (including employer match).
4. On April 1, 2001, Executive shall be eligible to continue
medical, dental, and vision care benefits under the
provisions of COBRA, and he will be notified of his COBRA
rights at that time.
5. Executive's participation in Company benefit plans,
programs, and arrangements not enumerated in paragraph 3
above shall be governed by their terms. Executive's
entitlement to further vacation, sick leave and other
paid time off shall cease on the Resignation Date. Earned
but unused vacation shall be paid to him with the next
regular payroll cycle following the Resignation Date.
6. Between April 1, 1999 and April 1, 2001, previously
granted, but unexercised stock options held by Executive
for the purchase of stock of the Company and restricted
shares shall continue to vest, and shall be subject to
rules regarding exercise, as if the Executive were still
an active employee of the Company, and all rights of an
option holder which may arise on a change of control of
the Company shall continue to accrue to the Executive
during such time period.
7. On December 16, 1997, the Company lent the Executive
$479,997.25 (the "Principal Amount") pursuant to a Secured
Promissory Note (the "Share Loan"), which Loan Amount the
Executive used to purchased 46,829 shares of the Company's
common stock (the "Purchased Shares") at a price per share
of $10.25. Currently, the market value of the Purchased
Shares is less than the sum of the Principal Amount plus
accrued interest. It is the intention of the parties, and
the parties hereby agree, that the Share Loan remain
outstanding, and payment of interest deferred, until as
late as the maturity date of December 16, 2002 ("Maturity
Date"), notwithstanding the expiration of this Agreement,
so that the Executive may delay in repaying the Share Loan
until such such time prior to the Maturity Date - if ever
- - that the market value of the Purchased Shares equals or
exceeds the sum of the Principal Amount plus accrued
interest. Further, in order to mitigate the potential
economic impact to the Executive arising from the Share
Loan, the parties agree that, should the closing price per
share of the Company's common stock never average the sum
of (1) $10.25 and (2) the Per-Share Adjusted Accrued
Interest (collectively, "the Put Price Per Share") for at
least thirty (30) consecutive calendar days prior to the
Maturity Date, then on the Maturity Date the Company shall
pay to the Executive an amount equal to the difference
between (a) the Principal Amount plus accrued interest;
and (b) the product of the closing price per share of the
Company's common stock on the Maturity Date and 46,829.
For example, if the highest the Put Share Price ever
averages for at least thirty (30) consecutive calendar
days prior to the Maturity Date is $8.00 per share, the
closing price per share of the Company's common stock on
the Maturity Date is $7.00 per share, and the sum of the
Principal Amount plus interest on the Maturity Date equals
$627,803, then on the Maturity Date the Company would pay
the Executive $300,000 (i.e., $627,803 - $327,803). "Per-
Share Adjusted Accrued Interest" shall mean the quotient
of (1) the cumulative interest then due pursuant to the
Share Loan, less a pro-forma income tax benefit of 31.6%,
and (2) 46,829.
8. The Company shall reimburse the executive for reasonable
legal fees incurred by the Executive in connection with
this Agreement, up to $12,500.
9. Anything contained in paragraphs 15 and 16
notwithstanding, the Company and Executive shall continue
to be bound by the Non-Disclosure Agreement executed by
Executive on October 4, 1996, which Agreement is
incorporated herein by reference.
10. Beginning on the date of this Agreement and continuing
through the date that is two (2) years after the
Termination Date, the Executive will not attempt to hire
or hire, or attempt to solicit or solicit, any employee of
the Company, or assist in such hiring by anyone else, to
work as an employee or independent contractor, with, or
otherwise provide services to, any business directly or
indirectly competitive with the Company's business.
Notwithstanding the foregoing, the Executive will not be
considered to be in violation of this Agreement if he
complies with a request to provide a written or oral
reference for someone seeking employment where this
conduct would otherwise be considered to violate the
provisions of this paragraph.
11. Beginning on the date of this Agreement and continuing
through the date that is two (2) years after the
Termination Date, absent the Company's prior written
approval, the Executive shall not provide services, either
as a contractor, employee or otherwise, for any of the
following companies or their parents, subsidiaries or
affiliates: (a) Vignette, (b) Broadvision, (c) Interwoven,
(d) ExpressRoom, (e) FutureTense, (f) Allaire, (g)
NetObjects, (h) Dreamweaver, (i) Documentum; (j)
Interleaf, or (k) any division or operating unit of Oracle
engaged in direct or indirect competition with the
Company. Executive agrees and understands that if he is
to breach of any Provision of Paragraphs 10 or 11 of this
Agreement, in addition to all other remedies available to
the Company in law and in equity, the Company shall be
entitled to: (a) discontinue any of its obligations under
this Agreement; and (b) obtain a Court Order enforcing the
provision(s) which Executive has breached.
12. From and after the date of this Agreement, the Executive
shall continue to be entitled to indemnification as an
"Officer" of the Company in accordance with Article V of
the Company's By-laws as in effect as of the date of this
Agreement notwithstanding any subsequent amendment to such
By-laws. The term "Officer" shall have the meaning set
forth in Article V of the Company's By-laws.
13. Executive agrees to return to the Company prior to the
Resignation Date all Company
property including, but not limited to, vendor, supplier,
and any other business or mailing
lists, reports, files, memoranda, records and software,
credit cards, desk or file keys, computer access codes or
disks, and Company manuals. Executive further agrees that
he will not retain any copies, duplicates, reproductions or
excerpts of such property. Notwithstanding this paragraph,
the Executive may retain his laptop computer.
14. Executive acknowledges that the Company will include a copy
of this Agreement as an exhibit to its Form 10-Q for the
fiscal quarter ending October 31, 1999. Until such time as
the Company includes a copy of this Agreement as an exhibit
to its Form 10-Q, the Executive and Company represent and
agree that they and their agents and representatives shall
keep completely and strictly confidential the terms of this
Agreement and any settlement negotiations that occurred in
connection with this Agreement, except that (1) the
Executive may disclose said information to his legal
advisors, financial advisors and spouse (including the
spouse's legal counsel) providing that the Executive
informs these persons of the confidentiality restriction
and they agree to be bound by it; (2) the parties may
disclose said information if agreed in writing by
authorized agents of both parties; (3) as required by law;
(4) in order to rebut any material misstatement by the
other party. In the event that either party seeks to
disclose the confidential information pursuant to (3) or
(4) above, that party will give the other party at least
ten (10) days advance written notice to provide an
opportunity to contest disclosure. Notwithstanding the
foregoing, Executive may inform third parties of his
obligations under paragraph 10 without violating this
paragraph 14.
15. In exchange for the consideration provided in this
Agreement, to which Executive acknowledges and agrees he is
not otherwise entitled, Executive for himself and on behalf
of his heirs, executors, administrators and assigns, hereby
remises, releases and fully discharges the Company and, to
the extent applicable, its present, former, and future
parent companies, subsidiaries and affiliates, and the
officers, directors, employees, agents, successors and
assigns of each of them ("the Released Parties") of and
from any and all claims, rights and causes of action of all
nature known, unknown, past, present, now foreseeable or
unforeseeable, which he has or may have, in any way arising
out of, connected with or related to Executive's employment
with any of the Released Parties, the termination thereof
or based upon information made known to Executive during
employment with any of the Released Parties. This Release
shall include, but not be limited to, any claims, damages,
rights and causes of action for wrongful discharge, breach
of contract, discrimination or retaliation under any
federal, state or local laws, rules, orders or regulations
including but not limited to, the Age Discrimination in
Employment Act, Title VII the Civil Rights Act of 1964, 42
U.S.C. Sec. 200 et. seq., the Massachusetts Civil Rights Act,
M.G.L.c. 12 Sec. 11H and 11I, the Massachusetts Fair Employment
Practices Act, M.G.L.c. 151b, Sec. 1 et. seq., the Americans
with Disabilities Act, 29 U.S.C. Sec. 12101 et. seq., and the
Massachusetts Equal Rights Act, c.93, Sec. 102. This Release
shall also include, but not be limited to, all claims,
rights and causes of action for costs, attorney's fees,
bounties, or percentage of awards or settlements which
Executive may assert against or which may be asserted
against the Company by others on Executive's behalf, or
against any of the Released Parties. Executive and the
Company intend and agree that this Release is to be a broad
Release to apply to any relief or cause of action, to the
extent permitted by law, no matter what it is called, and
shall include, but not be limited to, claims, rights or
causes of action for wages, benefits, bonuses, fines, back
pay, share of awards, compensatory damages, and punitive
damages; however, nothing in this Release shall be
construed to bar claims for alleged breaches of this
Agreement.
16. The Company, on its behalf, and to the extent applicable,
on behalf of its present, former and future parent
companies, subsidiaries and affiliates, and officers,
directors, agents, successors and assigns of each of them
hereby remises, releases, and fully discharges Executive of
and from all claims, demands, causes of action, damages and
expenses, of any and every nature whatsoever, known or
unknown by the Company, past or present as a result of
actions, omissions or events occurring through the date of
this Agreement in connection with his employment with the
Company; however, nothing in this Release shall be
construed to bar claims for alleged breaches of this
Agreement.
17. Executive will not disparage or discuss the Company or its
agents, officers, servants or employees in a derogatory
manner. Executive will at all times state, if asked, that
the Company was and is a reputable company during his or
her employment with the Company and that he or she was
proud to have been associated with it. The Company will not
disparage or discuss the Executive in a derogatory manner
and will at all times state if asked, that the Executive
conducted himself or herself honorably and is a reputable
person.
18. The Executive herein represents that he has not filed any
complaints, charges or claims for relief against the
Released Parties with any local, state, or federal court or
administrative agency which currently are outstanding.
19. The payment by the Company of the consideration referred to
herein is not, and shall not be deemed, an admission of
responsibility or liability by any of the Released Parties.
20. Executive acknowledges that he has been given twenty-one
(21) days to consider this Agreement and has been advised
to consult with, and has in fact consulted with, an
attorney before signing.
21. This Agreement shall become effective on the eighth (8th)
day following the date on which it is signed by Executive.
Executive may revoke this Agreement in the seven-day period
following the date on which the Executive signs the
Agreement by submitting a written revocation to the
Company. Any payments due under this Agreement shall not be
paid until the Effective Date of this Agreement, except as
otherwise agreed.
22. Executive acknowledges that:
- -He was advised to consult with an attorney to review
this Agreement prior to signing it, did consult with
an attorney, and was given a chance to refuse to
sign this Agreement.
- -He has read and understands this Agreement and
understands fully its final and binding effect.
- -None of the Released Parties had made any
statements, promises or representations not set forth in this
Agreement, and Executive has not relied
on any such statements, promises or representations.
- -He has voluntarily signed this Agreement with the
knowledge and understanding and full intention of releasing the
Released Parties as set forth above.
23. This Agreement is binding upon and shall inure to the benefits
of the parties hereto and their respective assigns, successors,
heirs and personal representatives; provided however that the Executive
may not assign any rights or duties it may have hereunder without prior
written consent of the Company.
24. If any provision of this Agreement is judicially
determined to be invalid or unenforceable as
written, then such provision shall, if possible, be
modified and reformed to the degree
necessary to render it valid and enforceable. Any such
invalidity or unenforceability of any
provision shall have no effect on the remainder of this
Agreement which shall remain in full
force and effect. The parties agree that each Party and
the attorney(s) for each Party to this Agreement have
negotiated, prepared, and reviewed this Agreement and,
accordingly, the normal rule of construction (to the
effect that any ambiguities are to be resolved against the
drafting Party) will not be employed in any interpretation
of this Agreement.
25. This Agreement is to be governed and will be construed as
a sealed instrument under and in accordance with the laws
of the Commonwealth of Massachusetts. If any dispute or
disagreement arises between the parties relating to the
terms of this Agreement, the parties shall attempt to
mediate their differences through the offices of
J.A.M.S./Endispute. If mediation does not resolve the
dispute, the parties agree to binding arbitration with
J.A.M.S./Endispute. The parties shall abide by and perform
any arbitration award and such award shall be entered as a
judgement by any court having jurisdiction thereof.
26. This Agreement, together with the document incorporated
herein by reference, constitutes the
entire agreement between the parties hereto and supersedes
all prior and contemporaneous negotiations, representations,
understandings and agreements, whether written or oral. Without limitation,
the parties acknowledge that the Management Retention
Agreement, by and between Inso and the Executive is
terminated and is of no further force and effect.
IN WITNESS WHEREOF, the Company and Executive have entered into
this Agreement on the date first above written.
Inso Corporation
By: /s/ Jonathan Levitt /s/ Steven R. Vana-Paxhia
----------------------- -------------------------
Jonathan Levitt Steven R. Vana-Paxhia
Secretary
INSO CORPORATION
EMPLOYMENT AGREEMENT
AGREEMENT effective the 1st day of April, 1999, by and between
Inso Corporation, a Delaware corporation with principal offices
at 31 St. James Avenue, Boston, MA 02116 ("Inso"), and Stephen O.
Jaeger, residing at 11 Topstone Road, Redding, Connecticut,
06896-1810 ("Executive").
The parties hereto, intending to be legally bound, hereby agree
upon the following terms of employment of the Executive by Inso.
1. Position and Responsibilities.
(A) Title. Executive shall serve as Chief Executive
Officer ("CEO") and Chairman of the Board of Inso, subject to the
terms and conditions set forth in this Agreement.
(B) Services. During the term of this Agreement,
Executive agrees to undertake such activities on behalf of Inso
as the Board of Directors from time to time requests, and
Executive shall exercise such powers and perform such duties in
relation to the business and affairs of Inso as may from time to
time be vested in him or requested by the Board of Directors of
Inso. Executive shall at all times report to, and his activities
shall at all times be subject to the direction and control of,
the Board of Directors of Inso. Inso specifically acknowledges
that Executive is a non-executive director of Strategic
Diagnostics, Inc. and is an executive director and a principal
investor in PharmaCom Group, Inc., a privately held educational
marketing company based in Stamford, Connecticut. These
activities require the Executive's periodic attention but not to
the extent that Executive is unable to devote substantially all
of his business time, attention and services to the diligent,
faithful and competent discharge of such duties for the
successful operation of Inso's business.
Inso specifically acknowledges, understands and agrees that
Executive shall continue to maintain his principal residence in
Connecticut and that he shall not be required to establish his
principal residence and only office in the metropolitan Boston
area; there shall be no established minimum number of days per
month in which Executive shall be required to work in Inso's
metropolitan Boston offices.
2. Compensation: Base Salary, Bonus, Stock Options and Other
Benefits. The following compensation shall be payable to the
Executive during the term of his employment as CEO of Inso. The
Executive's compensation package shall be reviewed annually by
the Board of Directors.
(A) Base Salary. The Executive's initial base salary
shall be Two Hundred and Sixty Thousand Dollars ($260,000) per
year. Such salary shall be payable in conformity with Inso's
customary practices for executive compensation as such practices
shall be established or modified from time to time. Salary
payments shall be subject to all applicable federal and state
withholding, payroll and other taxes.
(B) Bonus. The Executive's target annual bonus shall
be sixty percent (60%) of his then-current base salary, payable
at the discretion of the Board of Directors based upon the
provisions of Inso's cash incentive compensation plan for senior
executives.
(C) Stock Options. Effective May 6, 1999, Executive
shall be granted Stock Options to purchase One Hundred Thousand
(100,000) shares of Inso's common stock as follows: 85,185 shall
be Non-qualified Stock Options, and 14,815 shall be Incentive
Stock Options. Such options shall have an exercise price of
$6.75 per share, and shall be subject to vesting as follows:
(i) Options (of which 4,938 are Incentive Stock
Options, and 28,395 are Non-qualified Stock
Options) to purchase 33,333 shares shall vest
on the earlier to occur of (1) March 31,
2000, and (2) the date of Executive's
termination of employment as CEO of Inso.
Notwithstanding the foregoing, if prior to
March 31, 2000 the Executive terminates his
employment as CEO of Inso other than for Good
Reason or Inso terminates the employment of
the Executive as CEO for Cause, then no
options shall vest under this subsection
2(C)(i).
(ii) Options (of which 4,938 are Incentive Stock
Options, and 28,395 are Non-qualified Stock
Options) to purchase an additional 33,333
shares shall vest on the earlier to occur of
(1) March 31, 2001, and (2) the date of
Inso's termination of Executive's employment
as CEO of Inso other than for Cause, so long
as such date is between April 1, 2000 and
March 30, 2001. Notwithstanding the
foregoing, if prior to March 31, 2001, the
Executive terminates his employment as CEO of
Inso for any reason or Inso terminates the
employment of the Executive as CEO of Inso
for Cause, then no options shall vest under
this subsection 2(C)(ii);
(iii) Options (of which 4,939 are Incentive Stock
Options, and 28,395 are Non-qualified Stock
Options) to purchase an additional 33, 334
shares shall vest on the earlier to occur of
(1) March 31, 2002, and (2) the date of
Inso's termination of Executive's employment
as CEO of Inso other than for Cause, so long
as such date is between April 1, 2001 and
March 30, 2002. Notwithstanding the
foregoing, if prior to March 31, 2002, the
Executive terminates his employment as CEO of
Inso for any reason or Inso terminates the
employment of the Executive as CEO of Inso
for Cause, then no options shall vest under
this subsection 2(C)(iii).
(D) Benefits. Inso shall provide Executive with such
medical, dental, vision care, life insurance, disability, 401(K)
and other benefits as it makes available to Inso's Chief
Operating Officer. Such participation shall be subject to (i)
the terms of the applicable plan documents, and (ii) generally
applicable Inso policies. A copy of Inso's current policies will
be provided to you in a separate letter from Inso's HR
department.
(E) Vacation. Executive shall be entitled to four (4)
weeks of vacation per year, to be taken at such times and at such
intervals as shall be determined by Executive, subject to the
reasonable business needs of Inso.
(F) Expenses. It is understood that Executive will
from time to time incur reasonable expenses in conjunction with
his employment. Inso will reimburse the Executive for any such
expenses in accordance with Inso's policies. Without limitation,
Inso shall reimburse the Executive for the reasonable cost of
renting an apartment in the Boston area and associated living
expenses, as well as for the cost of travel between Inso's
principal office and the Executive's residence(s).
3. Nondisclosure. The Nondisclosure Agreement entered into by
the Executive and Inso on April 27, 1999, shall remain in full
force and effect, and is incorporated herein by reference.
4. Indemnification and Insurance. From and after the date of
this Agreement, the Executive shall continue to be entitled to
indemnification as an "Officer" of Inso in accordance with
Article V of Inso's By-laws as in effect as of the date of this
Agreement, notwithstanding any subsequent amendment to such By-
laws. The term "Officer" shall have the meaning set forth in
Article V of Inso's By-laws. Inso agrees to maintain Director
and Officer liability insurance coverage in an amount not less
than $10,000,000.
5. Definitions. The following definitions shall apply with
respect to this Agreement:
5.1 The following, as determined by the Board in its
reasonable judgment, shall constitute "Cause" for termination of
the Executive's employment as CEO of Inso: (i) Executive's
failure to perform, or material negligence in the performance of,
his duties and responsibilities to Inso; (ii) material breach by
Executive of any provision of this Agreement; (iii) other conduct
by Executive that is materially harmful to the business,
interests or reputation of Inso; (iv) an act of fraud,
embezzlement or theft in connection with Executive's duties to
Inso or in the course of his employment with Inso, or (v) gross
misconduct which is demonstrably and materially injurious to
Inso.
5.2 "Disability" shall be deemed to have occurred if
Executive becomes disabled during his employment under this
Agreement through any illness, injury, accident or condition of
either a physical or psychological nature and, as a result, is
unable to perform substantially all of his duties and
responsibilities hereunder for ninety (90) days during any period
of three hundred and sixty-five (365) consecutive calendar days.
If any question arises as to whether during any period Executive
is so disabled, Executive shall, at the request of Inso or the
Board of Directors, submit to a medical examination by a
physician selected by Inso or the Board of Directors to determine
whether Executive is so disabled. Such determination shall, for
the purposes of this Agreement, be conclusive of the issue. If
this question arises and Executive does not submit to the medical
examination, the Board of Director's determination of the issue
shall be binding on Executive.
5.3 "Good Reason" shall mean any of the following
circumstances:
(A) without the Executive's express written consent,
any significant diminution in the Executive's position, duties,
responsibilities, power, title or office, including without
limitation the hiring and/or promotion by Inso of another
individual as CEO;
(B) without the Executive's express written consent,
any reduction in the Executive's annual base salary;
(C) without the Executive's express written consent,
the failure by Inso to (i) continue in effect any material
compensation or benefit plan in which the Executive participates,
unless an equitable arrangement (embodied in an ongoing
substitute or alternative plan) has been made with respect to
such plan, (ii) continue the Executive's participation therein
(or in such substitute or alternative plan) on a basis not
materially less favorable, both in terms of the amount of
benefits provided and the level of his participation relative to
other participants or (iii) award cash bonuses to the Executive
in amounts and in a manner substantially consistent with past
practice in light of Inso's financial performance; or
(D) without the Executive's express written consent,
the failure by Inso to continue to provide the Executive with
benefits substantially similar to those enjoyed by him under any
of Inso's life insurance, medical, health and accident, or
disability plans, the taking of any action by Inso which would
directly or indirectly materially reduce any of such benefits, or
the failure by Inso to provide the Executive with the number of
paid vacation days to which he is entitled on the basis of years
of service with Inso in accordance with Inso's normal vacation
policy.
(E) A "Change of Control" of Inso occurs. A "Change in
Control" shall occur or be deemed to have occurred only if any of
the following events occur:
(i) any "person," as such term is used in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), (other than Inso, any trustee or
other fiduciary holding securities under an employee benefit plan
of Inso, any corporation owned directly or indirectly by the
stockholders of Inso in substantially the same proportion as
their ownership of stock of Inso) is or becomes the "beneficial
owner" (as defined in Rule 13(d)(3) under the Exchange Act),
directly or indirectly, of securities of Inso representing 33
1/3% or more of the combined voting power of Inso's then
outstanding securities (other than as a result of the acquisition
of such securities directly from Inso);
(ii) during any period of two (2) consecutive
years (specifically including any period prior to the execution
of this Agreement), individuals who at the beginning of such
period constitute the Board, and any new director (other than a
director designated by a person who has entered into an agreement
with Inso to effect a transaction described in paragraph (i),
(iii) or (iv) of this Subsection) whose election by the Board or
nomination for election by Inso's stockholders was approved by a
vote of at least two-thirds (2/3) of the directors then still in
office who either were directors at the beginning of the period
or whose election or nomination for election was previously so
approved cease for any reason to constitute at least a majority
thereof;
(iii) the stockholders of Inso approve a
merger or consolidation of Inso with any other corporation, other
than (A) a merger or consolidation which would result in the
voting securities of Inso outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity)
more than 50% of the combined voting power of the voting
securities of Inso or such surviving entity outstanding
immediately after such merger or consolidation or (B) a merger or
consolidation effected to implement a recapitalization of Inso
(or similar transaction) in which no person (as hereinabove
defined), other than a person holding more than 50% of the
combined voting power of Inso's then outstanding securities
immediately prior to such recapitalization, acquires more than
50% of the combined voting power of Inso's then outstanding
securities; or
(iv) the stockholders of Inso approve a plan of
complete liquidation of Inso or an agreement for the sale or
disposition by Inso of all or substantially all of Inso's assets.
6. Termination. This Agreement may be terminated at any time
(1) by the Company (a) for any reason other than for Cause on
sixty (60) days written notice, and (b) for Cause on thirty (30)
days written notice; and (2) by the Executive (a) for any reason
other than for Good Reason on sixty (60) days written notice, and
(b) for Good Reason on thirty (30) days written notice.
7. Effect of Termination of Executive's Employment.
7.1 Termination by Inso Without Cause; Termination by
Executive for Good Reason; Disability or Death of Executive.
Except as otherwise described in Section 7.4 below, in the event
of termination of Executive's employment as CEO by Inso without
Cause, by Executive for Good Reason, or as a result of Disability
or the death of Executive, Executive (or his estate, as the case
may be) shall be entitled to the following compensation:
(A) Six (6) months of base salary, payable in equal
bi-weekly installments over a twelve (12) month period, beginning
on the first day following the effective date of termination;
provided that Executive shall cease to receive such base salary
payments should Executive no longer serve as a member of the
Board of Directors of Inso, effective on the date that Executive
ceases service as a member of the Board of Directors of Inso;
(B) All base salary earned through the effective date
of termination, all accrued but unused vacation time earned
through the effective date of termination, all then unreimbursed
expenses, plus a bonus equal to the greater of (1) $100,000, or
(2) the Executive's pro-rated target annual bonus, based upon the
provisions of Inso's cash incentive compensation plan for senior
executives, shall be payable to the Executive within thirty (30)
days of the effective date of termination;
(C) Continued participation in all Inso medical,
dental, vision care, 401(K) and other employee benefit plans to
the extent permissible under those plans for a period of twelve
(12) months from the effective date of termination;
(D) Stock options shall vest as per the terms of
Section 2(C) above. Executive shall have ninety (90) days from
the effective date of termination to exercise any unexercised
vested options; and
(E) Should Executive remain a member of the Board of
Directors in any capacity other than as described in Section 7.4
below, such other remuneration as is reasonably determined by the
Compensation Committee of the Board to properly compensate the
Executive for his continuing activities as a member of the Board
of Directors.
7.2 Termination by Executive other than for Good Reason. In
the event of termination of Executive's employment as CEO by
Executive other than for Good Reason, Executive shall be entitled
to the following compensation:
(A) All base salary earned through the effective date
of termination, all accrued but unused vacation time, all then
unreimbursed expenses, plus a pro-rated target annual bonus,
based upon the provisions of Inso's cash incentive compensation
plan for senior executives, shall be payable to the Executive
within five (5) days of the effective date of termination; and
(B) Stock options shall vest as per the terms of Section
2(C) above. Executive shall have ninety (90) days from
the effective date of termination to exercise any
unexercised vested options.
7.3 Termination by Inso for Cause. In the event of the
termination of Executive's employment as CEO by Inso for Cause,
Executive shall be entitled to the following compensation:
(A) All base salary earned through the effective date
of termination, all accrued but unused vacation time earned
through the effective date of termination, and all then
unreimbursed expenses, shall be payable to the Executive within
five (5) days of the effective date of termination; and
(B) Stock options shall vest as per the terms of Section
2(C) above. Executive shall have ninety (90) days from
the effective date of termination to exercise any
unexercised vested options.
7.4 Termination as CEO; Retention of Strategic Role. In the
event of termination of Executive's employment as CEO by Inso
without Cause or by Executive for Good Reason pursuant to Section
7.1 above, should Executive at the behest of Inso or the Board of
Directors retain a strategic role in implementing key Inso
policies, whether as Chairman of the Board or otherwise, then in
lieu of the compensation described in Section 7.1 above,
Executive shall be entitled to the following compensation:
(A) An initial base salary of $120,000 per year, subject to
annual review by the Board, payable in equal bi-weekly
installments, beginning on the effective date of the
termination of Executive's employment as CEO of Inso and
continuing for so long as Executive serves in such
strategic role;
(B) Solely for the year in which Executive's
employment as CEO of Inso is terminated, a bonus equal to the
greater of (1) $100,000, or (2) the Executive's pro-rated target
annual bonus, based upon the provisions of Inso's cash incentive
compensation plan for senior executives;
(C) Continued participation in all Inso medical,
dental, vision care, 401(K) and other employee benefit plans to
the extent permissible under those plans, for so long as
Executive serves in such strategic role;
(D) Stock options shall vest as per the terms of
Section 2(C) above. Exercise of any unexercised vested options
shall be per the terms of Inso's Stock Option Plan; and
(E) For so long as Executive serves in such strategic
role, Executive shall receive annual grants of Non-qualified
Stock Options to purchase 10,000 shares of Inso's common stock,
the first such grant to be on the effective date of the
termination of Executive's employment as CEO of Inso.
8. Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the
Commonwealth of Massachusetts and shall be deemed to be performed
in Massachusetts. Each party consents to the jurisdiction of the
courts of Massachusetts for the resolution of any dispute with
respect to this Agreement.
9. Severability. In case any one or more of the provisions
contained in this Agreement or the other agreements executed in
connection herewith for any reason shall be held to be invalid,
illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other
provision of this Agreement or such other agreements, but this
Agreement or the such other agreements, as the case may be, shall
be construed as if such invalid, illegal or unenforceable
provisions had never been contained herein or therein.
10. Waivers and Modifications. This Agreement may be modified,
and the rights, remedies and obligations contained in any
provision hereof may be waived, only in accordance with this
paragraph 10. No waiver by either party of any breach by the
other or any provision hereof shall be deemed to be a waiver of
any later or other breach thereof or as a waiver of any other
provision of this Agreement. This Agreement (including any
exhibits hereto) sets forth all of the terms of the
understandings between the parties with reference to the subject
matter set forth herein and may not be waived, changed,
discharged orally or by any course of dealing between the
parties, but only by an instrument in writing signed by the party
against whom any waiver, change, discharge or termination is
sought.
11. Assignment. Executive acknowledges that the services to be
rendered by him are unique and personal in nature. Accordingly,
Executive may not assign any of his rights or delegate any of his
duties or obligations under this Agreement. The rights and
obligations of Inso under this Agreement shall inure to the
benefit of, and shall be binding upon, the successors and assigns
of Inso.
12. Miscellaneous. All payments made by Inso under this
Agreement shall be reduced by any tax or other amounts required
to be withheld by Inso under applicable law. The headings and
captions in this Agreement are for convenience only and in no way
define or describe the scope or content of any provision of this
Agreement. This Agreement may be executed in two (2) or more
counterparts, each of which shall be an original and all of which
together shall constitute one and the same instrument.
13. Attorney's Fees. Inso shall pay Executive's reasonable
attorney's fees incurred by Executive in connection with this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written as an instrument
under seal.
Inso Corporation Stephen O. Jaeger
/s/ Kirby A. Mansfield /s/ Stephen O. Jaeger
__________________________ ___________________________
signature
Kirby A. Mansfield
__________________________
print name
President and COO
__________________________
title
October 6, 1999
Paul R. Anderson
1135 Hidden Oaks Drive
Menlo Park, CA 94025
Dear Paul:
This letter agreement supercedes and replaces the offer letter to
you dated October 5, 1998 and (1) confirms your basic
compensation package associated with your employment as President
of Inso's PDM Division; and (2) describes certain additional
considerations related to Inso's planned disposition of the PDM
Division.
1. Basic Compensation Package
To confirm, your current total, targeted, annualized compensation
is equivalent to $294,000. This is comprised of a base salary of
$196,000 and a bonus of up to 50% of base salary, subject to the
terms of the Fiscal 2000 Executive Incentive Plan, a copy of
which was previously provided to you and which is incorporated by
reference into this letter agreement.
2. Additional Considerations
In addition to your basic compensation package, as a result of
Inso's decision to divest the PDM division, preferably by fiscal
year end 1/31/00, Inso is providing you with certain security and
incentive arrangements, which are described in greater detail on
Attachment A to this letter agreement (collectively, the
"Transaction Compensation"). The Transaction Compensation is
being offered to focus and reward your efforts relative to the
ongoing management of the PDM Division and its ultimate
disposition.
Paul, as indicated in Attachment A, the amount and nature of the
Transaction Compensation is variable, and is a function of the
timing of the disposition of the PDM Division. Also, your
entitlement to the Transaction Compensation assumes that you are
employed with Inso at the time of disposition of the PDM
Division, and that you use best efforts to assist with the
successful disposition of the PDM Division (including during any
reasonable transition period) while at the same time performing
your usual duties as President of the PDM Division. Finally,
your entitlement to receive base salary continuation as described
in Attachment A applies so long as you do not (i) own, operate,
or be employed by any business or other entity in the product
data management space; or (ii) solicit, seek to employ, employ,
retain, or seek to retain the services of any person who is at
that an employee of Inso.
This Agreement is intended to be the entire agreement between you
and Inso with respect to its subject matter, and supercedes and
replaces any prior discussions, memos and e-mails that may have
been exchanged on these subjects; provided that your
Nondisclosure Agreement, dated October 9,1998, shall remain in
effect. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Massachusetts,
without regard to conflict of laws principles, and shall be
deemed to be performed in Massachusetts. This Agreement may not
be altered, modified or amended except by a written instrument
signed by you and an authorized representative of Inso.
Finally, this Agreement does not give you the right to be
retained in the employment of Inso. This Agreement does not, and
shall not be construed to, create a contract of employment
between you and Inso, and Inso's relationship with you shall
remain terminable at will.
I hope that this letter agreement answers any questions you have
regarding your personal situation relative to the disposition of
the PDM business. As you know, we are pleased to have your
valuable skill dedicated to this activity. Please countersign
both copies of this letter agreement where indicated below, and
return one fully executed copy to me.
Sincerely,
Inso Corporation
/s/ Kirby A. Mansfield
Kirby A. Mansfield
President
Accepted and Agreed:
/s/ Paul R. Anderson
___________________
Paul R. Anderson
Dated: 10/8/99
ATTACHMENT A
<TABLE>
Compensation Disposition On or
Component Prior to 1/31/00 Disposition After 1/31/00
<S> <C> <C>
Base Salary As described in letter Eligible for executive
agreement pay review in Spring '00
for 4/1/00 adjustment
Bonus under Payment after end of As per Fiscal 2000 Executive
Fiscal 2000 FY '00 Incentive Plan
Executive Incentive Payment of 100% of
Plan target annual bonus
($98K) if PDM
division performance
is at least 85% of
annual plan at time
of closing, as
reasonably determined
by Inso's President
Any payment for over-
plan component as per
Fiscal 2000 Executive
Incentive Plan, as
reasonably determined
by Inso's President
Severance 18 months base salary 18 months base salary
(payable only continuation at then- continutation at then-
if, upon current rate current rate
closing, Buyer Transaction Bonus of Transaction Bonus of
does not retain $98,000, payable within $49,000, payable within
Anderson in same 30 days of closing2 30 days of closing
or substantially 18 months employee 18 months employee benefit
equivalent benefit continuation as continuation as per Inso
position1) per Inso policy and policy and applicable law
applicable law
Reasonable Executive Reasonable Executive
outplacement services outplacement services
as per Inso policy as per Inso policy
Transaction Transaction Bonus of Transaction Bonus of
Incentive $200,000, payable $100,000, payable
(payable only within 30 days of within 30 days of
if, upon closing closing
closing, Buyer
retains Anderson
in same or
substantially
equivalent
position3)
Employment Employment with Inso Employment with Inso
Status; will terminate on will terminate on closing;
Management closing; Management Management Retention
Retention Retention Agreement Agreement dated December
Agreement dated December 13, 13, 1998 will terminate
1998 will terminate immediately prior to
immediately prior to closing
closing
Stock Options Any Inso stock Fifty percent (50%) of any
options which remain Inso stock options which
unvested as of the remain unvested as of the
closing which would closings which would have
have vested within vested within one year of
one year of the closing will vest on the
closing will vest on closing unless, at the
the closing unless, time of closing, the
at the time of Buyer offers you (in Inso's
closing, the Buyer reasonable opinion) more
offers you (in Inso's favorable treatment of your
reasonable opinion) unvested Inso stock options,
more favorable in which case no
treatment of your acceleration of vesting will
unvested Inso stock be provided by Inso
options, in which hereunder. You will have 90
case no acceleration days from the date of
of vesting will be closing to exercise any
provided by Inso vesting Inso stock options.
hereunder. You will
have 90 days from the
date of closing to
exercise any vested
Inso stock options.
1 A "substantially equivalent position," as reasonably determined by
Inso's President, shall be any position other than: (a) a demotion from
the position held by you at the time of the execution of the Agreement;
or (b) a position which involves a material change in your reporting
structure, geographic work location, compensation or benefits, or duties
and responsibilities.
2 All monetary amounts referenced in this letter shall be reduced by
applicable legally-required and volunatarily authorized deductions such
as taxes.
3 See above regarding defination of a "substantially equivalent position."
</TABLE>
POLICY NUMBER: 859-62-16
AMERICAN INTERNATIONAL COMPANIES
CATASTROPHIC EQUITY PROTECTION INSURANCE
AIU Insurance Company X Illinois National Insurance Company
American Global Insurance Company National Union Fire Insurance Company
of Pittsburgh, Pa.
Granite State Insurance Company National Union Fire Insurance Company
of Louisiana
New Hampshire Insurance Company Birmingham Fire Insurance Company
of Pennsylvania
American Home Assurance Company
(each of the above being a capital stock company)
DECLARATIONS
ITEM 1.
NAMED CORPORATION INSO CORPORATION
MAILING ADDRESS IN 330 N. WABASH, 15TH FLOOR
ILLINOIS CHICAGO, ILLINOIS 60611
JURISDICTION OF
INCORPORATION OF THE
NAMED CORPORATION: DELAWARE
ITEM 2.
POLICY PERIOD: From: September 29, 1999
To: September 29, 2000
(12:01 A.M. at the address
stated in Item 1.)
ITEM 3.
RETENTION: $1,000,000 (See Clause #2.)
ITEM 4
PREMIUM: See Clause #4.
ITEM 5.
NAME AND ADDRESS OF INSURER ("Insurer"):
(This Agreement is issued only by the insurance
company indicated below.)
Illinois National Insurance Company
c/o Loss Mitigation Unit
175 Water Street, 11th Floor
New York, New York 10038
IN WITNESS WHEREOF, the Insurer has caused this Insurance
Agreement to be signed on the Declarations Page, by a duly
authorized representative of the Insurer.
/s/ Augustin Formoso
- ----------------------------
Augustin Formoso
AUTHORIZED REPRESENTATIVE
CATASTROPHIC EQUITY PROTECTION INSURANCE AGREEMENT
This Catastrophic Equity Protection Insurance Agreement is made
and entered into as of the 29th day of September, 1999 by the
Named Corporation and the Insurer.
WHEREAS, the Named Corporation and certain of its directors and
officers (the "Individual Defendants") are defendants in one or
more of the Actions (as hereinafter defined); and
WHEREAS, the Named Corporation wishes to protect itself and its
parents, subsidiaries and affiliates (together with the Named
Corporation collectively the "Company") against a diminution in
each of its shareholders equity which may result from the
Actions;
NOW, THEREFORE, in consideration of the payment of premium as
hereinafter stated in Clause #4, the Named Corporation and the
Insurer agree as follows:
1. INSURING AGREEMENT
The Insurer shall pay on behalf of the Company and the
Individual Defendants all Loss (as hereinafter defined)
arising out of or in connection with the Actions.
2. DEFINITIONS
"Actions" shall mean Michael Abramsky, et al. v. Inso Corp.,
et al. [In re Inso Corp Securities Litigation], Civil Action
No. 99-CV-10193 (2/1/99) in the United States District Court
for the District of Massachusetts (the "Pending Action"),
all actions that have been or will be consolidated therewith
and all actions brought by any persons who are within the
definitions of the classes alleged in the foregoing who
shall opt out of any of such classes. "Actions" shall not
include any Securities and Exchange Commission or other
administrative or regulatory claims or investigations.
"Defense Costs" shall mean defense fees and expenses
incurred by or consented to by the Insurer (including
premiums for any appeal bond, attachment bond or similar
bond), defense fees and expenses of counsel designated by
the Insurer, and court costs which result solely from the
investigation, adjustment, defense and appeal of any or all
of the Actions; provided, however, "Defense Costs" shall not
include salaries and other compensation and the expenses of
any current, former or future directors, officers or
employees of the Company or any of its affiliates (other
than costs of legal representation in connection with the
Actions) and shall not include any of the foregoing items
actually incurred (whether or not billed) prior to the
inception of the Policy Period. The Insurer agrees that it
shall not unreasonably withhold or delay its consent
hereunder, and further agrees that such consent shall be
presumed to be given with respect to any fees and expenses
of Hale and Dorr and any counsel designated by the Insurer.
"Individual Defendants" shall mean all current or former
directors, officers and employees of the Company who have
been or shall be named as defendants in the Actions.
"Insureds" shall mean the Company and the Individual
Defendants.
"Loss" shall mean the amount determined by the application
of the following formula:
A-B=C
in which "A" is the aggregate amount of all Defense Costs,
damages, settlements or final judgments incurred
in the Actions payable by the Insureds, whether in
satisfaction of their own obligations to any
claimant or any indemnification obligation to
other defendants in the Actions, including fines,
penalties and exemplary or punitive damages;
"B" is the amount of the Retention set forth in
Item 3 of the Declarations which represents the
amount of the Loss which remains the
responsibility of the Insureds; and
"C" is the aggregate amount of Loss.
3. DEFENSE, SETTLEMENTS, JUDGMENTS
The Insurer shall have the exclusive right and obligation to
assume the defense of the Actions, to control the strategy
for defense in the Actions and to negotiate directly with
all parties involved in the Actions and control the terms of
any settlement of the Actions. In addition, the Named
Corporation shall cause the defendants in the Actions to
consent to the Insurer having the right to assume the
defense of the Actions, to control the strategy for defense
in the Actions, and to negotiate directly with all parties
involved in the Actions and control the terms of any
settlement of the Actions. Anything in this Clause #3 to the
contrary notwithstanding, the Insurer hereby agrees to the
continued retention of Hale and Dorr as defense counsel in
the Actions; provided, however, that in the event
representation of all defendants in the Actions would create
a conflict of interest for any one law firm, the defendants
shall retain as defense counsel in the Actions such
additional law firm(s) as shall be designated by the
Insurer.
The Named Corporation shall cause the defendants in the
Actions not to admit or assume any liability, enter into any
settlement agreement or stipulate to any judgment in
connection with the Actions without the prior written
consent of the Insurer. Only Loss in connection with those
settlements or stipulated judgments which have been
consented to by the Insurer shall be payable by the Insurer
to the Company under the terms of this Agreement.
The Named Corporation shall and shall cause the defendants
in the Actions to give the Insurer full cooperation and such
information as it may require in connection with the defense
of the Actions.
The Named Corporation shall and shall cause the defendants
in the Actions to consent to any settlement of the Actions
recommended by the Insurer. In the event that such consent
of all defendants is not obtained for a settlement which
otherwise would have been agreed to by lead plaintiffs'
counsel, the liability of the Insurer for Loss under this
Agreement shall not exceed the amount it would have paid if
such settlement had been completed; provided, however, that
the foregoing provision shall not apply to any settlement
which contains non-monetary remedies.
The Insurer shall have the right to cause the Actions to be
tried to judgment and to take all appeals from any adverse
judgment and shall cause defense counsel to advise the Named
Corporation of any significant developments or strategies
relating to the Actions.
The Insureds and the Insurer shall maintain the
confidentiality of the issuance and provisions of this
Agreement to the extent permitted by law and except to the
extent disclosure hereof is necessary to enforce the
provisions hereof. Except for the press release set forth as
Exhibit A hereto, which the Insureds may issue upon the
effectiveness of this Agreement, and except for the
disclosure regarding this Agreement required to be made by
the Named Corporation with the Securities and Exchange
Commission, the Insureds and the Insurer shall not, and
shall cause the defense counsel not to, issue any press
release or make any statements relating to the Actions
without the prior written consent of the Insurer in the case
of the Insureds and the Named Corporation in the case of the
Insurer. Any provision herein to the contrary
notwithstanding, nothing in this clause shall prohibit the
Insureds and the Insurer from disclosing information about
any or all of the Actions if legally required to do so, or
from disseminating information regarding this Agreement
which has already been properly disclosed hereunder subject
to the condition that such subsequent dissemination shall be
no broader than the prior disclosure. No written consent
required hereunder shall unreasonably be withheld or
delayed.
4. PREMIUM
This agreement is a binding agreement of the parties
effective upon execution. The Company shall pay the Insurer
a premium of Fifteen Million Five Hundred Twenty-Nine
Thousand Seven Hundred Ninety-Four Dollars (US$15,029,794)
in two installments, which premium shall be fully earned
upon execution of this Agreement. The first such installment
shall be in the amount of Seven Million Five Hundred
Thousand Dollars (US$7,500,000) and shall be paid by wire
transfer no later than 5:00 pm (New York time) on September
29, 1999. The second such installment shall be in the amount
of Seven Million Five Hundred Thousand Seven Hundred Ninety-
Four Dollars (US$7,529,794) and shall be paid no later than
5:00 pm (New York time) on October 29, 1999. Coverage shall
be void "ab initio" (from the beginning) if the Insurer does
not receive both installments of the premium at or before
the respective times and on or before the respective dates
set forth above in this Clause #4.
This Agreement shall be non-cancelable by the Named
Corporation or the Insurer (except for nonpayment of the
premium in accordance with this Clause #4). The Insurer's
liability for paying Loss for the Actions shall survive the
expiration of the Policy Period (as a claims made and
reported policy) even if the Actions are not resolved prior
to such expiration.
5. SUBROGATION
In the event of any payment of Loss under this Agreement,
the Named Corporation shall, and shall cause the defendants
in the Actions to: (i) assign to the Insurer all of their
respective rights of recovery against any other person or
entity for loss incurred by the defendants arising out of
the Actions, and (ii) execute all papers required and do
everything that may be necessary to secure such rights,
including but not limited to the execution of such documents
necessary to enable the Insurer to effectively bring suit in
the name of such defendants. Notwithstanding anything in
this Agreement to the contrary, the Insurer shall not be
entitled to any rights of recovery against any or all of the
Company or any of its respective directors, officers,
partners, employees or affiliates, directly or indirectly,
nor shall this Clause #5 apply with respect to claims
against the Named Corporation's outside attorneys or outside
certified public accountants.
6. ASSIGNMENT
Neither this Agreement nor any of the rights or obligations
hereunder are assignable by either party hereto without the
prior written consent of the other party hereto; provided,
however, that in the event the Named Corporation shall
consolidate with or merge into or sell all or substantially
all of its assets to any other person or entity or group of
persons or entities acting in concert or any person or
entity or group of persons or entities acting in concert
shall acquire an amount of the outstanding securities
representing more than 50% of the voting power for the
election of directors of the Named Corporation or acquires
the voting rights of such an amount of securities, then the
Insurer shall be deemed to have provided its written consent
to the assignment of the Named Corporation's rights and
obligations hereunder to such person or entity or group of
persons or entities acting in concert. Except as set forth
in this Clause #6, the rights hereunder shall inure only to
the benefit of the Insureds and the Insurer, and no other
person or entity shall be deemed a beneficiary thereof.
7. ARBITRATION
It is hereby understood and agreed that all disputes or
differences which may arise under or in connection with this
Agreement, including any determination of the amount of
Loss, shall be submitted to the American Arbitration
Association under and in accordance with its then prevailing
commercial arbitration rules. The arbitrators shall be
chosen in the manner and within the time frames provided by
such rules. If permitted under such rules, the arbitrators
shall be three disinterested individuals having knowledge of
the legal, corporate management or insurance issues relevant
to the matters in dispute.
Notwithstanding the mailing address set forth in Item 1 of
the Declarations, any such arbitration shall take place in
Boston, Massachusetts and the internal laws of the
Commonwealth of Massachusetts shall govern the construction
and interpretation of the provisions of this Agreement
without giving effect to the principles of conflict of laws
thereof; provided, however, that the terms, conditions,
provisions and exclusions of this Agreement are to be
construed in an evenhanded fashion as between the parties,
including without limitation, where the language of this
Agreement is alleged to be ambiguous or otherwise unclear,
the issue shall be resolved in the matter most consistent
with the relevant terms, conditions, provisions or
exclusions of the policy (without regard to the authorship
of the language or the doctrine of reasonable expectation of
the parties and without any presumption or arbitrary
interpretation or construction in favor of either party or
parties) and in accordance with the intent of the parties.
The written decision of the arbitrators shall be provided to
both parties and shall be binding on them. The arbitrators'
award shall not include punitive or exemplary damages except
to the extent recoverable as Loss, or, unless otherwise
decided by the arbitrators, costs or attorneys' fees. Each
party shall bear its respective legal and other costs
incurred in connection with the arbitration and, except as
specifically provided herein, the parties shall bear equally
the fees and expenses of the American Arbitration
Association and the arbitrators.
The decision of the arbitrators shall be enforceable in any
court having jurisdiction over the party against whom the
award was rendered.
8. NOTICES
All notices under this Agreement shall be in writing and
delivered by hand, sent by overnight courier or sent by
telecopier to the following persons:
For the Insurer:
Michael Mitrovic
President
A.I. Management and Professional Liability Claims
Adjusters
175 Water Street
11th Floor
New York, NY 10038
Tel: 212-458-1571
Fax: 212-425-0296
With a copy to:
Richard George
D'Amato & Lynch
70 Pine Street
New York, NY 10279
Tel: (212) 269-0927
Fax: (212) 269-3559
For the Named Corporation:
Stephen O. Jaeger
31 James Street, 11th Floor
Boston, Massachusetts 02116
Tel: (617) 753 6500
Fax: (617) 753 6666
With copies to:
Jonathan P. Levitt
31 James Street, 11th Floor
Boston, Massachusetts 02116
Tel: (617) 753 6500
Fax: (617) 753 6666
and
Jeffrey B. Rudman
Hale and Dorr
60 State Street
Boston, Massachusetts 02109
Tel: (617) 526 6912
Fax: (617) 526 5000
9. MISCELLANEOUS
The descriptions in the headings of this Agreement are
solely for convenience, and form no part of the terms and
conditions of coverage. This Agreement is the entire
agreement between the parties with respect to its subject
matter, and supersedes any prior oral or written
communications between the parties, including without
limitation any term sheet or binder agreement. This
Agreement may only be amended by a writing signed by both
parties.
IN WITNESS WHEREOF, the Named Corporation and the Insurer
have caused this Agreement to be signed by, in the case of the
Named Corporation, its Chief Executive Officer and, in the case
of the Insurer, its Vice President.
INSO CORPORATION
By /s/ Stephen O. Jaeger
------------------
Stephen O. Jaeger
Chief Executive Officer
ILLINOIS NATIONAL INSURANCE
COMPANY
By /s/ Augustin Formoso
------------------
Augustin Formoso
Vice President
EXHIBIT A - Press Release
INSO PRESS CONTACT:
Bruce G. Hill
Vice President, Business Development
Telephone: 617/753-6542
E-mail: [email protected]
For Immediate Release
Inso Corporation Removes Shareholder Litigation Liability
PURCHASES INSURANCE COVERAGE ENSURING THAT CLASS ACTION
LITIGATION PRESENTS NO MATERIAL ADVERSE FINANCIAL RISK TO THE
COMPANY
BOSTON, MA, September 30, 1999 - Inso Corporation (NASDAQ: INSO)
announced today that it has entered into an insurance agreement
with a major AAA-rated insurance carrier pursuant to which the
insurance carrier will assume complete financial responsibility
for the defense and ultimate resolution of the securities class
action litigation initially filed in February 1999 on behalf of
certain purchasers of the Company's common stock.
Stephen O. Jaeger, Chief Executive Officer and Chairman of the
Board of Inso Corporation, said: "This is an important
development for Inso. We can move forward with the certainty
that the class action litigation no longer presents a material
adverse financial risk to the Company. Equally significant is
the removal of the distraction from this litigation on our
business continuity."
The Company expects to take a net charge against earnings of
approximately $14,000,000 in the third fiscal quarter ending
October 31, 1999. This charge includes professional fees, other
expenses incurred to date in connection with the class action
litigation, and premium costs for the insurance agreement, less
recovery under the Company's existing insurance policy. The
Company expects that all future costs to defend and resolve the
class action litigation will be covered by the insurance
agreement.
About Inso Corporation
Inso Corporation is a leading provider of solutions for the
management, exchange and dynamic delivery of critical business
information. Inso's award-winning technology enables large
corporations to manage, exchange and publish all types of
information, from the simplest memo to the most complex
multimedia document. For more information, visit the Inso Web
site at http://www.inso.com.
This release contains forward-looking statements contemplated
under the Private Securities Litigation Reform Act of 1995. Such
forward looking statements involve numerous assumptions, known
and unknown risks, uncertainties and other factors which may
cause the Company's actual results to differ materially from
those forecasted or projected in such forward-looking statements.
A discussion of a number of these assumptions, risks and factors
is contained in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998, and in the Company's other
filings with the Securities and Exchange Commission.
<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> 9-MOS 9-MOS
<FISCAL-YEAR-END> JAN-31-2000 JAN-31-1999
<PERIOD-END> OCT-31-1999 OCT-31-1998
<CASH> 14,840 22,857
<SECURITIES> 5,395 63,704
<RECEIVABLES> 23,234 21,624
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 52,378 112,522
<PP&E> 6,808 6,823
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 91,431 145,773
<CURRENT-LIABILITIES> 38,733 18,014
<BONDS> 0 0
0 0
0 0
<COMMON> 156 154
<OTHER-SE> 51,956 127,605
<TOTAL-LIABILITY-AND-EQUITY> 91,431 145,773
<SALES> 50,282 44,895
<TOTAL-REVENUES> 50,282 44,895
<CGS> 0 0
<TOTAL-COSTS> 17,532 7,329
<OTHER-EXPENSES> 97,494 50,928
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (51,594) 2,280
<INCOME-TAX> 220 (601)
<INCOME-CONTINUING> (51,814) 2,881
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (51,814) 2,881
<EPS-BASIC> (3.33) 0.19
<EPS-DILUTED> (3.33) 0.19
</TABLE>
