<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) December 4, 1998
INSO CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 000-23384 04-3216243
(State or other jurisdiction of (Commission File Number) (I.R.S.
incorporation or organization) Employer
Identification
No.)
31 ST. JAMES AVENUE, 02116-4101
BOSTON, MASSACHUSETTS (Zip code)
(Address of principal executive offices)
(Registrant's telephone number, including area code) (617) 753-6500
N/A
(Former name or former address, if changed since last report)
<PAGE> 2
This Amendment No.1 to Current Report on Form 8-K/A is filed for the purpose of
filing the financial statements of Sherpa Systems Corporation required by Item
7(a) and the pro forma financial information required by Item 7(b).
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of Business Acquired.
Financial statements of the business acquired are filed as
Exhibit 99.1 hereto and incorporated herein by reference.
(b) Pro Forma Financial Information.
Pro Forma financial information is filed as Exhibit 99.2 hereto
and incorporated herein by reference.
(c) Exhibits
2.1 Share Exchange Agreement and Agreement and Plan of Merger
among Inso Corporation, Tabasco Corp., Sherpa Systems
Corporation and The Selling Stockholders named therein.
(previously filed).
4.1 Form of Warrant (previously filed).
20.1 Press release, dated November 11, 1998 (previously filed).
20.2 Press release, dated December 4, 1998 (previously filed).
23.1 Consent of Independent Accountants (filed herewith).
99.1 Financial Statements of Business Acquired (filed herewith).
99.2 Pro Forma Financial Information (filed herewith).
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 hereunto duly authorized this 10th day of September 1999.
Inso Corporation
By /s/ Robert F. Dudley
----------------------------
Robert F. Dudley
Vice President and Chief
Financial Officer
<PAGE> 3
EXHIBIT INDEX
Exhibit No. Exhibit Description
- ----------- -------------------
2.1 Share Exchange Agreement and Agreement and Plan of Merger among
Inso Corporation, Tabasco Corp., Sherpa Systems Corporation and
The Selling Stockholders named therein (previously filed).
4.1 Form of Warrant (previously filed).
20.1 Press release, dated November 11, 1998 (previously filed).
20.2 Press release, dated December 4, 1998 (previously filed).
23.1 Consent of Independent Accountants (filed herewith).
99.1 Financial Statements of Business Acquired (filed herewith).
99.2 Pro Forma Financial Information (filed herewith).
<PAGE> 1
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-69259) and Forms S-8 (No. 33-77302, 33-83606,
33-77304, 33-93324, 333-06847, 333-06845, 333-67771, 333-67773, and 333-67777)
of Inso Corporation of our report dated March 27, 1998, except for paragraph 1
of Note 12 which is as of August 28, 1998, relating to the consolidated
financial statements of Sherpa Systems Corporation, which appears in the Current
Report on Form 8-K/A of Inso Corporation.
/s/ PricewaterhouseCoopers LLP
- --------------------------------
PricewaterhouseCoopers LLP
San Jose, California
September 8, 1999
<PAGE> 1
EXHIBIT 99.1
SHERPA SYSTEMS CORPORATION
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
<PAGE> 2
SHERPA SYSTEMS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants........................................................................... F-2
Consolidated Balance Sheet.................................................................................. F-3
Consolidated Statement of Operations........................................................................ F-4
Consolidated Statement of Shareholders' Equity.............................................................. F-5
Consolidated Statement of Cash Flows........................................................................ F-6
Notes to Consolidated Financial Statements.................................................................. F-7
</TABLE>
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Sherpa Systems Corporation
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Sherpa
Systems Corporation and its subsidiaries at December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- ---------------------------------
PricewaterhouseCoopers LLP
San Jose, California
March 27, 1998, except for paragraph 1 of Note 12
which is as of August 28, 1998
F-2
<PAGE> 4
SHERPA SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PAR VALUES)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------- -------------
1996 1997 1998
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,205 $ 4,124 $ 772
Accounts receivable, net 13,439 13,022 14,105
Other current assets 1,025 1,275 1,811
------- ------- -------
Total current assets 19,669 18,421 16,688
Accounts receivable, noncurrent 1,178 1,520 330
Property and equipment, net 3,373 2,969 2,310
Other assets 1,414 1,279 1,119
------- ------- -------
$25,634 $24,189 $20,447
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loan $ 1,129 $ 2,500 $ 3,500
Capital leases 806 1,235 1,014
Accounts payable 5,288 2,824 2,553
Accrued expenses 3,395 4,086 4,097
Deferred revenue 4,209 6,748 7,736
------- ------- -------
Total current liabilities 14,827 17,393 18,900
Capital leases, noncurrent 1,211 1,435 694
------- ------- -------
16,038 18,828 19,594
------- ------- -------
Commitments and contingencies (Notes 3 and 5)
Shareholders' equity:
Preferred stock, Series A, $0.01 par value;
6,000 shares authorized; 5,454 shares issued and
outstanding (liquidation value $8,181) 54 54 54
Common stock, $0.01 par value; 15,000 shares
authorized; 3,960, 4,423 and 4,665 (unaudited)
shares issued and outstanding 39 44 47
Additional paid-in capital 22,288 22,474 22,712
Notes receivable for purchase of common stock (106) (113) (286)
Cumulative comprehensive losses (425) (189) (103)
Accumulated deficit (12,254) (16,909) (21,571)
------- ------- -------
Total shareholders' equity 9,596 5,361 853
------- ------- -------
$25,634 $24,189 $20,447
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 5
SHERPA SYSTEMS CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------- ----------------------
1995 1996 1997 1997 1998
------- -------- -------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Software licenses $14,880 $18,824 $19,333 $13,874 $10,684
Service and maintenance 11,913 13,997 16,090 11,477 13,849
------- ------- ------- ------- -------
Total revenue 26,793 32,821 35,423 25,351 24,533
------- ------- ------- ------- -------
Operating costs and expenses:
Cost of software licenses 1,438 1,935 2,784 1,952 1,696
Cost of service and maintenance 7,025 8,995 10,042 7,506 7,375
Selling and marketing 9,344 11,201 12,888 9,483 9,207
Research and development 5,147 6,561 7,510 5,383 5,736
General and administrative 4,130 3,994 6,141 4,102 4,280
------- ------- ------- ------- -------
Total operating costs and expenses 27,084 32,686 39,365 28,426 28,294
------- ------- ------- ------- -------
Income (loss) from operations (291) 135 (3,942) (3,075) (3,761)
Interest expense (229) (206) (397) (276) (336)
Interest and other income (expense), net 240 381 (113) 25 (224)
------- ------- ------- ------- -------
Income (loss) before income taxes (280) 310 (4,452) (3,326) (4,321)
Provision for income taxes (165) (229) (203) (152) (341)
------- ------- ------- ------- -------
Net income (loss) (445) 81 (4,655) (3,478) (4,662)
Foreign currency translation adjustments (118) (107) 33 (8) 86
Unrealized investment losses -- (203) -- -- --
------- ------- ------- ------- -------
Comprehensive loss $ (563) $ (229) $(4,622) $(3,486) $(4,576)
======= ======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 6
SHERPA SYSTEMS CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK SERIES A COMMON STOCK ADDITIONAL
------------------------ -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ ------ ------ --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995 5,454 $54 3,853 $38 $22,172
Issuance of common stock
upon option exercises -- -- 107 1 116
Accrued interest on shareholder
notes receivable -- -- -- -- --
Unrealized loss securities -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Net income -- -- -- -- --
----- --- ----- --- -------
Balance at December 31, 1996 5,454 54 3,960 39 22,288
Issuance of common stock
upon option exercises -- -- 463 5 186
Write-off of marketable securities -- -- -- -- --
Accrued interest on shareholder
notes receivable -- -- -- -- --
Foreign currency translation adjustment -- -- -- -- --
Net loss -- -- -- -- --
----- --- ----- --- -------
Balance at December 31, 1997 5,454 54 4,423 44 22,474
Issuance of common stock
upon option exercises -- -- 242 3 238
(unaudited)
Interest on shareholder notes
(unaudited) -- -- -- -- --
Foreign currency translation adjustment
(unaudited) -- -- -- -- --
Net loss (unaudited) -- -- -- -- --
----- --- ----- --- -------
Balance at September 30, 1998
(unaudited) 5,454 $54 4,665 $47 $22,712
===== === ===== === =======
</TABLE>
<TABLE>
<CAPTION>
NOTES
CUMULATIVE RECEIVABLE
COMPREHENSIVE FOR PURCHASE
INCOME OF COMMON ACCUMULATED
(LOSS) STOCK DEFICIT TOTAL
------------- ------------ ----------- ------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 $(115) $(100) $(12,335) $9,714
Issuance of common stock
upon option exercises -- -- -- 117
Accrued interest on shareholder
notes receivable -- (6) -- (6)
Unrealized loss securities (203) -- -- (203)
Foreign currency translation adjustment (107) -- -- (107)
Net income -- -- 81 81
----- ----- -------- ------
Balance at December 31, 1996 (425) (106) (12,254) 9,596
Issuance of common stock
upon option exercises -- -- -- 191
Write-off of marketable securities 203 -- -- 203
Accrued interest on shareholder
notes receivable -- (7) -- (7)
Foreign currency translation adjustment 33 -- -- 33
Net loss -- -- (4,655) (4,655)
----- ----- -------- ------
Balance at December 31, 1997 (189) (113) (16,909) 5,361
Issuance of common stock
upon option exercises -- (168) -- 73
(unaudited)
Interest on shareholder notes
(unaudited) -- (5) -- (5)
Foreign currency translation adjustment
(unaudited) 86 -- -- 86
Net loss (unaudited) -- -- (4,662) (4,662)
----- ----- -------- ------
Balance at September 30, 1998
(unaudited) $ (103) $(286) $(21,571) $ 853
====== ===== ======== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 7
SHERPA SYSTEMS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- --------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (445) $ 81 $(4,655) $ 3,478 $(4,662)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Unrealized foreign currency (gains)/losses 96 (93) 72 (182) 39
Depreciation and amortization 1,912 2,020 1,935 1,445 1,329
Provision for doubtful accounts 278 292 375 275 (150)
Forgiveness of stockholder notes receivable 14 -- -- -- --
Changes in assets and liabilities:
Accounts receivable (1,978) (3,754) (483) (6,526) 3,240
Other assets 141 (771) (170) 3,118 103
Accounts payable and accrued expenses 228 3,970 (1,515) 430 (631)
Deferred revenue 937 948 2,719 1,666 (2,390)
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities 1,183 2,693 (1,722) 3,704 (3,122)
------- ------- ------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment (761) (1,721) (1,465) (1,017) (526)
Proceeds from sale of fixed assets 18 -- -- -- --
Capitalization of software development costs, net (127) (240) 20 3 (17)
Purchase of software licenses, net -- (633) (79) (77) --
------- ------- ------- ------- -------
Net cash used in investing activities (870) (2,594) (1,524) (1,091) (543)
------- ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from bank loans -- 1,129 1,371 (129) 1,000
Proceeds from issuance of common stock 103 117 191 141 239
Payments on capital lease obligations (418) (636) 546 684 (961)
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities (315) 610 2,108 696 278
------- ------- ------- ------- -------
Effect of exchange rate changes on cash 27 (16) 57 27 35
------- ------- ------- ------- -------
Increase (decrease) in cash and cash equivalents 25 693 (1,081) 3,336 (3,352)
Cash and cash equivalents at beginning of period 4,487 4,512 5,205 5,205 4,124
------- ------- ------- ------- -------
Cash and cash equivalents at end of period $ 4,512 $ 5,205 $ 4,124 $ 8,541 $ 772
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Income taxes $ 180 $ -- $ 208 $ 30 $ 87
======= ======= ======= ======= =======
Interest $ 229 $ 206 $ 37 $ 280 $ 342
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Equipment acquired under capital lease obligations $ 1,698 $ 1,031 $ 1,617 $ 1,364 $ --
======= ======= ======= ======= =======
Securities received as consideration for
accounts receivable $ -- $ 331 $ -- $ -- $ --
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 8
SHERPA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NOTE 1 - THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
THE COMPANY
Sherpa Corporation, (the "Company" or "Sherpa") provides software
applications and services that facilitate the communication and management of
product-related information and processes for the extended manufacturing
enterprise throughout the product lifecycle. The markets primarily serviced by
the Company are within North America and Europe, where the Company operates
several sales offices. The Company was incorporated in California in 1980.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated accounts include the accounts of Sherpa and
its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents are comprised of cash, time deposit accounts and government treasury
bills.
MARKETABLE SECURITIES
Marketable securities are composed of 268 shares of Radius Inc. common
stock the Company received in 1996 in full satisfaction of a delinquent account
receivable. The Company classifies marketable securities as "available-for-sale"
in which net unrealized gains and losses are reported as a separate component of
shareholder's equity. At December 31, 1996, the fair value of the marketable
securities, based on the quoted trading price of the stock, was $128 and the
unrealized loss totaled $203.
At December 31, 1997, the Company determined that the value of these
marketable securities had been permanently impaired, and wrote down the value of
the securities to the market valuation of $83.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to a
concentration of credit risk consist primarily of cash equivalents and trade
receivables. The Company invests any excess cash in highly liquid time deposit
accounts and government treasury bills. Temporary cash is held by financial
institutions that the Company believes are of high credit quality. The Company's
accounts receivable are derived from revenue earned from customers located in
North America, Europe, Australia and Japan. The Company performs ongoing credit
evaluations of its customers and generally does not require collateral. One
customer account represented 25% and 27% of the net trade accounts receivable
balance at December 31, 1996 and 1997, respectively. One customer account
represented 26% (unaudited) of net the trade accounts receivable balance as at
September 30, 1998. No other customer account represented greater than 10% of
the net trade accounts receivable balance at December 31, 1996 or 1997 or at
September 30, 1998 (unaudited). Revenues from one customer represented 10% and
14% of net revenue during 1996 and 1997, respectively. One customer account
represented 17% and 12% of revenues for the nine month periods ending September
30, 1997 and 1998 (unaudited), respectively.
F-7
<PAGE> 9
SHERPA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and capital lease obligations are carried
at cost, which approximates their fair value because of the short-term maturity
of these instruments.
PROPERTY AND EQUIPMENT
Property and equipment is stated at historical cost and is depreciated
using the straight-line method over the estimated useful lives of the assets,
generally three to five years. Leasehold improvements are amortized over five
years or the term of the related lease, whichever is shorter. When assets are
sold or retired, their cost and related accumulated depreciation or amortization
are removed from the accounts and any gain or loss is charged to operations.
RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Costs of internally-developed software incurred prior to the establishment
of technological feasibility are charged to research and development expense as
incurred. Costs of internally-developed software incurred between the time a
product's technological feasibility has been established and the time the
product is available for general release to customers are capitalized.
Amortization of capitalized costs is computed using the straight-line method
over the estimated economic life of the product, generally two years, or the
ratio of current revenues to total projected product revenues, whichever is
greater. The cost of developing routine enhancements are expensed as research
and development.
SOFTWARE LICENSES
Costs of purchased software licenses are amortized using the greater of
straight-line method over their estimated economic lives, generally three years,
or the ratio of licenses sold to total licenses available for sale.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of long-lived assets in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of". SFAS No. 121 requires recognition of impairment of long-lived assets in the
event the net book value of such assets exceeds the future undiscounted cash
flows attributable to such assets.
REVENUE RECOGNITION
The Company derives revenue from the license of software products under
non-cancelable license agreements and from the delivery of professional services
and maintenance services. Effective for all periods ending prior to January 1,
1998, the Company recognized revenue in accordance with Statement of Position
("SOP") 91-1, "Software Revenue Recognition." In accordance with the provisions
of this SOP, revenue from the sale of software products was recognized upon
shipment when no significant vendor obligations remained and collection of the
license fees was probable. Revenue on software license transactions in which
there were significant outstanding obligations was deferred and recognized upon
fulfillment of such obligations. The Company's software licenses typically did
not include significant post delivery obligations to be fulfilled by the Company
and the related software license fees were generally due within a twelve-month
period from the date of delivery. Accordingly, license revenue was generally
recognized upon shipment. Services revenue from customer maintenance fees for
ongoing customer support, including maintenance bundled with software license
was initially deferred and recognized over the support service periods. Revenue
for professional services was recognized as services were performed.
F-8
<PAGE> 10
SHERPA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
Effective January 1, 1998, the Company adopted SOP 97-2, "Software Revenue
Recognition" with the exception of the provision deferred by SOP 98-4, "Deferral
of the Effective Date of a Provision of SOP 97-2," In accordance with the
adopted provisions of SOP 97-2, the Company records revenue from software
license when a license agreement is signed by both parties, the fee is fixed or
determinable, collection of the fee is probable and delivery of the product has
occurred. If an element of the license agreement has not been delivered, revenue
for the element is deferred based on vendor-specific objective evidence of fair
value. If vendor-specific objective evidence of fair value does not exist, all
revenue is deferred until sufficient objective evidence exists or all elements
have been delivered. Payments received in advance of revenue recognition are
recorded as deferred revenue. Revenue for maintenance are deferred and
recognized over the term of the contract. Revenue for professional services are
recognized when the services are performed and collectibility is deemed
probable. The Company believes that the adoption of SOP 97-2 and SOP 98-4 has
not had a significant impact on its current licensing or revenue recognition
practices. Should the Company modify its licensing practices, the application of
the requirements under SOP 97-2 and SOP 98-4 may impact the timing of revenue
recognition.
FOREIGN CURRENCY TRANSLATION AND HEDGING
The functional currency of each foreign operation is its local currency.
Assets and liabilities are translated from the local currency to United States
dollars using the current exchange rate at the end of the period. Revenue and
expenses are translated using average exchange rates in effect during the
period. Net gains and losses resulting from foreign currency translation are
accumulated in a separate component of shareholders' equity. Intercompany
balances denominated in foreign currencies are remeasured into the functional
currency at each balance sheet date. Transaction gains and losses resulting from
remeasurement are included in the determination of net income (loss). Gains or
losses from remeasuring transactions denominated in currencies other than the
functional currency are also reported as foreign currency gains or losses.
Foreign currency cash flows are calculated in the local currency and then
translated into United States dollars using average exchange rates in effect
during the period.
The Company purchased foreign currency forward exchange contracts in 1997
and 1996 to hedge the economic exposure against currency fluctuations affecting
certain foreign assets and liabilities. These forward exchange contracts are
marked to market at each reporting date. Any resulting foreign exchange
transaction gains or losses are recorded in "interest and other income (expense)
net" in the statement of operations. For contracts fulfilled in the years ended
December 31, 1996 and 1997, the Company recognized foreign currency losses of
$22 and $168, respectively, which were offset by foreign currency transaction
gains of $5 and $624, respectively. At December 31, 1997, the Company had
certain forward exchange contracts maturing at various times through January
1998, to purchase a net equivalent of approximately $2,100 (primarily British
Pounds Sterling, German Marks, Italian Lira and French Francs) for which the
estimated unrealized gains and losses were not significant.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation arrangements in
accordance with the provisions of Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees," and complies with the
disclosure provisions of Statement of Financial Standards ("SFAS") No. 123,
"Accounting for Stock Based Compensation." Under APB 25, compensation expense is
based on the difference, if any, on the date of grant, between the fair value of
the Company's stock and the exercise price. The Company accounts for stock
issued to non-employees in accordance with the provisions of SFAS No. 123 and
the Emerging Issues Task Force Consensus in Issue No. 96-18.
F-9
<PAGE> 11
SHERPA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
INCOME TAXES
Income taxes are accounted for using an asset and liability approach, which
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
the provisions of enacted tax law; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying interim consolidated financial information as of September
30, 1998, and for the nine months ended September 30, 1997 and 1998, are
unaudited. The unaudited interim consolidated financial statements have been
prepared on the same basis as the annual consolidated financial statements and,
in the opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's financial
position, results of operations and cash flows as of September 30, 1998 and for
the nine months ended September 30, 1997 and 1998. The financial data and other
information disclosed in these notes to consolidated financial statements
related to these periods are unaudited. The results of the nine months ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the year ending December 31, 1998.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial
statements to conform to the current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for the way companies report
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The disclosures prescribed by FAS No. 131
will be effective for the Company's consolidated financial statements for the
year ending December 31, 1998. The Company does not expect that the adoption of
SFAS No. 131 will have a material impact on its consolidated financial
statements.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidance for determining whether computer software is internal-use software and
on accounting for the proceeds of computer software originally developed or
obtained for internal use and then subsequently sold to the public. It also
provides guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The Company has not yet determined the
impact, if any, of adopting this statement. The disclosures prescribed by SOP
98-1 will be effective for the year ending December 31, 1999.
F-10
<PAGE> 12
SHERPA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
In June 1998 and 1999, the FASB issued SFAS No. 133, "Accounting for
Derivatives and Hedging Activities" and SFAS No. 137, "Accounting for
Derivatives and Hedging Activities - Deferral of the Effective Date of SFAS No.
133" ("SFAS 133"), respectively. SFAS 133 is effective for all fiscal quarters
beginning with the quarter ending June 30, 2000. SFAS 133 establishes accounting
and reporting standards of derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
will adopt SFAS 133 in its quarter ending June 30, 2000 and does not expect such
adoption to have an impact on the Company's results of operations, financial
position or cash flows.
NOTE 2 - BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1996 1997 1998
---------------------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ACCOUNTS RECEIVABLE, NET:
Accounts receivable $13,603 $13,428 $14,691
Less: allowance for doubtful accounts (164) (406) (256)
------- ------- -------
13,439 $13,022 $14,435
======= ======= =======
</TABLE>
Noncurrent accounts receivable generally represents amounts receivable for
future maintenance and amounts due under software license agreements.
Write-offs against the allowance for doubtful accounts were $0, $25 and $48
(unaudited) for the years ended December 31, 1996 and 1997 and for the nine
months ended September 31, 1998, respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1996 1997 1998
------------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
PROPERTY AND EQUIPMENT, NET:
Equipment $ 6,828 $ 7,584 $ 7,728
Furniture and fixtures 1,516 1,611 1,714
Leasehold improvements 1,022 1,032 1,028
------- ------- -------
9,366 10,227 10,470
Less: accumulated depreciation and amortization (5,993) (7,258) (8,160)
------- ------- -------
$ 3,373 $ 2,969 $ 2,310
======= ======= =======
</TABLE>
Property and equipment includes $3,101, $4,288 and $4,944 (unaudited) of
fixed assets under capital leases at December 31, 1996 and 1997 and September
30, 1998, respectively. Accumulated depreciation of such assets was $2,080,
$3,022 and $3,614 (unaudited) at December 31, 1996 and 1997 and September 30,
1998, respectively.
Accrued expenses and other current liabilities include commissions and
payroll-related costs of $2,385, $953, and $434 (unaudited) at December 31, 1996
and 1997 and September 30, 1998, respectively.
F-11
<PAGE> 13
SHERPA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
NOTE 3 - BORROWING ARRANGEMENTS:
LINE OF CREDIT AND FACTORING AGREEMENT
At December 31, 1997, the Company had a line of credit with a bank, which
provides for borrowings based on eligible accounts receivable, up to a maximum
of $5,000 with interest thereon at the bank's prime rate of 8.5 percent. This
line of credit facility had a termination date of July 23, 1998. In addition,
the Company entered into an equipment term loan with the bank for borrowings up
to $1,000 and bears interest at the bank's prime rate plus 0.5%. Draws were
available on this equipment loan until September 16, 1998.
The line of credit agreement is secured by substantially all of the
Company's assets, and the terms of the related agreement include certain
covenants, including annual profitability, liquidity and minimum quick ratio and
tangible net worth amounts. In addition, the agreement prohibits the Company
from taking certain actions, such as the payment of dividends or sale of
intellectual property, without the prior written approval of the bank.
At December 31, 1997, the Company was not in compliance with certain
covenants. In March 1998, the bank agreed to waive such covenant violations and
extend the line of credit maturity until August 31, 1998. The equipment term
loan availability was suspended until September 1, 1998.
CAPITALIZED LEASE OBLIGATIONS
In 1997, the Company entered into several new lease agreements to finance
the acquisition of $1,616 of equipment. These lease agreements have been
classified as capital leases and are secured by all of the equipment acquired.
In addition, the Company also has several other capital lease agreements for
other assets currently in use. Individual leases under these lease agreements
have interest rates ranging from 8.86% to 10.28% per annum and expire at various
dates through 2000. Scheduled future minimum payments are as follows:
YEAR ENDING
DECEMBER 31, AMOUNT
- ------------ --------
1998 $ 1,453
1999 1,090
2000 331
2001 --
-----
2,874
Less: amount representing interest (205)
-----
2,669
Less: current portion (1,235)
------
$ 1,434
=======
F-12
<PAGE> 14
SHERPA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
NOTE 4 - INCOME TAXES:
Domestic and foreign income (loss) before income taxes and the
significant components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------ ---- --------
INCOME (LOSS) BEFORE INCOME TAXES:
Domestic $(559) $124 $(4,637)
Foreign 279 186 185
----- ---- -------
$(280) $310 $(4,452)
===== ==== =======
Provision for income taxes:
Current:
Federal 25 $ 14 $ --
State 45 36 15
Foreign 95 179 188
----- ---- -------
$ 165 $229 $ 203
===== ==== =======
The Company's actual provision for income taxes differs from the provision
(benefit) computed by applying the statutory federal income tax rate to income
(loss) before income taxes as follows:
YEAR ENDED DECEMBER 31,
---------------------------
1995 1996 1997
------ ---- --------
Tax (benefit) at statutory federal rate $(95) $ 106 $(1,514)
State taxes, net of federal benefit 45 26 10
Net operating loss carryforwards 65 (115) 1,514
Foreign taxes, net of federal benefit 95 179 188
Federal alternative minimum tax 25 14 --
Other, net 30 19 5
----- ----- -------
Tax provision $165 $ 229 $ 203
===== ===== =======
F-13
<PAGE> 15
SHERPA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
The components of net deferred tax assets are as follows:
DECEMBER 31,
-----------------------
1996 1997
-----------------------
Reserves and allowances $ 270 $ 600
Net operating loss and credit carryforwards 3,862 5,603
Foreign currency losses 102 109
Depreciation on property and equipment 981 1,076
------- ------
Deferred tax assets 5,215 7,388
Deferred tax liabilities - software development cost s (220) (395)
------- ------
4,995 6,993
Deferred tax asset valuation allowance (4,995) (6,993)
------- ------
Net deferred tax assets $ -- $ --
======= ======
At December 31, 1997, the Company had net operating loss carryforwards of
approximately $13,105 available to offset future federal taxable income, and
federal tax credit carryforwards of approximately $634. The Company believes it
experienced a "change in ownership" as defined by the Internal Revenue Code, in
1988 which caused a limitation of available net operating loss and tax credit
carryforwards generated prior to 1989. The carryforwards expire beginning in
2001 through 2005. If certain substantial changes in the Company's ownership
should occur in the future, there would be an additional annual limitation on
the amount of the unrestricted carryforwards which can be utilized.
Based upon the currently available evidence, including the Company's
accumulated deficit, lack of carryback capacity to realize deferred tax assets,
the annual limitation on the utilization of net operating loss carryforwards,
the uncertainty of the market for its products, and other factors, management
believes that it is more likely than not that the deferred tax assets will not
be fully utilized. Accordingly, the Company has provided a valuation allowance
on all of its deferred tax assets.
NOTE 5 - COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases buildings, vehicles and certain equipment under
noncancelable operating leases which expire between 1998 and 2003. Under the
terms of the leases, the Company is responsible for utilities, taxes, insurance
and maintenance. Scheduled future minimum lease payments under outstanding
operating leases are as follows (in thousands):
YEAR ENDING
DECEMBER 31, AMOUNT
- ------------ ------
1998 $1,751
1999 1,587
2000 1,294
2001 1,067
Thereafter 1,676
------
$7,375
======
F-14
<PAGE> 16
SHERPA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
Rent expense was $1,362, $1,478, $1,411, $1,055 (unaudited) and $1,088
(unaudited), for the years ended December 31, 1995, 1996 and 1997, and for the
nine months ended September 31, 1997 and 1998, respectively. The building leases
provide for scheduled rent increases. The total lease commitment is being
charged to operations on a straight-line basis.
LITIGATION
From time to time, the Company is subject to legal proceedings and claims
in the ordinary course of business, including claims of alleged infringement of
trademarks and other intellectual property rights. The Company is not currently
aware of any legal proceedings or claims that the Company believes will have,
individually or in the aggregate, a material adverse effect on the Company's
financial position or results of operations.
NOTE 6 - PREFERRED STOCK:
Each share of Series A preferred stock ("Series A") is convertible into one
share of common stock, subject to certain antidilution provisions, at the option
of the holder or automatically upon the closing of an initial public offering of
the Company's common stock at a price equal to or exceeding $3 per share with
aggregate proceeds of at least $5,000. At December 31, 1997, the Company
reserved 6,000 shares of common stock for issuance upon the conversion of the
Series A stock.
The Series A preferred stockholders are entitled to annual noncumulative
dividends of $0.15 per share when, and if, declared by the Board of Directors
and are entitled to the number of votes equal to the number of shares of common
stock into which such shares of Series A could be converted.
In the event of liquidation of the Company, the Series A preferred
stockholders will receive $1.50 per share plus any declared but unpaid dividends
in preference to any distribution to the common stockholders. All amounts in
excess of the full liquidation value of the Series A shall be distributed to the
common stockholders.
The Company has the option to redeem any portion of Series A at a price of
$1.50 per share, together with all declared and unpaid dividends. As of
September 30, 1998 (unaudited), the Company has not exercised its option to
redeem any portion of this preferred stock.
NOTE 7 - STOCK OPTION PLAN:
STOCK OPTION PLAN ACTIVITY
During 1992, the Company's Board of Directors approved the 1992 Stock
Option Plan (the "1992 Plan") which enveloped the former 1982 plan and provides
for the granting of incentive stock options to employees and nonstatutory stock
options to employees and consultants to purchase shares of common stock. In
March 1995, the Board of Directors, which administers the 1992 Plan, increased
the number of shares reserved for issuance under the 1992 Plan to 1,735 shares,
of which 100 shares have been repurchased and are not available for grant. In
addition 1,234 shares are reserved under the former 1982 Plan. Stock options are
generally granted at exercise prices not less than the fair market value, as
determined by the Board of Directors at the grant date. Incentive options
generally expire ten years after the grant date. Options vest as determined by
the Board of Directors at the date of grant, generally over four years.
F-15
<PAGE> 17
SHERPA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
Information with respect to activity under the 1992 Plan is as follows:
WEIGHTED
AVERAGE
OPTIONS EXERCISE
OUTSTANDING PRICE
----------- --------
Balance at December 31, 1995 $2,486 $1.50
Options granted 405 3.20
Options exercised (107) 1.34
Options canceled (313) 1.86
------ -----
Balance at December 31, 1996 2,471 1.74
Options granted 361 4.18
Options exercised (463) 1.08
Options canceled (360) 2.16
------ -----
Balance at December 31, 1997 2,009 2.26
Options granted (unaudited) 361 4.68
Options exercised (unaudited) (231) 1.03
Options canceled (unaudited) (212) 2.89
------ -----
Balance at September 30, 1998 (unaudited) 1,927 $2.79
====== =====
Using the Black-Scholes option-valuation model, the weighted average
minimum value of options granted during 1996 and 1997, and the nine months ended
September 30, 1998, was $0.82 and $1.07 and $0.83 (unaudited), respectively.
The following table summarizes information about employee stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING AT DECEMBER 31, 1997 AT DECEMBER 31, 1997
---------------------------------------- --------------------
WEIGHTED
AVERAGE
RANGE OF REMAINING WEIGHTED WEIGHTED
EXERCISE NUMBER OF CONTRACTUAL LIFE AVERAGE NUMBER OF AVERAGE
PRICES SHARES (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
- -------- --------- ---------------- -------------- --------- --------------
<C> <C> <C> <C> <C> <C>
$1.00-1.25 621 2.20 $1.00 621 $1.00
1.50-2.00 784 6.87 2.00 615 2.00
3.00-3.75 481 8.93 3.61 124 3.54
5.00-5.00 123 9.77 5.00 -- --
----- -----
2,009 6.09 2.26 1,360 1.68
===== =====
</TABLE>
F-16
<PAGE> 18
SHERPA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
The following table summarizes information about employee stock options
outstanding at September 30, 1998 (unaudited):
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING AT SEPTEMBER 30, 1998 AT SEPTEMBER 30, 1998
----------------------------------------- ---------------------
WEIGHTED
AVERAGE
RANGE OF REMAINING WEIGHTED WEIGHTED
EXERCISE NUMBER OF CONTRACTUAL LIFE AVERAGE NUMBER OF AVERAGE
PRICES SHARES (YEARS) EXERCISE PRICE SHARES EXERCISE PRICE
- -------- --------- ---------------- -------------- --------- --------------
<C> <C> <C> <C> <C> <C>
$1.00-1.25 373 2.19 $1.00 $ 373 $1.00
1.50-2.00 686 6.18 2.00 620 1.99
3.00-3.75 481 8.33 3.52 195 2.38
5.00 387 9.28 5.00 67 5.00
----- -----
1,927 6.58 2.79 1,255 2.10
===== =====
</TABLE>
MINIMUM VALUE DISCLOSURES
The Company calculated the minimum value of each option grant on the date
of grant using the Black-Scholes option pricing model as prescribed by SFAS No.
123 using the following assumptions:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------------------- SEPTEMBER 30,
1995 1996 1997 1998
---- ---- ---- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Risk-free interest rates 6.0% 6.1% 6.1% 4.7%
Expected lives (in years) 5.0 5.0 5.0 5.0
Dividend yield 0.0% 0.0% 0.0% 0.0%
Expected volatility 0.0% 0.0% 0.0% 0.0%
</TABLE>
If the compensation cost associated with the Company's stock-based
compensation plan had been determined using the minimum value method prescribed
by SFAS No. 123, the Company's net loss would have been $500, $111, $4,815,
$3,598 (unaudited) and $4,824 (unaudited) for the years ended December 31, 1995,
1996 and 1997 and for the nine months ended September 30, 1997 and 1998,
respectively.
As the determination of the minimum value of options granted for all
periods presented is based on the assumptions set forth above, the pro forma
disclosures may not be indicative of the pro forma effects of option grants on
reported net income (loss) for future years.
F-17
<PAGE> 19
SHERPA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
NOTE 8 - PROFIT SHARING PLAN:
The Company has a Salary Savings Plan (the "Savings Plan") which covers
substantially all officers and employees of the Company and was established
under Section 401 of the Internal Revenue Code of 1986. The Company's
contributions to the Savings Plan are determined at the discretion of the Board
of Directors, subject to limits as defined under applicable federal income tax
regulations. No contributions were made to the Savings Plan by the Company for
the years ended December 31, 1996 and 1997.
NOTE 9 - RELATED PARTY TRANSACTIONS:
The Company has various notes receivable from shareholders relating to
their exercise of options for the Company's Common Stock. These notes bear
interest at rates ranging from 5.63% to 6.35% per annum. Principal and accrued
interest are generally payable at various dates beginning in 1996 through 2004
or upon termination of employment. At December 31, 1996 and 1997 and September
30, 1998, the principal and accrued interest on these notes, aggregating $106,
$113 and $286 (unaudited), respectively, are presented as a reduction of
shareholders' equity in the accompanying consolidated financial statements.
NOTE 10 - SALE OF ACCOUNTS RECEIVABLE:
In 1996 and 1997, the Company had reached an agreement with a bank to sell,
without recourse, $1,400 and $1,500 of its accounts receivable. Under the terms
of the agreements, the debtor was directed to make payments directly to the bank
and the Company retained no further obligations with respect to these accounts.
Accordingly, the sales of the accounts receivable are reflected as a reduction
of the accounts receivable in the accompanying balance sheet and the proceeds
received are included in the cash flows from operating activities in the
statement of cash flows. The difference between the carrying amount and the
proceeds from the sale of the accounts receivable for the years ended December
31, 1996 and 1997 was $25 and $27, respectively. These amounts are recorded as a
loss on the sale of accounts receivable and included in other expenses in the
statement of operations.
NOTE 11 - SEGMENT AND GEOGRAPHIC REPORTING:
The Company operates in one industry segment which includes developing,
marketing and implementing product data management software solutions for
manufacturing organizations.
Information about the Company's operations in different geographic
locations for the three years ended December 31, 1997 is shown below. The
Company's areas of operation outside of the United States are primarily within
Europe. Revenues from unaffiliated customers represent total net revenues from
the respective geographic areas after elimination of intercompany transactions.
Operating profit is net revenues less operating costs and expenses relating to
specific geographic areas. Identifiable assets are those assets used in the
geographic areas and are reflected after elimination of intercompany balances.
F-18
<PAGE> 20
SHERPA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- --------------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues from (IN THOUSANDS) (UNAUDITED)
unaffiliated customers:
United States $17,337 $20,070 $25,734 $18,537 $15,959
Europe 9,456 12,751 9,689 6,814 8,574
------- ------- ------- ------- -------
$26,793 $32,821 $35,423 $25,351 $24,533
======= ======= ======= ======= =======
Operating profit (loss):
United States $ (456) $ 159 $(3,847) $(2,975) $(5,339)
Europe 165 (24) (95) (100) 1,578
------- ------- ------- ------- -------
(291) $ 135 $(3,942) $(3,075) $(3,761)
======= ======= ======= ======= =======
Identifiable assets:
United States $12,427 $16,478 $20,199 $18,814 $15,237
Europe 6,713 9,156 3,990 3,083 5,210
------- ------- ------- ------- -------
$19,140 $25,634 $24,189 $21,897 $20,447
======= ======= ======= ======= =======
</TABLE>
NOTE 12 - SUBSEQUENT EVENTS:
LINE OF CREDIT
In August 1998, the Company entered into an agreement with a bank to extend
the term of the Company's current $5,000 line of credit facility to February 28,
1999, and to waive the December 31, 1997 covenant violations. As part of the
Agreement, the equipment term loan availability was removed. The conditions and
covenants of the extended line of credit agreement remain unchanged from the
previous agreement, which was to expire on August 31, 1998, except that the
tangible net worth and liquidity covenants were permanently removed.
ACQUISITION (UNAUDITED)
In December 1998, Inso Corporation acquired all of the Company's
outstanding shares of Common Stock, at which time the Company became a wholly
owned subsidiary of Inso Corporation.
F-19
<PAGE> 1
Exhibit 99.2
INSO CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AND STATEMENTS OF
OPERATIONS
BACKGROUND INFORMATION
On December 4, 1998, Inso Corporation, a Delaware corporation (the "Company" or
"Inso"), through a subsidiary acquired 94.6% of the outstanding capital stock of
privately held Sherpa Systems Corporation, a California corporation ("Sherpa").
Sherpa is a provider of product data management solutions that manage
mission-critical information through the product lifecycle process of design,
testing, manufacturing, and delivery. The acquisition was followed by a merger
of the aforementioned subsidiary of the Company into Sherpa. As a result of the
merger, the Company became the owner of 100% of the stock of Sherpa in December
1998.
The total consideration paid for the Sherpa acquisition was $36,000,000,
consisting of $28,700,000 of cash ($1,800,000 of which was paid in January 1999)
and warrants to purchase 1,456,458 shares of the Company's common stock. The
warrants at the time of the acquisition were valued at $5.00 per warrant, or
$7,282,000 ("Original warrants"). The warrants, which are fully exercisable,
have a 24-month term and entitled the holder to purchase shares of the Company's
common stock at an exercise price of $23.50 per share.
On February 1, 1999, the Company announced that it would restate its financial
results for the quarters ended March 31, June 30, and September 30, 1998, due to
discovered errors and irregularities which ultimately affected the timing and
dollar amounts of previously reported revenues. Subsequent to the announcement
of its intention to restate results, the Company initiated discussions with the
warrant holders to reprice the warrants or exchange the warrants for cash with
the objective of meeting the intention under the original agreement. As a
result, the Company has included $7,282,000 within acquisition related
liabilities on the Unaudited Pro Forma Combined Condensed Balance Sheet.
On June 22, 1999, the Company entered into an agreement with the holders of the
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. No adjustment has been reflected in the Unaudited Pro Forma
Combined Condensed Balance Sheet for this agreement. As a result of the
agreement, the Company expects to reduce the purchase price by approximately
$2,100,000.
<PAGE> 2
INSO CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AND STATEMENTS OF
OPERATIONS
The Company's acquisition of Sherpa was accounted for as a purchase and has been
included in the Company's consolidated financial statements since the date of
acquisition. The acquisition also included certain technology under research and
development, which was written-off with a one-time charge of $12,000,000 to the
Company's consolidated 1998 fourth quarter earnings.
The foregoing description of the acquisition does not purport to be complete and
is qualified in its entirety by reference to the Share Exchange Agreement and
Agreement and Plan of Merger, a copy of which was previously filed and is hereby
incorporated by reference in its entirety.
BASIS OF ACCOMPANYING UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS
The Unaudited Pro Forma Condensed Combined Balance Sheet assumes that the
acquisition occurred on September 30, 1998. The Unaudited Pro Forma Condensed
Combined Statements of Operations combines the historical results of operations
of the Company and Sherpa for the year ended December 31, 1997 and the nine
months ended September 30, 1998 assuming the acquisition occurred on January 1,
1997. The historical results for the nine months ended September 30, 1998 are
derived from the Company's unaudited condensed consolidated financial statements
included in its Form 10-Q/A and the operating results for the year ended
December 31, 1997 are derived from the Company's Annual Report on Form 10-K. The
unaudited pro forma condensed combined financial statements do not reflect cost
savings and synergies that might be achieved from the acquisition.
The Unaudited Pro Forma Condensed Combined Balance Sheet includes the effect of
the write-off of certain technology under research and development of
$12,000,000. However, the Unaudited Pro Forma Condensed Combined Statements of
Operations do not consider the write-off of this technology, or other
non-recurring charges that may result from the transaction, and the integration
of Sherpa into the Company.
The Unaudited Pro Forma Condensed Combined Balance Sheet includes direct
transaction costs associated with the acquisition. These direct costs consist of
legal and accounting services and appraisal fees. Additionally, the Unaudited
Pro Forma Condensed Combined Balance Sheet includes estimated costs relating to
exiting excess and duplicate activities as a result of the acquisition. The
actual allocation of the final purchase price may be different from that
reflected in the Unaudited Pro Forma Condensed Combined Financial Statements.
There can be no assurance that the Company will not incur additional charges in
subsequent quarters to reflect costs associated with the acquisition or that
management will be successful in its efforts to integrate the operations of the
two companies.
<PAGE> 3
INSO CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AND STATEMENTS OF
OPERATIONS
Management believes that the assumptions used in preparing these Unaudited Pro
Forma Condensed Combined Financial Statements provide a reasonable basis for
presenting all of the significant effects of the acquisition. These Unaudited
Pro Forma Condensed Combined Financial Statements do not purport to be
indicative of the results which actually would have been obtained if the
acquisition had been effected on the date indicated or of those results which
may be achieved in the future. The Unaudited Pro Forma Condensed Combined
Financial Statements should be read in conjunction with the consolidated
financial statements included in the Inso Corporation Annual Report on Form 10-K
for the year ended December 31, 1998.
<PAGE> 4
INSO CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET AND STATEMENTS OF
OPERATIONS
PRO FORMA ADJUSTMENTS
A summary of the Pro Forma Adjustments is set forth as follows:
(a) To record operating cash used for the acquisition.
(b) To adjust net assets acquired to estimated fair value.
(c) To record the write-off of certain purchased technology under research and
development.
(d) To eliminate Sherpa's stockholders' equity.
(e) To record amounts due to stockholders of Sherpa and consideration to be
paid for employment and noncompetition agreements.
(f) To record direct costs of the acquisition, including legal and accounting
services and appraisal fees, and to record estimated costs of exiting
excess and duplicate activities relating to the acquisition.
(g) To record estimated value at the time of the acquisition of warrants to
purchase 1,456,458 shares of the Company's common stock.
(h) To record the excess purchase price over net assets acquired.
(i) To record deferred tax assets and liabilities resulting from the
acquisition.
(j) To record product development amortization expense.
(k) To record amortization expense associated with intangible assets acquired.
(l) To record the tax benefit of related amortization expense.
(m) To record the benefit of Sherpa net operating losses. The Unaudited Pro
Forma Condensed Combined Statements of Operations assumes that the
acquisition occurred on January 1, 1997. However, due to certain provisions
of the Internal Revenue Code concerning changes in ownership, the actual
use of net operating losses generated prior to the date of acquisition may
be limited.
<PAGE> 5
EXHIBIT 99.2
<TABLE>
<CAPTION>
INSO CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(AMOUNTS IN THOUSANDS)
SHERPA SYSTEMS
INSO CORPORATION
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 ADJUSTMENTS COMBINED
------------------ ------------------ ----------- --------
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash, cash equivalents and marketable securities $ 88,397 $ 772 $(26,876) a $ 62,293
Accounts receivable, net 24,444 14,105 38,549
Prepaid expenses and other current assets 3,238 1,811 2,218 b 7,267
-------- ------- ------- --------
Total current assets 116,079 16,688 (24,658) 108,109
Property and equipment, net 6,699 2,310 9,009
Product development costs, net 13,140 0 7,875 b 21,015
Intangible assets, net 4,108 0 8,597 b
16,078 h 28,783
Other assets, net 6,295 1,449 7,744
Deferred income tax benefit, net 2,528 0 2,528
-------- ------- ------- --------
TOTAL ASSETS $148,849 $20,447 $ 7,892 $177,188
======== ======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities, salaries, $ 10,634 $ 6,650 $ 17,284
commissions, and bonuses and royalties payable
Acquisition related liabilities 0 0 1,841 e
5,800 f
7,282 g
1,597 e 16,520
Unearned revenue 5,285 7,736 13,021
Capital leases, current portion 0 1,014 1,014
Bank loan payable 0 3,500 3,500
Deferred income taxes 3,703 0 (1,325) i 2,378
-------- ------- ------- --------
Total current liabilities 19,622 18,900 15,195 53,717
Capital leases, non-current portion 0 694 694
Deferred income tax, non-current portion 0 0 5,550 i 5,550
Total stockholders' equity 129,227 853 (853) d 117,227
(12,000) c
-------- ------- ------- --------
129,227 853 (12,853) 117,227
-------- ------- ------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $148,849 $20,447 $ 7,892 $177,188
======== ======= ======= ========
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
INSO CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
SHERPA
SYSTEMS
INSO CORPORATION
HISTORICAL HISTORICAL
FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED PRO FORMA PRO FORMA
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998 ADJUSTMENTS COMBINED
------------------ ------------------ ----------- --------
<S> <C> <C> <C> <C>
Total revenues $45,462 $24,533 $69,995
Cost of revenues 7,441 9,071 $ 1,050 j 17,562
------- ------- ------- -------
Gross profit 38,021 15,462 (1,050) 52,433
Operating expenses:
Sales and marketing 16,269 9,207 578 k 26,054
Product development 14,899 5,736 594 k 21,229
General and administrative 12,602 4,280 1,175 k 18,057
Purchased in-process research and development 8,100 0 8,100
------- ------- ------- -------
Total operating expenses 51,870 19,223 2,347 73,440
------- ------- ------- -------
Operating loss (13,849) (3,761) (3,397) (21,007)
Non-operating income:
Net investment income (expense) 3,480 (560) 2,920
Gain on sale of linguistic software net assets 12,012 0 12,012
------- ------- ------- -------
Income (loss) before provision for income taxes 1,643 (4,321) (3,397) (6,075)
(Benefit) provision for income taxes (837) 341 (1,253) l (1,749)
------- ------- ------- -------
Net (loss) income $ 2,480 $(4,662) $(2,144) $(4,326)
======= ======= ======= =======
Basic earnings (loss) per share $ 0.17 $( 0.29)
======= =======
Diluted earnings (loss) per share $ 0.16 $( 0.29)
======= =======
Weighted average shares outstanding
Basic 14,942 14,942
Diluted 15,425 14,942
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
INSO CORPORATION
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
SHERPA SYSTEMS
INSO CORPORATION
HISTORICAL HISTORICAL
FOR THE FOR THE
YEAR ENDED YEAR ENDED PRO FORMA PRO FORMA
DECEMBER 31, 1997 DECEMBER 31, 1997 ADJUSTMENTS COMBINED
----------------- ----------------- ----------- --------
<S> <C> <C> <C> <C>
Total revenues $81,869 $35,423 $117,292
Cost of revenues 9,811 12,826 $ 1,400 j 24,037
------- ------- ------- --------
Gross profit 72,058 22,597 (1,400) 93,255
Operating expenses:
Sales and marketing 23,548 12,888 770 k 37,206
Product development 22,660 7,510 792 k 30,962
General and administrative 15,774 6,141 1,567 k 23,482
Restructuring expenses 5,848 0 5,848
Purchased in-process research and development 6,100 0 6,100
------- ------- ------- --------
Total operating expenses 73,930 26,539 3,129 103,598
------- ------- ------- --------
Operating loss (1,872) (3,942) (4,529) (10,343)
Net investment income (expense) 4,376 (510) 3,866
------- ------- ------- --------
Income (loss) before provision for income taxes 2,504 (4,452) (4,529) (6,477)
(Benefit) provision for income taxes 2,944 203 (1,016) l 913
(1,218) m
------- ------- ------- --------
Net loss $( 440) $(4,655) $(2,295) $( 7,390)
======= ======= ======= ========
Basic loss per share $( 0.03) $( 0.51)
======= ========
Diluted loss per share $( 0.03) $( 0.51)
======= ========
Weighted average shares outstanding
Basic 14,362 14,362
Diluted 14,362 14,362
</TABLE>
