<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No.1 on
FORM 10-Q/A
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1998
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or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 000-23384
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INSO CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-3216243
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
31 ST. JAMES AVENUE, BOSTON, MA 02116
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(Address of principal executive offices) (Zip Code)
(617) 753 - 6500
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT MAY 12, 1998
- --------------------------------------- ------------------------------------
Common Stock (par value $.01 per share) 14,889,141
1 of 16
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INSO CORPORATION
AMENDMENT NO. 1 ON FORM 10-Q/A
AMENDED FILING OF FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1998
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
Subsequent to the filing of its Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998 with the Securities and Exchange Commission, Inso
Corporation (the "Company") discovered certain errors and irregularities that
ultimately affected the dollar amount of previously reported revenues from
license transactions for the three months ended March 31, 1998. As a result of
these errors and irregularities, the Company has restated revenues and the
results of operations in its interim financial statements for the three months
ended March 31, 1998 (see Note 1 to the Unaudited Condensed Consolidated
Financial Statements).
The Company, in consultation with its independent accountants, also has
determined to adjust the amounts originally allocated to acquired in-process
research and development for the acquisition of ViewPort Development AB for the
quarter ended March 31, 1998 to reflect the new methodology set forth in the
September 15, 1998 letter from the Securities and Exchange Commission Staff to
the American Institute of Certified Public Accountants (see Note 1 to the
Unaudited Condensed Consolidated Financial Statements).
In addition to the above, the Company reclassified for 1998 and 1997 certain
service and support costs from sales and marketing expense to cost of revenues.
Unless otherwise stated, information in the originally filed Form 10-Q is
presented as of the original filing date, and has not been updated in this
amended filing. Quarterly financial statement information and related
disclosures included in this amended filing reflect, where appropriate, changes
as a result of the restatements.
2
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INSO CORPORATION
FORM 10-Q INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
Part I. Financial Information - Restated
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
March 31, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Operations
Three Months Ended March 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 16
Exhibit Index
</TABLE>
3
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PART I - FINANCIAL INFORMATION - RESTATED
ITEM 1. FINANCIAL STATEMENTS
INSO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31 December 31
1998 1997
------------ -----------
ASSETS (Restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,431 $ 18,512
Marketable securities 67,084 61,945
Accounts receivable, net 27,835 25,889
Other current assets 3,408 1,817
------------ -----------
Total current assets 103,758 108,163
Property and equipment, net 8,081 7,073
Product development costs, net 9,315 9,015
Intangible assets, net 5,838 4,714
Other assets, net 3,272 3,201
Deferred income tax benefit, net 5,917 5,917
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TOTAL ASSETS $ 136,181 $ 138,083
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<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 4,770 $ 3,899
Accrued salaries, commissions and bonuses 3,683 5,478
Acquisition related liabilities 0 1,482
Unearned revenue 4,183 3,522
Royalties payable 1,075 1,266
Due to Houghton Mifflin Company 506 396
Current income taxes payable 332 575
Deferred income taxes 5,987 5,987
------------ -----------
Total current liabilities 20,536 22,605
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued
Common stock, $.01 par value, 50,000,000 shares
authorized; 14,743,389 and 14,645,611 shares
issued in 1998 and 1997, respectively 147 146
Capital in excess of par value 129,309 128,187
Accumulated deficit (11,062) (10,063)
------------ -----------
118,394 118,270
Unamortized value of restricted shares (197) (240)
Notes Receivable from Stock Purchase Agreements (2,494) (2,494)
Treasury stock, at cost (58) (58)
------------ -----------
Total stockholders' equity 115,645 115,478
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 136,181 $ 138,083
------------ -----------
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</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
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INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
------------ -----------
(Restated)
<S> <C> <C>
Net revenues $ 16,810 $ 19,062
Cost of revenues 2,783 1,976
------------ -----------
Gross profit 14,027 17,086
Operating expenses
Sales and marketing 5,422 3,963
Product development 5,646 4,605
General and administrative 4,509 2,733
Purchased in-process research and development 600 1,800
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Total operating expenses 16,177 13,101
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Operating income (loss) (2,150) 3,985
Net investment income 917 1,082
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Income (loss) before provision for income taxes (1,233) 5,067
Provision (benefit) for income taxes (234) 2,559
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Net income (loss) $ (999) $ 2,508
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------------ -----------
Basic earnings (loss) per share $ (0.07) $ 0.18
------------ -----------
------------ -----------
Diluted earnings (loss) per share $ (0.07) $ 0.17
------------ -----------
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Weighted Average Shares Outstanding:
Basic 14,701 14,313
Diluted 14,701 14,831
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
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INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED, IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1998 1997
------------ -----------
(Restated)
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ (999) $ 2,508
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,126 2,663
Purchased in-process research and development 600 1,800
------------ -----------
1,727 6,971
Changes in operating assets and liabilities:
Accounts receivable (1,900) 1,112
Accounts payable and accrued liabilities (807) (2,091)
Current income taxes (314) 1,782
Royalties payable (191) (312)
Net due to affiliates 110 (405)
Other assets and liabilities (1,033) (595)
------------ -----------
Net cash (used in) provided by operating
activities (2,408) 6,462
Cash flows from (used in) investing activities:
Property and equipment expenditures (1,721) (1,025)
Capitalized product development costs (940) (2,237)
Acquisitions, net of cash acquired (3,893) (4,240)
Net purchase of marketable securities (5,139) (3,857)
------------ -----------
Net cash used in investing activities (11,693) (11,359)
Cash flows from (used in) financing activities:
Net proceeds from issuance of common stock 1,020 630
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Net cash provided by financing activities 1,020 630
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Net decrease in cash and cash equivalents (13,081) (4,267)
Cash and cash equivalents at beginning of period 18,512 34,280
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Cash and cash equivalents at end of period $ 5,431 $ 30,013
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
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INSO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1998
Note 1. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the filing of its Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 with the Securities and Exchange
Commission, the Company discovered certain errors and irregularities
during its year end audit that ultimately affected the timing and
dollar amount of previously reported revenues. In January and
February 1999, the Company performed an investigation, including
additional procedures to determine the extent of the errors and
irregularities. As a result of these procedures and the information
now known or disclosed, the Company has concluded that two
transactions were improperly reported as revenue for the three months
ended March 31, 1998 (as well as other transactions in the subsequent
two quarters). As a result, the Company has restated revenues and the
results of operations in its interim financial statements for the
three months ended March 31, 1998.
In its investigation, the Company discovered irregularities that
relate primarily to side agreements and other terms and conditions
with a number of foreign distributors that have resulted or could
result in significant concessions or allowances that were not
known or accounted for when the revenue was previously reported as
earned.
The Company, in consultation with its independent accountants, also
has adjusted the amounts originally allocated to acquired in-process
research and development for the acquisition of ViewPort Development
AB for the quarter ended March 31, 1998 to reflect the new
methodology set forth in the September 15, 1998 letter from the
Securities and Exchange Commission Staff to the American Institute of
Certified Public Accountants. As a result, the Company has decreased
the amount of the purchase price allocated to acquired in-process
research and development and increased the amount allocated to
technology, other intangibles and goodwill. Specifically, the Company
reduced the amount of the previously reported charge for in-process
research and development from $2,100,000 to $600,000, increased
purchased technology by $200,000, increased other intangibles by
$230,000, and increased goodwill by $1,070,000.
In addition to the above, the Company reclassified for 1998 and 1997
certain service and support costs from sales and marketing expense to
cost of revenues.
As a result of the foregoing, the Company's consolidated revenues and
results of operations for the three months ended March 31, 1998 and
its financial position at March 31, 1998 have been restated as
follows:
7
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<TABLE>
<CAPTION>
For the three months
ended March 31, 1998
STATEMENT OF OPERATIONS DATA: (As reported) (Restated)
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(in thousands, expect per share amounts)
<S> <C> <C>
Net revenues $17,632 $16,810
Cost of revenues 2,270 2,783
Gross profit 15,362 14,027
Purchased in-process research and development 2,100 600
Sales and marketing expenses 5,916 5,422
Total operating expenses 18,142 16,177
Operating loss (2,780) (2,150)
Provision (benefit) for taxes 88 (234)
Net loss (1,951) (999)
Basic loss per share ($0.13) ($0.07)
--------- ---------
--------- ---------
Diluted loss per share ($0.13) ($0.07)
--------- ---------
--------- ---------
<CAPTION>
AS OF MARCH 31, 1998
BALANCE SHEET DATA: (As reported) (Restated)
- -------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Accounts receivable $28,721 $27,835
Total current assets 104,644 103,758
Product development costs, net 8,934 9,315
Intangible assets, net 4,767 5,838
Total assets 135,615 136,181
Unearned revenue 4,246 4,183
Total current liabilities 20,922 20,536
Total stockholders' equity 114,693 115,645
</TABLE>
For the three months ended March 31, 1997, the Company reclassified $401,000
for certain service and support costs from sales and marketing expense to
cost of revenues.
8
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Note 2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. All normal and recurring adjustments that are,
in the opinion of management, necessary for a fair presentation of
the results for the interim periods have been included. Operating
results for the three-month period ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the
year ended December 31, 1998.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission
for the fiscal year ended December 31, 1997.
Note 3. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings
per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the SFAS 128
requirements.
The following table sets forth the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
For the three months
ended March 31,
1998 1997
--------------------
(Restated)
<S> <C> <C>
Numerator:
Numerator for basic and diluted earnings per share:
Net (loss) income ($999) $2,508
Denominator:
Denominator for basic earnings per
share-weighted average shares 14,701 14,313
Effect of dilutive securities:
Employee stock options 518
------ ------
Denominator for diluted earnings per share-
adjusted weighted-average shares 14,701 14,831
Basic (loss) earnings per share ($0.07) $0.18
------ ------
------ ------
Diluted (loss) earnings per share ($0.07) $0.17
------ ------
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</TABLE>
9
<PAGE>
Note 4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" (SFAS 130). SFAS
130 establishes new rules for the reporting and display of
comprehensive income and its components in a full set of general
purpose financial statements. The adoption of SFAS 130 did not have a
material impact on the Company's financial position or results of
operations for the quarter ended March 31, 1998.
In March 1998, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AcSEC) issued
Statement of Position 98-1 (SOP 98-1) "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". SOP 98-1
requires the capitalization of certain costs related to the
development of software for internal use. The adoption of SOP 98-1
did not have a material impact on the Company's financial position or
results of operations for the quarter ended March 31, 1998.
Note 5. ACQUISITIONS
VIEWPORT DEVELOPMENT AB
On March 12, 1998, the Company acquired all of the outstanding
capital stock of ViewPort Development AB for $2,500,000 using
available cash. ViewPort, through its wholly owned subsidiary Synex
Information AB, is a developer of browser engines and application
development toolkits for viewing Standard Generalized Markup Language
information. The transaction was accounted for as a purchase and has
been included in the consolidated financial statements since the date
of acquisition. The purchase price has been allocated on the basis of
the estimated fair market value of the assets acquired and the
liabilities assumed. The acquisition included the purchase of certain
technology under research and development, which resulted in a charge
to the Company's consolidated results for the quarter ended March 31,
1998 of $600,000, or $0.04 per share. Intangible assets of $1,829,000
were recorded at the time of the acquisition and are being amortized
on a straight-line basis over their estimated useful lives ranging
from one to five years.
HENDERSON SOFTWARE, INC.
On November 24, 1997, the Company acquired all of the outstanding
capital stock of privately held Henderson Software, Inc. for $750,000
using available cash. Henderson Software is a provider of Computer
Graphics Metafile viewing and filtering solutions. The transaction
was accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition. The
acquisition included the purchase of certain technology under
research and development, which resulted in a charge to the Company's
consolidated results for the quarter ended December 31, 1997 of
$700,000, or $0.05 per share.
10
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LEVEL FIVE RESEARCH, INC.
On April 22, 1997, the Company acquired all of the outstanding
capital stock of Level Five Research, Inc. from Information Builders,
Inc. for $5,000,000 using available cash. The Company also caused, at
the time of acquisition, Level Five Research, Inc. to enter into
noncompetition agreements with key executives and made aggregate
payments of $300,000 in cash under those agreements. Level Five
Research, Inc., which operated as Inso Florida Corporation prior to
the sale of its assets to Lernout & Hauspie Speech Products N.V.
(Lernout & Hauspie) (See Note 6 below), is a developer of software
and systems that apply intelligent technologies to data access
management. The transaction was accounted for as a purchase and has
been included in the consolidated financial statements since the date
of acquisition. The acquisition included the purchase of certain
technology under research and development, which resulted in a charge
to the Company's consolidated results for the quarter ended June 30,
1997 of $3,600,000, or $0.25 per share.
MASTERSOFT
On February 6, 1997, the Company acquired the intellectual property
and certain other assets of Adobe Systems Incorporated's document
access and conversion business, formerly known as Mastersoft, for
$2,965,000 using available cash. The transaction was accounted for as
a purchase and has been included in the consolidated financial
statements since the date of acquisition. The acquisition included
the purchase of certain technology under research and development,
which resulted in a charge to the Company's consolidated results for
the quarter ended March 31, 1997 of $1,800,000, or $0.13 per share.
Unaudited pro forma net revenues, net loss and net loss per share
shown below for the three months ended March 31, 1998 assumes the
acquisitions of ViewPort AB occurred on January 1, 1998 and for the
three months ended March 31, 1997, assumes the acquisitions of
ViewPort AB, Mastersoft, Level Five Research, Inc., and Henderson
Software, Inc. occurred on January 1, 1997. Therefore, the three
months ended March 31, 1997, presented below, includes the write-off
of certain purchased technology under research and development of
$600,000 relating to ViewPort AB, $3,600,000 relating to Level Five
Research, Inc., and $700,000 relating to Henderson Software, Inc.
<TABLE>
<CAPTION>
Three months ended Three months ended
March 31, 1998 March 31, 1997
-------------- --------------
(Restated) (Restated)
<S> <C> <C>
Net revenues $16,927,000 $19,767,000
Net loss $(1,059,000) $(2,724,000)
Net loss per share $ (0.07) $ (0.19)
</TABLE>
11
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Note 6. ACCOUNTING POLICIES
The Company adopted the straight-line depreciation method for all
property placed in service on or after January 1, 1998. Management
believes that the straight-line method of depreciation provides a
preferable matching between expected productivity and cost allocation
since the equipment's operating capacity and consumption generally
remains consistent over time. The change was not material to
operating results or the financial position of the Company.
Note 7. SUBSEQUENT EVENTS
On April 23 1998, the Company sold its linguistic software assets to
Lernout & Hauspie Speech Products N.V. for $19,500,000, plus an
additional amount for certain receivables net of certain liabilities.
The purchase price was paid 50% in cash and 50% in the form of a
note, due June 30, 1998, bearing interest at 5.5% and secured by a
letter of credit issued by Banque Paribas. The note will be converted
into shares of Lernout & Hauspie common stock having a market value
equal to $9,750,000 plus accrued interest assuming shares having such
a value are delivered to the Company and are available for public
resale before June 30, 1998. The additional consideration for the
other net assets was paid in cash. Included in the assets transferred
to Lernout & Hauspie are all of Inso's linguistic software products,
including its proofing tools, reference works, and information
management tools, the Quest database search technology acquired with
the Level Five Research, Inc. acquisition (see Note 5), and all
customer and supplier agreements related to those products. The
Company expects to report in the quarter ended June 30, 1998, a net
after-tax gain of approximately $12 million to $13 million as a
result of the transaction.
On May 7, 1998, the Company's stockholders voted to increase the
number of shares authorized to be issued under the 1993 Stock
Purchase Plan from 200,000 to 450,000 shares.
On May 7, 1998, the Company's stockholders voted to increase the
number of shares authorized to be issued under the 1996 Stock
Incentive Plan from 2,000,000 to 5,000,000 shares.
On May 7, 1998, the Company's stockholders voted to increase the
number of shares authorized to be issued under the 1996 Non-employee
Director Plan from 250,000 to 415,000.
12
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As a result of the restatement of the Company's financial statements for the
first quarter of 1998, certain information contained in this item related to
such period has changed from that which appeared in the Company's originally
filed Form 10-Q for that period.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues for the three months ended March 31, 1998 decreased $2,252,000, or
12%, to $16,810,000 compared to $19,062,000 for the three months ended March
31, 1997. Net revenues for the quarter ended March 31, 1997, of $19,062,000
included certain revenues from Microsoft Corporation, which are no longer
recurring. Excluding the 1997 Microsoft revenues which are no longer
recurring, net revenues for the quarter ended March 31, 1998 increased
approximately 34% over net revenues for the quarter ended March 31, 1997. Of
the total revenues in 1998, less than 5% were revenues from the acquisitions
of ViewPort Development AB, Mastersoft, Level Five Research, Inc., and
Henderson Software, Inc. Direct and distribution product revenues grew by
approximately 25% over the quarter ended March 31, 1997 due primarily to
increases in Dynamic Document Exchange and Electronic Publishing Solutions
products. On April 23, 1998, the Company sold its linguistic software assets
to Lernout & Hauspie Speech Products N.V. (Lernout & Hauspie) for
$19,500,000. Included in the assets transferred to Lernout & Hauspie are all
of Inso's linguistic software products, including its proofing tools,
reference works, and information management tools, the Quest database search
technology, and all customer and supplier agreements related to those
products. Excluding the revenues associated with the assets sold to Lernout &
Hauspie, net revenues for the three months ended March 31, 1998 and 1997 were
$10,362,000 and $9,084,000, respectively.
Gross profit decreased $3,059,000, or 18%, from $17,086,000 for the three months
ended March 31, 1997 to $14,027,000 for the three months ended March 31, 1998.
Gross profit as a percentage of revenues for the three months ended March 31,
1998 was 83% compared to 90% for the three months ended March 31, 1997. The
decrease in gross profit percentage was primarily attributable to higher
revenues from International CorrectSpell, International Electronic
Thesaurus, and bilingual electronic dictionaries in the quarter ended March 31,
1998, which carry higher royalty burdens.
Total operating expenses increased $3,076,000 to $16,177,000 for the three
months ended March 31, 1998 from $13,101,000 for the three months ended March
31, 1997. Included in total operating expenses for the three months ended March
31, 1998 was an acquisition charge of $600,000 for certain purchased technology
under research and development by ViewPort Development AB at the time of the
March 12, 1998 acquisition. Included in total operating expenses for the three
months ended March 31, 1997 was an acquisition charge of $1,800,000 for certain
purchased technology under research and development by Mastersoft at the time of
the 1997 acquisition. Excluding the 1998 and 1997 aforementioned acquisition
charges as well as the operating expenses associated with the assets sold to
Lernout & Hauspie, operating expenses increased $4,811,000, or 55%, for the
three months ended March 31, 1998 compared to the three months ended March 31,
1997.
Sales and marketing expenses increased $1,459,000 to $5,422,000 for the three
months ended March 31, 1998 from $3,963,000 for the three months ended March 31,
1997. The increase reflects increased costs for the reorganization of sales and
marketing departments. Sales and marketing expenses were 32% of revenues for the
three months ended March 31, 1998 compared to 21% for the three months ended
March 31, 1997. Product development expenses increased $1,041,000 from
$4,605,000 for the three months ended March 31, 1997 to
13
<PAGE>
$5,646,000 for the three months ended March 31, 1998. The increase in product
development costs was primarily due to the lower capitalized costs for the three
months ended March 31, 1998 compared to the three months ended March 31, 1997.
The Company's total product development costs, including capitalized costs, were
$6,586,000, or 39% of revenues, for the three months ended March 31, 1998
compared to $6,842,000, or 36% of revenues, for the three months ended March 31,
1997. General and administrative expenses increased $1,776,000 to $4,509,000 for
the three months ended March 31, 1998 compared to $2,733,000 for the three
months ended March 31, 1997. General and administrative expenses were 27% of
revenues for the three months ended March 31, 1998 compared to 14% for the three
months ended March 31, 1997. The increase in general and administrative expenses
was primarily due to goodwill amortization related to the Company's acquisitions
as well as increases in personnel, facilities costs, and general expenses
required to support the changes in the Company's operations.
The Company's effective tax rate was influenced by the purchased in-process
research and development charges discussed above. Excluding these charges, the
Company's effective tax rate for the three months ended March 31, 1998 and 1997
was 37%.
Excluding the $600,000 ($0.04 per share) ViewPort purchased in-process research
and development charge, net loss and loss per share for the quarter ending March
31, 1998 would have been $399,000 and $0.03, respectively. Excluding the 1997
$1,800,000 ($0.13 per share) Mastersoft purchased in process research and
development charge, net income and earnings per share for the quarter ended
March 31, 1997 would have been $4,308,000 and $0.29, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities used cash of $2,408,000 for the three months
ended March 31, 1998 compared to providing cash of $6,462,000 for the three
months ended March 31, 1997. The decreased contribution from operating
activities of $8,870,000 was primarily due to the reduced level of earnings in
the first quarter of 1998 as compared to the same period last year as well as an
increase in accounts receivable in 1998.
The Company's investing activities used cash of $11,693,000 for the three months
ended March 31, 1998 compared to $11,359,000 for the three months ended March
31, 1997. The increase of $334,000 was due to the 1998 increase in investment
activity for marketable securities of $1,282,000; an increase of $696,000 in
property and equipment expenditures in 1998; offset by a decrease in capitalized
product development costs and acquisition activity. The investing activity in
1998 also included the payment of $1,467,000 to the former principal stockholder
of Inso Providence.
The Company's financing activities provided cash of $1,020,000 for the three
months ended March 31, 1998 compared to $630,000 for the three months ended
March 31, 1997. The increase of $390,000 primarily relates to an increase in the
proceeds received from stock option exercises.
As of March 31, 1997, the Company had working capital of $83,222,000. Total
cash, cash equivalents, and marketable securities at March 31, 1998 were
$72,515,000. 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.
14
<PAGE>
FUTURE OPERATING RESULTS
This report, and other reports, proxy statements and other communications to
stockholders, as well as oral statements by the Company's officers or its
agents, may contain forward-looking statements with respect to, among other
things, the Company's future revenues, operating income or earnings per share.
Please refer to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997 for a description of certain factors which may cause the
Company's actual results to vary materially from those forecasted or projected
in any such forward-looking statements. Among the factors which may cause the
Company's actual results to differ materially from historical results are the
following: competitive pressures including price pressures; declining royalty
revenues from Microsoft Corporation which decrease substantially in 1998 and
thereafter; increased reliance on direct and distribution channels which results
in lower operating margins; increased personnel costs and competition for
experienced personnel; market acceptance of products based on eXtensible Markup
Language and Standard Generalized Markup Language; consolidation in the OEM
business and potential competition from OEM customers; adverse economic changes
in the markets in which the Company does business; difficulties integrating
operations and personnel of acquired businesses; and increasing reliance on
international markets. As a result of the sale of the linguistic software assets
to Lernout & Hauspie Speech Products N.V., the Company does not expect to
receive significant revenues from Microsoft Corporation in future periods.
15
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following are filed as exhibits to this Form 10-Q
Exhibit 18 * Letter re Change in Accounting Principle
Exhibit 27 Restated Financial Data Schedule
* Previously filed
(b) Reports on Form 8-K
Registrant filed no reports on Form 8-K during the quarter ended March 31, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Inso Corporation
----------------
Registrant
Date: March 31, 1999 /s/ Betty J. Savage
---------------------------------
Betty J. Savage
Vice President and Chief Financial Officer
Date: March 31, 1999 /s/ Patricia A. Michaels
---------------------------------
Patricia A. Michaels
Corporate Controller
(Chief Accounting Officer)
16
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
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