-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EARpBNf/TS/3oCpDe9uPM3LJQG7pNFh4ot9THSg2S3zyFfSEG9tT4UHMmrkjI4qd bcLtxtfm2lDNQM6xcye66Q== 0001047469-99-012912.txt : 19990402 0001047469-99-012912.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012912 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSO CORP CENTRAL INDEX KEY: 0000917471 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 043216243 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 000-23384 FILM NUMBER: 99582444 BUSINESS ADDRESS: STREET 1: 31 ST JAMES ST, 11TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 BUSINESS PHONE: 6177536500 MAIL ADDRESS: STREET 1: 31 ST JAMES STREET, 11TH FLOOR CITY: BOSTON STATE: MA ZIP: 02116 FORMER COMPANY: FORMER CONFORMED NAME: INFOSOFT INTERNATIONAL INC DATE OF NAME CHANGE: 19940112 10-Q/A 1 FORM 10-Q/A 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 ------------------------------------------------- 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 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 MAY 12, 1998 - --------------------------------------- ------------------------------------ Common Stock (par value $.01 per share) 14,889,141 1 of 16 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 INSO CORPORATION FORM 10-Q INDEX
PAGE NO. -------- 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
3 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)
March 31 December 31 1998 1997 ------------ ----------- ASSETS (Restated) 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 ------------ ----------- TOTAL ASSETS $ 136,181 $ 138,083 ------------ ----------- ------------ ----------- 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 ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 136,181 $ 138,083 ------------ ----------- ------------ -----------
See accompanying notes to unaudited condensed consolidated financial statements. 4 INSO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
1998 1997 ------------ ----------- (Restated) 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 ------------ ----------- Total operating expenses 16,177 13,101 ------------ ----------- Operating income (loss) (2,150) 3,985 Net investment income 917 1,082 ------------ ----------- Income (loss) before provision for income taxes (1,233) 5,067 Provision (benefit) for income taxes (234) 2,559 ------------ ----------- Net income (loss) $ (999) $ 2,508 ------------ ----------- ------------ ----------- Basic earnings (loss) per share $ (0.07) $ 0.18 ------------ ----------- ------------ ----------- Diluted earnings (loss) per share $ (0.07) $ 0.17 ------------ ----------- ------------ ----------- Weighted Average Shares Outstanding: Basic 14,701 14,313 Diluted 14,701 14,831
See accompanying notes to unaudited condensed consolidated financial statements. 5 INSO CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED, IN THOUSANDS OF DOLLARS)
1998 1997 ------------ ----------- (Restated) 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 ------------ ----------- Net cash provided by financing activities 1,020 630 ------------ ----------- Net decrease in cash and cash equivalents (13,081) (4,267) Cash and cash equivalents at beginning of period 18,512 34,280 ------------ ----------- Cash and cash equivalents at end of period $ 5,431 $ 30,013 ------------ ----------- ------------ -----------
See accompanying notes to unaudited condensed consolidated financial statements. 6 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
For the three months ended March 31, 1998 STATEMENT OF OPERATIONS DATA: (As reported) (Restated) - ------------------------------------------------------------------------------- (in thousands, expect per share amounts) 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) --------- --------- --------- --------- AS OF MARCH 31, 1998 BALANCE SHEET DATA: (As reported) (Restated) - ------------------------------------------------------------------------------- (in thousands) 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
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 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.
For the three months ended March 31, 1998 1997 -------------------- (Restated) 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 ------ ------ ------ ------
9 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 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.
Three months ended Three months ended March 31, 1998 March 31, 1997 -------------- -------------- (Restated) (Restated) Net revenues $16,927,000 $19,767,000 Net loss $(1,059,000) $(2,724,000) Net loss per share $ (0.07) $ (0.19)
11 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 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 $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 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 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 EX-27 2 EXHIBIT 27
5 THIS 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. 1 3-MOS DEC-31-1998 MAR-31-1998 5,431 67,084 27,835 0 0 103,758 8,081 0 136,181 20,536 0 0 0 147 115,498 136,181 16,810 16,810 0 2,783 16,177 0 0 (1,233) (234) (999) 0 0 0 (999) (0.07) (0.07)
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