<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 JUNE 30, 1998
-------------------------------------------------
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------- -----------------
Commission File Number: 000-23384
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INSO CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 04-3216243
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
31 ST. JAMES AVENUE, BOSTON, MA 02116
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(617) 753 - 6500
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT AUGUST 11, 1998
- ------------------------------------------ ----------------------------------
Common Stock (par value $.01 per share) 15,301,589
1 of 20
<PAGE>
INSO CORPORATION
AMENDMENT NO. 1 ON FORM 10-Q/A
AMENDED FILING OF FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998
RESTATEMENT OF FINANCIAL STATEMENTS AND CHANGES TO CERTAIN INFORMATION
Subsequent to the filing of its Quarterly Report on Form 10-Q for the quarter
ended June 30, 1998 with the Securities and Exchange Commission, Inso
Corporation (the "Company") discovered certain irregularities that ultimately
affected the timing and dollar amount of previously reported earned revenues
from license transactions for the three and six month periods ended June 30,
1998. As a result of these errors and irregularities, the Company has restated
revenues and the results of operations in its interim financial statements for
the three and six months ended June 30, 1998 (see Note 1 to the Unaudited
Condensed Consolidated Financial Statements).
The Company, in consultation with its independent accountants, also has
determined to adjust the amounts originally allocated to acquired in-process
research and development for the acquisition of ViewPort Development AB for the
six months ended June 30, 1998 to reflect the new methodology set forth in the
September 15, 1998 letter from the Securities and Exchange Commission Staff to
the American Institute of Certified Public Accountants (see Note 1 to the
Unaudited Condensed Consolidated Financial Statements).
In addition to the above, the Company reclassified for 1998 and 1997 certain
service and support costs from sales and marketing expense to cost of revenues.
Unless otherwise stated, information in the originally filed Form 10-Q is
presented as of the original filing date, and has not been updated in this
amended filing. Quarterly financial statement information and related
disclosures included in this amended filing reflect, where appropriate, changes
as a result of the restatements.
2
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INSO CORPORATION
FORM 10-Q INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
Part I. Financial Information - Restated
Item 1. Financial Information
Condensed Consolidated Balance Sheets
June 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Operations
Three Months Ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Operations
Six Months Ended June 30, 1998 and 1997 6
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 1998 and 1997 7
Notes to Condensed Consolidated Financial Statements 8-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-17
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders 18-19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 20
Exhibit Index
</TABLE>
3
<PAGE>
PART I - FINANCIAL INFORMATION - RESTATED
ITEM 1. FINANCIAL STATEMENTS
INSO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED, IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 30 December 31
1998 1997
------------ -----------
ASSETS (Restated)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 29,291 $ 18,512
Marketable securities 67,621 61,945
Accounts receivable, net 23,955 25,889
Income tax receivable 2,063 0
Other current assets 2,394 1,817
------------ -----------
Total current assets 125,324 108,163
Property and equipment, net 6,945 7,073
Product development costs, net 8,720 9,015
Intangible assets, net 4,523 4,714
Other assets, net 4,400 3,201
Deferred income tax benefit, net 549 5,917
------------ -----------
TOTAL ASSETS $ 150,461 $ 138,083
------------ -----------
------------ -----------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 5,580 $ 3,899
Accrued salaries, commissions and bonuses 6,458 5,478
Acquisition related liabilities 0 1,482
Unearned revenue 4,494 3,522
Royalties payable 30 1,266
Due to Houghton Mifflin Company 0 396
Current income taxes payable 0 575
Deferred income taxes 3,703 5,987
------------ -----------
Total current liabilities 20,265 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, 14,908,656 and 14,645,611 shares
issued in 1998 and 1997, respectively 149 146
Capital in excess of par value 132,293 128,187
Retained Earnings (Accumulated deficit) 539 (10,063)
------------ -----------
132,981 118,270
Unamortized value of restricted shares (233) (240)
Notes Receivable from Stock Purchase Agreements (2,494) (2,494)
Treasury stock, at cost, 5,075 shares in
1998 and 1997 (58) (58)
------------ -----------
Total stockholders' equity 130,196 115,478
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 150,461 $ 138,083
------------ -----------
------------ -----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE>
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
------------ -----------
(Restated)
<S> <C> <C>
Net revenues $ 14,513 $ 20,058
Cost of revenues 2,037 2,946
------------ -----------
Gross profit 12,476 17,112
Operating expenses
Sales and marketing 5,272 6,340
Product development 4,502 6,168
General and administrative 4,469 4,488
Restructuring expenses 0 5,848
Purchased in-process research and development 0 3,600
------------ -----------
Total operating expenses 14,243 26,444
------------ -----------
Operating (loss) income (1,767) (9,332)
Non-operating income:
Net investment income 1,117 694
Gain on sale of linguistic software net assets 12,012
------------ -----------
Income (loss) before provision for income taxes 11,362 (8,638)
Benefit for income taxes (239) (1,865)
------------ -----------
Net income (loss) $ 11,601 $ (6,773)
------------ -----------
------------ -----------
Basic earnings (loss) per share $ 0.78 $ (0.47)
------------ -----------
------------ -----------
Diluted earnings (loss) per share $ 0.74 $ (0.47)
------------ -----------
------------ -----------
Weighted Average Shares Outstanding:
Basic 14,869 14,339
Diluted 15,641 14,339
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
5
<PAGE>
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
------------ -----------
(Restated)
<S> <C> <C>
Net revenues $ 31,323 $ 39,120
Cost of revenues 4,820 4,922
------------ -----------
Gross profit 26,503 34,198
Operating expenses
Sales and marketing 10,694 10,303
Product development 10,148 10,773
General and administrative 8,978 7,221
Restructuring expenses 0 5,848
Purchased in-process research and development 600 5,400
------------ -----------
Total operating expenses 30,420 39,545
------------ -----------
Operating loss (3,917) (5,347)
Non-operating income:
Net investment income 2,034 1,776
Gain on sale of linguistic software net assets 12,012
------------ -----------
Income (loss) before provision for income taxes 10,129 (3,571)
Provision (benefit) for income taxes (473) 694
------------ -----------
Net income (loss) $ 10,602 $ (4,265)
------------ -----------
------------ -----------
Basic earnings (loss) per share $ 0.72 $ (0.30)
------------ -----------
------------ -----------
Diluted earnings (loss) per share $ 0.70 $ (0.30)
------------ -----------
------------ -----------
Weighted Average Shares Outstanding:
Basic 14,785 14,326
Diluted 15,227 14,326
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
6
<PAGE>
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED, IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
1998 1997
------------ -----------
(Restated)
<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ 10,602 $ (4,265)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 4,387 4,179
Purchased in-process research and development 600 5,400
Deferred income taxes 3,084 (3,496)
Restructuring expenses 5,045
Gain on sale of linguistic software net assets (12,012)
------------ -----------
6,661 6,863
Changes in operating assets and liabilities:
Accounts receivable 2,157 (458)
Accounts payable and accrued liabilities (2,572) 898
Current income taxes (2,247) 4,363
Royalties payable (1,236) (73)
Due to Houghton Mifflin Company (396) (510)
Other assets and liabilities (694) (873)
------------ -----------
Net cash (used in) provided by operating
activities 1,673 10,210
Cash flows from (used in) investing activities:
Property and equipment expenditures (2,316) (2,336)
Capitalized product development costs (2,230) (3,941)
Acquisitions, net of cash acquired (3,893) (9,602)
Net purchase of marketable securities (5,676) (7,096)
Proceeds from the sale of linguistic software
net assets 19,853
------------ -----------
Net cash used in investing activities 5,738 (22,975)
Cash flows from (used in) financing activities:
Net proceeds from issuance of common stock 3,368 948
------------ -----------
Net cash provided by financing activities 3,368 948
------------ -----------
Net increase (decrease) in cash and cash equivalents 10,779 (11,817)
Cash and cash equivalents at beginning of period 18,512 34,280
------------ -----------
Cash and cash equivalents at end of period $ 29,291 $ 22,463
------------ -----------
------------ -----------
Supplementary Information:
Investment in Information Please LLC $ 2,620
-----------
-----------
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
7
<PAGE>
INSO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1998
Note 1. RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the filing of its Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 with the Securities and Exchange
Commission, the Company discovered certain errors and irregularities
during its year end audit that ultimately affected the timing and
dollar amount of previously reported revenues. In January and
February 1999, the Company performed an investigation, including
additional procedures to determine the extent of the errors and
irregularities. As a result of these procedures, and the information
now known or disclosed, the Company has concluded that certain
transactions were improperly reported as revenue for the three and
six-month periods ended June 30, 1998 (as well as the subsequent
quarter). As a result, the Company has restated revenues and the
results of operations in its interim financial statements for the
three and six-month periods ended June 30, 1998.
In its investigation, the Company discovered irregularities that
relate primarily to side agreements and other terms and conditions
with a number of foreign distributors that have resulted or could
result in significant concessions or allowances that were not known,
or accounted for when the revenue was previously reported as earned.
The Company, in consultation with its independent accountants, also
has adjusted the amounts originally allocated to acquired in-process
research and development for the acquisition of ViewPort Development
AB for the six months ended June 30, 1998 to reflect the new
methodology set forth in the September 15, 1998 letter from the
Securities and Exchange Commission Staff to the American Institute of
Certified Public Accountants. As a result, the Company has decreased
the amount of the purchase price allocated to acquired in-process
research and development and increased the amount allocated to
technology, other intangibles, and goodwill. Specifically, the
Company reduced the amount of the previously reported charge for
in-process research and development from $2,100,000 to $600,000,
increased purchased technology by $200,000, increased other
intangibles by $230,000, and increased goodwill by $1,070,000.
In addition to the above, the Company reclassified for 1998 and 1997
certain service and support costs from sales and marketing expense to
cost of revenues.
As a result of the foregoing, the Company's consolidated revenues and
results of operations for the three and six-month periods ended June
30, 1998 and its financial position at June 30, 1998 have been
restated as follows:
8
<PAGE>
<TABLE>
<CAPTION>
For the three months For the nine months
ended June 30, 1998 ended June 30, 1998
STATEMENT OF OPERATIONS DATA: (AS REPORTED) (RESTATED) (AS REPORTED) (RESTATED)
- -----------------------------------------------------------------------------------------------------------
(in thousands, expect per share amounts)
<S> <C> <C> <C> <C>
Net revenues $16,213 $14,513 $33,845 $31,323
Cost of revenues 1,401 2,037 3,671 4,820
Gross profit 14,812 12,476 30,174 26,503
Purchased in-process research and development 0 0 2,100 600
Sales and marketing expenses 5,850 5,272 11,766 10,694
Total operating expenses 14,735 14,243 32,877 30,420
Operating income (loss) 77 (1,767) (2,703) (3,917)
Provision (benefit) for taxes 443 (239) 531 (473)
Net income 12,763 11,601 10,812 10,602
Basic earnings per share $0.86 $0.78 $0.73 $0.72
------- ------- ------- -------
------- ------- ------- -------
Diluted earnings per share $0.82 $0.74 $0.71 $0.70
------- ------- ------- -------
------- ------- ------- -------
<CAPTION>
As of June 30, 1998
BALANCE SHEET DATA: (As reported) (Restated)
- -----------------------------------------------------------------------------------------------------------
(in thousands)
<S> <C> <C>
Accounts receivable $26,324 $23,955
Total current assets 126,688 125,324
Product development costs, net 8,598 8,720
Intangible assets, net 3,338 4,523
Total assets 150,918 150,461
Unearned revenue 4,740 4,494
Total current liabilities 20,512 20,265
Total stockholders' equity 130,406 130,196
</TABLE>
For the three and six-month periods ended June 30, 1997, the Company
reclassified $522,000 and $923,000, respectively for certain service and
support costs from sales and marketing expense to cost of revenues.
9
<PAGE>
Note 2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. All normal and recurring adjustments that are,
in the opinion of management, necessary for a fair presentation of
the results for the interim periods have been included. Operating
results for the three and six-month periods ended June 30, 1998 are
not necessarily indicative of the results that may be expected for
the year ended December 31, 1998.
For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's Annual
Report on Form 10-K filed with the Securities and Exchange Commission
for the fiscal year ended December 31, 1997.
Note 3. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" (SFAS 128). SFAS 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings
per share. All earnings per share amounts for all periods have been
presented, and where appropriate, restated to conform to the SFAS 128
requirements.
The following table sets forth the computation of basic and diluted
earnings per share.
<TABLE>
<CAPTION>
For the three months
ended June 30,
1998 1997
---------------------
(Restated)
<S> <C> <C>
Numerator:
Numerator for basic and diluted earnings per share:
Net income (loss) $11,601 ($6,773)
Denominator:
Denominator for basic earnings per
share-weighted average shares 14,869 14,339
Effect of dilutive securities:
Employee stock options 772
------- -----
Denominator for diluted earnings per share-
adjusted weighted-average shares 15,641 14,339
Basic earnings (loss) per share $0.78 ($0.47)
------- -------
------- -------
Diluted earnings (loss) per share $0.74 ($0.47)
------- -------
------- -------
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
For the six months
ended June 30,
1998 1997
--------------------------
(Restated)
<S> <C> <C>
Numerator:
Numerator for basic and diluted earnings per share:
Net income (loss) $10,602 ($4,265)
Denominator:
Denominator for basic earnings per
share-weighted average shares 14,785 14,326
Effect of dilutive securities:
Employee stock options 442
------- -----
Denominator for diluted earnings per share-
adjusted weighted-average shares 15,227 14,326
Basic earnings (loss) per share $0.72 ($0.30)
------- -----
------- -----
Diluted earnings (loss) per share $0.70 ($0.30)
------- -----
------- -----
</TABLE>
Note 4. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 "Reporting Comprehensive Income" (SFAS 130). SFAS
130 establishes new rules for the reporting and display of
comprehensive income and its components in a full set of
general-purpose financial statements. The adoption of SFAS 130 did
not have a material impact on the Company's financial position or
results of operations for the three and six-month periods ended June
30, 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 three and six-month periods ended June
30, 1998.
Note 5. SALE OF LINGUISTIC SOFTWARE NET ASSETS
On April 23, 1998, the Company sold its linguistic software assets to
Lernout & Hauspie Speech Products N.V. for $19,500,000, plus an
additional amount for certain receivables net of certain liabilities.
The purchase price was paid 50% in cash and 50% in the form of a note
which was converted into shares of Lernout & Hauspie common stock in
June 1998. The Company sold the Lernout & Hauspie common stock in
June 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. 1997 acquisition, and all customer and supplier
agreements related to those products. In connection with the sale,
the Company recorded direct transaction costs; costs to write-off
capitalized software and other assets; estimated lease and facility
costs; and other accruals for costs directly associated with the
sale. As a result, the Company reported in the quarter ended June 30,
1998, a gain of $12,012,000. In addition, the Company's valuation
allowance on its deferred tax assets was reduced by approximately
$4,000,000 as management deemed that it is more likely than not that
these assets would be recoverable.
11
<PAGE>
Note 6. 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 of ranging
from one to five years.
HENDERSON SOFTWARE, INC.
On November 24, 1997, the Company acquired all of the outstanding
capital stock of privately held Henderson Software, Inc. for $750,000
using available cash. Henderson Software is a provider of Computer
Graphics Metafile viewing and filtering solutions. The transaction
was accounted for as a purchase and has been included in the
consolidated financial statements since the date of acquisition. The
acquisition included the purchase of certain technology under
research and development, which resulted in a charge to the Company's
consolidated results for the quarter ended December 31, 1997 of
$700,000, or $0.05 per share.
LEVEL FIVE RESEARCH, INC.
On April 22, 1997, the Company acquired all of the outstanding
capital stock of Level Five Research, Inc. from Information Builders,
Inc. for $5,000,000 using available cash. Level Five Research, Inc.,
which operated as Inso Florida Corporation prior to the sale of its
assets to Lernout & Hauspie Speech Products N.V. (see Note 4 above),
is a developer of software and systems that apply intelligent
technologies to data access management. The transaction was accounted
for as a purchase and has been included in the consolidated financial
statements since the date of acquisition. The acquisition included
the purchase of certain technology under research and development,
which resulted in a charge to the Company's consolidated results for
the quarter ended June 30, 1997 of $3,600,000, or $0.25 per share.
MASTERSOFT
On February 6, 1997, the Company acquired the intellectual property
and certain other assets of Adobe Systems Incorporated's document
access and conversion business, formerly known as Mastersoft, for
$2,965,000 using available cash. The transaction was accounted for as
a purchase and has been included in the consolidated financial
statements since the date of acquisition. The acquisition included
the purchase of certain technology under research and development,
which resulted in a charge to the Company's consolidated results for
the quarter ended March 31, 1997 of $1,800,000, or $0.13 per share.
Unaudited pro forma net revenues, net income (loss) and earnings
(loss) per share shown below for the six months ended June 30, 1998
assumes the acquisition of ViewPort Development AB occurred on
January 1, 1998 and for the six months ended June 30, 1997, assumes
the acquisitions of ViewPort AB and Henderson Software, Inc. occurred
on January 1, 1997. Therefore, the six months ended June 30, 1997,
presented below, includes the write-off of certain purchased
technology under research and
12
<PAGE>
development of $600,000 relating to ViewPort Development AB and
$700,000 relating to Henderson Software, Inc.
<TABLE>
<CAPTION>
Six months ended Six months ended
June 30, 1998 June 30, 1997
------------- -------------
(Restated) (Restated)
<S> <C> <C>
Net revenues $31,440,000 $39,636,000
Net income (loss) $10,542,000 $(5,635,000)
Diluted earnings (loss) per share $ 0.69 $ (0.39)
</TABLE>
Note 7. ACCOUNTING POLICIES
The Company adopted the straight-line depreciation method for all
property placed in service on or after January 1, 1998. Management
believes that the straight-line method of depreciation provides a
preferable matching between expected productivity and cost allocation
since the equipment's operating capacity and consumption generally
remains consistent over time. The change was not material to
operating results or the financial position of the Company.
Note 8. SHAREHOLDER RESOLUTIONS
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.
13
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
As a result of the restatement of the Company's financial statements for the
interim periods in 1998, certain information contained in this item related to
such periods have changed from that which appeared in the Company's originally
filed Form 10-Q for those periods.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Revenues for the three months ended June 30, 1998 decreased $5,545,000, or 28%,
to $14,513,000 compared to $20,058,000 for the three months ended June 30, 1997.
On April 23, 1998, the Company sold its linguistic software assets to Lernout &
Hauspie Speech Products N.V. (Lernout & Hauspie) for $19,500,000, plus an
additional amount for certain receivables net of certain liabilities. Included
in the assets transferred to Lernout & Hauspie are all of Inso's linguistic
software products, including its proofing tools, reference works, and
information management tools, the Quest database search technology, and all
customer and supplier agreements related to those products. Excluding the
revenues associated with the assets sold to Lernout & Hauspie, net revenues grew
approximately 23% to $13,983,000 for the three months ended June 30, 1998
compared to $11,412,000 for the three months ended June 30, 1997. Excluding the
revenues associated with the assets sold to Lernout & Hauspie, revenues from
direct and distribution product sales represented approximately 56% of the
revenue total for the quarter ended June 30, 1998 and increased by
approximately 11% over the quarter ended June 30, 1997. Additionally, of the
total revenues in 1998, less than 5% were revenues from the acquisitions of
ViewPort and Henderson Software, Inc.
Gross profit decreased $4,636,000, or 27%, from $17,112,000 for the three months
ended June 30, 1997 to $12,476,000 for the three months ended June 30, 1998.
Excluding the gross profit associated with the assets sold to Lernout & Hauspie,
gross profit increased $2,416,000, or 25%, to $12,054,000 for the three months
ended June 30, 1998 from $9,638,000 for the three months ended June 30, 1997.
Gross profit as a percentage of revenues, excluding the gross profit associated
with the assets sold to Lernout & Hauspie, was 86% for the three months ended
June 30, 1998 compared to 84% for the three months ended June 30, 1997. The
increase in gross profit percentage was primarily due to an increase in revenues
at a faster rate than the related fulfillment costs.
Total operating expenses decreased $12,201,000 to $14,243,000 for the three
months ended June 30, 1998 from $26,444,000 for the three months ended June 30,
1997. Included in total operating expenses for the three months ended June 30,
1997 was an acquisition charge of $3,600,000 for certain purchased technology
under research and development by Level Five Research, Inc. at the time of the
1997 acquisition and restructuring expenses of $5,848,000 relating to the
Company's Information Products and certain of the Information Management Tools
product lines. Excluding the 1997 aforementioned special charges as well as the
operating expenses associated with the assets sold to Lernout & Hauspie,
operating expenses decreased $235,000, or 2%, to $13,760,000 for the three
months ended June 30, 1998 compared to $13,995,000 the three months ended June
30, 1997.
Sales and marketing expenses decreased $1,068,000 to $5,272,000 for the three
months ended June 30, 1998 from $6,340,000 for the three months ended June 30,
1997. Excluding the sales and marketing expenses associated with the assets sold
to Lernout & Hauspie, sales and marketing expenses decreased $895,000, or 15%,
for the three months ended June 30, 1998 compared to the three months ended June
30, 1997. The decrease is the result of the reorganization of the sales and
marketing departments. Excluding the sales and marketing expenses associated
with the assets sold to Lernout & Hauspie, sales and marketing expenses were 37%
of revenues for the three months ended June 30, 1998 compared to 54% for the
three months ended June 30, 1997. The decline in the percentage is primarily due
to revenues increasing at a higher percentage than sales and marketing expenses.
14
<PAGE>
Product development expenses decreased $1,666,000 from $6,168,000 for the three
months ended June 30, 1997 to $4,502,000 for the three months ended June 30,
1998. Excluding the product development expenses associated with the assets sold
to Lernout & Hauspie, product development costs increased by $455,000, or 12%,
for the three months ended June 30, 1998 compared to the three months ended June
30, 1997. The increase is due to the Company's increased investment in viewing
and information sharing and distribution products. The Company's product
development costs, excluding the product development expenses associated with
the assets sold to Lernout & Hauspie, were 30% of revenues for the three months
ended June 30, 1998 compared to 33% of revenues for the three months ended June
30, 1997.
General and administrative expenses decreased $19,000 to $4,469,000 for the
three months ended June 30, 1998 compared to $4,488,000 for the three months
ended June 30, 1997. Excluding the administrative expenses associated with the
assets sold to Lernout & Hauspie, general and administrative expenses increased
$205,000, or 5%, for the three months ended June 30, 1998 compared to the three
months ended June 30, 1997. The increase in general and administrative expenses
was primarily due to costs associated with the Company's facilities and due to
goodwill amortization related to the Company's acquisitions. General and
administrative expenses, excluding the expenses associated with the assets sold
to Lernout & Hauspie, were 31% of revenues for the three months ended June 30,
1998 compared to 36% for the three months ended June 30, 1997.
The Company's effective tax rate was influenced in 1998 by the gain on sale of
the assets sold to Lernout & Hauspie in April 1998 and the reduction of the
valuation allowance of approximately $4,000,000 related to the Company deeming
that it is more likely than not that certain assets associated with the sale
would be recoverable, and in 1997 by the in-process research and development
charge of $3,600,000 discussed above. Excluding these special items, the
Company's effective tax rate for the three months ended June 30, 1998 and 1997
was 37%.
Excluding the $12,012,000 ($0.77 per share) gain on sale of the assets sold to
Lernout & Hauspie, net loss and loss per share for the quarter ending June 30,
1998 would have been $411,000 and $0.03, respectively. Excluding the 1997
$3,600,000 ($0.25 per share) Level Five Research, Inc. purchased in process
research and development charge and restructuring expenses of $3,684,000, net of
income taxes ($0.26 per share) relating to the Company's Information Products
and certain of the Information Management Tools products, net income and
earnings per share for the quarter ended June 30, 1997 would have been $510,000
and $0.03, respectively.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
Revenues for the six months ended June 30, 1998 decreased $7,797,000, or 20%,
to $31,323,000 compared to $39,120,000 for the six months ended June 30,
1997. On April 23, 1998, the Company sold its linguistic software assets to
Lernout & Hauspie Speech Products N.V. (Lernout & Hauspie) for $19,500,000,
plus an additional amount for certain receivables net of certain liabilities.
Included in the assets transferred to Lernout & Hauspie are all of Inso's
linguistic software products, including its proofing tools, reference works,
and information management tools, the Quest database search technology, and
all customer and supplier agreements related to those products. Excluding the
revenues associated with the assets sold to Lernout & Hauspie, net revenues
increased approximately 19% to $24,345,000 for the six months ended June 30,
1998 compared to $20,496,000 for the six months ended June 30, 1997.
Excluding the revenues associated with the assets sold to Lernout & Hauspie,
revenues from direct and distribution product sales represented over 39% of
the revenue total for the six months ended June 30, 1998 and increased by 15%
over the six months ended June 30, 1997. Additionally, of the total revenues
in 1998, less than 5% were revenues from the acquisitions of ViewPort and
Henderson Software, Inc.
Gross profit decreased $7,695,000, or 23%, from $34,198,000 for the six months
ended June 30, 1997 to $26,503,000 for the six months ended June 30, 1998.
Excluding the gross profit associated with the assets sold to Lernout & Hauspie,
gross profit increased $2,879,000, or 16%, to $20,444,000 for the six months
ended June 30,
15
<PAGE>
1998 from $17,565,000 for the six months ended June 30, 1997. Gross profit as a
percentage of revenues, excluding the gross profit associated with the assets
sold to Lernout & Hauspie, was 84% for the six months ended June 30, 1998
compared to 86% for same period in 1997. The decrease in the gross profit
percentage is due to fulfillment costs increasing at a faster rate than
revenues.
Total operating expenses decreased $9,125,000 to $30,420,000 for the six months
ended June 30, 1998 from $39,545,000 for the six months ended June 30, 1997.
Included in the total operating expenses for the six months ended June 30, 1998
was an acquisition charge of $600,000 for certain purchase technology under
research and development by ViewPort Development AB. Included in total operating
expenses for the six months ended June 30, 1997 were acquisition charges of
$5,400,000 for certain purchased technology under research and development by
Level Five Research, Inc. and Mastersoft products and technologies at the time
of the 1997 acquisitions and restructuring expenses of $5,848,000 relating to
the Company's Information Products and certain of the Information Management
Tools product lines. Excluding the 1998 and 1997 aforementioned special charges
as well as the operating expenses associated with the assets sold to Lernout &
Hauspie, operating expenses increased $4,577,000, or 20%, to $27,257,000 for the
six months ended June 30, 1998 compared to $22,680,000 for the six months ended
June 30, 1997.
Sales and marketing expenses increased $391,000, or 4%, to $10,694,000 for the
six months ended June 30, 1998 from $10,303,000 for the six months ended June
30, 1997. Excluding the sales and marketing expenses associated with the assets
sold to Lernout & Hauspie, sales and marketing expenses increased $441,000, or
5%, for the six months ended June 30, 1998 compared to the six months ended June
30, 1997. The increase is the result of the costs relating to the reorganization
of the sales and marketing departments. Excluding the sales and marketing
expenses associated with the assets sold to Lernout & Hauspie, sales and
marketing expenses were 42% of revenues for the six months ended June 30, 1998
compared to 48% for the six months ended June 30, 1997.
Product development expenses decreased $625,000 from $10,773,000 for the six
months ended June 30, 1997 to $10,148,000 for the six months ended June 30,
1998. Excluding the product development expenses associated with the assets sold
to Lernout & Hauspie, product development costs increased by $2,510,000, or 41%,
for the six months ended June 30, 1998 compared to the six months ended June 30,
1997. The increase is primarily due to lower capitalized costs for the Company
for the six months ended June 30, 1998 as compared to the same period in 1997.
The Company's product development costs, excluding the product development
expenses associated with the assets sold to Lernout & Hauspie, were 35% of
revenues for the six months ended June 30, 1998 compared to 30% of revenues for
the six months ended June 30, 1997.
General and administrative expenses increased $1,757,000 to $8,978,000 for the
six months ended June 30, 1998 compared to $7,221,000 for the six months ended
June 30, 1997. Excluding the administrative expenses associated with the assets
sold to Lernout & Hauspie, general and administrative expenses increased
$1,626,000, or 24%, for the six months ended June 30, 1998 compared to the six
months ended June 30, 1997. The increase in general and administrative expenses
was primarily due to goodwill amortization related to the Company's acquisitions
as well as increases in personnel and facilities costs. General and
administrative expenses, excluding the expenses associated with the assets sold
to Lernout & Hauspie, were 35% of revenues for the six months ended June 30,
1998 compared to 33% for the six months ended June 30, 1997.
The Company's effective tax rate was influenced in 1998 by the $12,012,000 gain
on sale of the assets sold to Lernout & Hauspie in April 1998 and reduction of
valuation allowance of approximately $4,000,000 related to the Company deeming
that it is more likely than not that certain assets associated with the sale
would be recoverable and the 1998 in-process research and development charge of
$600,000 discussed above and in 1997 by the in-process research and development
charge of $5,400,000 as discussed above. Excluding these special items, the
Company's effective tax rate for the six months ended June 30, 1998 was 37% as
compared to 38% for the six months ended June 30, 1997.
16
<PAGE>
Excluding the $12,012,000 ($0.77 per share) gain on sale of the assets sold to
Lernout & Hauspie and the $600,000 ($0.04 per share) write-off related to the
ViewPort Development AB in-process research and development, net loss and loss
per share for the six months ending June 30, 1998 would have been $810,000 and
$0.05, respectively. Excluding the 1997 $3,600,000 ($0.25 per share) Level Five
Research, Inc. purchased in process research and development charge; $1,800,000
($0.13 per share) write-off related to the Mastersoft products and technologies
in-process research and development charge; and restructuring expenses of
$3,684,000, net of income taxes ($0.26 per share) relating to the Company's
Information Products and certain of the Information Management Tools products,
net income and earnings per share for the six months ended June 30, 1997 would
have been $4,819,000 and $0.32, respectively.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities provided cash of $1,673,000 for the six
months ended June 30, 1998 compared to $10,210,000 for the six months ended June
30, 1997. The decreased contribution from operating activities of $8,537,000 was
primarily due to timing of payments on accounts payable, accrued liabilities,
and income taxes in 1998.
The Company's investing activities provided cash of $5,738,000 for the six
months ended June 30, 1998 compared to using cash of $22,975,000 for the six
months ended June 30, 1997. The increase of $28,713,000 was due to the 1998
proceeds of $19,853,000 received from Lernout & Hauspie for sale of the
Company's linguistic software assets; decrease in capitalized product
development costs; and decline in acquisition activity. The investing activity
in 1998 also included the payment of $1,467,000 to the former principal
stockholder of Inso Providence.
The Company's financing activities provided cash of $3,368,000 for the six
months ended June 30, 1998 compared to $948,000 for the six months ended June
30, 1997. The increase of $2,420,000 primarily relates to an increase in the
proceeds received from stock option exercises.
As of June 30, 1998, the Company had working capital of $105,059,000. Total
cash, cash equivalents, and marketable securities at June 30, 1998 were
$96,912,000. 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.
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; 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.
17
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company on May 7,
1998, at which a quorum was present, the stockholders approved
the following proposals by the number of shares of common
stock voted as noted:
Proposal #1 - Election of three Class II directors to serve
until the Company's 2001 Annual Meeting of Stockholders and
until their successors are elected and qualified.
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------
VOTED FOR WITHHELD
---------- --------
<S> <C> <C>
Steven R Vana-Paxhia 12,853,535 604,170
Stephen O. Jaeger 12,864,800 592,905
John Guttag 12,862,068 595,637
</TABLE>
The following directors' terms of office continued after
the Annual Stockholders' Meeting of Stockholders:
Ray Stata
William J. Wisneski
Samuel H. Fuller
Ray Shepard
Joseph A. Baute
J.P. Barger
Joanna T. Lau
Proposal #2 - Approval and ratification of an amendment to the
Company's 1993 Stock Purchase Plan, which would provide that
the number of shares authorized to be issued under the 1993
Stock Purchase Plan, be increased to 450,000 shares.
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C> <C>
For 7,544,996
Against 291,565
Abstain 24,278
No Vote 5,596,866
</TABLE>
Proposal #3 - Approval and ratification of an amendment to the
Company's 1996 Stock Incentive Plan, which would provide that
the number of shares authorized to be issued under the 1996
Stock Incentive Plan, be increased to 5,000,000 shares.
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C> <C>
For 4,918,534
Against 2,911,006
Abstain 29,754
No Vote 5,598,411
</TABLE>
18
<PAGE>
Proposal #4 - Approval and ratification of an amendment to the
Company's 1996 Non-employee Director Plan which would provide
that the number of shares authorized to be issued under the
1996 Non-employee Director Plan be increased to 415,000
shares.
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C> <C>
For 5,389,418
Against 2,911,006
Abstain 31,174
No Vote 5,598,411
</TABLE>
Proposal #5 - Ratification of the selection of Ernst & Young
LLP as independent auditors of the Company for the fiscal year ended
December 31, 1998.
<TABLE>
<CAPTION>
Number of Shares
----------------
<S> <C> <C>
For 13,425,802
Against 13,385
Abstain 18,518
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following are filed as exhibits to this Form 10-Q
Exhibit 27 Restated Financial Data Schedule
(b) Reports on Form 8-K
Registrant filed (1) report on Form 8-K during the quarter ended
June 30, 1998.
(i) Current Report on Form 8-K dated April 23, 1998 reporting the
sale on April 23, 1998 of the linguistic software assets to
Lernout & Hauspie Speech Products N.V. under Item 2 (Acquisition
or Disposition of Assets), which was filed with the Securities
and Exchange Commission on May 7, 1998. The Report also contained
the following proforma financial information under Item 7
(Financial Statements and Exhibits).
19
<PAGE>
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)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF INCOME FILED
AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 29,291
<SECURITIES> 67,621
<RECEIVABLES> 23,955
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 125,324
<PP&E> 6,945
<DEPRECIATION> 0
<TOTAL-ASSETS> 150,461
<CURRENT-LIABILITIES> 20,265
<BONDS> 0
0
0
<COMMON> 149
<OTHER-SE> 130,047
<TOTAL-LIABILITY-AND-EQUITY> 150,461
<SALES> 31,323
<TOTAL-REVENUES> 31,323
<CGS> 0
<TOTAL-COSTS> 4,820
<OTHER-EXPENSES> 30,420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,129
<INCOME-TAX> (473)
<INCOME-CONTINUING> 10,602
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,602
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.70
</TABLE>
