UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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
October 31, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-23384
INSO CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 04-3216243
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
31 St. James Avenue, Boston, MA 02116
(Address of principal executive offices) (Zip Code)
(617) 753 - 6500
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at December 10, 1999
Common Stock 15,824,654
(par value $.01 per share)
INSO CORPORATION
FORM 10-Q INDEX
Page No.
Part I. Financial Information
Item 1. Financial Statements**
Condensed Consolidated Balance Sheets
October 31, 1999 and December 31, 1998
Condensed Consolidated Statements of Operations
Three Months Ended October 31, 1999 and 1998
Condensed Consolidated Statements of Operations
Nine Months Ended October 31, 1999 and 1998
Condensed Consolidated Statements of Cash Flows
Nine Months Ended October 31, 1999 and 1998
Notes to Condensed Consolidated Financial Statements
**The financial statements set forth in Item 1 are unchanged from
Inso Corporation's original filing of its Quarterly Report on
Form 10-Q on December 15, 1999. This Form 10Q/A is
filed to correct an inadvertant ommission in Note 10 to the
unaudited condensed consolidated financial statements, "Operations by
Industry Segment."
<TABLE>
<CAPTION>
INSO CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1999 AND DECEMBER 31, 1998
(Unaudited, in thousands except share and per share amounts)
October 31 December 31
1999 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents 14,840 9,502
Marketable securities 5,395 44,555
Restricted marketable securities 0 6,526
Accounts receivable, net 23,234 27,588
Note Receivable 5,600 0
Prepaid expenses and other current assets 3,309 5,223
----- -----
Total current assets 52,378 93,394
Property and equipment, net 6,808 9,865
Product development costs, net 14,493 21,322
Excess of costs over net assets acquired, net 9,172 19,891
Other intangible assets, net 5,327 10,783
Long-term accounts receivable, net 755 2,901
Licensed technology and advances, net 2,498 2,408
Investment in Information Please LLC 0 2,655
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TOTAL ASSETS 91,431 163,219
------ -------
------ -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 1,860 2,207
Accrued liabilities 12,990 9,771
Accrued salaries, commissions and bonuses 7,799 6,444
Acquisition related liabilities 1,320 16,551
Unearned revenue 13,362 13,542
Royalties payable 769 1,615
Capital leases, current portion 633 987
------ ------
Total current liabilities 38,733 51,117
Unearned revenue, non-current portion 371 2,478
Capital leases, non-current portion 215 450
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued
Common stock, $.01 par value; 50,000,000 shares
authorized; 15,620,897 and 15,506,640 shares issued
at October 31, 1999 and December 31, 1998,
respectively 156 155
Capital in excess of par value 143,160 140,130
Accumulated deficit (90,137) (29,632)
------- -------
53,179 110,653
Unamortized value of restricted shares 0 (116)
Notes receivable from stock purchase agreements (1,009) (1,305)
Treasury stock, at cost, 5,075 shares in
1999 and 1998 (58) (58)
------ --------
Total stockholders' equity 52,112 109,174
------ --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 91,431 163,219
------ -------
------ -------
See accompanying notes to unaudited condensed consolidated financial
statements
</TABLE>
<TABLE>
<CAPTION>
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1999 and 1998
(Unaudited, in thousands except per share amounts)
1999 1998
---- ----
<S> <C> <C>
Revenues:
Product licenses $ 11,802 $ 12,830
Service 7,619 1,871
----- -----
Total revenues 19,421 14,701
Cost of revenues:
Cost of product licenses 2,307 2,145
Cost of service 2,843 688
----- -----
Total cost of revenues 5,150 2,833
----- -----
Gross profit 14,271 11,868
Operating expenses:
Sales and marketing 2,522 5,474
Product development 5,925 4,455
Amortization of intangible assets 1,033 386
General and administrative 4,824 3,263
Restructuring expenses 4,353 0
Special charges 24,256 0
Purchased in-process research and
development 0 7,500
------ -----
Total operating expenses 42,913 21,078
Operating loss (28,642) (9,210)
Non-operating income (expense):
Net investment income 270 1,419
Write-down of investment in
Information Please LLC 0 0
Gain on sale 14,549 0
------ -----
Loss before provision (benefit) for
income taxes (13,823) (7,791)
Provision (benefit) for income taxes 143 (108)
------- ------
Net loss * $ (13,966) $ (7,683)
-------- -------
-------- -------
Basic loss per share $ (0.89) $ (0.50)
------- -------
------- -------
Diluted loss per share $ (0.89) $ (0.50)
------- -------
------- -------
Weighted Average Shares Outstanding:
Basic 15,608 15,350
Diluted 15,608 15,350
* Net loss equals comprehensive loss for each period presented.
See accompanying notes to unaudited condensed consolidated financial
statements.
</TABLE>
<TABLE>
<CAPTION>
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1999 and 1998
(Unaudited, in thousands except per share amounts)
1999 1998
----- -----
<S> <C> <C>
Revenues:
Product licenses $ 31,189 $ 40,252
Service 19,093 4,643
------ ------
Total revenues 50,282 44,895
Cost of revenues:
Cost of product licenses 8,332 5,514
Cost of service 9,200 1,815
----- -----
Total cost of revenues 17,532 7,329
------ -----
Gross profit 32,750 37,566
Operating expenses:
Sales and marketing 18,075 16,093
Product development 20,919 14,174
Amortization of intangible assets 3,523 1,016
General and administrative 16,216 11,545
Restructuring expenses 11,068 0
Special charges 27,693 0
Purchased in-process research and
development 0 8,100
------ ------
Total operating expenses 97,494 50,928
------ ------
Operating loss (64,744) (13,362)
Non-operating income (expense):
Net investment income 1,256 3,630
Write-down of investment in
Information Please LLC (2,655) 0
Gain on sale 14,549 12,012
------ ------
(Loss) income before provision
(benefit) for income taxes (51,594) 2,280
Provision (benefit) for income taxes 220 (601)
------- -----
Net (loss) income * $ (51,814) $ 2,881
------- ------
------- ------
Basic (loss) earnings per share $ (3.33) $ 0.19
------- ----
------- ----
Diluted (loss) earnings per share $ (3.33) $ 0.19
------- ----
------- ----
Weighted Average Shares Outstanding:
Basic 15,569 15,020
Diluted 15,569 15,474
* Net (loss) income equals comprehensive (loss) income for each
period presented.
See accompanying notes to unaudited condensed consolidated
financial statements.
</TABLE>
<TABLE>
<CAPTION>
INSO CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED OCTOBER 31, 1999 and 1998
(Unaudited, in thousands of dollars)
1999 1998
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<S> <C> <C>
Cash flows from (used in) operating activities:
Net income (loss) $ (51,814) $ 2,881
Adjustments to reconcile net income (loss)
to net cash
provided by operating activities:
Depreciation and amortization 12,137 7,215
Purchased in-process research and development 0 8,100
Non-cash restructuring expenses 5,646 0
Non-cash special charges expenses 10,805 0
Write-down of investment in Information Please LLC 2,655 0
Deferred income taxes 0 1,105
Gain on sale (14,549) (12,012)
------ ------
(35,120) 7,289
Changes in operating assets and liabilities:
Accounts receivable 3,383 1,010
Accounts payable and accrued liabilities 1,298 (4,788)
Royalties payable (479) (1,284)
Due to Houghton Mifflin Company 0 (384)
Other assets and liabilities (1,575) (1,412)
------ -------
Net cash (used in) provided by
operating activities (32,493) 431
Cash flows from (used in) investing activities:
Property and equipment expenditures (1,140) (2,999)
Capitalized product development costs (2,535) (3,740)
Acquisitions, net of cash acquired 0 (14,326)
Payments related to 1998 acquisitions (5,440) 0
Net sale of marketable securities 37,704 4,536
Proceeds from the sale of assets 9,000 19,853
------ ------
Net cash provided in investing activities 37,589 3,324
Cash flows from financing activities:
Net proceeds from issuance of common stock 675 9,742
Proceeds from the payment of notes receivable
underlying Stock Purchase Agreements 296 533
Payments under capital lease obligations (744)
------- ------
Net cash provided by financing activities 227 10,275
------ ------
Net increase in cash and cash equivalents 5,323 14,030
Cash and cash equivalents at beginning of period 9,517 8,827
------ ------
Cash and cash equivalents at end of period $ 14,840 $ 22,857
------ ------
------ ------
Supplementary Information:
Note Receivable from the sale of assets $ 5,600
------
------
See accompanying notes to unaudited condensed consolidated financial
statements.
</TABLE>
INSO CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
October 31, 1999
Note 1. Basis of Presentation
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with
generally accepted accounting principles for interim
financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes
required by generally accepted accounting principles for
complete financial statements. All normal and recurring
adjustments that are, in the opinion of management,
necessary for a fair presentation of the results for the
interim periods have been included. Operating results
for the three- and nine-month periods ended October 31,
1999 are not necessarily indicative of the results that
may be expected for the fiscal year ending January 31,
2000.
For further information, refer to the consolidated
financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission for the fiscal year
ended December 31, 1998.
In November 1998, the Board of Directors approved a change
in the Company's fiscal year to February 1 through January
31, effective for the twelve-month period ending January
31, 2000. Through December 31, 1998, the Company reported
results on a calendar year basis. As such, all quarterly
and year to date comparative information has been recast
to reflect the change in the fiscal year-end.
Additionally, refer to the Company's Quarterly Report on
Form 10-Q for the quarter ended April 30, 1999 filed with
the Securities and Exchange Commission for the unaudited
condensed consolidated balance sheet, statement of
operations and cash flows as of and for the one-month
period ended January 31, 1999.
Note 2. Recent Accounting Pronouncements
In 1998, the Accounting Standards Executive Committee of
the American Institute of Certified Public Accountants
issued Statement of Position 98-9 (SOP 98-9) "Modification
of SOP 97-2, Software Revenue Recognition with respect to
Certain Transactions" effective for fiscal years beginning
after March 15, 1999. SOP 98-9 defines vendor-specific
objective evidence of fair value in connection with
software revenue recognition. . The Company does not
believe that the adoption of this standard will have a
material impact on its financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board
issued Statement of Accounting Standards No. 133, as
amended by Statement of Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging
Activities" (collectively SFAS 133) effective for fiscal
years beginning after June 15, 2000. SFAS 133 provides a
comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities.
The Company does not believe that the adoption of this
standard will have a material impact on its financial
position or results of operations.
Note 3. Earnings Per Share
Basic earnings (loss) per share is calculated based on the
weighted average number of common shares outstanding.
Diluted earnings per share includes the effect of dilutive
stock options representing 454,000 shares for the nine
months ended October 31, 1998. Options and warrants to
purchase shares of common stock, for the three months ended
October 31, 1999 and 1998 and for the nine months ended October 31,
1999, were not included in the computation of diluted loss
per share because the effect would be antidilutive.
Note 4. Commitments and Contingencies
During February 1999, certain putative class action
lawsuits were filed against the Company and certain of its
officers and employees by purported representatives of a
class of the Company's current and former stockholders in
the U.S. District Court for the District of Massachusetts,
claiming violations of the Federal securities laws based
on alleged misrepresentations regarding the Company's
anticipated revenues and earnings and interim financial
statements for the first three quarters of fiscal 1998.
The lawsuits were filed following the Company's
announcement on February 1, 1999 that it planned to
restate its previously reported revenues for the first
three quarters of 1998. The lawsuits seek unspecified
damages. The Company believes that the claims are subject
to meritorious defenses, they which plan to assert during
the lawsuit. On April 5, 1999, the seven class action
lawsuits that were filed against the Company were
consolidated into one lawsuit. On September 29, 1999 the
Company entered into an insurance agreement with a major
AAA-rated insurance carrier pursuant to which the
insurance carrier assumed complete financial responsibly
for the defense and ultimate resolution of the securities
class action suit. A charge to the Company's current year
fiscal consolidated third quarter results of $13,451,000
was taken in connection with the insurance agreement. The
charge is included in special charges in the accompanying
statement of operations.
The Company entered into a distribution agreement in the
fourth quarter of calendar year 1998 with an international
reseller that provided the reseller with guaranteed levels
of net cash receipts, as defined by the agreement, for
specified geographic areas (primarily Australia, New
Zealand, and certain countries in the Far East), of
$2,000,000 for each calendar year ended December 31, 1999
and 2000. At December 31, 1998, the Company recorded a
charge of $4,000,000, as management did not believe that
the reseller would be able to achieve the defined level of
net receipts from the agreement territory in either year.
The Company had outstanding irrevocable stand-by letters
of credit with terms of one to two years totaling
$4,004,000 to support this guarantee. The Company also
had restricted marketable securities totaling $6,526,000
supporting the letters of credit.
On September 14, 1999, the Company negotiated a release of
the outstanding commitments with the international
reseller whereby the Company paid the international
reseller $606,000 from available cash and cancelled the
distribution agreement. Additionally, the stand-by
letters of credit were terminated thus allowing the
restriction on the marketable securities to be lifted.
Furthermore, as a result of the release, the Company took
a credit to sales and marketing expenses in the third
fiscal quarter of the current year of approximately
$3,093,000 for expenses that were recorded in the prior
fiscal year. Finally, a separate cash payment of
approximately $3,000,000 paid to the Company in January
1999 under a cancelled purchase order was repaid to the
international reseller at the time of execution of the
release of the 1998 distribution arrangement.
On June 2, 1999, the Company was informed that the United
States Securities and Exchange Commission issued a Formal
Order of Private Investigation in connection with matters
relating to the Company's previously announced restatement
of its 1998 financial results. The Company is cooperating
with the Securities and Exchange Commission. The Company
cannot predict the ultimate resolution of this action at
this time, and there can be no assurance that the
investigation will not have a material adverse impact on
the Company's financial condition and results of
operations. While it is not feasible to predict the total
costs, the Company expects to incur further professional
fees with respect to the Formal Order of Private
Investigation.
On June 9, 1999, the bankruptcy estates of Microlytics,
Inc. and Microlytics Technology Co., Inc. (together
"Microlytics") filed an adversary proceeding against the
Company in the United States Bankruptcy Court for the
Western District of New York. The complaint seeks
turnover of purported property of the estates and damages
for the Company's alleged breaches of a license from
Microlytics relating to certain computer software
databases and other information. The complaint seeks
damages of at least $11,750,000. On August 19, 1999, the
Company filed a motion to withdraw the case from the
Bankruptcy Court to the United States District Court for
the Western District of New York. The motion is pending.
Also, on August 19, 1999, the Company filed its Answer and
Demand for Jury Trial. The Company believes that the
claims are subject to meritorious defenses, which it plans
to assert during the lawsuit. The Company cannot predict
the ultimate resolution of this action at this time.
Note 5. Acquisitions
AIS Software S.A.
On January 12, 1999, the Company acquired AIS Software
S.A. ("AIS Software") from Berger-Levrault S.A., a French
publisher, for approximately $3,000,000 using available
cash. AIS Software, based in Paris, France is the
developer of Balise, an SGML and XML transformation tool
and scripting language, as well as Dual Prism, a Web-based
XML and SGML publishing system. AIS Software operates as
part of the Company's Product Data Management Division
(see Note 6). The transaction was accounted for as a
purchase and has been included in the consolidated
financial statements since the date of acquisition. The
purchase price has been allocated on a basis of the
estimated fair market value of the assets acquired and the
liabilities assumed. The acquisition included the
purchase of certain technology under research and
development, which resulted in a charge to the Company's
consolidated results for the one-month period ended
January 31, 1999 of $500,000, or $0.03 per share.
Intangible assets totaling $2,700,000 were recorded at the
time of the acquisition and are being amortized on a
straight-line basis over their estimated useful lives,
ranging from two to five years.
Venture Labs, Inc.
On December 22, 1998, the Company acquired all of the
outstanding stock of privately held Venture Labs Inc. and
its subsidiary Paradigm Development Corporation
(collectively "Paradigm") for a total value of $4,800,000.
Paradigm is the developer of Java file filtering and
viewing technology for both OEM and direct corporate use.
Paradigm operates as part of the Company's Information
Exchange Division. In connection with the acquisition,
the Company paid $4,300,000 in December 1998 using
available cash and assumed certain liabilities. The
transaction was accounted for as a purchase and included
the purchase of certain technology under research and
development, which resulted in a charge to the Company's
fiscal 1998 consolidated fourth quarter results of
$1,800,000. Intangible assets totaling $1,594,000 were
recorded for the acquisition as well as noncompetition
agreements with key executives for a total value of
$1,500,000.
Sherpa Systems Corporation
In December 1998, the Company acquired all of the
outstanding stock of privately held Sherpa Systems
Corporation ("Sherpa"). Sherpa is a provider of product
data management solutions that manage mission-critical
information through the product lifecycle process of
design, testing, manufacturing, and delivery. Sherpa
operates as part of the Company's Product Data Management
Division (see note 6). The total consideration paid at
the time of the acquisition was $36,000,000, consisting of
$28,700,000 of cash and warrants ("Original Warrants") to
purchase 1,456,458 shares of the Company's common stock.
The Original Warrants, at the time of the acquisition,
were valued at $5.00 per warrant, or $7,282,000. The
Original Warrants had a 24-month term and the right to
purchase shares of the Company's common stock at an
exercise price of $23.50 per share.
Subsequent to the Company's announcement on February 1,
1999 of its intention to restate its financial results
(see note 4), the Company began discussions with the
warrant holders to reprice the Original Warrants or
exchange them for cash with the objective of meeting the
intention under the original agreement. On June 22, 1999,
the Company entered into an agreement with the holders of
the Original Warrants that provided, among other things,
a) for the cancellation of all of the Original Warrants
held by such holders, b) the issuance to such holders of
new warrants to purchase their proportionate share of
1,000,000 shares of the Company's Common stock with a 36-
month term and an exercise price of $10.00 per share and
c) the payment to such holders of their proportionate
share of $3,000,000 in cash. The new warrants were valued
at $2.01 per warrant. As a result of the agreement, the
value of the consideration paid by the Company for the
Sherpa acquisition was reduced by approximately $2,100,000
with such amount recorded as a reduction to goodwill.
The acquisition also included estimated costs of
approximately $5,800,000 for direct transaction costs and
costs relating to the elimination of excess and
duplicative activities as a result of the merger. As of
October 31, 1999, approximately $160,000 for such costs
remained in the accrual. Since December 31, 1998,
payments against the accrual consisted of the following:
approximately $1,530,000 for employee severance for
elimination of duplicate functions and closure of
duplicate and excess operations; approximately $400,000
for professional fees consisting principally of appraisal,
legal, and accounting fees; and other out-of-pocket
expenses related to the acquisition. Employee
terminations were essentially in the areas of sales,
marketing and administrative functions. Additionally, at
October 31, 1999, the Company reevaluated the estimated
severance and other costs relating to the elimination of
excess and duplicative activities as well as costs
associated with certain contractual obligations which
existed at the time of the acquisition and reduced the
related accrual and goodwill by approximately $3,710,000.
The majority of the payments relating to the remaining
accrual are expected to be made prior to January 31, 2000.
The acquisition of Sherpa was accounted for as a purchase
and the results of operations of Sherpa have been included
in the consolidated financial statements since December 4,
1998. The purchase price has been allocated on a
preliminary basis (until the final closing adjustments
under the original agreement are resolved with the
sellers) based upon the estimated fair value of the assets
acquired and the liabilities assumed at December 4, 1998.
The acquisition included the purchase of certain
technology under research and development, which resulted
in a charge to the Company's fiscal 1998 consolidated
fourth quarter results of $12,000,000. At the time of the
acquisition, the Company also caused Sherpa to enter into
employment and noncompetition agreements with key
executives totaling $1,597,000. The Company expects to
make remaining aggregate payments of approximately
$1,000,000 over the next two years under those agreements.
Additionally, other intangible assets and capitalized
software totaling $25,200,000 were recorded in connection
with the acquisition after consideration of adjustments
noted above.
MediaBank
On August 28, 1998, the Company acquired the intellectual
property and certain other assets of Bitstream Inc.'s
MediaBank media asset management system and related
technologies for $11,900,000 using available cash.
MediaBank operates as part of the Company's eBusiness
Technologies Division. The transaction was accounted for
as a purchase and included the purchase of certain
technology under research and development, which resulted
in a charge the Company's fiscal 1998 consolidated third
quarter results of $7,500,000. Intangible assets totaling
$4,460,000 were recorded at the time of the acquisition.
ViewPort Development AB
On March 12, 1998, the Company acquired all of the
outstanding capital stock of privately held ViewPort
Development AB for $2,500,000 using available cash.
ViewPort Development AB operated as part of the Company's
Product Data Management Division prior to its sale to
Enigma Information System Ltd. on October 29, 1999 (see
Note 8) The transaction was accounted for as a purchase
and included the purchase of certain technology under
research and development, which resulted in a charge to
the Company's fiscal 1998 consolidated first quarter
results of $600,000.
Unaudited pro forma net revenues, net loss and net loss
per share shown below for the nine months ended October
31, 1998 assumes the acquisition of AIS Software S.A.,
Venture Labs, Inc., Sherpa Systems Corporation and
ViewPort Development AB occurred on February 1, 1998.
Therefore, the nine months ended October 31, 1998,
presented below, includes the write-off of certain
purchased technology under research and development of
$500,000 relating to the acquisition of AIS Software S.A.,
$1,800,000 relating to the acquisition of Venture Labs,
Inc. and $12,000,000 relating to the acquisition of Sherpa
Systems Corporation.
<TABLE>
<CAPTION>
Nine months ended
October 31, 1998
----------------
<S> <C>
Net revenues $ 78,090,000
Net loss $ (23,048,000)
Diluted loss per share $ (1.53)
</TABLE>
Note 6. Restructuring Expenses
In October 1999, the Company adopted a plan of
restructuring aimed at reducing current operating costs at
the Company's Product Data Management ("PDM") division,
while retaining its technical assets and customer service
and support infrastructure. The Company's Board of Directors
also authorized management to pursue the potential sale
of the PDM Division. The restructuring plan
included a PDM workforce reduction of approximately 40%,
the consolidation of the PDM division's sales, service and
support organizations, the consolidation of PDM
development facilities and the abandonment of leasehold
improvements and support assets associated with these
locations. The plan also calls for a change in focus away
from certain development activities. Therefore, the
charge includes a write-down of licensed technology for
discontinued development activities to their estimated
future cash flows. As a result of the restructuring plan,
the Company recorded a charge of $4,290,000 to the current
year third fiscal quarter's results. The charge included
approximately $1,000,000 of severance for employees in
administrative, sales and development positions; $918,000
for the consolidation of sales, service and support
organizations and development facilities; and
$2,372,000 for write-down of licensed technology for
discontinued development activities and the write-off of
leasehold improvements and support assets associated with
closed locations. As of October 31, 1999, approximately
$1,920,000 remained in accrued liabilities relating to
this restructuring charge.
In July 1999, the Company adopted a plan of restructuring
aimed at reducing current operating costs, as well as
supporting the Company's new divisional structure. The
Company's restructuring plan included a reduction of more
than 20% from staff levels at the end of fiscal year 1998,
the closure and/or combination of domestic and
international sales and administrative facilities and the
abandonment of leasehold improvements and support assets
associated with these locations. The plan also called for
a change in focus away from certain products. As a result
of the restructuring plan, the Company recorded a charge
of $6,234,000 to the second fiscal quarter's results. The
charge included approximately $2,000,000 of severance for
employees in administrative, sales and development
positions; $960,000 for the closure and/or combination of
domestic and international sales and administrative
facilities; and $3,274,000 for write-down of capitalized
product development costs and intangibles for certain
discontinued products and the write-off of leasehold
improvements and support assets associated with closed
locations. The capitalized product development costs and
intangibles were written-down to their estimated future
cash flows. As of October 31, 1999, approximately
$800,000 remained in accrued liabilities relating to this
restructuring charge.
In connection with the Company's July 1999 restructuring
plan, the Company incurred in the third fiscal quarter of
the current year approximately $65,000 of restructuring
charges for relocation costs as a result of the
combination of certain sales and administrative offices.
In addition to the above, the Company incurred
approximately $500,000 in the first fiscal quarter
relating to the closure of the Company's Kansas City
location, primarily for severance for terminated
employees.
Note 7. Special Charges
For the nine months ended October 31, 1999, the Company
has incurred $27,693,000 of special charges. Of the total
amount incurred, approximately $1,117,000 related to
professional fees incurred in connection with the
Company's investigation and restatement of its 1998
financial results, lawsuits and the Securities and
Exchange Commission investigation, approximately
$10,805,000 related to the write-down of intangible assets
and capitalized software costs, substantially all
attributable to the Company's PDM division to their
estimated future cash flows, approximately $13,451,000
related to the net premium costs for a major insurance
carrier to assume financial risk associated with the class
action litigation initiated against the Company in
February 1999 (see note 4) and approximately $2,320,000
related to severance and other costs incurred for certain
executive, management, and other staff terminations.
Note 8. Dispositions
On October 29, 1999, the Company sold its DynaText/DynaWeb
stand-alone technical document publishing component of its
PDM Division, along with its ViewPort browser technology
assets, for $14,750,000. The purchase was in the form of
a stock purchase by Enigma Information System Ltd. and its
subsidiary, Enigma Information Retrieval Systems, Inc.,
(collectively "Enigma") of all of the outstanding stock of
Inso Providence Corporation and ViewPort Development AB of
Stockholm, Sweden. The purchase price was paid $9,000,000
in cash and $5,600,000 in the form of a promissory note,
due and payable by April 30, 2000. The final payment of
the note is subject to final closing adjustments allowed
under the original agreement with Enigma. The promissory
note bears interest as follows: (i) if the promissory note
is paid by December 15, 1999, no interest shall be due or
payable, (ii) if the promissory note is paid after
December 15, 1999 but prior to January 31, 2000, interest
is at a rate of 6.5% per annum accrued from October 29,
1999 until the date on which the final payment is paid,
and (iii) if the promissory note is paid after January 31,
2000, interest at a rate of 6.5% per annum accrued from
October 29, 1999 through and until January 31, 2000 and
13.0% per annum accrued from February 1, 2000 through and
until the date on which the final payment is paid. The
promissory note is secured by a Stock Pledge Agreement of
the stock of Inso Providence Corporation. In connection
with the disposition, the Company retained the accounts
receivable directly associated with the DynaText/DynaWeb
and ViewPort browser technologies. Additionally, the
Company recorded direct transaction costs; costs to write-
off capitalized software and other assets; and other
accruals for costs directly associated with the sale. As
a result, the Company reported in the fiscal quarter ended
October 31, 1999 a gain of $14,549,000. The transaction
created a capital loss for federal tax purposes, which
will be carried forward to future periods.
On April 23, 1998, the Company sold its linguistic
software assets to Lernout & Hauspie Speech Products N.V.
("Lernout & Hauspie") for $19,500,000, plus an additional
amount for certain receivables net of certain liabilities.
Lernout & Hauspie paid the purchase price 50% in cash and
50% in the form of a note that was converted into shares
of Lernout & Hauspie common stock in June 1998. The
Company sold the Lernout & Hauspie common stock in June
1998. Lernout & Hauspie paid for the other net assets in
cash. Included in the assets transferred to Lernout &
Hauspie were all of the Company's linguistic software
products, including its proofing tools, reference works,
and information management tools, the Quest database
search technology, and all customer and supplier
agreements related to those products. In connection with
the sale, the Company recorded direct transaction costs;
costs to write-off capitalized software and other assets;
estimated lease and facility costs; and other accruals for
costs directly associated with the sale. As a result, the
Company reported in the fiscal quarter ended April 30,
1998, a gain of $12,012,000. In addition, the Company's
valuation allowance on its deferred tax assets was reduced
by approximately $4,000,000 in the three months ended
April 30, 1998 as management deemed that it is more likely
than not that these assets would be realized.
Note 9. Other
The Company determined that the value of its investment in
Information Please LLC was impaired. This assessment was
based on the Company's review of Information Please LLC's
operating results and business plan and the Company's
anticipated future cash flows from its investment.
Accordingly, the investment was written down to its net
realizable value resulting in a charge of $2,655,000 in
the Company's second fiscal quarter.
Note 10. Operations by Industry Segment
The Company has three operating segments: Product Data
Management ("PDM"), eBusiness Technologies ("EBT"), and
Information Exchange ("IED"). A fourth operating segment,
Lexical and Linguistic, was sold to Lernout & Hauspie
Speech Products N.V. in April 1998 (see Note 11 below). On
April 29, 1999, the Company announced implementation of a
new division structure, which was implemented in the
second fiscal quarter. As such, all prior period segment
data has been recast to reflect the new division structure.
Each of the identified operating segments disclosed represent
the divisions for which the Company manages.
The PDM segment information below for all periods presented
includes the operations of the DynaText/DynaWeb and ViewPort
browser technologies sold to Enigma on October 29, 1999 (see
note 8 above). Additionally, on October 28, 1999, the
Company's Board of Directors authorized management to pursue
the potential sale of PDM Division (see note 6 above).
Each segment's profit and loss for the three and nine
months ended October 31, 1999, reflects all income and
losses except for the items shown in the reconciliation
information below. The accounting policies of the
reportable segments are the same as those described in the
summary of significant accounting policies in the
Company's Annual Report on Form 10-K.
<TABLE>
Three months ended October 31, 1999
- -----------------------------------
Lexical
(In thousands and
of dollars) EBT IED PDM Linguistic Totals
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
Revenues from
external customers $4,428 $6,021 $8,972 $0 $19,421
Segment profit (loss) (2,243) 1,704 (271) 0 (810)
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
Three months ended October 31, 1998
- -----------------------------------
Lexical
(In thousands and
of dollars) EBT IED PDM Linguistic Totals
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------
Revenues from
external customer $3,867 $7,999 $2,835 $0 $14,701
Segment profit (loss) 276 2,741 (1,515) 0 1,502
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
Reconciliation Information
Profit or loss Three months ended
- -------------- ------------------
(In thousands of dollars) 1999 1998
<S> <C> <C>
- ------------------------------------------------------------------------
Total external profit (loss) for
reportable segments $ (810) $ 1,502
Special charges (24,256) -
Credit for termination of
international distributor agreement 3,093 -
Restructuring expenses (4,353) -
Net investment income 270 1,419
Gain on sale 14,549 -
Purchased in-process research and development - (7,500)
Unallocated corporate and other expenses (2,316) (3,212)
------ ------
Consolidated loss before provision (benefit) for
income taxes $(13,823) $ (7,791)
------- ------
------- ------
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
Nine months ended October 31, 1999
- ----------------------------------
Lexical
(In thousands and
of dollars) EBT IED PDM Linguistic Totals
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------
Revenues from
external customers $7,953 $19,131 $23,198 $0 $50,282
Segment profit (loss) (13,585) 5,008 (8,836) 0 (17,413)
Segment assets 20,662 42,598 36,249 0 99,509
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
Nine months ended October 31, 1998
- ----------------------------------
Lexical
(In thousands and
of dollars) EBT IED PDM Linguistic Totals
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------
Revenues from
external customers $7,006 $22,497 $9,141 $6,251 $44,895
Segment profit (loss) (1,439) 7,517 (3,818) 3,701 5,961
Segment assets 6,859 48,229 12,016 0 67,104
- --------------------------------------------------------------------------
</TABLE>
<TABLE>
Reconciliation Information
Profit or loss Nine months ended
- -------------- -----------------
(In thousands of dollars) 1999 1998
<S> <C> <C>
- ----------------------------------------------------------------------
Total external profit (loss) for
reportable segments $ (17,413) $ 5,961
Purchased in-process research and
development - (8,100)
Special charges (27,693) -
Credit for termination of international
distributor agreement 3,093 -
Restructuring expenses (11,068) -
Net investment income 1,256 3,630
Write down of investment in Information
Please LLC (2,655) -
Gain on sale of assets 14,549 12,012
Unallocated corporate and other expenses (11,663) (11,223)
------- -------
Consolidated (loss) income before
provision (benefit) for income taxes $ (51,594) $ 2,280
------- -------
------- -------
- -----------------------------------------------------------------------
</TABLE>
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
Date: January 12, 2000 /s/ Robert F. Dudley
---------------------
Robert F. Dudley
Vice President and Chief Financial Officer
