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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended: January 31, 2001
Commission File Number: 000-23384
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eBT International, Inc.
(Exact name of registrant as specified in its charter)
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Delaware 04-3216243
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
299 Promenade St., Providence, RI
(Address of principal executive offices)
02908
(Zip code)
(401) 752-4400
(Registrant's telephone number, including area code)
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Securities Registered Pursuant to Section 12(g) of the Act: None
Common Stock, par value $.01 per share
(Title of class)
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
Class Outstanding at April 23, 2001
Common Stock (par value $.01 per 14,726,758
share)
As of April 23, 2001, the aggregate market value of common stock held by
non-affiliates of the registrant was $26,716,115.
Documents Incorporated by Reference
Portions of the Registrant's Definitive Proxy Statement for the 2001 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange
Commission, are incorporated by reference into Part III.
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Dear Fellow Shareholder:
Fiscal year 2001 marked a year of rapid and positive change for our company.
Last August, a new corporate name, eBT International, Inc., supplanted that of
our predecessor, Inso Corporation, and mirrors the continued evolution of the
company squarely into the e-business and e-commerce arena.
Preparatory to the name change, we arranged for the disposition of the
Company's non-core assets and sold our Information Exchange division. Now,
significantly reduced in size and complexity, the resultant organization is
highly focused, technically nimble, and well positioned to capitalize on new
opportunities in the burgeoning Web content management market.
Also during the year, we significantly enhanced our product line with the
launch of engenda and entrepid, initial offerings of a new breed of XML-based
Web content management technology built upon our core Web publishing platform,
DynaBase.
Conceived as future-proof, enterprise-wide solutions strategic to the long-
term success of corporate customers, these new product lines deliver the
innovative and powerful tools needed to develop, manage and extend large Web
presences and essential e-business applications.
And, to help us bring our new products and services to the global marketplace
more effectively, we have expanded our worldwide sales and support network
with new offices and staff in California, Illinois, New York in the United
States and in Reading in the United Kingdom.
The newly streamlined corporate structure of eBT with its potent blending of
superior technology and sharply focused business objectives ultimately has the
following purposes:
. To increase our market penetration significantly,
. To improve our product offerings continually, and
. To grow revenue as we move toward profitability.
We remain committed to achieving these goals during the coming year.
In conclusion, and on behalf of the entire management team at eBT, thank you
for your support throughout the past year. We look forward to working with you
in the future.
Sincerely,
/s/ James Ringrose
James Ringrose
President & CEO
Form 10-K
This report contains forward-looking statements. For this purpose, any
statements contained herein that are not statements of historical fact may be
deemed to be forward-looking statements. Without limiting the foregoing, the
words "believes," "anticipates," "plans," "expects," and similar expressions
are intended to identify forward-looking statements. There are a number of
factors of which we are aware that may cause our actual results to vary
materially from those forecasted or projected in any such forward-looking
statement. Please see "Risk Factors that May Affect Future Operating Results"
for a discussion of certain, but not necessarily all, of the factors that we
believe could cause our actual operating results to be materially less than
those forecasted or projected in any forward-looking statement.
Part I
Item 1. Business
eBT International, Inc. ("eBT", "we" or "Company") and its wholly owned
subsidiaries develop and market enterprise-wide Web content management
software solutions and associated services. Our solutions help organizations
meet the ongoing challenge of efficiently gathering and managing all
information destined for Internet, intranet and extranet use. Until August 28,
2000, the Company operated under the name Inso Corporation. During the first
half of fiscal 2001, Inso was comprised of two operating divisions: eBusiness
Technologies and the Information Exchange division ("IED"). The eBusiness
Technologies division was comprised of Web content management technologies and
related services. IED was comprised of technologies that enabled users to
filter, view, copy, print and distribute electronic information over LANs,
WANs and the Web, regardless of format or structure. During the early part of
fiscal year 2001, we decided to focus all of our resources on opportunities in
the Web content management market that the eBusiness Technologies division
served, and determined that eBT's value would be most enhanced by divestiture
of IED. In periods prior to fiscal 2001, Inso had operated in two additional
segments, which were divested in 1998 and 2000 and are more fully described
below.
On July 10, 2000, in accordance with the plan announced in April 2000, we
sold IED, completing the sale of what we had previously determined to be our
non-core assets, and streamlining our operations to consist solely of our
eBusiness Technologies division. On August 28, 2000, we changed our name to
eBT International, Inc. and our Nasdaq ticker symbol to EBTI, to more closely
reflect the concentration of our resources exclusively on the Web content
management market that we now serve.
On January 31, 2001, the Company adopted a plan of restructuring aimed at
reducing current operating cost. In connection with this plan, 19 non-
management employees, primarily development and administrative positions, and
one executive level employee, were terminated. As a result of this plan, we
recorded a charge of $539,000 for severance costs in the fourth quarter of
fiscal 2001. To support eBT's growing global presence, we opened satellite
offices in San Bruno, California; Chicago, Illinois; New York, New York; and
Reading, UK in fiscal year 2001.
eBT Products and Services
eBT supplies solutions that are designed to help organizations automate the
creation, management and publication of their Web content by satisfying three
business objectives: time-to-market, integration and ease of use. Our product
set includes our DynaBase Dynamic Web Publishing system, our engenda Web
Content Management and Workflow Automation solution, our entrepid Content
Management system for Oracle environments, and related technologies. During
fiscal year 2001, we also marketed our MediaBank Media Asset Management
system, which we divested of in June 2000. Our MediaBank product offered the
media asset management market a solution to help enable workgroup
productivity, workflow and object management for a wide range of pre-
production media elements including text, document images, movies, graphics,
sounds and fonts.
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As our products have matured, we have migrated from solutions geared to
technical users to those designed for business users. Our latest products
feature an easy-to-use interface and support for design and authoring tools to
enable every user in an organization to contribute to and manage Web content,
eliminating the bottlenecks that arise when a company uses one Web master to
manage content. Co-workers collaborate on projects by accessing our solutions
from anywhere, any time, through a Web browser and email. Content is
automatically routed through the approval chain based on an organization's
current business processes. The result is a convenient system for publishing
timely, accurate information.
All of our products support multiple W3C (World Wide Web Consortium)
recommendations and other industry standards to make them well suited to work
in concert with other software solutions, such as e-commerce engines,
applications servers, access control solutions and middleware. Our open
solutions enable the integration that customers require to build a cohesive,
complete e-business solution that maximizes the viability of an organization's
Web infrastructure.
DynaBase(R), the industry's first integrated XML-based Web publishing
solution, combines sophisticated content management capabilities with a
powerful dynamic serving environment. DynaBase automates the production of
content for, and enables personalized delivery of content to, the Internet as
well as intranet, extranet and wireless networks and devices.
engenda(TM) is an XML-based content management and workflow automation
solution based on DynaBase technology. An open, standards-based solution,
engenda integrates with existing data communications infrastructures and e-
business/e-commerce application servers for rapid deployment and easy
operation.
Designed to meet the needs of the growing number of customers who use Oracle
as their e-business platform, entrepid(TM) is a sophisticated content
management and workflow solution created to provide increased scalability and
extensibility.
We also provide a full range of technical consulting, training and support
through our Professional Services Organization. Our professional services are
designed to fit our customers' needs, from simple product installation through
full project ownership. Our offerings are designed to help organizations
define their content management needs effectively, deploy our solutions
quickly and sustain their B2B and B2C activities profitably.
We sell our products primarily through direct and reseller channels focused
on medium to large-sized organizations. Our ultimate customers are corporate
end users in a broad range of industries. We typically sell our services in
conjunction with the license of our software products.
Research and Development
Technology changes rapidly in the content management industry, and eBT's
ability to compete and operate successfully depends on, among other factors,
its ability to anticipate such change. In addition, eBT relies upon the rapid
development of products that support standards such as XML to differentiate
itself. Accordingly, we are committed to the development of new products, to
the continuing evaluation of new technologies, and to participating in
standard setting. During fiscal year 2001, eBT made significant investments in
research and development of new products, including engenda and entrepid. The
rapid changes that characterize these markets may require that we make
substantial additional investments in research and development in order to
respond to market or technological developments. We expect to make significant
investments in fiscal year 2002 in our products. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Intellectual Property Rights
eBT registers patents, copyrights and trademarks to certain of its products
on an ongoing basis. However, we believe that, in general, patents,
copyrights, trademarks and similar intellectual property rights are less
important to the ability of eBT to compete successfully in its markets than is
the age of the technology and the
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know-how and ability of its development personnel. Certain of our eBT
technologies include database technology from third parties, which we license
pursuant to royalty-free licenses expiring in 2003.
Competition
The market for content management solutions is comprised of a large number
of participants offering full or partial solutions, based on both proprietary
formats and open standards-based formats. Participants in this market include
Vignette Corporation, Interwoven, Inc., Documentum, Inc., and Open Market,
Inc. Many of these competitors have substantially greater development,
marketing, sales and financial resources than eBT. As the market for e-
business solutions continues to grow and consolidate, we expect to face
additional competition from both new entrants as well as existing companies in
the e-commerce market that are seeking to expand their product offerings. We
also face limited competition from specialized providers offering to develop
custom solutions. We believe that the principal competitive factors in this
market are product quality, scalability, ease of use, functionality,
interoperability, adherence to emerging industry standards, including XML, and
completeness of solution, with price being a secondary factor.
Information Exchange Products
IED, which we owned through July 10, 2000, provided comprehensive
information access solutions for delivering business information in both
connected and mobile computing environments. Our IED products included the
Quick View Plus(R) enterprise viewing product, the Outside In(R) OEM Viewing
Technology, the Outside In(R) HTML Export OEM product and the Outside In(R)
Server HTML on-demand conversion product. Quick View Plus(R) provided
businesses and consumers with the ability to view, copy and print files
originating in more than 250 applications and in disparate operating system
environments. Outside In(R) Server automatically created customized Web pages
from standard business documents. Our Outside In(R) Viewing Technology and
HTML Export OEM products provided file viewing and Web delivery functionality
to software vendors and corporate software developers. Outside In(R) OEM
Viewing Technology ran on the Symbian (EPOC) platform, a leading platform for
mobile and wireless handheld devices.
On December 22, 1998, we acquired the outstanding stock of Venture Labs,
Inc., owner of Paradigm Development Corporation ("Paradigm"), a developer of
Java-based document conversion and viewing products. The Java filtering and
viewing technologies obtained from Paradigm were integrated into the IED
operating division.
On July 10, 2000, we sold IED to IntraNet Solutions, Inc. for a stated price
of $55 million, less amounts for retained rights under license and adjustment
for the net working capital of the IED business on the closing date.
Research and Development
IED operated in an industry with rapidly changing technology and significant
competition. Continued product acceptance required rapid response to changing
technology and market conditions. Product evolution, particularly with respect
to new versions of popular desktop products, such as Microsoft Office, was a
requirement of both the OEM and direct markets served by the IED products. In
addition, the OEM portion of IED's market required that IED products run on
new operating system platforms, such as Symbian, on a continuing basis.
Accordingly, we invested on an ongoing basis in rapid support for new
application formats in our products. During the period in which we operated
the division, IED continued to make significant investments in development
related to the creation of a new product architecture designed to permit rapid
response to new requirements for application format and operating system
support, and in development of products for the mobile and wireless market.
Intellectual Property Rights
The IED operating division did not have patents on its technologies,
although we registered copyrights and trademarks to certain of its products
from time to time. Due to the nature of its business, we believe that product
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evolution and timeliness of upgrades and platform support were more important
to our competitive position than patents or other intellectual property
rights.
Competition
During the period we operated IED, competition in the markets for its
products was significant. IED's viewing and conversion products and on-demand
Web publishing system competed with offerings from Verity Inc. in the OEM
market and from other proprietary file viewing products. We believe that the
principal competitive factors in the direct corporate and government market
were product quality, compatibility with multiple applications and operating
systems, and update frequency, with price being a secondary factor. We believe
that the principal competitive factors in the OEM market for IED products were
price, format and operating system coverage, and ease of implementation.
Product Data Management Products
Until January 5, 2000, we operated a Product Data Management ("PDM")
division. The PDM division consisted of two principal sets of technologies:
(1) the product data management technologies we obtained in December 1998
through our acquisition of all of the outstanding stock of Sherpa Systems
Corporation, and (2) our traditional stand-alone technical document publishing
business. The stand-alone technical document publishing business consisted of
the following products: (a) our DynaText/DynaWeb technical publishing tools,
which were previously part of our Electronic Publishing Systems division, (b)
the Synex ViewPort browser engine and related application development toolkits
for the viewing of SGML information, which we obtained on March 12, 1998,
through our acquisition of all the stock of ViewPort Development AB of
Stockholm, Sweden, and (c) Balise, an SGML and XML transformation tool and
scripting language, and Dual Prism, a Web-based XML and SGML publishing
system, each of which we acquired on January 12, 1999 through our acquisition
of AIS Software S.A. of Paris, France ("AIS Software") from Berger-Levrault
S.A., a leading French publisher.
At the time of the acquisition in 1998 of Sherpa Systems Corporation, we
anticipated that Sherpa Systems Corporation's existing and planned product
offerings could be integrated with certain of our other technologies into a
solution serving the electronic information needs of an entire enterprise. We
later determined that the Company's value would be most enhanced by the
eBusiness Technologies and IED divisions pursuing their respective market
opportunities, and by the divestiture of the Product Data Management division.
During fiscal year 2000, we disposed of the PDM division in two separate
transactions. On October 29, 1999, we sold the DynaText/DynaWeb stand-alone
technical document publishing component of our PDM division, including the
Synex ViewPort browser engine and related application development toolkits,
for $14,750,000 to Enigma Information System Ltd. and its subsidiary, Enigma
Information USA, Inc., (collectively "Enigma"). The transaction was in the
form of a purchase by Enigma of all of the outstanding stock of our
subsidiaries Inso Providence Corporation and ViewPort Development AB.
On January 5, 2000, we sold the remainder of the PDM division for $6,000,000
in cash plus assumption of liabilities (subject to adjustment based on the net
worth of the business at the closing) to Structural Dynamics Research
Corporation ("SDRC"). The transaction was in the form of a purchase by SDRC of
all of the outstanding stock of our subsidiaries Sherpa Systems Corporation
and Inso France Development SA (formerly AIS Software, S.A.). The proceeds
received from the sale totaled $5,000,000 in cash at the time of the closing,
and $1,000,000 was placed in a supplemental closing fund to be paid no later
than 90 days after the first anniversary of the closing date. The selling
price was subject to adjustment based on the net worth of the business at
closing. After direct transaction costs, the loss on the sale of PDM was
$2,337,000 at January 31, 2000. The transaction created a capital loss for
federal tax purposes, which will be carried forward to future periods. The net
worth of the business on the closing balance sheet, as agreed to by SDRC and
the Company in July 2000, net of certain other adjustments negotiated between
the Company and SDRC, resulted in an additional receipt from SDRC of
approximately $2,696,000, in final settlement of the net worth balances. This
amount was received in July 2000. In connection with this settlement, during
the second quarter of fiscal 2001, we adjusted
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the carrying amounts of certain assets and liabilities, and recorded an
additional loss of approximately $637,000. The loss is included in the non-
operating income section in the accompanying statements of operations.
During the fourth quarter of fiscal 2001, the Company and SDRC reached a
settlement agreement under which SDRC remitted an additional net purchase
price adjustment amount of $1,971,000, according to the terms of the original
agreement, as modified in the final settlement agreement dated January 24,
2001. This additional net payment was comprised of additional proceeds based
on Qualifying Maintenance and License Revenue, as defined in the original
agreement, reduced by certain agreed upon amounts relative to remaining
contingent liabilities. With the exception of statutory severance amounts that
may become due to a former foreign employee of the Company, there are no
additional liabilities associated with the PDM sale to SDRC. The Company has
estimated and accrued the amounts it believes may become due. The net results
of the monies received and adjustments recorded in connection with the
settlement agreement was a $1,526,000 gain in fiscal year 2001, which is
included in the non-operating income section of the Company's Consolidated
Statements of Operations.
Our product data management products consisted of a line of products
designed to meet the needs of large manufacturers and other businesses that
need to efficiently and effectively manage product-related information and the
deployment of that information in product development, manufacturing, sales,
service, and other departments of their extended enterprises. These products
provided document management, change control, and workflow functionality, and
frequently were integrated with other software applications in the enterprise,
including Computer Aided Design ("CAD") tools and Manufacturing Resource
Planning/Enterprise Resource Planning (MRP/ERP) systems. Our technical
publishing products enabled traditional technical publishers to manage and
distribute electronic content from a wide variety of sources through the World
Wide Web, intranets, CD-ROM and print.
Research and Development
The portion of our PDM division consisting of product data management
products operated in an industry that is subject to considerable technological
evolution, and our ability to compete successfully in those markets required
that we be able to forecast and develop products in anticipation of such
change, and that these products adhere to open standards for communication and
data interchange with other applications. During the period of our ownership
in fiscal year 2000, we focused our research and development efforts primarily
on improving the scalability and reliability of the product data management
products.
Intellectual Property Rights
The PDM operating division registered patents, copyrights and trademarks on
an ongoing basis. Due to the nature of its business, we believe that the
domain expertise of its personnel and its knowledge of its customers'
processes were more important competitive factors than such intellectual
property rights. However, we believed that, in general, patents, copyrights,
trademarks and similar intellectual property rights were less important to the
ability of the PDM operating division to compete successfully in its markets
than was the age of the technology and the know-how and ability of its
development personnel.
Competition
During the period in which we operated the PDM division, the primary
competition for our product data management technologies arose from products
and services offered by SDRC, Parametric Technology Corporation, and Matrix-
One, Inc. During that time, the principal competitors in the technical
publishing market were Quark, Inc., Softquad International, Inc., Enigma and
an affiliate of Open Market, Inc. We believe that the primary competitive
factors in PDM's markets were scalability, product quality, configurability,
implementation cost, implementation support, support for multiple product
design environments, and completeness of solution, with price being a
secondary factor.
5
Lexical and Linguistic Products
Until April 23, 1998, we operated a division that sold Lexical and
Linguistic products. On April 23, 1998, we sold those assets, including the
proofing tools, reference works, and information management tools products as
well as all customer and supplier agreements related to the products, to
Lernout & Hauspie Speech Products, NV ("Lernout & Hauspie").
The products of the Lexical and Linguistic operating division included
International CorrectSpell(TM), a spelling correction system; CorrectText(R)
Grammar Correction System, an English grammar correction technology used in
word processors; International ProofReader(TM), a multilingual proofreading
system available in 10 languages; and the IntelliScope(R) family of linguistic
search and retrieval tools. Included in the disposition was Level 5 Research,
Inc., maker of the Quest database search product, which had been incorporated
into the Lexical and Linguistic operating division.
Lexical and Linguistic products were sold almost exclusively on a direct
basis to OEMs to embed in common desktop applications and consumer electronic
devices. Prior to the disposition of the Lexical and Linguistic operating
division, our OEM sales force sold both IED and Lexical and Linguistic
products.
Research and Development
We operated the Lexical and Linguistic operating division in two parts of
the software industry: the mature proofing tools and reference works markets
that were not as susceptible to rapid technological change as other parts of
the industry, and the rapidly changing and evolving linguistic search market.
Product development issues in the proofing tools and reference works markets
were focused on platform support and currency with European language changes.
In the linguistic search market, product development issues were predominantly
associated with improving accuracy and speed of retrieval against increasingly
large data collections. Overall, the level of development expenditure required
for Lexical and Linguistic products was lower than that in our current
operating divisions. During the period of our ownership in 1998, we did not
make significant investments in new technology initiatives for the Lexical and
Linguistic products.
Intellectual Property Rights
The Lexical and Linguistic operating division obtained, prior to its
disposition, a number of patents on its proofing tools and search
technologies, and registered copyrights to its products on a regular basis.
However, it was our experience that continued improvement of lexical
information and ease of implementation were more important to our competitive
position than were patents, copyrights, and similar intellectual property
rights. The Lexical and Linguistic operating division licensed significant
lexical and linguistic content from third party suppliers, and these license
agreements were very important to maintaining its competitive position. It was
our experience that there were sufficient potential suppliers of such content,
alternative sources were generally available, and that the Lexical and
Linguistic operating division was not reliant on any particular vendor.
Competition
During the period of our ownership of the Lexical and Linguistic operating
division, the most significant competition came from the internal development
capabilities of large OEM customers, such as Microsoft Corporation. We believe
that the principal competitive factors in the markets for our Lexical and
Linguistic products were price, product quality, ease of implementation,
language coverage, and platform support.
Research and Development
During fiscal years 2001, 2000 and 1998, our expenditures for developing new
products and product enhancements were $12,037,000, $29,825,000 and
$24,435,000, respectively. These expenditures represented 55%, 46% and 41%,
respectively, of total revenues for those periods. Of these amounts,
$1,140,000, $3,746,000
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and $4,906,000, respectively, were capitalized in accordance with applicable
accounting principles and are subject to amortization over subsequent periods.
The balance was charged as product development expense.
International Operations
Our international operations primarily support direct and indirect
distribution of products to customers in a wide variety of industries. In
connection with the opening of a new office in the United Kingdom and
appointment of a Vice President, General Manager of European Operations, we
increased the direct marketing of our products to customers outside the United
States. The marketing of products to customers outside the United States
increases the risk to our revenues associated with fluctuations of the U.S.
dollar in relation to foreign currencies. Such fluctuations could also result
in increased operating expenses associated with foreign operations. See Item
7A "Quantitative and Qualitative Disclosures About Market Risk" for additional
disclosures about foreign currency risk, and Note 15 to the "Notes to
Consolidated Financial Statements" for additional information regarding
foreign sales.
Sales and Marketing
eBT enables global e-businesses with solutions that support multi-lingual
and multi-national organizations through a single product deployment. In
fiscal year 2001, we extended our marketing and sales activities from our
corporate headquarters in Providence, Rhode Island, with the establishment of
satellite offices in California, Illinois, New York and the United Kingdom. To
date in North America, we have sold our product primarily through our direct
sales force. We are also developing our indirect sales channel by expanding
our relationships with Internet technology vendors, Internet professional
services firms and systems integrators. Through our office in the United
Kingdom, we manage sales of our products to end-users directly and through
networks of Value-Added Resellers and distributors. Approximately 28% of our
revenues during fiscal year 2001 originated with customers outside the United
States.
Employees
As of January 31, 2001, we had 156 employees, including 49 in research and
development, 63 in sales and marketing, 28 in services and support, and 16 in
financial and administrative positions.
We believe that our future success will depend in large part upon our
continued ability to recruit and retain highly qualified sales, technical,
managerial, and marketing personnel. To date, we have been successful in
attracting and retaining skilled employees. None of our employees is
represented by a labor union, and we consider our relationship with our
employees to be satisfactory.
Item 2. Property
Our corporate headquarters is located in Providence, Rhode Island, where we
currently lease approximately 44,300 square feet of space. This lease has a
term expiring in January 2007, and includes options on contiguous space.
During fiscal 2001, to support our global presence, we opened satellite
offices in San Bruno, California; Chicago, Illinois; New York, New York; and
Reading, UK. These offices are generally small sales locations and are
occupied under short-term, primarily month-to-month, leases.
Through March 2000, we leased approximately 42,500 square feet of space in
Boston, Massachusetts. On March 3, 2000, we reached an agreement with our
Boston landlord, which terminated our existing lease and provided for a new
lease of smaller quarters, comprising 10,741 square feet of space, within the
same office building, effective May 1, 2000, and expiring in May 2005. We have
sub-leased the Boston office space, for the entire term of the lease, at rates
in excess of the amount of lease payments for which we are obligated. The IED
business leased approximately 28,230 square feet of space in downtown Chicago,
Illinois, with a lease term expiring September 2006. We sold the IED division
on July 10, 2000, and are no longer obligated under that lease. The IED
division formerly leased approximately 15,223 square feet of space in
Vancouver, British
7
Columbia, and approximately 5,500 square feet in Kansas City, Kansas, but
those leases were terminated in fiscal 2000 in connection with our
restructuring actions. In addition, we lease, through our various
subsidiaries, office space in the United States and overseas for marketing and
sales activities. We do not own any real property.
We believe that the space currently under lease to us is adequate for our
current needs and that suitable additional or substitute space will be
available as needed to accommodate further physical expansion of our
operations and for additional sales offices.
Item 3. Legal Proceedings
On February 4, 1999, the Company and certain of its officers were named as
defendants in a purported class action lawsuit filed in the United States
District Court for the District of Massachusetts. Thereafter, six
substantially similar actions were filed in the same Court. On April 5, 1999,
the seven class action lawsuits that were filed against us were consolidated
into one lawsuit entitled In Re Inso Corporation, Civil Action No. 99-10193-
WGY. These lawsuits were filed following our announcement on February 1, 1999
that we planned to restate our revenues for the first three quarters of 1998.
The plaintiffs alleged that the defendants prepared and issued deceptive and
materially false and misleading statements to the investing public. They
sought unspecified damages. On September 29, 1999, we entered into an
insurance agreement with a major AAA-rated insurance carrier pursuant to which
the insurance carrier assumed complete financial responsibility for the
defense and ultimate resolution of the lawsuit. A net charge to our fiscal
year 2000 consolidated results of $13,451,000 was taken in connection with the
insurance agreement. On May 26, 2000, we entered into an agreement to settle
the consolidated securities class action. The settlement provided that all
claims against the Company and the individual defendants would be dismissed.
In agreeing to the proposed settlement, the Company and the individual
defendants specifically continued to deny any wrongdoing. The settlement was
approved by the Court on September 14, 2000.
As soon as the Company discovered that it would be necessary to restate
certain of its financial results for the first three quarters of 1998, the
Company immediately and voluntarily provided this information to the U.S.
Securities and Exchange Commission. On June 2, 1999, the Company was informed
that the U.S. Securities and Exchange Commission had issued a Formal Order of
Private Investigation in connection with matters relating to the previously
announced restatement of the Company's 1998 financial results. We cannot
predict the ultimate resolution of this action at this time, and there can be
no assurance that the Formal Order of Private Investigation will not have a
material adverse impact on our financial condition and results of operations.
On June 9, 1999, the bankruptcy estates of Microlytics, Inc. and Microlytics
Technology Co., Inc. (together "Microlytics") filed a complaint against us in
the United States Bankruptcy Court for the Western District of New York. The
lawsuit is captioned Microlytics, Inc. and Microlytics Technology Co., Inc. v.
Inso Corporation, Adversary Proceeding No. 99-2177. The complaint seeks
turnover of purported property of the estates and damages for our 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, we filed our Answer and Demand for Jury
Trial. Also, on August 19, 1999, we filed a motion to withdraw the case from
the Bankruptcy Court to the United States District Court for the Western
District of New York. On December 15, 1999, the United States District Court
granted our motion for the purposes of dispositive motions and trial. The
parties are presently engaging in document discovery and no depositions have
been taken. We believe that the claims are subject to meritorious defenses,
which we plan to assert during the lawsuit. We cannot predict the ultimate
resolution of this action at this time, and there can be no assurance that the
litigation will not have a material adverse impact on our financial condition
and results of operations.
During February 2000, certain shareholders of the Company filed two
substantially similar putative class action complaints against the Company and
certain of the Company's officers and employees in the United States District
Court for the District of Massachusetts that were captioned as follows: Liz
Lindawati, et al. v. Inso Corp., et al., Civil Action No. 00-CV-10305GAO;
Group One Limited, et al. v. Inso Corp., et al., Civil Action
8
No. 00-CV-10318GAO. These lawsuits were filed following our preliminary
disclosure of revenues for the fiscal year 2000 fourth quarter on February 1,
2000. Their complaints assert claims for violations of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 of the Securities and Exchange
Commission, as well as a claim for violation of Section 20(a) of the Exchange
Act.
On June 14, 2000, the District Court ordered that both actions be
consolidated into one lawsuit entitled In Re Inso Corporation Securities
Litigation, Civil Action No. 00-103050-GAO. The plaintiffs filed a
consolidated amended complaint on February 21, 2001. The plaintiffs alleged
that the defendants prepared and issued deceptive and materially false and
misleading statements to the investing public. They sought unspecified
damages. On April 9, 2001, the Company filed a motion to dismiss the lawsuit
on the grounds that the plaintiffs failed to state a claim under the relevant
securities laws. After receiving the Company's motion to dismiss, the
plaintiffs themselves moved to dismiss the lawsuit with prejudice on April 23,
2001. The plaintiffs received no consideration for, and the Company assented
to, the dismissal. We are awaiting Court approval of the plantiffs' motion to
dismiss (see Note 16 of "Notes to Consolidated Financial Statements").
We are also subject to various legal proceedings and claims that arise in
the ordinary course of business. We currently believe that resolving these
matters will not have a material adverse impact on our financial condition or
our results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 4A Executive Officers of the Registrant
James M. Ringrose, who is 48 years old, has been President and Chief
Executive Officer of the Company since April 2000. He was President of our
former eBusiness Technologies division and Vice President of the Company from
May 1999 to April 2000. Mr. Ringrose was Vice President of Marketing for the
Company from March 1998 to May 1999. Prior to joining eBT, Mr. Ringrose served
in various senior marketing roles at Banyan Systems of Westborough,
Massachusetts.
Christopher M. Burns, who is 36 years old, has been Vice President, Chief
Financial Officer and Treasurer of the Company since May 2000. From April 1999
through April, 2000, Mr. Burns was Vice President of Operations of our former
eBusiness Technologies Division. From July 1996 through April 1999, Mr. Burns
was Divisional Controller of Inso Providence Corporation. Prior to joining
eBT, Mr. Burns held various senior finance and accounting positions with
Electronic Book Technologies, Inc., most recently as Controller.
William Stone, who is 34 years old, has served as Vice President, Corporate
Development of the Company since July, 2000. Mr. Stone has more than eight
years of experience in business and financial development, most recently at
Verde Media, Inc., where he served as the Vice President of Corporate
Development, from November, 1999 to June 2000. In June 2000, following his
departure, Verde Media filed a bankruptcy petition under Chapter 11 of the
Bankruptcy Code. Previously, he was a partner with the law firm Tonkon Torp
LLP, of Portland, Oregon, where he served as a corporate finance and
transactional attorney specializing in early-stage financings, public
offerings and mergers and acquisitions, and co-founded the firm's Technology
Practice Group.
9
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The common stock of eBT is quoted on The Nasdaq Stock Market under the
symbol "EBTI". The following table sets forth the high and low sale prices per
share of eBT's common stock for the fiscal periods listed below as reported on
The Nasdaq Stock Market. Such information reflects interdealer prices, without
retail markup, markdown, or commission, and may not represent actual
transactions.
Fiscal 2001 Fiscal 2000
------------ ------------
Quarter Ended High Low High Low
- ------------- ------ ----- ------ -----
April 30.............................................. $39.38 $3.69 $10.00 $5.56
July 31............................................... 8.44 3.06 7.75 4.69
October 31............................................ 6.94 2.69 14.88 4.63
January 31............................................ 3.94 1.56 42.00 13.25
As of April 23, 2001, eBT's common stock was held by 388 holders of record.
eBT has paid no dividends on its common stock since its formation and has no
current plans to do so.
Item 6. Selected Financial Data
Statement of Operations Data
One Month Years Ended December
Years Ended January 31, Ended 31,
------------------------ January 31, -------------------------
2001(1) 2000(1) 1999 1998(1) 1997(1) 1996(1)
----------- ----------- ----------- ------- ------- -------
(In thousands except per share amounts)
Total revenues.......... $ 21,696 $ 64,680 $3,108 $60,094 $81,869 $70,534
Gross profit (loss)..... 12,060 42,470 (239) 47,444 72,058 61,362
Restructuring
expenses(4)............ 1,954 11,068 -- -- 5,848 --
Special charges(4)...... 200 28,103 -- -- -- --
Purchased in-process
research and
development............ -- -- 500 21,900 6,100 38,700
Total operating
expenses(3)............ 37,933 115,584 8,805 86,019 73,930 75,439
Operating loss.......... (25,873) (73,114) (9,044) (38,575) (1,872) (14,077)
Recovery/(write-down) of
investments in IPLLC... 657 (2,655) -- -- -- --
Gains on sales of
assets, net(2)......... 38,170 12,212 -- 13,289 -- --
Income (loss) before
provision for income
taxes.................. 16,815 (61,836) (8,691) (20,604) 2,504 (11,073)
Provision (benefit) for
income taxes........... 300 474 -- (1,035) 2,944 10,207
Net income (loss)
(2,3).................. 16,515 (62,310) (8,691) (19,569) (440) (21,280)
Earnings (loss) per
common share........... $ 1.00 $ (3.98) $(0.56) $ (1.30) $ (0.03) $ (1.61)
Earnings (loss) per
common share, assuming
dilution............... $ 0.98 $ (3.98) $(0.56) $ (1.30) $ (0.03) $ (1.61)
10
Balance Sheet Data
As of January
31, As of December 31,
--------------- -----------------------
2001 2000 1998 1997 1996
------- ------- ------- ------- -------
(In thousands)
Working capital........................ $63,660 $34,363 $42,277 $85,558 $84,261
Deferred income tax benefit, net....... -- -- -- 5,917 4,930
Total assets........................... 80,002 80,589 163,219 138,083 136,272
Long-term debt......................... -- 142 450 -- --
Stockholders' equity................... 68,287 55,372 109,174 115,478 113,413
- --------
(1) eBT's 1996 results include the operations of Electronic Book Technologies,
Inc. and ImageMark Software Labs since their acquisition dates of July 16,
1996 and January 9, 1996, respectively. eBT's 1997 results include the
operations of Mastersoft, Inc., Level Five Research, Inc., and Henderson
Software, Inc. since their acquisition dates of February 6, 1997, April
22, 1997, and November 24, 1997, respectively. Level Five Research, Inc.
was subsequently sold on April 23, 1998. eBT's 1998 results include the
operations of ViewPort Development AB, MediaBank, Sherpa Systems
Corporation, and Venture Labs, Inc. since their acquisitions dates of
March 12, 1998, August 28, 1998, December 4, 1998 and December 22, 1998,
respectively (see Notes 4 and 5 of "Notes to Consolidated Financial
Statements"). eBT's fiscal 2000 results include the operations of the PDM
Division through January 2000 and the fiscal 2001 results include the
operations of IED through July 2000 and the MediaBank product line through
June 2000 (see Note 5 of "Notes to Consolidated Financial Statements").
(2) eBT's 1998 results include a gain of $13,289,000 on the sale of eBT's
linguistic software net assets to Lernout & Hauspie Speech Products N.V.
on April 23, 1998. eBT's fiscal 2000 results include a gain of $14,549,000
on the sale of its DynaText/DynaWeb stand-alone technical publishing
products and its ViewPort browser technology, a loss of $2,337,000 on the
sale of the balance of its PDM Division (see Note 5 of "Notes to
Consolidated Financial Statements"). eBT's fiscal 2001 results include a
gain of $39,914,000 on the sale of IED to IntraNet Solutions on July 10,
2000, a $3,735,000 loss on the sale of its MediaBank product line in June
2000, a gain on the sale of its PDM Division and DynaText/DynaWeb stand-
alone technical publishing products and its ViewPort browser technology of
$1,991,000 (see Note 5 of "Notes to Consolidated Financial Statements").
(3) eBT's 1998 results include a charge of $4,000,000 relating to an
international distributor relationship (see Note 14 of "Notes to
Consolidated Financial Statements"). eBT's fiscal 2000 results include a
credit of $3,093,000, relating to a release from the 1998 agreement with
the international distributor.
(4) eBT's restructuring charges of $1,954,000, $11,068,000 and $5,848,000 in
fiscal 2001, 2000 and 1997 and the special charge of $200,000, and
$28,103,000 in fiscal 2001 and 2000 are described in Notes 6 and 7 of
"Notes to Consolidated Financial Statements".
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
We derive our revenues from the license of our software products and from
services we provide to our customers. Our license revenue is generated from
one-time and annual licenses and royalty arrangements with corporate,
government, and OEM customers and channel-partners. Our service revenues
consist of professional services and software maintenance fees associated with
the license of our software products. Since the divestiture of our non-core
assets, which was completed in July 2000, we derive virtually all of our
license revenues from licenses of engenda and DynaBase. Revenues from license
agreements generally consist of a one-time product license fee based on the
number of individual users or contributors and the amount of content being
managed. For each license agreement, an annual software maintenance fee is
calculated based upon a percentage of the applicable license fee. Payment of
the maintenance fee permits customers to receive updates and enhancements to
the software licensed for the duration of the maintenance agreement. Royalty
revenues of the IED business were earned in one of the following ways: as a
percentage of net revenues from product unit sales by licensees that
incorporate our products, as a fixed per-unit royalty, or as a regular
periodic fee based on estimated
11
shipments or usage over time. Professional service fees may include fees for
training, installation, consulting, implementation support, software design
and/or development, and, for the IED business, customization or modification
of licensed software. Service fees are charged based on time and materials or
on a fixed fee basis, and are recognized when the service has been provided.
We generate a significant portion of our revenue from customers outside the
United States. Such revenues totaled 28%, 33% and 24% of total net revenue for
the years ended January 31, 2001 and 2000 and December 31, 1998, respectively.
We expect that the international market will continue to account for a
significant portion of our total business. We generally denominate the prices
for our corporate and end-user products sold internationally in U.S. dollars.
Therefore, we believe that we are not exposed to significant risk with respect
to changing currency exchange rates in connection with our business with
international customers. Business conducted with overseas end-users may be
subject to greater currency exchange rate risk in the future (see "Risk
Factors that May Affect Future Operating Results").
Cost of revenues primarily is comprised of the amortization of capitalized
product development costs and certain assets from acquisitions and license
agreements described in Note 4 of the "Notes to Consolidated Financial
Statements"; royalty expense for the licensing of technology; fulfillment; and
service and support costs. The level of amortization expense of capitalized
product development costs is directly related to the amount of product
development costs capitalized in each year and the time frame in which a
specific product is made available for general release to customers.
In July 2000, we completed the divestiture of certain assets, which was
originally announced in April 2000. Between October 1999 and July 2000, we
divested our former Product Data Management ("PDM") division including our
DynaText/DynaWeb technical document publishing technology and ViewPort browser
technology, our Information Exchange Division ("IED") and our MediaBank
product line ("MediaBank"). Our ongoing operations are comprised of our family
of Web content management technologies and related services, and are run under
the name eBusiness Technologies ("eBT"). MediaBank was previously a component
of the eBT division. All references to eBT in this narrative exclude the
MediaBank results. References to "disposed businesses" include the PDM
division, IED and MediaBank.
As a result of the divestitures that have taken place in fiscal 2000 and
2001, and the restructuring that took place in the first quarter of fiscal
2001, the corporate function has been substantially reduced and absorbed into
the operations of eBT. Accordingly, effective with the decision in the second
quarter of fiscal 2001 to operate under this new structure, the corporate
costs are more directly related to the operations solely of the Company.
Beginning in the second half of fiscal 2001, we have only one operating
segment. Prior to the second half of fiscal 2001, we had several operating
segments, and the Company was structured differently to accommodate this
diversity. Consequently, certain corporate costs, which have historically been
excluded from our divisional and segment discussions in this section, are now
included in the eBT results in all of the discussion presented below,
beginning in the second quarter of fiscal 2001, when the Boston corporate
offices were closed. Due to the significant changes that have taken place in
the Company since July 1999, we believe that attempts to allocate a portion of
the prior year corporate related expenses among the segments is not
meaningful, and therefore, no such allocations have been included in the
discussion presented below for any periods prior to the second quarter of
fiscal 2001.
12
The following table sets forth, for the periods indicated, certain income
statement data expressed as a percentage of revenues.
Percentage of Revenues
Years Ended
January 31, Year Ended
------------ December 31,
2001 2000 1998
----- ----- ------------
Net revenues....................................... 100% 100% 100%
Cost of revenues................................... 44 34 21
Gross profit (loss)................................ 56 66 79
Operating expenses:
Sales and marketing................................ 71 38 46
Product development................................ 50 40 33
Amortization of intangible assets.................. 3 7 3
General and administrative......................... 41 33 26
Restructuring expenses............................. 10 17 --
Special charges.................................... -- 44 --
Purchased in-process research and development...... -- -- 36
Total operating expenses........................... 175 179 144
Operating loss..................................... (119) (113) (65)
Net investment income.............................. 15 3 8
Recovery (write-down) of investment in Information
Please LLC........................................ 3 (4) --
Gain on sale of assets............................. 178 19 22
Income (loss) before provision for income taxes.... 77 (95) (35)
Provision (benefit) for income taxes............... 1 1 (2)
Net income (loss).................................. 76 (96) (33)
Year Ended January 31, 2001 Compared to Year Ended January 31, 2000
Company-wide revenues totaled $21,696,000 for the year ended January 31,
2001, a decline of $42,984,000 from the $64,680,000 Company-wide total
reported in the prior year. Excluding revenues of the disposed businesses, eBT
revenues, totaled $12,615,000 for the year ended January 31, 2001, an increase
of $2,816,000, or 29%, over the prior year total of $9,799,000. This increase
in total revenues is a result of a growth in service revenue, offset by a 12%
decrease in product revenue. The decrease in product revenue reflects the
impact of the current year product transition to the newly released
engenda(TM) product, and also reflects training and ramp-up time to transition
our sales force to a solution-selling approach. As product sales have
historically led service revenue, the Company may experience slower growth in
its service revenue in the near future as a result of the lower levels of
product sales in the current year.
The balance of the change in total revenues relates to revenues for the
disposed Product Data Management ("PDM"), MediaBank and Information Exchange
Division ("IED") businesses, which were a combined $9,081,000 in fiscal 2001,
a decline of $45,800,000 from the $54,881,000 reported in fiscal 2000. Fiscal
2000 revenues for these businesses included nearly one full year of revenues,
while there were no PDM revenues in fiscal 2001, and slightly less than one
half year's revenues for MediaBank and IED. PDM was sold in January 2000,
MediaBank was sold in June 2000, and IED was sold in July 2000.
Company-wide gross profit was $12,060,000 for the year ended January 31,
2001, a decrease of $30,410,000 from the fiscal 2000 Company-wide gross profit
of $42,470,000. Excluding the gross profit of the disposed businesses, eBT
gross profit was $4,828,000 for the year ended January 31, 2001, a decrease of
$631,000, or 12%, from the comparable prior year total of $5,459,000. The
decrease in eBT's gross profit reflects the increase in service revenues as a
percentage of total revenue, and the impact of costs related to our expanding
professional services organization, including the use of third party
contractors. Since service revenues have lower margins
13
than license revenues, growth in our service business will result in lower
gross profit if our license revenues do not increase in the same period. Gross
profit as a percentage of revenues, excluding the revenues and gross profit
associated with the divested PDM and IED divisions, was 38% for the year ended
January 31, 2001, compared to 56% for the year ended January 31, 2000.
The remaining decline in gross profit is attributable to the disposed
businesses, which reported gross profit of $7,232,000 for the year ended
January 31, 2001, a decrease of $29,779,000 from $37,011,000 for the year
ended January 31, 2000. Again, this decline is related to the timing of the
dispositions of these businesses, as the prior year results include nearly
twelve months of results for all of these businesses, compared to no results
for PDM in fiscal 2001 and slightly less than one-half year's revenues for
both MediaBank and IED in fiscal year 2001.
Company-wide total operating expenses were $37,933,000 for the year ended
January 31, 2001, a decrease of $77,651,000 from the prior year total of
$115,584,000. Excluding operating expenses of the disposed businesses, eBT
total operating expenses were $25,047,000 for the year ended January 31, 2001,
an increase of $7,392,000, or 42%, from $17,655,000 for the year ended January
31, 2000. This increase is primarily related to increases in sales and
marketing positions, marketing programs and the corporate related expenses
absorbed by eBT since the May 2000 closure of the Company's former Boston
headquarters.
The increase in eBT operating expenses was more than offset by a decline in
operating expenses attributable to the disposed businesses, and also to
decreased corporate operating expenses, resulting from the restructuring
actions taken from July 1999 to May 2000. Total operating expenses relating to
the disposed business and former corporate office were $12,886,000 for the
year ended January 31, 2001, a decline of $85,043,000, or 87%, from the
$97,929,000 reported for the year ended January 31, 2000. Of this decline,
$38,073,000 resulted from the disposed PDM division; $7,331,000 from the
disposition of IED and $2,865,000 from the disposed MediaBank product line.
The balance of the decline was attributable to the closure of the Boston
office and to cost savings generated from the restructuring actions taken
since July 1999.
Included in total operating expenses for the year ended January 31, 2001
were net restructuring expenses and special charges of $2,154,000. These
charges consisted primarily of severance costs related to both the May 2000
relocation of our corporate offices to Providence, Rhode Island and the
January 2001 workforce reduction. Included in total operating expenses for the
year ended January 31, 2000 were special charges of $28,103,000 and
restructuring expenses of $11,068,000. The special charges include expenses
for costs relating to the restatement of our 1998 financial results and the
associated SEC investigation; costs relating to the write-down of intangible
assets and capitalized software costs, substantially all attributable to the
PDM division and net premium costs and related expenses for a major insurance
carrier to assume financial risk associated with the class action litigation
initiated against us in February 1999 (see Notes 7 and 15 to the "Notes to
Consolidated Financial Statements"). Restructuring expenses included costs
relating to the April and July 1999 charges in connection with the
implementation of our new divisional structure (see Note 6 to the "Notes to
Consolidated Financial Statements") and our October 1999 restructuring of the
PDM division. Additionally, the operating expenses for the year ended January
31, 2000 were reduced by a credit of $3,093,000 to sales and marketing
expenses for the termination of a 1998 international distributor agreement,
for which an accrual of $4,000,000 was recorded in the year ended December 31,
1998.
Sales and marketing expenses consist primarily of salaries, commissions, and
bonuses for sales and marketing personnel and promotional expenses. Company-
wide sales and marketing expenses totaled $15,419,000 for the year ended
January 31, 2001, a decline of $9,140,000 from the $24,559,000 reported in the
year ended January 31, 2000. Excluding expenses of the disposed businesses,
eBT sales and marketing expenses increased $4,217,000 to $11,712,000 for the
year ended January 31, 2001, primarily due to our continued investment in
growing the eBT business. This growth is evidenced primarily through expanded
marketing campaigns and increases in sales and sales-related personnel and
associated recruiting costs. These increases were partially offset by
reductions in certain incentive related compensation costs as a result of the
lower sales in the current year.
14
The remaining change in sales and marketing expenses is attributable to
decreases in expenses of the disposed businesses. Sales and marketing expenses
of the disposed businesses decreased $13,357,000 to $3,707,000 for the year
ended January 31, 2001, compared to $17,064,000 for the year ended January 31,
2000. The dispositions of PDM, IED and MediaBank accounted for decreases of
$6,817,000, $1,808,000 and $961,000, respectively. The balance of the decrease
in sales and marketing expenses relates to the cost savings resulting from the
restructuring actions taken in fiscal 2000.
Product development costs consist primarily of personnel costs and, to a
lesser extent, fees paid for outside software development and consulting
services. Company-wide product development expenses totaled $10,897,000 for
the year ended January 31, 2001, a decline of $15,182,000 from the $26,079,000
reported in the year ended January 31, 2000. Excluding expenses of the
disposed businesses, eBT product development expenses increased $439,000 to
$7,310,000 for the year ended January 31, 2001. Additional costs associated
with increased headcount to support new product development initiatives were
nearly offset by decreases in outside contractor fees, resulting from the
Company's effort to decrease reliance on outside contractors, and decreases in
certain incentive related compensation costs.
The remaining $15,621,000 decrease in product development expenses is
attributable to the decreased expenses of the disposed businesses, combined
with cost savings generated through the restructuring actions taken since July
1999. The dispositions of PDM, IED and MediaBank accounted for decreases of
$8,443,000, $2,091,000 and $1,884,000, respectively. The balance of the
decrease in product development expenses relates to the costs savings
generated by the restructuring actions taken in fiscal 2000.
Amortization of intangible assets decreased $3,687,000 to $561,000 for the
year ended January 31, 2001 from $4,248,000 for the year ended January 31,
2000 due to the fiscal 2000 and 2001 divestitures. All of the intangible
assets that were being amortized related to businesses that were divested in
fiscal 2000 and 2001.
Company-wide general and administrative expenses totaled $8,902,000 for the
year ended January 31, 2001, a decrease of $12,625,000 from the $21,527,000
reported in the prior year. eBT general and administrative expenses increased
$2,197,000 to $5,486,000, for the year ended January 31, 2001, primarily as a
result of the inclusion of certain expenses formerly considered corporate
unallocated expenses prior to the second quarter of fiscal 2001. The prior
year presentation has not been restated to reflect an allocation of corporate
expenses, as the structure of the Company was so different at that time that
we believe such an allocation would not be meaningful.
The remaining $14,822,000 decline in total general and administrative
expenses is largely attributable to the January, June and July 2000
dispositions of businesses. General and administrative expenses of the
disposed businesses decreased to $3,416,000 for the year ended January 31,
2001, compared to $18,238,000 for the year ended January 31, 2000. The
dispositions of PDM, IED and MediaBank accounted for decreases of $5,968,000,
$1,428,000 and $20,000, respectively. The remaining decrease in general and
administrative expenses is attributable to the cost savings generated through
the restructuring actions taken in fiscal 2000 and 2001.
The restructuring charges reported in the fiscal year ended January 31, 2001
relate primarily to the April 2000 restructuring plan, under which we began to
focus our energies on eBT's Web content management and workflow product line
and related services, and pursue divestiture of certain assets, including IED.
The plan included the consolidation of our Boston headquarters into the
Providence, Rhode Island offices of the eBT division. In connection with this
reorganization, approximately 18 administrative employees and four executive
officers were terminated or resigned in April, May and June 2000. As a result
of this plan, we recorded a net charge of $1,835,000 in the first quarter of
fiscal year ending January 31, 2001. The charge was comprised primarily of
severance for those employees. This restructuring action was estimated to
generate annualized cost savings of approximately $4 million from the level of
expenses incurred at the time of the restructuring. At January 31, 2001,
$909,000 of this charge remains unpaid and the balance is expected to be paid
in full during fiscal 2002.
15
On January 31, 2001, the Company adopted a plan of restructuring aimed at
reducing current operating cost. In connection with this plan, 19 non-
management employees, primarily development and administrative positions, and
one executive level employee were terminated. As a result of this plan, we
recorded a charge of $539,000 for severance costs in the fourth quarter of
fiscal 2001(see Note 6 to the "Notes to Consolidated Financial Statements"),
all of which remains unpaid at January 31, 2001. Annualized savings from the
elimination of these positions, primarily in development and administrative
functions in the Providence headquarters, are estimated to approximate $1.7
million. The development and administrative cost savings from this action are
expected to be offset by increases in sales related costs to be incurred over
the course of the year, as the Company completes its restructuring plan
through increased sales staffing.
Net credit adjustments of approximately $420,000 were recorded in fiscal
2001, related to the fiscal 2000 restructuring initiatives described below.
These adjustments were to reduce accrued amounts to reflect estimated
remaining balances to be paid out, (see Note 6 to the "Notes to Consolidated
Financial Statements").
The restructuring charges reported in the fiscal year ended January 31,
2000, totaling $11,086,000, related to three initiatives:
(1) A $480,000 charge in the first quarter of fiscal 2000 relating to the
closure of the Company's Kansas City location, primarily for severance for
11 terminated employees. As of January 31, 2001, there were no remaining
accrued liabilities relating to this restructuring charge.
(2) A $6,390,000 charge relating to the July 1999 plan of restructuring
aimed at reducing current operating costs, as well as supporting our new
divisional structure, which included a reduction of 105 employees,
including 10 executive or management level employees. This plan also
included 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 charge included
approximately $2,372,000 of severance for employees in administrative,
sales and development positions; $925,000 for the closure and/or
combination of domestic and international sales and administrative
facilities; $1,739,000 for write-down of capitalized product development
costs and intangibles for certain discontinued products; and $1,354,000 for
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 discounted cash flows. At
January 31, 2001, there were no remaining accrued liabilities relating to
this restructuring charge.
(3) A $4,198,000 charge related to the October 1999 plan of restructuring
aimed at reducing operating costs in our PDM division. The restructuring
plan included a PDM workforce reduction of 51 employees, including 9
executive or manager level employees. The plan also included 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 charge included a write-down of licensed technology
for discontinued development activities to their fair values, based upon
their estimated future cash flows. The charge included approximately
$1,396,000 of severance for employees in administrative, sales and
development positions; $490,000 for the consolidation of sales, service and
support organizations and development facilities; $1,923,000 for the write-
down of licensed technology for discontinued development activities; and
$389,000 for the write-off of leasehold improvements and support assets
associated with closed locations. At January 31, 2001, accrued liabilities
of approximately $11,000 remained relating to this restructuring charge,
which is expected to be paid in full during fiscal 2002 (see Note 6 to the
"Notes to Consolidated Financial Statements").
For the year ended January 31, 2000, the Company incurred $28,103,000 of
special charges. Included in the special charges were $1,527,000 in
professional fees incurred in connection with the restatement of the Company's
results of operations for the first nine months of 1998. These professional
fees were for the Company's investigation of the circumstances surrounding
certain transactions leading to the restatement and for the formal
investigation initiated by the Securities and Exchange Commission following
the restatement. Also related to the restatement were $13,451,000 of net
premium costs and related professional advisory fees for a
16
major insurance carrier to assume financial risk associated with the class
action litigation initiated against the Company in February 1999, as well as
$2,320,000 of severance costs for certain employees who were terminated or
resigned. Additionally, approximately $10,805,000 of the special charges
related to the write-down of intangible assets and capitalized software costs
primarily attributable to the Company's PDM division, to their estimated fair
values, determined based upon estimated future cash flows. In connection with
the Company's restructure and subsequent plan to divest of the PDM division,
the intangible assets recorded at the time of acquisition were re-evaluated.
In connection with the future plans and the anticipated future cash flows of
the business, the intangible assets were written down to their net realizable
values, as determined from estimated proceeds to be received upon a sale of
the business. Approximately $1,471,000 of these charges remain unpaid as of
January 31, 2001, and this balance is expected to be paid in full during
fiscal 2002.
In June 2000, we sold the MediaBank product line, which was formerly a
component of the eBT division, for contingent future consideration of up to
$2,000,000. As the consideration is contingent, we did not record any proceeds
on the sale, and we wrote off the net assets of the MediaBank business, taking
a net charge of $3,735,000 in connection with the transaction. The majority of
the charge, approximately $3,548,000, was a non-cash charge related to
licensed technology that was sold, while approximately $386,000 related to
severance and professional fees incurred on the transaction. These amounts
were partially offset by the liabilities assumed by the buyer.
On July 10, 2000, we sold our IED division for a stated sale price of
$55,000,000, less amounts for retained rights under license and subject to
adjustment based on the net working capital of the IED business on the closing
date. The sale transaction was in the form of a merger of two wholly owned
subsidiaries of IntraNet Solutions, Inc. ("IS") with our subsidiaries, Inso
Chicago Corporation and Inso Kansas City Corporation, which comprised the IED
business. We received $48,000,000 of the proceeds in cash at the time of the
closing. An additional $5,500,000 has been placed in an escrow account, and,
subject to our indemnification obligations under the agreement, shall be
released to us on the first anniversary of the closing date. The net gain from
the transaction, as adjusted for final settlement of the working capital
requirements, was $39,914,000. The transaction created a capital gain for
federal income tax purposes, essentially all of which is offset by the capital
loss carryforwards generated in prior years.
On October 29, 1999, we sold our DynaText/DynaWeb stand-alone technical
document publishing component of our PDM Division, along with our ViewPort
browser technology assets, for $14,750,000. The transaction was in the form of
a stock purchase. We received proceeds on this sale of $9,000,000 in cash and
$5,750,000 in the form of a promissory note, due and payable by April 30,
2000. We received payment of $4,500,000 on the promissory note in January,
2000. The final payment of the note was subject to final closing adjustments.
During fiscal year 2001 the Company recorded an additional gain of $465,000
from the sale of the DynaText business in October 1999. This gain adjustment
resulted from resolution of previously accrued contingent liabilities in the
Company's favor.
On January 5, 2000, we sold the remaining interest in our PDM division for
$6,000,000 in cash plus assumption of liabilities, subject to adjustment based
on the net worth of the business at the closing. The sale transaction was in
the form of a stock purchase by SDRC of all of the outstanding stock of our
subsidiaries Sherpa Systems Corporation and Inso France Development S.A. The
proceeds received from the sale totaled $5,000,000 in cash at the time of the
closing, and $1,000,000 was placed in a supplemental closing fund to be paid
no later than 90 days after the first anniversary of the closing date. The
selling price was subject to adjustment based on the net worth of the business
at closing. After direct transaction costs, the loss on the sale of PDM was
$2,337,000 at January 31, 2000. The transaction created a capital loss for
federal tax purposes, which will be carried forward to future periods. The net
worth of the business on the closing balance sheet, as agreed to by SDRC and
the Company in July 2000, net of certain other adjustments negotiated between
the Company and SDRC, resulted in an additional receipt from SDRC of
approximately $2,696,000, in final settlement of the net worth balances. This
amount was received in July 2000. In connection with this settlement, during
the second quarter of fiscal 2001, we adjusted the carrying amounts of certain
assets and liabilities, and
17
recorded an additional loss of approximately $637,000. The loss is included in
the non-operating income section in the accompanying statements of operations.
During the fourth quarter of fiscal 2001, the Company and SDRC reached a
settlement agreement under which SDRC remitted an additional net purchase
price adjustment amount of $1,971,000, according to the terms of the original
agreement, as modified in the final settlement agreement dated January 24,
2001. This additional net payment was comprised of additional proceeds based
on Qualifying Maintenance and License Revenue, as defined in the original
agreement, reduced by certain agreed upon amounts relative to remaining
contingent liabilities. With the exception of statutory severance amounts that
may become due to a former foreign employee of the Company, there are no
additional liabilities associated with the PDM sale to SDRC. The Company has
estimated and accrued the amounts it believes may become due. The net results
of the monies received and adjustments recorded in connection with the
settlement agreement was a $1,526,000 gain and this amount is included in the
non-operating income section of the Company's Consolidated Statements of
Operations.
In October 2000, we received a $657,000 distribution related to our former
investment in Information Please LLC, which had been written down to net
realizable value, for which we recorded a charge of $2,655,000 in fiscal 2000.
Net investment and other income in fiscal 2001 totaled $3,861,000, an
increase of $2,140,000 over the prior year total of $1,721,000, due primarily
to the increased cash and investment balances resulting from the sale of IED.
As a result of net operating losses incurred in prior periods, and after
evaluating the Company's anticipated performance over its normal planning
horizon, we have provided a full valuation allowance for our net operating
loss carryforwards and other net deferred tax assets for federal tax purposes
as of January 31, 2001. In fiscal 2000, the net operating loss carryforwards
and other deferred tax assets in excess of deferred tax liabilities were also
fully reserved through a valuation allowance. We have estimated that the tax
gain generated from the sale of IED, almost all of which will be characterized
as capital, will be offset, for federal tax purposes, by our capital loss
carryforwards of approximately $46,000,000. However, the transaction is
expected to generate a small state tax liability, as some states do not
provide for the same utilization of net operating loss and capital loss
carryforwards as the federal tax rules allow. Additionally, the Company
generates taxable income in many of the foreign jurisdictions in which it
transacts business. Accordingly, we have recorded a tax provision of $300,000
for the year ended January 31, 2001, for state and foreign income tax
liabilities, as compared to a provision of $474,000 for the year ended January
31, 2000.
Net income and diluted income per share were $16,515,000 and $0.98,
respectively, for the year ended January 31, 2001 as compared to net loss and
diluted loss per share of $62,310,000 and $3.98, respectively, for the year
ended January 31, 2000.
Year Ended January 31, 2000 Compared to Year Ended December 31, 1998
Revenues for the fiscal year ended January 31, 2000 increased $4,586,000, or
8%, to $64,680,000 compared to $60,094,000 for the fiscal year ended December
31, 1998. Total revenues for the year ended January 31, 2000 included
$26,096,000 in revenues from our Product Data Management ("PDM") division,
which we sold in January, 2000. Total revenues for the year ended December 31,
1998 included revenues of $6,975,000 from our former Lexical and Linguistic
operating division, which was sold to Lernout & Hauspie Speech Products N.V.
("Lernout & Hauspie") in April 1998. Excluding the Lexical and Linguistic
operating division in 1998 and the PDM division in both years, revenues from
our ongoing operations were $38,584,000 for the year ended January 31, 2000,
compared to the 1998 revenues of $38,568,000.
Revenues from the eBusiness Technologies ("eBT") division increased 24% from
$9,935,000 in the year ended December 31, 1998 to $12,329,000, including
revenues from divested business, in the year ended January 31, 2000. The
increase was due primarily to increased sales of the DynaBase product, which
was introduced in
18
late 1997. We expect to make continued significant investments in fiscal 2001
in our eBT products, particularly DynaBase and related e-business
applications.
Revenues from the Information Exchange ("IED") division decreased by
approximately 8% from $28,633,000 in the year ended December 31, 1998 to
$26,255,000 in the year ended January 31, 2000. The decline in revenues in the
IED division is primarily attributable to lower revenues from the sales of
Quick View Plus to corporate customers.
Gross profit decreased $4,974,000, or 10%, from $47,444,000 for the year
ended December 31, 1998 to $42,470,000 for the year ended January 31, 2000.
Excluding the gross profit associated with the assets sold to Lernout &
Hauspie and the divested PDM division, gross profit decreased $3,475,000, or
11%, from $32,794,000 for the year ended December 31, 1998 to $29,319,000 for
the year ended January 31, 2000. The decrease was due primarily to higher
amortization expense for capitalized software and acquired license technology
associated with the MediaBank product. As the eBT division added professional
services personnel, the cost of service revenues increased at a faster rate
than the associated revenues, also contributing to the decline. Gross profit
as a percentage of revenues, excluding the revenues and gross profit
associated with the assets sold to Lernout & Hauspie and the divested PDM
division, was 76% for the year ended January 31, 2000, compared to 85% for the
year ended December 31, 1998.
Total operating expenses increased $29,565,000 to $115,584,000 for the year
ended January 31, 2000 from $86,019,000 for the year ended December 31, 1998.
Included in total operating expenses for the year ended January 31, 2000 were
special charges of $28,103,000 and restructuring expenses of $11,068,000.
Additionally, the operating expenses for the year ended January 31, 2000 were
reduced by a credit of $3,093,000 to sales and marketing expenses for the
termination of a 1998 international distributor agreement, for which an
accrual of $4,000,000 was recorded in the prior year. Included in total
operating expenses for the year ended December 31, 1998 were acquisition
charges of $21,900,000 for certain purchased technology under research and
development by Venture Labs, Inc., Sherpa Systems Corporation, MediaBank and
ViewPort Development AB, $2,596,000 in operating expenses associated with our
former Lexical and Linguistic operating division, which was sold to Lernout &
Hauspie, and the charge of $4,000,000 related to the same international
distributor agreement under which a credit was taken in fiscal 2000. Excluding
the aforementioned charges and credit, operating expenses increased
$21,983,000 to $79,506,000 for the year ended January 31, 2000 from
$57,523,000 for the year ended December 31, 1998. Acquisitions made in late
1998, primarily in the PDM division, contributed approximately $25,000,000 to
this increase, net of cost savings achieved through our restructurings.
Additional investments of approximately $5,000,000 in the eBT division added
to the increase.
Sales and marketing expenses consist primarily of salaries, commissions, and
bonuses for sales and marketing personnel and promotional expenses. Sales and
marketing expenses decreased $2,904,000 to $24,559,000 for the year ended
January 31, 2000, from $27,463,000 for the year ended December 31, 1998. Sales
and marketing expenses for the year ended January 31, 2000 included a credit
of $3,093,000 for the termination of a 1998 international distributor
agreement, while the 1998 sales and marketing expenses included a charge of
$4,000,000 related to this same distributor. Excluding the fiscal 2000 credit
and the 1998 charge noted above and $461,000 in 1998 expenses associated with
the assets sold to Lernout & Hauspie, sales and marketing expenses increased
$4,650,000 to $27,652,000 for the year ended January 31, 2000, compared to
$23,002,000 for the year ended December 31, 1998. The increase was primarily
due to acquisitions made in 1998. Savings from the July 1999 restructuring of
ongoing operations offset increased spending in the eBT division relating to
additional sales resources and marketing programs.
Product development costs consist primarily of personnel costs and, to a
lesser extent, fees paid for outside software development and consulting
services. Product development expenses increased $6,550,000 to $26,079,000 for
the year ended January 31, 2000 from $19,529,000 for the year ended December
31, 1998. Excluding $1,572,000 in expenses associated with the assets sold to
Lernout & Hauspie, product development expenses increased by $8,122,000 for
the year ended January 31, 2000 compared to the year ended December 31, 1998.
The increase was due to acquisitions made in 1998, in particular Sherpa
Systems Corporation and
19
MediaBank, combined with continued investment in DynaBase. This increase was
partially offset by savings resulting from the second quarter restructuring.
Amortization of intangible assets increased $2,707,000 to $4,248,000 for the
year ended January 31, 2000 from $1,541,000 for the year ended December 31,
1998 due to the 1998 acquisitions.
General and administrative expenses increased $5,941,000 to $21,527,000 for
the year ended January 31, 2000 compared to $15,586,000 for the year ended
December 31, 1998. Excluding $530,000 in administrative expenses associated
with the assets sold to Lernout & Hauspie, general and administrative expenses
increased $6,471,000 for the year ended January 31, 2000 compared to the year
ended December 31, 1998. The increase in general and administrative expenses
was primarily due to additional costs for facilities, insurance and personnel
due to the acquisitions made in 1998.
As a result of the net operating losses incurred in fiscal 2000, and after
evaluating the Company's anticipated performance over its normal planning
horizon, we have provided a full valuation allowance for our net operating
loss carryforwards and other net deferred tax assets. The 1998 reported tax
benefit was the result of net operating loss carrybacks available from taxes
paid in prior years. In 1998, the net operating loss carryforwards and other
deferred tax assets in excess of deferred tax liabilities were also fully
reserved through a valuation allowance.
Net loss and diluted loss per share were $62,310,000 and $3.98,
respectively, for the year ended January 31, 2000 as compared to net loss and
diluted loss per share of $19,569,000 and $1.30, respectively, for the year
ended December 31, 1998.
Liquidity and Capital Resources
Our operating activities used cash of $14,869,000 for the year ended January
31, 2001, compared to $34,473,000 for the year ended January 31, 2000. The
increased contribution from operating activities of $19,604,000 from the 2000
fiscal year to the 2001 fiscal year was due principally to the improved
operating performance resulting from the 2000 divestitures of PDM and
DynaText, and the cost savings related to the fiscal 2000 and 2001
restructuring actions and special charges.
Our investing activities provided cash of $44,284,000 for the year ended
January 31, 2001 compared to $44,719,000 for the year ended January 31, 2000.
The decreased contribution of $435,000 in fiscal 2001 compared to fiscal 2000
was due primarily to the proceeds of $50,798,000 received from the sale of IED
combined with additional selling price adjustments related to the fiscal 2000
sales of PDM and DynaText, offset by uses of cash to purchase $4,359,000 of
marketable securities and investments in property and equipment and
capitalized product development costs of $2,155,000. In fiscal 2000, the
Company received proceeds from the PDM and DynaText transactions amounting to
$18,066,000, $38,212,000 from sales of marketable securities, which were
offset by payments of $5,685,000 for prior year acquisitions and investments
of $5,874,000 for property and equipment and capitalized product development
costs.
Our financing activities used cash of $4,114,000 for the year ended January
31, 2001 compared to providing cash of $11,645,000 for the year ended January
31, 2000. The decrease in fiscal 2001 from fiscal 2000 of $15,759,000 resulted
from decreased proceeds from issuances of common stock, pursuant to employee
benefit plans, resulting primarily from the reduced employee base due to the
divestitures and restructurings in fiscal year 2001, and increased use of cash
to repurchase 1.7 million shares of treasury stock, at a cost of approximately
$4.8 million. On March 7, 2001 the Company announced another share repurchase
plan under which up to 1.5 million shares of the Company's common stock may be
repurchased. All treasury stock transactions have taken place at market
prices, and the Company expects that all future purchases will also take place
at market prices.
As of January 31, 2001, we had working capital of $63,660,000. Total cash,
cash equivalents, and marketable securities at January 31, 2001 were
$65,670,000. We believe that current funds available and funds receivable from
the recent sale of assets will be sufficient to finance our operations.
20
As soon as we discovered that it could be necessary to restate certain of
our financial results for the first three quarters of 1998, we immediately and
voluntarily provided this information to the U.S. Securities and Exchange
Commission. On June 2, 1999, we were informed that the U.S. Securities and
Exchange Commission had issued a Formal Order of Private Investigation in
connection with matters relating to our previously announced restatement of
our 1998 financial results. We cannot predict the ultimate resolution of this
action at this time, and there can be no assurance that the Formal Order of
Private Investigation will not have a material adverse impact on our financial
condition and results of operations.
On June 9, 1999, the bankruptcy estates of Microlytics, Inc. and Microlytics
Technology Co., Inc. (together "Microlytics") filed a complaint against us in
the United States Bankruptcy Court for the Western District of New York. The
lawsuit is captioned Microlytics, Inc. and Microlytics Technology Co., Inc. v.
Inso Corporation, Adversary Proceeding No. 99-2177. The complaint seeks
turnover of purported property of the estates and damages for our 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, we filed our Answer and Demand for Jury
Trial. Also, on August 19, 1999, we filed a motion to withdraw the case from
the Bankruptcy Court to the United States District Court for the Western
District of New York. On December 15, 1999, the United States District Court
granted our motion for the purposes of dispositive motions and trial. The
parties are presently engaging in document discovery and no depositions have
been taken. We believe that the claims are subject to meritorious defenses,
which we plan to assert during the lawsuit. We cannot predict the ultimate
resolution of this action at this time, and there can be no assurance that the
litigation will not have a material adverse impact on our financial condition
and results of operations.
During February 2000, certain shareholders of the Company filed two
substantially similar putative class action complaints against the Company and
certain of the Company's officers and employees in the United States District
Court for the District of Massachusetts that were are captioned as follows:
Liz Lindawati, et al. v. Inso Corp., et al., Civil Action No. 00-CV-10305GAO;
Group One Limited, et al. v. Inso Corp., et al., Civil Action No. 00-CV-
10318GAO. These lawsuits were filed following our preliminary disclosure of
revenues for the fiscal year 2000 fourth quarter on February 1, 2000. They
assert claims for violations of Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 of the Securities and Exchange Commission, as well as a
claim for violation of Section 20(a) of the Exchange Act.
On June 14, 2000, the District Court ordered that both actions be
consolidated into one lawsuit entitled In Re Inso Corporation Securities
Litigation, Civil Action No. 00-103050-GAO. The plaintiffs filed a
consolidated amended complaint on February 21, 2001. The plaintiffs alleged
that the defendants prepared and issued deceptive and materially false and
misleading statements to the investing public. They sought unspecified
damages. On April 9, 2001, the Company filed a motion to dismiss the lawsuit
on the grounds that the plaintiffs failed to state a claim under the relevant
securities laws. After receiving the Company's motion to dismiss, the
plaintiffs themselves moved to dismiss the lawsuit with prejudice on April 23,
2001. The plaintiffs received no consideration for, and the Company assented
to, the dismissal. We are awaiting Court approval of the plaintiffs' motion to
dismiss (see Note 16 of "Notes to Consolidated Financial Statements").
We are also subject to various legal proceedings and claims that arise in
the ordinary course of business. We currently believe that resolving these
matters will not have a material adverse impact on our financial condition or
our results of operations.
In November 1998, the Board of Directors approved a change in our fiscal
year to February 1 through January 31, effective for the twelve-month period
ending January 31, 2000. Through December 31, 1998, we reported results on a
calendar year basis.
In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133 "Accounting for Derivative Instruments and
Hedging Activities," as amended by Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities-an amendment to FASB Statement No 133" (collectively FAS 133). This
statement, which is effective for the
21
Company's fiscal year beginning February 1, 2001, provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. We do not expect the adoption of FAS 133 to have a
significant impact on our financial position or results of operations.
Acquired In-Process Research and Development
The Company's January 1999 and calendar year 1998 acquisitions included
purchased in-process research and development charges for Venture Labs, Inc.,
Sherpa Systems Corporation, and MediaBank totaling $22,400,000. These amounts
were expensed as non-recurring charges on the respective acquisition dates as
the acquired technology had not yet reached technological feasibility and
therefore had no alternative future uses. At the time of the acquisitions, the
Company engaged an independent appraiser to estimate the fair market value of
the assets acquired, to serve as a basis for the allocation of the purchase
price.
The nature of the efforts required to develop the purchased in-process
technology into commercially viable products principally related to the
completion of all planning, designing, prototyping, verification, and testing
activities necessary to establish that each product can be produced to meet
its design specifications, including functions, features, and technical
performance requirements.
The values of the purchased in-process research and development were based
upon future revenues to be earned upon commercialization of the products.
These cash flows were discounted back to their net present value. The
resulting projected net cash flows from such projects were based on
management's estimates of revenues and operating profits related to such
projects. The revenue estimates used to value the in-process research and
development were based on estimates of relevant market sizes and growth
factors, expected trends in the related technology, and the nature and
expected timing of new product introductions by the Company and its
competitors. The projected net cash flows were discounted to their present
value using the weighted average cost of capital ("WACC"). The WACC
calculation produces the average required rate of return of an investment in
an operating enterprise, based on required rates of return from investments in
various areas of the enterprise. The Company no longer employs any of this
technology in its operations, as all of the technology acquired in connection
with the 1998 and 1999 business acquisitions has been sold through the various
sale transactions of DynaText, PDM, IED and MediaBank (see Note 5 to the
"Notes to Consolidated Financial Statements").
The estimates used in valuing the in-process research and development were
based upon assumptions the Company believed to be reasonable but which are
inherently uncertain and unpredictable. The assumptions may be incomplete or
inaccurate, and no assurance can be given that unanticipated events and
circumstances will not occur. Accordingly, actual results may vary from the
projected results. Any such variances may adversely affect the sales and
profitability of future periods. Additionally, the value of other intangible
assets recorded at the time of the respective acquisitions may become
impaired.
AIS Software S.A.
The primary purchased in-process technology acquired in the AIS acquisition
was the DualPrism Web distribution technology. This is a flexible server-based
publishing technology that allows data stored in a number of possible
repositories, file systems, relational databases and object databases, to be
served dynamically to a standard World Wide Web browser. The Company estimates
that this project was 80% completed at the time of the acquisition. The nature
of the efforts required to develop the purchased in-process technology into
commercially viable products was substantially completed during fiscal 2000,
and AIS Software S.A. was subsequently sold as part of the January 2000
disposition of the PDM division.
Venture Labs, Inc.
The primary purchased in-process technologies acquired in the Venture Labs,
Inc. acquisition consisted of the Java filtering and viewing projects. The
Company estimates that the projects were between 75% and 85% complete at the
date of the Venture Labs, Inc. acquisition. As of January 31, 2000, the nature
of the efforts
22
required to develop the purchased in-process technology into commercially
viable products was substantially completed, and Venture Labs, Inc. and its
subsidiary Paradigm Development Corporation (collectively "Paradigm") were
subsequently sold as part of the July 2000 divesture of the Company's
Information Exchange Division.
Sherpa Systems Corporation
The primary purchased in-process technology acquired in the Sherpa Systems
Corporation acquisition was the SherpaWorks Version 3 product. This technology
was designed to implement a three-tier architecture, to provide out-of-the-
box, configurable Product Data Management systems. The Company estimated that
this project was approximately 85% complete at the date of the Sherpa
acquisition. The Company stopped development of SherpaWorks 3.0 in the third
quarter of fiscal 2000, given management's plans to divest of the PDM
division, and Sherpa Systems Corporation was subsequently sold as part of the
January 2000 disposition of the PDM division.
MediaBank
The primary purchased in-process technologies acquired in the MediaBank
acquisition consisted of the new digital asset management products, which were
divided into two projects. The first project was a media asset management
technology that provides support for standard query language (SQL) databases,
such as Oracle 7 and Microsoft's SQL Server. In addition, this project also
provides server capabilities that allow users to manage and retrieve assets
stored in the asset management systems through a standard Web browser. The
Company estimates that this project was 85% complete at the time of the
MediaBank acquisition. As of January 31, 2000, the nature of the efforts
required to develop the first project into commercially viable products was
substantially completed.
The second project provided content management capabilities based on the
contents of text embedded in popular text formats stored in the database. In
addition, the second project provides support for DB2, a popular relational
database developed by IBM, and IBM's Content Manager (formerly Digital
Library) product. The Company estimates that this project was 30% complete at
the time of the MediaBank acquisition. As of January 31, 2000, the nature of
the efforts required to develop this project into commercially viable products
was substantially completed.
Risk Factors that May Affect Future Operating Results
We intend to substantially increase eBT's sales and marketing organization.
This could burden our level of sales and marketing expenditures relative to
revenues, which could lower our operating margins in future periods.
Our ability to remain competitive in the computer software industry depends
on the services of a number of key management and technical personnel,
principally software engineers. Personnel costs for technical staff represent
a significant portion of our operating expenses, and increased competition and
related personnel cost increases for such staff could have a material adverse
impact on our operating results. Additionally, because of the drop in eBT's
stock price we may need to use larger amounts of cash to compensate our
employees, rather than the equity incentives we have relied on in prior
periods. This could result in reduced operating margins as a result of higher
personnel costs.
The market for enterprise content management is fiercely competitive, and is
currently dominated by companies such as Interwoven, Vignette, and Documentum,
which have substantially greater development, marketing, sales and financial
resources than we do. In addition, there are numerous smaller providers of
content management, both public and privately funded, which pose competitive
challenges. While we believe that products are selected today on the basis of
feature, ease-of-use, use of open standards, scalability and flexibility, and
not on the basis of price, there is risk that this competitive environment may
begin to put downward pressure on price for our products. Moreover, our
inability to differentiate our products effectively, to enter into strategic
relationships with consulting and other partners to drive customer
acquisition, or a failure to successfully market our solution would have a
material adverse affect on our results of operations and financial condition.
23
We have invested significant development resources in products utilizing
standards-based publishing formats, such as XML, and we intend to invest
significant resources in technologies and standards for the mobile and
wireless market. Should large numbers of customers and potential customers not
ultimately adopt such formats and standards, it is possible that there may be
a limited market for the products we are currently developing, which could
have an adverse impact on future revenues and operating results.
We have invested substantial resources developing a new product, entrepid,
which provides content management for customers who have elected to use the
Oracle database as their repository for web content. Therefore, the success of
this product will be tied in part to the continued acceptance of Oracle as a
leading database technology provider. Failure of Oracle to continue to win
substantial market share for its database products would likely cause a
material adverse effect on our ability to sell entrepid. Moreover, should
Oracle develop or acquire its own competing content management and workflow
product, our ability to sell entrepid could be materially adversely affected.
Even if Oracle continues to be a market leader in enterprise database
technology and does not begin to sell a product with substantially similar
functionality to entrepid, there can be no assurance that we will achieve
sufficient market acceptance of entrepid to achieve a return on our
development investment. Failure to achieve market acceptance for entrepid
would likely have a material adverse impact on our business, results of
operations and financial condition.
As we have shifted from being a technology platform provider to offering a
solution, we have retrained and have substantially changed the make-up of our
sales force. The average tenure of our sales personnel is less than six
months. We have made substantial investments in training this new sales force.
There can be no assurance, however, that we will be successful in making this
sales force productive and in successfully transitioning to a solution selling
approach. Failure to do so would have a material adverse effect on our
business, results of operations and financial condition.
We intend to increase the marketing of our products directly to customers
outside the United States. The marketing of products directly to customers
outside the United States increases the risk to our revenues associated with
fluctuations of the U.S. dollar in relation to foreign currencies. Such
fluctuations could also result in increased operating expenses associated with
foreign operations.
Our business could be harmed if the growth of the Internet does not
continue. To the extent that businesses do not continue to adopt the Internet
as critical to their future plans, we may experience difficulty expanding our
customer base. Further, the growth of the Internet as a medium for business
requires the acceptance and adoption of new paradigms for operating
traditional businesses, and we cannot be certain that this will occur as
rapidly or completely as we hope. Many companies have already invested
substantial resources in other means of conducting commerce and exchanging
information, and they may be unwilling to quickly move to Internet-based
strategies to achieve these objectives.
Even with substantial Internet growth, it is possible that the existing and
future Internet infrastructure may not be able to support the additional
demands placed upon it. This could lead to delays in implementation of
Internet-based technologies, including those we market.
Future legislation or regulations could be enacted that directly or
indirectly impact our ability to market our products, especially in the area
of Internet commerce. It is impossible to predict if or how any future
legislation or regulations would impact the Internet and our business.
However, legislation or regulation that discouraged continued investment in
Internet commerce could slow demand for content management products, which
could have a material adverse affect on our business, results of operations
and financial condition.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
eBT is exposed to the impact of interest rate and foreign currency
fluctuations. Our cash equivalents and available for sale investments are
exposed to financial market risk due to fluctuation in interest rates, which
may affect our interest income and the fair value of our investments. We
manage the exposure to financial market risk
24
by performing ongoing evaluations of our investment portfolio and investing in
short-term investment grade corporate securities, United States agency bonds,
and asset backed securities. In addition, we do not use investments for
trading or other speculative purposes. We have performed a sensitivity
analysis assuming a hypothetical 10% adverse fluctuation in interest rates. As
of January 31, 2001, the analysis indicated that the change in interest income
would not have a material adverse effect on our financial position or results
of operations. Additionally, the carrying value of our investments
approximates the fair value and therefore the impact of a fluctuation in
interest rates to the carrying value is not material to our financial position
or results of operations. However, actual interest income and gains and losses
in the future may differ materially from our analysis.
We transact business in various foreign currencies, primarily in certain
European countries, and therefore are subject to exposure from movements in
foreign currency exchange rates. We primarily license our technology in U.S.
dollars but certain operating expenses are denominated in the local currency.
For fiscal 2001, we do not believe we had significant exposure associated with
movements in foreign currency exchange rates. We will evaluate the exposures
going forward and will implement the appropriate risk management procedures as
deemed necessary.
Item 8. Financial Statements and Supplementary Data
The Company's consolidated financial statements and supplementary data are
included under Item 14 of this Annual Report and incorporated herein by
reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The information required to be furnished pursuant to this item is set forth
under the caption "Executive Officers of the Registrant" in Part I hereof and
under the captions "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's proxy statement ("Proxy
Statement"), to be furnished to stockholders in connection with the
solicitation of proxies for use at the May 31, 2001 Annual Meeting of
Stockholders which was filed with the Securities and Exchange Commission on
April 30, 2001.
Item 11. Executive Compensation
The information required to be furnished pursuant to this item is set forth
under the captions "Directors Compensation," "Summary Compensation Table,"
"Stock Option Grants," "Aggregated Option Exercises and Year-End Option
Table," and "Severance Agreements" in the Proxy Statement and is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required to be furnished pursuant to this item is set forth
under the caption "Security Ownership" in the Proxy Statement and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required to be furnished pursuant to this item is set forth
under the caption "Item 1. Election of Directors" and "Executive Compensation"
in the Proxy Statement and is incorporated herein by reference.
25
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Consolidated Financial Statements
The consolidated financial statements listed in the accompanying Index
to Consolidated Financial Statements and Financial Statement Schedule
are filed as part of this Annual Report.
2. Consolidated Financial Statement Schedule
The consolidated financial statement schedule listed in the
accompanying Index to Consolidated Financial Statements and Financial
Statement Schedule is filed as part of this Annual Report.
3. Exhibits
The exhibits listed in the accompanying Exhibit Index are filed as part
of this Annual Report.
(b) Reports on Form 8-K filed in the fourth quarter of fiscal 2001
None.
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
eBT International, Inc.
Registrant
Date: April 30, 2001 /s/ James M. Ringrose
_____________________________________
James M. Ringrose
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Christopher M. Burns Vice President and Chief April 30, 2001
______________________________________ Financial Officer
Christopher M. Burns (Chief Accounting
Officer)
/s/ Samuel H. Fuller Director April 30, 2001
______________________________________
Samuel H. Fuller
/s/ Stephen O. Jaeger Chairman and Director April 30, 2001
______________________________________
Stephen O. Jaeger
/s/ Joanna T. Lau Director April 30, 2001
______________________________________
Joanna T. Lau
/s/ Edward Terino Director April 30, 2001
______________________________________
Edward Terino
27
Item 14(a). Index to Consolidated Financial Statements and Financial Statement
Schedule
Page
----
Report of Independent Auditors............................................. 29
Consolidated Balance Sheets at January 31, 2001 and 2000................... 30
Consolidated Statements of Operations for the years ended January 31, 2001,
2000, and December 31, 1998 and the one month ended January 31, 1999...... 31
Consolidated Statements of Cash Flows for the years ended January 31, 2001,
2000, and December 31, 1998 and the one month ended January 31, 1999...... 32
Consolidated Statements of Stockholders' Equity for the years ended January
31, 2001, 2000, and December 31, 1998 and the one month ended January 31,
1999...................................................................... 33
Notes to Consolidated Financial Statements................................. 34
Schedule for the years ended January 31, 2001, 2000, December 31, 1998 and
the one month ended January 31, 1999:
Schedule II Valuation and Qualifying Accounts............................ 60
All other schedules have been omitted since the required information is not
present, or the amounts are not sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements.
28
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
eBT International, Inc.
We have audited the accompanying consolidated balance sheets of eBT
International, Inc. as of January 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years ended January 31, 2001, 2000, and December 31,
1998 and the one month ended January 31, 1999. Our audits also included the
financial statement schedule listed in the Index at Item 14(a). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of eBT
International, Inc. at January 31, 2001 and 2000, and the consolidated results
of its operations and its cash flows for each of the three years ended January
31, 2001, 2000 and December 31, 1998, and the one month ended January 31,
1999, in conformity with accounting principles generally accepted in the
United States. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
Boston, Massachusetts
March 2, 2001, except for Note 16
as to which the date is April 23, 2001
29
eBT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
JANUARY 31, 2001 and 2000
(In thousands, except share amounts)
January 31, January 31,
2001 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents............................ $ 56,709 $ 31,408
Marketable securities................................ 8,961 4,602
Accounts receivable, net of allowances of $687 and
$3,139, respectively................................ 3,195 14,469
Receivables from asset sales......................... 5,973 5,723
Prepaid expenses and other current assets............ 537 2,719
-------- ---------
Total current assets............................... 75,375 58,921
Property and equipment, net............................ 2,402 5,034
Product development costs, net of accumulated
amortization of $7,519, and $11,375, respectively..... 1,187 10,402
Excess of costs over net assets acquired, net of
accumulated amortization of $0 and $4,628,
respectively.......................................... -- 2,055
Other intangible assets, net of accumulated
amortization of $1,038 and $1,860, respectively....... -- 1,005
Long-term accounts receivable.......................... 90 877
Licensed technology and advances, net.................. 948 2,295
-------- ---------
TOTAL ASSETS........................................... $ 80,002 $ 80,589
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 836 $ 1,295
Accrued liabilities.................................. 9,371 14,927
Unearned revenue..................................... 1,508 8,205
Other current liabilities............................ -- 131
-------- ---------
Total current liabilities.......................... 11,715 24,558
Unearned revenue, non-current portion.................. -- 517
Capital leases, non-current portion.................... -- 142
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized; none issued
Common stock, $.01 par value; 50,000,000 shares
authorized; 16,938,033 and 16,588,773 shares issued
at January 31, 2001 and 2000, respectively.......... 169 165
Capital in excess of par value....................... 157,712 156,098
Accumulated deficit.................................. (84,118) (100,633)
-------- ---------
73,763 55,630
Unamortized value of restricted shares................. (433) --
Notes receivable from stock purchase agreements........ (200) (200)
Treasury stock, at cost, 1,705,075 and 5,075 shares at
January 31, 2001 and 2000, respectively............... (4,843) (58)
-------- ---------
Total stockholders' equity......................... 68,287 55,372
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............. $ 80,002 $ 80,589
======== =========
See accompanying Notes to Consolidated Financial Statements.
30
eBT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended January 31, 2001, 2000 and December 31, 1998
and the One Month Ended January 31, 1999
(In thousands, except per share amounts)
Years Ended
January 31, One Month Ended Year Ended
----------------- January 31, December 31,
2001 2000 1999 1998
------- -------- --------------- ------------
Revenues:
Product licenses............. $13,739 $ 40,781 $ 1,819 $ 51,758
Service...................... 7,957 23,899 1,289 8,336
------- -------- ------- --------
Total revenues............... 21,696 64,680 3,108 60,094
Cost of revenues:
Cost of product licenses..... 3,434 10,262 2,332 9,362
Cost of service.............. 6,202 11,948 1,015 3,288
------- -------- ------- --------
Total cost of revenues....... 9,636 22,210 3,347 12,650
------- -------- ------- --------
Gross profit (loss)............ 12,060 42,470 (239) 47,444
Operating expenses:
Sales and marketing.......... 15,419 24,559 2,725 27,463
Product development.......... 10,897 26,079 2,535 19,529
Amortization of intangible
assets...................... 561 4,248 304 1,541
General and administrative... 8,902 21,527 2,741 15,586
Restructuring expenses....... 1,954 11,068 -- --
Special charges.............. 200 28,103 -- --
Purchased in-process research
and development............. -- -- 500 21,900
------- -------- ------- --------
Total operating expenses... 37,933 115,584 8,805 86,019
------- -------- ------- --------
Operating loss................. (25,873) (73,114) (9,044) (38,575)
Non-operating income (expense):
Net investment and other
income...................... 3,861 1,721 353 4,682
Recovery (write-down) of
investment in Information
Please LLC.................. 657 (2,655) -- --
Gain on sale of assets, net.. 38,170 12,212 -- 13,289
------- -------- ------- --------
Income (loss) before provision
for income taxes.............. 16,815 (61,836) (8,691) (20,604)
Provision (benefit) for income
taxes......................... 300 474 -- (1,035)
------- -------- ------- --------
Net income (loss).............. $16,515 $(62,310) $(8,691) $(19,569)
======= ======== ======= ========
Earnings (loss) per common
share......................... $ 1.00 $ (3.98) $ (0.56) $ (1.30)
======= ======== ======= ========
Earnings (loss) per common
share, assuming dilution...... $ 0.98 $ (3.98) $ (0.56) $ (1.30)
======= ======== ======= ========
See accompanying Notes to Consolidated Financial Statements.
31
eBT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 31, 2001, 2000, and December 31, 1998
and One Month Ended January 31, 1999
(In thousands of dollars)
Years Ended
January 31, One Month Ended Year Ended
----------------- January 31, December 31,
2001 2000 1999 1998
------- -------- --------------- ------------
Cash flows (used in) provided
by operating activities:
Net income (loss)............ $16,515 $(62,310) $(8,691) $(19,569)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities:
Depreciation............... 1,608 3,440 368 3,371
Amortization............... 3,823 12,246 2,325 7,086
Provisions for doubtful
accounts.................. 1,625 2,008 -- 3,044
Purchased in-process
research and development.. -- -- 500 21,900
Non-cash stock compensation
expense................... 172 1,482 -- --
Non-cash restructuring
expenses.................. -- 5,490 -- --
Non-cash special charges
expenses.................. -- 10,805 -- --
(Recovery) write-down of
investment in Information
Please LLC................ (657) 2,655 -- --
Deferred income taxes...... -- -- -- (70)
Gain on sale of assets, net.. (38,170) (12,212) -- (13,289)
------- -------- ------- --------
(15,084) (36,396) (5,498) 2,473
Changes in operating assets and
liabilities:
Accounts receivable.......... 4,273 5,773 3,419 457
Accounts payable and accrued
liabilities................. (3,389) (2,977) 1,357 (2,516)
Other assets and
liabilities................. (669) (873) 1,315 2,200
------- -------- ------- --------
Net cash (used in)
provided by operating
activities.............. (14,869) (34,473) 593 2,614
Cash flows (used in) provided
by investing activities:
Property and equipment
expenditures................ (1,015) (2,128) (169) (2,982)
Capitalized product
development costs........... (1,140) (3,746) (393) (4,906)
Acquisitions, net of cash
acquired.................... -- -- (5,883) (43,553)
Payments related to 1998
acquisitions................ -- (5,685) (2,027) --
Net (purchases) proceeds from
sales of marketable
securities.................. (4,359) 38,212 7,982 10,864
Proceeds from the sale of
assets, net................. 50,798 18,066 -- 19,853
------- -------- ------- --------
Net cash (used in)
provided by investing
activities.............. 44,284 44,719 (490) (20,724)
Cash flows (used in) provided
by financing activities:
Net proceeds from issuance of
common stock................ 707 11,543 -- 11,695
Proceeds from the payment of
notes receivable underlying
Stock Purchase Agreements... -- 1,105 -- 1,189
Purchases of treasury stock.. (4,785) -- -- --
Payments under capital lease
obligations................. (36) (1,003) (88) --
Repayment of acquired company
debt........................ -- -- -- (3,784)
------- -------- ------- --------
Net cash (used in)
provided by financing
activities.............. (4,114) 11,645 (88) 9,100
Net increase (decrease) in cash
and cash equivalents.......... 25,301 21,891 15 (9,010)
Cash and cash equivalents at
beginning of period........... 31,408 9,517 9,502 18,512
------- -------- ------- --------
Cash and cash equivalents at
end of period................. $56,709 $ 31,408 $ 9,517 $ 9,502
======= ======== ======= ========
See accompanying Notes to Consolidated Financial Statements.
32
eBT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands except share amounts)
Capital Notes
in Unamortized receivable
Common stock excess value of from stock Treasury stock
------------------ of par Accumulated restricted purchase -----------------
Shares Amount value deficit shares agreements Shares Amount Total
---------- ------ -------- ----------- ----------- ---------- --------- ------- -------- ---
Balance at December 31,
1997................... 14,645,611 $146 $128,187 $ (10,063) $(240) $(2,494) 5,075 $ (58) $115,478
Issuance of shares
pursuant to Employee
Stock Purchase Plan.... 128,199 1 1,354 1,355
Proceeds from Notes
Receivable from Stock
Purchase Agreements.... 1,189 1,189
Stock options
exercised.............. 716,330 8 10,332 10,340
Issuance of restricted
shares................. 7,500 135 (135) --
Other issuances and
repurchases............ 9,000 122 122
Amortization of
restricted shares...... 259 259
Net loss*............... (19,569) (19,569)
---------- ---- -------- --------- ----- ------- --------- ------- --------
Balance at December 31,
1998................... 15,506,640 $155 $140,130 $ (29,632) $(116) $(1,305) 5,075 $ (58) $109,174
Stock options
exercised.............. 200 2 2
Other issuances and
repurchases............ 9,000 156 156
Amortization of
restricted shares...... 14 14
Net loss*............... (8,691) (8,691)
---------- ---- -------- --------- ----- ------- --------- ------- --------
Balance at January 31,
1999................... 15,515,840 $155 $140,288 $ (38,323) $(102) $(1,305) 5,075 $ (58) $100,655
Issuance of shares
pursuant to Employee
Stock Purchase Plan.... 184,323 2 1,076 1,078
Proceeds from Notes
Receivable from Stock
Purchase Agreements.... 1,105 1,105
Stock options
exercised.............. 851,466 8 10,111 10,119
Cancellation of
restricted shares...... (3,750) (23) 23 --
Issuance of warrants.... 2,010 2,010
Exercise of warrants.... 34,644 346 346
Other issuances and
repurchases............ 6,250 546 546
Acceleration of stock
options................ 1,744 1,744
Amortization of
restricted shares...... 79 79
Net loss*............... (62,310) (62,310)
---------- ---- -------- --------- ----- ------- --------- ------- --------
Balance at January 31,
2000................... 16,588,773 $165 $156,098 $(100,633) $ -- $ (200) 5,075 $ (58) $ 55,372
Issuance of shares
pursuant to Employee
Stock Purchase Plan.... 188,210 2 499 501
Issuance of restricted
shares................. 177,300 2 763 (765) --
Stock options
exercised.............. 34,850 206 206
Cancellation of
restricted shares...... (51,100) (215) 215 --
Purchases of treasury
stock.................. 1,700,000 (4,785) (4,785)
Other issuances and
repurchases............ 361 (55) 306
Amortization of
restricted shares...... 172 172
Net income*............. 16,515 16,515
---------- ---- -------- --------- ----- ------- --------- ------- --------
Balance at January 31,
2001................... 16,938,033 $169 $157,712 $ (84,118) $(433) $ (200) 1,705,075 $(4,843) $ 68,287
========== ==== ======== ========= ===== ======= ========= ======= ========
- -------
* Net income (loss) equals comprehensive income (loss) for each period
presented.
See accompanying Notes to Consolidated Financial Statements.
33
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Nature of Operations
eBT International, Inc. (the "Company") develops and markets enterprise-wide
Web content management and workflow software solutions and associated services
that are designed to automate and streamline the Web publishing process. As of
January 31, 2001, the Company has a single operating segment, which was
previously identified as the eBusiness Technologies division, having divested
of all of its other business lines as of July 10, 2000. Through enterprise
license agreements the Company's products enable customers to develop and
deploy content-rich e-business solutions. The Company markets its products
worldwide through direct and reseller channels to corporate end users in a
broad range of industries.
Between 1998 and July 10, 2000, the Company operated in three other
operating segments, which were all disposed between April 1998 and July 2000.
These segments included the Company's Information Exchange ("IED"), Product
Data Management ("PDM") and Lexical and Linguistic divisions. The IED division
was comprised of viewing technologies that provided customers the ability to
view, copy and print files of varying originations and in disparate operating
system environments. The IED division was sold on July 10, 2000 (see Note 5).
The Product Data Management division was comprised of technologies obtained in
connection with the acquisition in 1998 of Sherpa Systems Corporation, as well
as certain technologies from the division formerly referred to as Electronic
Publishing Solutions. The PDM division was sold in two transactions, both of
which took place during fiscal 2000 (see Note 5). The Lexical and Linguistic
division was comprised of proofing tools, reference works and information
tools, and was sold on April 23, 1998 (see Note 5).
On August 28, 2000, we changed our name from Inso Corporation to eBT
International, Inc. and our Nasdaq ticker symbol to EBTI, to more closely
reflect the concentration of our resources exclusively on the Web content
management market that we now serve.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Investments in less than 20% owned
affiliates are accounted for under the cost method.
Reclassification
Certain amounts in the prior period financial statements have been
reclassified to conform to the current year presentation.
Change in Year End
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.
Cash and Cash Equivalents
The Company considers highly liquid investments with maturities of three
months or less at the time of purchase to be cash equivalents.
34
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additional Cash Flow Statement Information
Years Ended
January 31, Year Ended
------------- December 31,
2001 2000 1998
------ ------ ------------
Supplemental disclosures of cash flow informa-
tion:
Cash paid for income taxes................... $ 24 $ 408 $230
Non-cash investing and financing information:
Receivables from asset sales................. 5,973 5,723 --
Investments
The Company accounts for its investments in securities, including certain
cash equivalents and marketable securities, in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The appropriate classification of debt securities
is determined at the time of purchase and is reevaluated at each balance sheet
date (see Note 2).
Foreign Currency Translation
The financial statements of foreign subsidiaries have been translated into
U.S. dollars in accordance with Statement of Financial Accounting Standards
No. 52, "Foreign Currency Translation". All balance sheet accounts have been
translated using the exchange rate in effect at the balance sheet date. Income
statement amounts have been translated using average exchange rates in effect
during the year. The gains and losses resulting from the changes in exchange
rates from year to year are insignificant for all years presented.
Additionally, the effect on the statements of operations for transaction gains
and losses is insignificant for all years presented.
Fair Value of Financial Instruments
The Company's cash equivalents, marketable securities and accounts
receivables are carried at cost, which approximates fair value.
Revenue Recognition
The Company derives its revenues from licenses of its software products and
from services the Company provides to its customers.
Revenue from software licensing and services fees is recognized in
accordance with Statement of Position ("SOP") 97-2, "Software Revenue
Recognition", and SOP 98-9, "Software Revenue Recognition with Respect to
Certain Transactions". Accordingly, the Company recognizes software license
revenue when: (1) persuasive evidence of an arrangement exists; (2) delivery
has occurred; (3) the fee is fixed or determinable; and (4) collectibility is
probable.
The Company's software arrangements may contain multiple elements, such as
software products, services and post-contract customer support (PCS). Revenue
earned on software arrangements involving multiple elements which qualify for
separate element treatment is allocated to each element based on the relative
fair values of those elements based on vendor specific objective evidence.
Typically, the Company's software licenses do not include significant post-
delivery obligations to be fulfilled by the Company and payments are due
within a twelve month period from date of delivery. Consequently, license fee
revenue is generally recognized when the product is shipped. Royalty revenues
are generally recognized in the quarter in which the amounts due to the
Company have been determined. Revenue from training, consulting and
implementation services is recognized
35
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
as the services are performed. Revenue for PCS under software maintenance
arrangements is recognized ratably over the term of the agreement, generally
one year. Revenue for license renewals is recognized when all the criteria
under SOP 97-2 have been met.
Product Development Costs
Software and other costs incurred in connection with product development are
charged to expense until such time as specific product technological
feasibility has been established. Thereafter, product development costs
specific to the product are capitalized and reported at the lower of
unamortized cost or net realizable value.
Amortization of capitalized product development costs begins when the
related product is available for general release to customers. These costs are
amortized using the shorter of the estimated future product revenue streams or
the straight-line method over periods not exceeding three years.
Acquired developed software is capitalized as part of the allocation of the
purchase price on the basis of the estimated fair market value. Acquired
developed software is amortized on a straight-line basis over its estimated
useful life ranging from two to ten years.
Amortization of $2,397,000, $6,456,000, and $4,599,000 for the years ended
January 31, 2001 and 2000 and December 31, 1998, respectively, is included as
a component of cost of revenues. Amortization of $608,000 for the one month
ended January 31, 1999 is included as a component of cost of revenues.
Licensed Technology and Advances
Licensed technology and royalty advances, which pertain to payments by the
Company for the license of technology used in the Company's products, are
stated at cost less royalty amounts expensed based on revenues recognized over
the life of the related agreement. Costs of purchased licenses are amortized
using the greater of (a) the straight-line method over their estimated
economic lives, generally one to five years, or (b) current period revenue to
anticipated total revenues during the license period.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided on
leasehold improvements using the straight-line method over the economic life
of the asset or the lease term, whichever is shorter.
Intangible Assets
Intangible assets, including excess costs over net assets acquired, are
amortized on a straight-line method over their estimated economic lives for
periods ranging from one to ten years.
Impairment of Long-Lived Assets
In accordance with the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of", if facts and circumstances suggest that
an impairment may have occurred, the unamortized balances of these assets are
reviewed. Facts and circumstances indicative of an impairment may include
factors such as a significant decrease in demand for a product related to an
asset, a history of operating cash flow losses, or a projection or forecast
that demonstrates continuing losses associated with a revenue producing asset.
The undiscounted cash flow method is used to determine if impairment has
occurred. If indicators of impairment are present, and the estimated
undiscounted cash flows to be derived from the related assets are not expected
to be sufficient to
36
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
recover the asset's carrying amount, an impairment loss is charged to expense
in the period identified. The impairment loss is based upon the difference
between the carrying amount and the fair value, as determined based upon
discounted cash flows. The rates that would be utilized to discount the net
cash flows to net present value would take into account the time value of
money and investment risk factors. In the fiscal year ended January 31, 2000,
certain of the Company's intangible assets were determined to be impaired, and
the carrying amounts were reduced, as appropriate (see Notes 6 and 7).
Concentration of Credit Risk
The Company performs ongoing credit evaluations of its customers and
maintains reserves for potential credit losses.
The Company licenses its products primarily to customers in North America.
Revenues from foreign customers accounted for 28%, 33% and 24% of total net
revenue for the years ended January 31, 2001 and 2000 and December 31, 1998.
Stock-Based Compensation
The Company has elected to account for its stock-based compensation plans
following Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related interpretations rather than the
alternative fair value accounting provided under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). Accordingly, the Company does not generally recognize compensation
expense for its stock option plans and its stock purchase plan. However, in
fiscal 2000, in connection with the sale of its DynaText product line and PDM
division (see Note 5), the Company accelerated vesting of options held by
employees of the PDM division, which resulted in charges for compensation
expense in the amount of $1,744,000. The compensation expense is included in
the appropriate operating expense categories in the accompanying consolidated
statements of operations, based on the nature of services provided by the
various employees affected.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Accounting Standards No. 133 "Accounting for Derivative Instruments and
Hedging Activities," as amended by Statement of Financial Accounting Standards
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities-an amendment to FASB Statement No 133" (collectively FAS 133). This
statement, which is effective for the Company's fiscal year beginning February
1, 2001, provides a comprehensive and consistent standard for the recognition
and measurement of derivatives and hedging activities. We do not expect the
adoption of FAS 133 to have a significant impact on our financial position or
results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101 ("SAB No. 101"), "Revenue Recognition in Financial
Statements", which establishes guidelines for recognition, presentation and
disclosure of revenue in financial statements. We have adopted SAB 101 for all
transactions during the year ending January 31, 2001. Such adoption did not
have a material impact on our results of operations or our financial position.
In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation ("FIN") No. 44, "Accounting for Certain Transactions Involving
Stock Compensation--An Interpretation of APB Opinion No. 25." FIN 44 clarifies
the application of APB Opinion No. 25. FIN 44 was effective July 1, 2000, but
certain conclusions in FIN 44 cover specific events that occurred after either
December 15, 1998 or January
37
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12, 2000. The application of FIN 44 did not have a material impact on the
Company's financial position or results of operations.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates and such
differences may be material to the financial statements.
Note 2. Available for Sale Investments
The Company's available-for-sale investments are carried at cost, which
approximates fair value, and are included in cash equivalents and marketable
securities. Following are the components of the available-for-sale
investments:
As of January
31,
---------------
2001 2000
------- -------
(In thousands
of dollars)
Commercial paper............................................ $44,149 $ 5,951
Corporate issues............................................ 3,009 5,645
Money market funds.......................................... 11,097 15,552
United States agency bonds.................................. 3,961 996
------- -------
Total....................................................... $62,216 $28,144
======= =======
Interest on securities classified as available-for-sale of $3,261,000,
$1,472,000 and $4,883,000 is included in net investment and other income in
the years ended January 31, 2001 and 2000, and December 31, 1998,
respectively.
During the years ended January 31, 2001 and 2000 and December 31, 1998,
available-for-sale securities with values of $126,069,000, $44,812,000 and
$144,464,000, respectively, were sold or redeemed. The gross realized gains
and losses on those sales were immaterial to the Company's financial
statements. During the years ended January 31, 2001 and 2000 and December 31,
1998, purchases of available-for-sale securities were $443,348,000,
$41,420,000 and $385,154,000, respectively. Maturities of available-for-sale
securities were $277,917,000, $29,947,000 and $265,100,000 for the years ended
January 31, 2001 and 2000 and December 31, 1998, respectively.
The Company's available-for-sale securities have the following maturities:
As of January 31,
2001
-----------------
(In thousands)
Due in one year or less.................................... $59,207
Due within two years....................................... 3,009
-------
Total...................................................... $62,216
=======
38
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 3. Property and Equipment
Property and equipment are summarized as follows:
As of January 31,
---------------------------
2001 2000
------------ -------------
(In thousands of dollars)
Leasehold improvements........................ $ 400 $ 1,561
Computer equipment and software............... 7,370 16,148
Furniture and fixtures........................ 1,178 2,945
------------ -------------
8,948 20,654
Less accumulated amortization and
depreciation................................. (6,546) (15,620)
------------ -------------
$ 2,402 $ 5,034
============ =============
Note 4. Acquisitions and Investments
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. The acquisition was
accounted for as a purchase and was included in the consolidated financial
statements from the date of acquisition until its disposition in January 2000.
The purchase price was allocated based on the estimated fair market value of
the assets acquired and the liabilities assumed. Intangible assets totaling
$2,700,000 were recorded at the time of the acquisition and had been amortized
on a straight-line basis over their estimated useful lives, ranging from two
to five years. AIS Software operated as part of the Company's Product Data
Management Division until its divestiture on January 5, 2000 (see Note 5).
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. The
Company paid $4,300,000 in cash and assumed certain liabilities. Paradigm is
the developer of Java file filtering and viewing technology for both OEM and
direct corporate use. Paradigm operated as part of the Company's Information
Exchange Division, which was divested on July 10, 2000 (see Note 5). The
acquisition was accounted for as a purchase and its results of operation were
included in the consolidated financial statements from the date of
acquisition. The purchase price was allocated based on the estimated fair
market value of the assets acquired and the liabilities assumed. The
transaction included the purchase of certain technology under research and
development, which resulted in a charge to the Company's fiscal 1998
consolidated results of $1,800,000. Intangible assets totaling $1,594,000 were
recorded in connection with the acquisition. In addition, the Company
negotiated noncompetition agreements with key executives for a total value of
$1,500,000. The intangible assets were being amortized on a straight-line
basis over their useful lives, ranging from one to five years.
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. The acquisition
39
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
was accounted for as a purchase and was included in the consolidated financial
statements from the date of acquisition until its disposition on January 5,
2000. The preliminary purchase price allocation was based upon the estimated
fair value of the assets acquired and the liabilities assumed on the date of
purchase. These preliminary estimates were adjusted subsequent to the initial
recording, as detailed below. 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 non-competition agreements with key executives, under which the
Company agreed to pay approximately $1,600,000 over a three-year period. The
Company paid approximately $700,000 over the period Sherpa operated as part of
the Company's Product Data Management Division, from December 4, 1998 until
its divestiture on January 5, 2000 (see Note 5).
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 that it would
restate its financial results (see Note 14), 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 outstanding Original Warrants, b) the issuance of
new warrants, with a 36-month term and an exercise price of $10.00 per share,
to purchase a proportionate share of 1,000,000 shares of the Company's Common
stock, and c) the payment of a 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 $2,272,000, with an offsetting 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. Since December 31, 1998,
payments against the accrual consisted of the following: approximately
$1,635,000 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 $39,000 for other out-of-pocket expenses related to the acquisition.
During fiscal 2000, the Company reevaluated the estimated costs and reduced
the related accrual and goodwill by approximately $3,629,000, primarily due to
a reduction in estimated costs to exit a long term, fixed fee professional
service agreement and reductions in estimated severance costs.
The preliminary purchase accounting included capitalized software and other
intangible assets totaling $30,385,000. After consideration of the above noted
adjustments, and an increase of $400,000 related to certain pre-acquisition
liabilities, intangible assets and capitalized software totaled $24,884,000,
and were amortized on the straight-line basis over their estimated useful
lives, ranging from two to five years.
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. The
transaction also included a license to Bitstream's Page Flex page composition
technology for an additional $600,000. The acquisition was accounted for as a
purchase and its results of operation were included in the consolidated
financial statements from the date of acquisition. The purchase price was
allocated based on the
40
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
estimated fair market value of the assets acquired and the liabilities
assumed. The transaction included the purchase of certain technology under
research and development, which resulted in a charge to 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, and were
being amortized on the straight-line basis over five years. MediaBank operated
as part of the Company's eBusiness Technologies division until its divestiture
in June 2000 (see Note 5).
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 until its sale to Enigma on October 29, 1999 (see Note 5).
The acquisition was accounted for as a purchase and its results of operation
were included in the consolidated financial statements from the date of
acquisition. The purchase price was allocated based on the estimated fair
market value of the assets acquired and the liabilities assumed. The
transaction included the purchase of certain technology under research and
development, which resulted in a charge to the Company's fiscal 1998
consolidated results of $600,000. Intangible assets of $1,830,000 recorded in
connection with the acquisition were being amortized over their estimated
useful lives, ranging from one to five years.
Note 5. Divestitures
Sale of Linguistic Software Assets to Lernout & Hauspie
On April 23, 1998, the Company sold its linguistic software assets to
Lernout & Hauspie for $19,500,000, plus an additional amount for certain
receivables, net of certain liabilities. The proceeds were received 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 a gain of $13,289,000 in the
year ended December 31, 1998.
Sale of DynaText
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 sale 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. In connection with the disposition, the Company retained the accounts
receivable directly associated with the DynaText/DynaWeb and ViewPort browser
technologies. The proceeds of the sale were $9,000,000 in cash and $5,750,000
in the form of a promissory note, due and payable by April 30, 2000. The
promissory note was secured by a Stock Pledge Agreement of the stock of Inso
Providence Corporation. In connection with this transaction, the Company
recorded direct transaction costs and other accruals for costs directly
associated with the sale. As a result, the Company reported 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 January 27, 2000 the Company and Enigma amended the terms of the
agreement and related promissory note. Enigma paid $4,500,000 in cash and
deposited $1,200,000 into an interest bearing escrow account. In
41
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
return, we released the security for the promissory note. In July 2000, we
received approximately $909,000 of the escrow, after certain adjustments, in
final settlement of all purchase price amounts due from Enigma. In connection
with this settlement we adjusted the carrying amounts of certain assets and
liabilities resulting in a net gain of $465,000, which is included in the non-
operating income section of the Company's Consolidated Statements of
Operations.
Sale of PDM Division
On January 5, 2000, we sold the remaining interest in our PDM Division to
Structural Dynamics Research Corporation ("SDRC") for $6,000,000 in cash plus
assumption of liabilities. The transaction was in the form of a stock purchase
of all of the outstanding stock of the Company's subsidiaries: Sherpa Systems
Corporation and Inso France Development S.A. (formerly AIS Software, S.A.).
The proceeds received from the sale totaled $5,000,000 in cash at the time of
the closing, and $1,000,000 was placed in a supplemental closing fund to be
paid no later than 90 days after the first anniversary of the closing date.
The selling price was subject to adjustment based on the net worth of the
business at closing. After direct transaction costs, the loss on the sale of
PDM was $2,337,000 at January 31, 2000. The transaction created a capital loss
for federal tax purposes, which will be carried forward to future periods. The
net worth of the business on the closing balance sheet, as agreed to by SDRC
and the Company in July 2000, net of certain other adjustments negotiated
between the Company and SDRC, resulted in an additional receipt from SDRC of
approximately $2,696,000, in final settlement of the net worth balances. This
amount was received in July 2000. In connection with this settlement, during
the second quarter of fiscal 2001, we adjusted the carrying amounts of certain
assets and liabilities, and recorded an additional loss of approximately
$637,000.
During the fourth quarter of fiscal 2001, the Company and SDRC reached a
settlement agreement under which SDRC remitted an additional net purchase
price adjustment amount of $1,971,000, according to the terms of the original
agreement, as modified in the final settlement agreement dated January 24,
2001. This additional net payment was comprised of additional proceeds based
on Qualifying Maintenance and License Revenue, as defined in the original
agreement, reduced by certain agreed upon amounts relative to remaining
contingent liabilities. The Company has estimated and accrued the amounts it
believes will become due. The net results of the monies received and
adjustments recorded in connection with the settlement agreement was a
$1,526,000 gain in fiscal 2001, which is included in the non-operating income
section of the Company's Consolidated Statements of Operations.
Investment in Information Please LLC
In fiscal 2000, the Company determined that the value of its equity
investment in Information Please LLC, an organization engaged in the
development and marketing of the Information Please Almanac product line, 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
fiscal 2000. In the third quarter of fiscal 2001, we received a $657,000
distribution due to the liquidation of our former investment in Information
Please LLC.
Sale of MediaBank
In June 2000, we sold our MediaBank product line, which was formerly a
component of the eBusiness Technologies ("eBT") division, for contingent
future consideration of up to $2,000,000. As the consideration is contingent,
no proceeds were recorded on the sale, and a loss on the disposition of the
net assets of the
42
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
MediaBank business in the amount of $3,735,000 was charged against income in
connection with the transaction in fiscal year 2001. The majority of the
charge, approximately $3,548,000, was a non-cash charge related to licensed
technology that was sold, while approximately $386,000 related to severance
and professional fees incurred as a result of the transaction. These amounts
were partially offset by the liabilities assumed by the buyer. This loss is
included in the non-operating income section of the Company's Consolidated
Statements of Operations.
Sale of Information Exchange Division
On July 10, 2000, the Company sold its Information Exchange Division ("IED")
to IntraNet Solutions, Inc. ("IS") for a stated sale price of $55,000,000,
less amounts for retained rights under license and subject to adjustment based
on the net working capital of the IED business on the closing date. The
transaction was in the form of a merger of two wholly owned subsidiaries of IS
with the Company's subsidiaries, Inso Chicago Corporation and Inso Kansas City
Corporation, which generally comprised the IED business. We received
$48,000,000 of the proceeds in cash at the time of the closing. An additional
$5,500,000 has been placed in an escrow account, and subject to our
indemnification obligations under the agreement, shall be released to us on
the first anniversary of the closing date. The net gain initially recorded in
the second fiscal quarter from the transaction was $39,312,000. Under terms of
the agreement, the purchase price was to be adjusted for the net working
capital delivered to IS, as agreed to by both parties. As a result of this
adjustment and the resolution of certain obligations, the net gain recorded in
fiscal 2001 was $39,914,000. The transaction created a capital gain for tax
purposes, which will be offset by capital losses generated in prior periods,
for federal tax reporting. We have provided for estimated state tax
liabilities in connection with the transaction.
We may incur additional liabilities to certain former employees of the IED
division. Any amounts due to former employees are contingent upon future
termination, and the amounts are dependent on the date of termination and on
our stock price at a future date. As of January 31, 2001, the Company has
accrued all amounts that would be due to the certain former employees had
terminations occurred as of that date. Additional contingent amounts that may
be due cannot be reasonably estimated at this time.
Note 6. Restructuring Expenses
On January 31, 2001, the Company adopted a plan of restructuring aimed at
reducing current operating cost. In connection with this plan, 19 non-
management employees, primarily development and administrative positions, and
one executive level employee were terminated. As a result of this plan, we
recorded a charge of $539,000 for severance costs in the fourth quarter of
fiscal 2001. No amounts have been paid under this plan as of January 31, 2001.
On April 11, 2000, we adopted a restructuring plan under which we would
focus our energies on our eBusiness Technologies' ("eBT") Web Content
Management and Workflow product line, and pursue divestiture of certain
assets, including the Information Exchange Division. The plan included the
consolidation of our Boston, Massachusetts headquarters into the Providence,
Rhode Island offices of our eBT division. In connection with this
reorganization, approximately 18 administrative employees and four executive
officers were terminated or resigned in April, May and June 2000. As a result
of this plan, we recorded a charge of $1,930,000 for severance costs in the
first quarter of fiscal 2001. The charge was reduced by net proceeds received
on the disposal of certain fixed assets located at the Boston headquarters in
connection with the move of $95,000, resulting in a net charge of $1,835,000
in the first quarter of fiscal 2001. Payments made for severance during the
year totaled $1,021,000 resulting in a remaining accrued salary balance of
$909,000 at January 31, 2001.
43
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company incurred $480,000 in the first quarter of fiscal 2000 relating
to the closure of the Company's Kansas City location, primarily for severance
for 11 terminated employees. As of January 31, 2000, the entire balance had
been paid in full.
In July 1999, the Company adopted a plan of restructuring aimed at reducing
current operating costs, as well as supporting a new divisional structure. The
Company's restructuring plan included a reduction of more than 20%, or 105
employees, including 10 executives or managers, from staff levels at the end
of 1998. The plan also included 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,
which were removed from service shortly after the implementation of the plan.
The plan also called for a change in focus away from certain products. As a
result of the restructuring plan, the Company recorded an initial charge of
$6,234,000 to the fiscal 2000 results. Subsequent to the initial recording,
net adjustments totaling $156,000 were recorded during fiscal 2000, increasing
the charge to $6,390,000. The capitalized product development costs and
intangibles were written-down to fair values, determined based upon their
estimated future cash flows. The components of the charge, as well as the
Company's payments made against the accruals, is detailed as follows:
Fiscal 2000 Fiscal 2001
---------------------- January 31, ------------- January 31,
Initial Adjust- Pay- 2000 Adjust- Pay- 2001
Charges ments ments Balance ments ments Balance
------- ------- ------ ----------- ------- ----- -----------
(in thousands of dollars)
Cash charges:
Severance............... $2,184 $188 $2,158 $214 $(122) $ 92 $--
Closure/combination of
facilities............. 957 (32) 733 192 (59) 133 --
------ ---- ------ ---- ----- ---- ----
Subtotal................ $3,141 $156 $2,891 $406 $(181) $225 $--
------ ---- ------ ---- ----- ---- ----
Non-cash charges:
Write-downs of
capitalized product
development costs and
intangibles for certain
discontinued products.. 1,739 -- -- -- -- -- --
Write-downs of assets
associated with closed
locations.............. 1,354 -- -- -- -- -- --
------ ---- ------ ---- ----- ---- ----
Total................... $6,234 $156 $2,891 $406 $(181) $225 $--
====== ==== ====== ==== ===== ==== ====
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. The restructuring plan included a PDM workforce reduction of
approximately 40%, or 51 employees, including 9 executives or managers. The
plan also included 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 called for a change in focus away from certain
development activities. Therefore, the charge included a write-down of
licensed technology for discontinued development activities to their fair
values, based upon their estimated future cash flows. As a result of the
restructuring plan, the Company recorded an initial charge of $4,290,000 to
the fiscal 2000 results. Subsequent to the initial recording, net adjustments
totaling $92,000 were recorded during fiscal 2000, reducing the charge to
$4,198,000. Additionally, in connection with evaluations made at the time of
the restructuring, the Company recorded a $10,000,000 charge for the write-
down of certain PDM intangible assets and capitalized software based on their
estimated future discounted cash flows. This charge was included in the
special charges line in the accompanying consolidated statements of operations
(see Note 7). The components of the restructuring charge, as well as the
Company's payments made against the accruals, is detailed as follows:
44
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fiscal 2000 Fiscal 2001
---------------------- January 31, ------------- January 31,
Initial Adjust- Pay- 2000 Adjust- Pay- 2001
Charges ments ments Balance ments ments Balance
------- ------- ------ ----------- ------- ----- -----------
(in thousands of dollars)
Cash charges:
Severance............... $1,030 $366 $ 766 $630 $(239) $380 $11
Consolidation of
facilities............. 690 (200) 490 -- -- -- --
------ ---- ------ ---- ----- ---- ---
Subtotal................ $1,720 $166 $1,256 $630 $(239) $380 $11
------ ---- ------ ---- ----- ---- ---
Non-cash charges:
Write-downs of licensed
technology............. 1,923 -- -- -- -- -- --
Write-downs of support
assets associated with
closed locations....... 647 (258) -- -- -- -- --
------ ---- ------ ---- ----- ---- ---
Total................... $4,290 $(92) $1,256 $630 $(239) $380 $11
====== ==== ====== ==== ===== ==== ===
Note 7. Special Charges
For the year ended January 31, 2000, the Company incurred $28,103,000 of
special charges. Included in the special charges were $1,527,000 in
professional fees incurred in connection with the restatement of the Company's
results for the first nine months of 1998. These professional fees were for
the Company's investigation of the circumstances surrounding certain
transactions leading to the restatement and for the formal investigation
initiated by the Securities and Exchange Commission following the restatement.
Also related to the restatement were special charges for net premium costs and
related professional advisory fees for a major insurance carrier to assume
financial risk associated with the class action litigation initiated against
the Company in February 1999, as well as severance costs of certain employees
who were terminated or resigned. Additionally, approximately $10,805,000 of
the special charges related to the write-down of intangible assets and
capitalized software costs, substantially all attributable to the Company's
PDM division, to their estimated fair values, determined based upon estimated
future cash flows. In connection with the Company's restructure and subsequent
plan to divest the PDM division, the intangible assets recorded at the time of
acquisition were reevaluated. In connection with the future plans and the
anticipated future cash flows of the business, the intangible assets were
written down to their estimated fair values, as determined from estimated
proceeds to be received upon a sale of the business. The components of the
special charges, as well as the Company's payments made against the accruals,
is detailed as follows:
45
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fiscal 2000 Fiscal 2001
----------------------- --------------
January January
31, 31,
Initial Pay- 2000 Adjust- Pay- 2001
Charges ments Balance ments ments Balance
------- ------- ------- ------- ------ -------
(in thousands of dollars)
Cash charges:
Professional fees associated
with restatement of 1998
results, lawsuits and SEC
investigation.............. $ 1,527 $ 1,027 $ 500 $300 $ 548 $ 252
Net insurance premiums and
other costs related to
class action litigation
initiated against the
Company in February 1999... 13,451 12,451 1,000 -- -- 1,000
------- ------- ------ ---- ------ ------
Severance................... 2,320 1,248 1,072 (100) 753 219
------- ------- ------ ---- ------ ------
Subtotal.................... $17,298 $14,726 $2,572 $200 $1,301 $1,471
------- ------- ------ ---- ------ ------
Non-cash charges:
Write-downs of capitalized
development costs and
intangibles................ 10,805 -- -- -- -- --
------- ------- ------ ---- ------ ------
Total....................... $28,103 $14,726 $2,572 $200 $1,301 $1,471
======= ======= ====== ==== ====== ======
Note 8. Accrued Liabilities
Accrued liabilities are summarized as follows:
As of January 31,
--------------------------
2001 2000
------------ -------------
(In thousands of dollars)
Accrued expenses................................. $ 2,333 $ 4,482
Accrued income taxes............................. 2,670 2,261
Accruals for special charges..................... 1,471 2,572
Accruals for restructuring charges............... 1,459 1,036
Accrued expenses related to dispositions......... 699 1,568
Accrued salary, commissions and bonuses.......... 739 3,008
------------ -------------
$ 9,371 $ 14,927
============ =============
Note 9. Income Taxes
Pre-tax income (loss) from continuing operations is taxed in the following
jurisdictions:
Years Ended
January 31, Year Ended
---------------- December 31,
2001 2000 1998
------- -------- ------------
Domestic...................................... $16,747 $(56,192) $(18,051)
Foreign....................................... 68 (5,644) (2,553)
------- -------- --------
Total......................................... $16,815 $(61,836) $(20,604)
======= ======== ========
46
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The provision (benefit) for income taxes comprised the following:
Years Ended
January 31, Year Ended
------------- December 31,
2001 2000 1998
------ ------ ------------
Current:
Federal......................................... $ -- $ -- $(1,203)
Foreign......................................... 137 390 90
State........................................... 163 84 148
------ ------ -------
Total current................................. 300 474 (965)
------ ------ -------
Deferred:
Federal......................................... -- -- (843)
State........................................... -- -- 773
------ ------ -------
Total deferred................................ -- -- (70)
------ ------ -------
Total provision (benefit)......................... $ 300 $ 474 $(1,035)
====== ====== =======
A reconciliation of income tax (benefit) expense to the statutory federal
income tax rate was as follows:
Years Ended
January 31, Year Ended
---------------- December 31,
2001 2000 1998
------ -------- ------------ ---
(In thousands of dollars)
Federal statutory rate................. $5,717 $(21,024) $(7,005)
State income taxes, net of federal
effect................................ 613 (589) 608
Change in valuation allowance.......... (2,773) 32,938 493
Purchased in-process research and
development........................... -- -- 4,692
Amortization of intangible assets
acquired through stock purchase....... -- 2,077 712
Tax basis in excess of book basis on
the sales of the PDM division......... -- (15,708) --
(Benefited)/Unbenefited losses......... (3,328) 2,273 --
Foreign taxes.......................... 134 390 --
Other.................................. (63) 117 (535)
------ -------- -------
Total.................................. $ 300 $ 474 $(1,035)
====== ======== =======
47
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Significant components of the Company's net deferred income tax assets
(liabilities) were as follows:
As of January 31,
--------------------------
2001 2000
------------ ------------
(In thousands of dollars)
Deferred tax assets:
Net operating loss carryforwards and tax
credits....................................... $ 39,219 $ 22,116
Capital loss carryforwards..................... 2,473 15,470
Intangible assets.............................. 85 4,680
Accrued liabilities not currently deductible
for tax....................................... 841 3,613
Compensation expense........................... 176 97
Depreciation expense........................... 203 452
Bad debt reserve............................... 223 1,019
Deferred state taxes........................... 228 1,068
Deferred income................................ 399 --
Other.......................................... 106 699
Valuation allowance............................ (43,566) (46,339)
------------ ------------
387 2,875
------------ ------------
Deferred tax liabilities:
Deferred income................................ -- 444
Capitalized development costs.................. 387 2,431
------------ ------------
Deferred state taxes........................... -- --
------------ ------------
387 2,875
------------ ------------
Net deferred income taxes...................... $ -- $ --
============ ============
The valuation allowance of $43,566,000 (which includes net operating losses
and other deductions subject to limitations in future years) and $46,339,000
at January 31, 2001 and 2000, respectively, was determined after evaluating
the Company's historical operating results and anticipated performance over
its normal planning horizon. The Company periodically evaluates the valuation
allowance and makes adjustments to the extent that actual and anticipated
operating results vary from those initially estimated at the time the
valuation allowance was established. At January 31, 2001, a valuation
allowance has been recorded due to the uncertainty associated with the
recoverability of the Company's net deferred tax assets. The valuation
allowance decreased by approximately $2,773,000 during fiscal year 2001,
primarily due to utilization of capital loss carryforwards related to the IED
transaction. During fiscal year 2000, the Company increased its valuation
allowance by approximately $36,000,000, primarily due to net operating loss
carryforwards and capital loss carryforwards generated by the two transactions
that accounted for the divestiture of the PDM division.
The Company has available net operating loss carryforwards and other tax
credits totaling approximately $113,200,000, which expire in the fiscal years
2010 to 2021. Capital loss carryforwards of approximately $7,300,000 are also
available to the Company, as a result of the two transactions which accounted
for the divestiture of the PDM division. These loss carryforwards expire in
fiscal 2005. Because of acquisitions the Company has consummated and due to
certain provisions of the Internal Revenue Code concerning changes in
ownership, the use of the Company's net operating loss carryforwards may be
limited.
As a result of the exercise of non-qualified options during the year, any
future benefit recognized for the deduction will be charged directly to
equity.
48
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 10. Common Stock
On July 11, 1997, the Board of Directors adopted a Shareholders' Rights Plan
and declared a dividend distribution of one preferred stock purchase right (a
"Right") for each outstanding share of the Company's Common Stock to
stockholders of record at the close of business on July 24, 1997 (the "Record
Date"). Each Right entitles the registered holder to purchase from the Company
a unit consisting of one one-thousandth of a share (a "Unit") of Series A
Junior Participating Preferred Stock, $0.01 par value per share (the
"Preferred Stock"), at a purchase price of $145 in cash per Unit (the
"Purchase Price"), subject to adjustment. The description and terms of the
Rights are set forth in a Rights Agreement dated as of July 11, 1997, as
amended in Amendment Number 1 to the Rights Agreement, dated October 27, 1999
(the "Rights Agreement"), between the Company and State Street Bank & Trust
Company, as Rights Agent.
The Rights will become exercisable after a person or group has acquired or
obtained the right to acquire beneficial ownership of 20% or more of the
outstanding common stock, or following the commencement of a tender or
exchange offer that would result in a person or group owning 30% or more of
the shares of common stock. Generally, if any person becomes the beneficial
owner of 20% or more of the shares of Common Stock of the Company, except
pursuant to a tender or exchange offer for all shares at a fair price as
determined by the outside Board members, each Right not owned by the 20% or
more stockholder will enable its holder to purchase that number of shares of
the Company's Common Stock, in lieu of preferred stock, which equals the
exercise price of the Right divided by one-half of the current market price of
such Common Stock at the date of the occurrence of the event. In addition, if
the Company is involved in a merger or other business combination transaction
with another person or group in which it is not the surviving corporation or
in connection with which its Common Stock is changed or converted, or it sells
or transfers 50% or more of it assets or earning power to another person, each
Right that has not previously been exercised will entitle its holder to
purchase that number of shares of Common Stock of such other person which
equals the exercise price of the Right divided by one-half of the current
market price of such Common Stock at the date of the occurrence of the event.
In general, the Company may redeem the Rights in whole, but not in part, at a
price of $0.01 per Right, payable in cash, in shares of common stock, or in
any other form of consideration or any combination of the foregoing deemed
appropriate by the Board of Directors, at any time prior to the earlier of (1)
the tenth day after a public announcement that a person or group has acquired,
or obtained the right to acquire, 20% or more of the outstanding common stock,
or (2) the tenth day following the commencement of a tender offer or exchange
offer that would result in a person or group owning 30% or more of the
outstanding common stock. The Rights will expire in July 2007.
Note 11. Earnings (Loss) Per Common Share
Earnings (loss) per common share is calculated based on the weighted average
number of common shares outstanding during the period. Earnings per common
share, assuming dilution, is calculated using the weighted average number of
common shares outstanding during the period, plus the dilutive effect of
potential common shares which consists of stock options, stock purchase
warrants, unissued shares subscribed under the employee stock purchase plan
and unvested shares of restricted stock.
49
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following table sets forth the computations of earnings (loss) per
share.
Year Ended January 31, One Month Ended Year Ended
---------------------- January 31, December 31,
2001 2000 1999 1998
---------------------- --------------- ------------
(in thousands, except per share data)
Earnings (loss) per
common share:
Net income (loss)..... $ 16,515 $ (62,310) $(8,691) $(19,569)
Weighted average
shares outstanding... 16,447 15,668 15,506 15,062
Income (loss) per
common share......... $ 1.00 $ (3.98) $ (0.56) $ (1.30)
Earnings (loss) per
common share, assuming
dilution:
Net income (loss)..... $ 16,515 $ (62,310) $(8,691) $(19,569)
Weighted average
shares outstanding... 16,447 15,668 15,506 15,062
Dilutive effect of
potential common
shares............... 421 -- -- --
---------- ----------- ------- --------
Total diluted weighted
average shares....... 16,868 15,668 15,506 15,062
Income (loss) per
common share......... $ 0.98 $ (3.98) $ (0.56) $ (1.30)
Securities that have been excluded from earnings (loss) per share, assuming
dilution, because they would have been anti-dilutive are listed below:
Year Ended January
31, One Month Ended Year Ended
------------------- January 31, December 31,
2001 2000 1999 1998
--------- --------- --------------- ------------
Stock options
outstanding............. 2,716,836 4,831,581 4,361,031 4,471,023
Warrants outstanding..... 926,682 965,356 1,456,458 1,456,458
Note 12. Stock Compensation Plans
Stock Incentive Plans
The Company has reserved 3,000,000 shares for issuance under the 1993 Stock
Incentive Plan ("1993 Plan") and 5,000,000 shares for issuance under the 1996
Stock Incentive Plan, as amended ("1996 Plan"). The 1993 Plan and the 1996
Plan ("the Plans") provide for the issuance of incentive stock options, non-
qualified stock options, unrestricted stock, restricted stock, and performance
share awards. Under the Plans, both incentive options and non-qualified
options may be granted to employees and consultants. The option exercise price
shall not be less than 100% of the fair market value of the shares on the date
of grant in the case of incentive options and not less than 85% of the fair
market value of the shares on the date of grant in the case of non-qualified
options. The Plans also provide for the grant of performance share awards to
employees, entitling the recipient to receive shares of common stock based
upon achievement of individual or Company performance goals. The term of each
option and the vesting periods for options and stock awards is fixed by the
Compensation Committee of the Company's Board of Directors. The term for
incentive stock option grants may not exceed 10 years from the date of grant.
The Company's 1996 Non-employee Director Plan, as amended ("Director Plan")
provides for the automatic grant of non-qualified stock options and
unrestricted stock to members of the Board of Directors who are not employees
of the Company. The Company has reserved 415,000 shares for issuance under the
Director Plan. Effective February 1, 2000, the Director Plan currently
provides for an initial grant of options to each Non-employee Director to
purchase 7,500 shares of Common Stock at the fair market value on the date
that such Non-employee Director first becomes a director of the Company and an
annual grant of a non-qualified stock
50
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
option to purchase 7,500 shares of Common Stock at the fair market value on
the date of the Corporation's annual meeting. The term for the option grants
may not exceed 10 years from the date of grant. Options granted to purchase
common stock and restricted stock awarded under the Director Plan become fully
vested immediately upon issuance.
Notes Receivable from Stock Purchase Agreements
As of January 31, 2001 and 2000, the Company holds a note receivable for a
total of $200,000 from one of its former corporate officers, which the Company
provided to effect the purchase of shares of the Company's common stock,
pursuant to the 1996 Stock Incentive Plan. Interest on such loans accrues at
6.0% per annum until maturity. The principal and interest amounts of such
loans were originally repayable in full upon the earlier of (i) the fifth
anniversary of the loan, (ii) the date the officer leaves the Company, or
(iii) if and to the extent that the officer sells the stock. In connection
with the officer's separation from the Company, the term of this note was
extended through December 31, 2002, or 30 days from the date at which the
Company's common stock averages $10.25 per share over a period of 30
consecutive days, whichever comes first. This loan, which is shown as a
reduction to stockholders' equity on the balance sheet, is secured by the
common stock purchased.
The following table summarizes the stock option activity under the 1993
Plan, the 1996 Plan, and the Director Plan:
Weighted
Available Options Average
for Grant Outstanding Price
---------- ----------- --------
At December 31, 1997....................... 809,357 3,873,666 $15.20
1998
Additional authorized...................... 3,165,000
Granted.................................... (1,952,886) 1,952,886 $15.78
Exercised.................................. (716,330) $11.99
Forfeited.................................. 639,199 (639,199) $17.42
Restricted stock grant..................... (7,500) $17.95
Unrestricted stock grant................... (9,000) $13.56
---------- ---------- ------
At December 31, 1998....................... 2,644,170 4,471,023 $15.65
1999 (one month)
Exercised.................................. (200) $12.00
Forfeited.................................. 109,792 (109,792) $20.21
Unrestricted stock grant................... (9,000) $25.00
---------- ---------- ------
At January 31, 1999........................ 2,744,962 4,361,031 $15.54
2000
Granted.................................... (3,490,300) 3,490,300 $ 7.86
Exercised.................................. (851,466) $11.88
Forfeited.................................. 2,168,284 (2,168,284) $13.73
Unrestricted stock grant................... (6,000) $41.00
---------- ---------- ------
At January 31, 2000........................ 1,416,946 4,831,581 $11.04
2001
Granted.................................... (954,200) 954,200 $ 6.08
Exercised.................................. (34,850) $ 5.77
Forfeited.................................. 2,410,129 (2,410,129) $10.93
Restricted stock grant..................... (177,300) $ 4.32
Restricted stock forfeited................. 51,100 $ 4.20
---------- ---------- ------
At January 31, 2001........................ 2,746,675 3,340,802 $ 9.70
========== ========== ======
51
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Related information for options outstanding and exercisable as of January
31, 2001 under the Plans is as follows:
Options
Options Outstanding Exercisable
------------------------------ ------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Contractual Exercise Exercise
Ranges of Exercise Prices Shares Life Price Shares Price
------------------------- --------- ----------- -------- --------- --------
$1.91-$5.50............... 890,501 8.3 $4.67 188,845 $ 5.12
$5.51-$7.75............... 1,036,118 7.5 6.16 366,802 6.52
$7.76-$12.00.............. 594,997 5.9 10.78 313,663 11.12
$12.01-$17.75............. 335,567 5.2 14.87 234,235 15.74
$17.76-$54.25............. 483,619 4.8 21.63 404,287 21.73
--------- --- ----- --------- ------
Total................... 3,340,802 6.8 $9.70 1,507,832 $12.81
========= === ===== ========= ======
The market value of the restricted shares awarded has been recorded as
unearned compensation and is shown as a separate component of stockholders'
equity. Unearned compensation is being amortized to expense over the vesting
periods that range from one to two years. Amortization totaled $172,000,
$79,000 and $259,000, for the years ending January 31, 2001 and 2000 and
December 31, 1998, respectively. At January 31, 2000 and December 31, 1998,
options to purchase 892,772, and 915,306, shares, respectively were
exercisable.
Stock Purchase Plan
Under the Company's 1993 Stock Purchase Plan, employees have the opportunity
to purchase the Company's common stock. The price at which the employee may
purchase the common stock is 85% of the last reported sale price of the
Company's common stock on the Nasdaq National Market on the date the offering
period commences or concludes, whichever is lower when rounded to the next
highest sixteenth percentage. Offerings begin on June 1 and December 1 of each
year and conclude on May 31 and November 30. A total of 700,000 shares of
common stock have been reserved under this plan.
Employees purchased 188,210, 184,323 and 128,199 shares under the plan, in
fiscal 2001 and 2000 and calendar 1998, respectively, generating proceeds to
the Company of $501,000, $1,078,000 and $1,355,000 in each of the three years,
respectively. At January 31, 2001, 95,079 common shares remained available for
issuance under the stock purchase plan.
Fair Value
Pro forma information regarding net loss and loss per share is required by
SFAS 123, and has been determined as if the Company had accounted for its
employee stock plans based on the fair value method provided under SFAS 123.
The fair value for the options described below was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted
average assumptions for awards granted in fiscal 2001 and 2000 and calendar
1998.
2001 2000 1998
--------- --------- ---------
Risk-free interest rate........................ 5.96% 5.37% 5.05%
Expected life.................................. 3.0 years 3.0 years 3.7 years
Expected volatility............................ 116% 99% 66%
Expected dividends............................. 0.0% 0.0% 0.0%
52
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options, which have no vesting restriction and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
The total value of the awards granted during the years ended January 31,
2001 and 2000 and December 31, 1998, were computed as approximately
$12,314,000, $13,856,000 and $16,005,000, respectively, which would be
amortized over the vesting period of the options. The weighted average fair
value of awards granted in fiscal 2001 and 2000 and calendar 1998 was
estimated to be $5.76, $4.62 and $8.09, respectively. If the Company had
accounted for these awards in accordance with fair value accounting proscribed
under SFAS 123, the Company's pro forma net income (loss) and income (loss)
per share would have been as follows:
Years Ended January 31, Year Ended
----------------------- December 31,
2001 2000 1998
----------------------- ------------
(In thousands of dollars,
except per share amounts)
Pro forma net income (loss).......... $ 4,201 $ (76,166) $(28,380)
Pro forma earnings (loss) per share,
assuming dilution................... $ .25 $ (4.86) $ (1.88)
Note 13. Benefit Plan
The Company has a 401(k)-retirement savings plan ("401(k) Plan"), covering
substantially all of the Company's domestic employees. Eligible employees are
permitted to make pre-tax contributions, up to 15% of their compensation
subject to an annual limit. Under the 401(k) Plan, the Company may make
contributions either in cash or common stock of the Company at the discretion
of the Company's Board of Directors. The Company has authorized 100,000 shares
for issuance under the Plan. The contribution may match in whole or in part
the salary deferral contributions of the participants and/or represent
additional profit-sharing contributions tied to the Company's net income
performance. During the years ended January 31, 2001 and 2000 and December 31,
1998, the Company's total matching contribution amounted to approximately
$556,000, $1,137,000 and $873,000, respectively. During the one month ended
January 31, 1999, the Company's matching contribution amounted to $142,000.
All of the Company matching contributions have been made in the form of cash,
for all periods presented.
Note 14. Commitments and Contingencies
The Company has various lease agreements for office space that expire
between 2002 and 2007. The Company's office space leases include certain
renewal and expansion options, escalation clauses for the Company's
proportionate share of increases in building maintenance costs, and periods of
free rent. During fiscal 2001, in connection with the April 2000 restructuring
(see Note 6), the Company reduced the size and location of the Boston office
space under lease, terminating the existing leases and providing for a new
lease for a smaller space, effective May 1, 2000. This smaller space has been
subleased for the entire lease term, at rates in excess of the minimum lease
payments for which the Company is obligated. The Company received $203,000 in
rental
53
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
income during fiscal 2001 for the Boston sublease. The Company also expects to
receive the following payments with respect to the sublease (in thousands of
dollars):
2002.................................................................... $348
2003.................................................................... 351
2004.................................................................... 353
2005.................................................................... 354
2006.................................................................... 59
The Company remains the primary obligor under this lease, and the minimum
lease commitments for this space are included in the schedule below. At
January 31, 2001, future minimum lease commitments for non-cancelable leases
are as follows (in thousands of dollars):
2002.................................................................. $ 636
2003.................................................................. 834
2004.................................................................. 912
2005.................................................................. 913
2006.................................................................. 705
Thereafter............................................................ 1,218
Rent expense was approximately $1,086,000, $3,473,000 and $3,251,000, for
the years ended January 31, 2001 and 2000 and December 31, 1998, respectively.
Rent expense was approximately $404,000 for the one month ended January 31,
1999.
Commitments under Distributor Agreement
During 1998, the Company entered into a distribution agreement with an
international distributor that provided the distributor with guaranteed levels
of net 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 had outstanding irrevocable stand-by letters of
credit with terms of one to two years totaling $4,004,000 supporting the
guarantee. As of December 31, 1998, management believed that the distributor
would not be able to achieve the defined level of net receipts from the
agreement territory in either year, and therefore, the Company recorded a
charge to sales and marketing expense of $4,000,000. On September 14, 1999,
the Company negotiated a release of the outstanding commitments with the
international distributor. Under this release, the Company paid the
international distributor $606,000 from available cash and cancelled the
distribution agreement. Additionally, the stand-by letters of credit were
terminated. Furthermore, as a result of the release, the Company took a credit
to sales and marketing expenses in the third quarter of fiscal 2000 of
approximately $3,093,000 for the expenses recorded in 1998.
Litigation
On February 4, 1999, the Company and certain of its officers were named as
defendants in a purported class action lawsuit filed in the United States
District Court for the District of Massachusetts. Thereafter, six
substantially similar actions were filed in the same Court. On April 5, 1999,
the seven class action lawsuits that were filed against us were consolidated
into one lawsuit entitled In Re Inso Corporation, Civil Action No. 99-10193-
WGY. These lawsuits were filed following our announcement on February 1, 1999
that we planned to restate our revenues for the first three quarters of 1998.
54
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The plaintiffs alleged that the defendants prepared and issued deceptive and
materially false and misleading statements to the investing public. They
sought unspecified damages. On September 29, 1999, we entered into an
insurance agreement with a major AAA-rated insurance carrier pursuant to which
the insurance carrier assumed complete financial responsibility for the
defense and ultimate resolution of the lawsuit. A net charge to our fiscal
year 2000 consolidated results of $13,451,000 was taken in connection with the
insurance agreement. On May 26, 2000, we entered into an agreement to settle
the consolidated securities class action. The settlement provided that all
claims against the Company and the individual defendants would be dismissed.
In agreeing to the proposed settlement, the Company and the individual
defendants specifically continued to deny any wrongdoing. The settlement was
approved by the Court on September 14, 2000.
As soon as the Company discovered that it would be necessary to restate
certain of its financial results for the first three quarters of 1998, the
Company immediately and voluntarily provided this information to the U.S.
Securities and Exchange Commission. On June 2, 1999, the Company was informed
that the U.S. Securities and Exchange Commission had issued a Formal Order of
Private Investigation in connection with matters relating to the previously
announced restatement of the Company's 1998 financial results. We cannot
predict the ultimate resolution of this action at this time, and there can be
no assurance that the Formal Order of Private Investigation will not have a
material adverse impact on our financial condition and results of operations.
On June 9, 1999, the bankruptcy estates of Microlytics, Inc. and Microlytics
Technology Co., Inc. (together "Microlytics") filed a complaint against the
Company in the United States Bankruptcy Court for the Western District of New
York. The lawsuit is captioned Microlytics, Inc. and Microlytics Technology
Co., Inc. v. Inso Corporation, Adversary Proceeding No. 99-2177. 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 its Answer and
Demand for Jury Trial. Also, 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. On December 15, 1999, the United
States District Court granted the Company's motion for the purposes of
dispositive motions and trial. The parties are presently engaging in document
discovery and no depositions have been taken. We believe that the claims are
subject to meritorious defenses, which we plan to assert during the lawsuit.
We cannot predict the ultimate resolution of this action at this time, and
there can be no assurance that the litigation will not have a material adverse
impact on our financial condition and results of operations.
During February 2000, certain shareholders of the Company filed two
substantially similar putative class action complaints against the Company and
certain of the Company's officers and employees in the United States District
Court for the District of Massachusetts that were are captioned as follows:
Liz Lindawati, et al. v. Inso Corp., et al., Civil Action No. 00-CV-10305GAO;
Group One Limited, et al. v. Inso Corp., et al., Civil Action No. 00-CV-
10318GAO. These lawsuits were filed following our preliminary disclosure of
revenues for the fiscal year 2000 fourth quarter on February 1, 2000. They
assert claims for violations of Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 of the Securities and Exchange Commission, as well as a
claim for violation of Section 20(a) of the Exchange Act.
On June 14, 2000, the District Court ordered that both actions be
consolidated into one lawsuit entitled In re Inso Corporation Securities
Litigation, Civil Action No. 00-103050-GAO. The plaintiffs filed a
consolidated amended complaint on February 21, 2001. The plaintiffs alleged
that the defendants prepared and issued deceptive and materially false and
misleading statements to the investing public. They sought unspecified
damages. On April 9, 2001, the Company filed a motion to dismiss the lawsuit
on the grounds that the plaintiffs failed to state a claim under the relevant
securities laws. After receiving the Company's motion to dismiss, the
plaintiffs themselves moved to dismiss the lawsuit with prejudice on April 23,
2001. The plaintiffs received no
55
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
consideration for, and the Company assented to, the dismissal. We are awaiting
Court approval of the plaintiffs' motion to dismiss (see Note 16 of "Notes to
Consolidated Financial Statements").
We are also subject to various legal proceedings and claims that arise in
the ordinary course of business. We currently believe that resolving these
matters will not have a material adverse impact on our financial condition or
our results of operations.
Note 15. Operations by Industry Segment and Geographic Area
For the years ended January 31, 2001, 2000 and December 31, 1998, the
Company managed two, three, and four operating segments respectively. The
Company's Lexical and Linguistic operating segment was sold to Lernout &
Hauspie Speech Products N.V. in April 1998 (see Note 5). The PDM segment
information below for all periods presented includes the operations of the
DynaText/DynaWeb and ViewPort browser technologies until their sale to Enigma
on October 29, 1999 (see Note 5). The balance of the PDM division was sold
effective January 5, 2000 (see Note 5). The IED segment was sold to IntraNet
Solutions, Inc. on July 10, 2000 (see Note 5). The operating results of the
MediaBank product line, which was sold in June 2000 (see Note 5), are included
in the eBT segment results through the date of sale.
As a result of the dispositions, the Company has only one operating segment
at January 31, 2001. We have not restated the historical segment information
to conform to presentation of the eBT results as a single line of business,
which now includes all corporate operating expenses, but rather have disclosed
the corporate office expenses as a reconciling item to the consolidated
financial statement amounts.
Each segment's profit and loss for the years ended January 31, 2001, 2000
and December 31, 1998, 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.
Segment Disclosure
Year Ended January 31,
2001
-------------------------
eBT IED Totals
-------- ------ -------------
(In thousands of
dollars)
Revenues from external customers.............. $ 13,311 $8,385 $ 21,696
Depreciation and amortization expense......... 3,192 1,846 5,038
Segment profit (loss)......................... (20,217) 27 (20,190)
Segment assets................................ 80,002 -- 80,002
Year Ended January 31, 2000
------------------------------------
eBT IED PDM Totals
-------- ------- -------- --------
(In thousands of dollars)
Revenues from external customers..... $ 12,329 $26,255 $ 26,096 $ 64,680
Depreciation and amortization
expense............................. 4,245 3,760 6,589 14,594
Segment profit (loss)................ (16,679) 6,263 (12,997) (23,413)
Segment assets....................... 15,038 17,631 -- 32,669
56
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Year Ended December 31, 1998
--------------------------------------------
Lexical
and
eBT IED PDM Linguistic Totals
------- ------- ------- ---------- -------
(In thousands of dollars)
Revenues from external
customers.................... $ 9,935 $28,633 $14,551 $6,975 $60,094
Depreciation and amortization
expense...................... 1,477 3,154 4,580 494 9,705
Segment profit (loss)......... (2,111) 7,922 (7,499) 3,608 1,920
Segment assets................ 15,019 26,272 51,291 -- 92,582
Enterprise-Wide Disclosures
Geographic Information
2001 2000 1998
------- ------- -------
(In thousands of
dollars)
Revenues:
United States........................................ $15,569 $43,482 $45,696
Foreign countries.................................... 6,127 21,198 14,398
------- ------- -------
Consolidated Total................................... $21,696 $64,680 $60,094
======= ======= =======
Revenues are attributed to countries based on the location of the customer.
As of January 31, 2001 and 2000, the Company's long-lived assets were
primarily located in the Company's United States operations. The long-lived
assets located in foreign countries were less than 5% of consolidated assets.
Reconciliation Information
Profit or loss
2001 2000 1998
-------- -------- --------
(In thousands of dollars)
Total external profit or loss for reportable
segments.................................... $(20,190) $(23,413) $ 1,920
Purchased in-process research and
development................................. -- -- (21,900)
Restructuring expenses....................... (1,954) (11,068) --
Special charges.............................. (200) (28,103) --
Net investment and other income.............. 3,861 1,721 4,682
Recovery (write-down) of Information Please
LLC......................................... 657 (2,655) --
Gain on sale of assets, net.................. 38,170 12,212 13,289
Unallocated corporate and other expenses..... (3,529) (10,530) (18,595)
-------- -------- --------
Consolidated income (loss) before provision
for income taxes............................ $ 16,815 $(61,836) $(20,604)
======== ======== ========
Reconciliation Information
Assets
2001 2000
------- -------
(In thousands
of dollars)
Total assets for reportable segments....................... $80,002 $32,669
Cash and equivalents and marketable securities............. -- 36,010
Total assets for unallocated corporate and other
functions................................................. -- 11,910
------- -------
Consolidated total assets.................................. $80,002 $80,589
======= =======
57
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 16. Subsequent Events
On April 9, 2001, the Company filed a motion to dismiss the lawsuit entitled
In Re Inso Corporation Securities Litigation, Civil Action No. 00-103050-GAO
on the grounds that the plaintiffs failed to state a claim under the relevant
securities laws. After receiving the Company's motion to dismiss, the
plaintiffs themselves moved to dismiss the lawsuit with prejudice on April 23,
2001. The plaintiffs received no consideration for, and the Company assented
to, the dismissal. We are awaiting Court approval of the plaintiffs' motion to
dismiss.
Unaudited Quarterly Financial Data
Quarter Ended
-----------------------------------------
April July
30, 31, October 31, January 31,
------- ------- ----------- -----------
Fiscal 2001
Revenues............................ 10,290 5,655 2,532 3,219
Gross profit........................ 7,379 2,882 575 1,224
Restructuring and special charges... 1,835 -- -- 319
Gain on sale of assets, net
(1,2,3)............................ -- 35,296 490 2,384
Recovery on IPLLC................... -- -- 657 --
Net income (loss)................... (6,772) 28,171 (3,100) (1,784)
Earnings (loss) per share........... (0.41) 1.69 (0.19) (0.11)
Earnings (loss) per share, assuming
dilution........................... (0.41) 1.68 (0.19) (0.11)
Fiscal 2000
Revenues............................ 11,494 19,367 19,421 14,398
Gross profit........................ 5,187 13,292 14,271 9,720
Restructuring and special charges... 3,454 6,698 28,609 410
Gain on sale of assets, net (2,3)... -- -- 14,549 (2,337)
Write down of IPLLC................. -- (2,655) -- --
Net loss............................ (21,985) (15,863) (13,966) (10,496)
Loss per share...................... (1.42) (1.02) (0.89) (0.65)
Loss per share, assuming dilution... (1.42) (1.02) (0.89) (0.65)
The above table presents our unaudited results of operations for each of our
last eight quarters up to and including the quarter ended January 31, 2001.
The unaudited results of operations have been prepared on substantially the
same basis as the audited statements of operations contained in this Form 10-K
and include all adjustments, consisting of normal recurring accruals, that we
consider necessary to present this information fairly when read in conjunction
with our financial statements and accompanying notes appearing elsewhere in
this Form 10-K. The operating results in any quarter are not necessarily
indicative of the results that may be expected for any future period. As a
result we believe that period-to-period comparisons of our results of
operations may not be meaningful and should not be relied upon as indicators
of our future performance.
(1) eBT's second quarter results for fiscal year 2001 include a gain of
$39,312,000 on the sale of its Information Exchange Division, a loss of
$3,749,000 for the disposition of its Mediabank product line, a gain of
$370,000 for the sale of its Dynatext product line, and a loss of $637,000
for the sale of its PDM division. (See Note 5 of "Notes to Consolidated
Financial Statements").
(2) eBT's third quarter results for fiscal year 2001 include a gain of
$435,000 on the sale of its Information Exchange Division, a loss of
$40,000 for the disposition of its Mediabank product line, and a gain of
$95,000 for the sale of its Dynatext product line. eBT's third quarter
results for fiscal year 2000 include a gain of $14,549,000 for the sale of
its Dynatext product line. (See Note 5 of "Notes to Consolidated Financial
Statements").
58
eBT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) eBT's fourth quarter results for fiscal year 2001 include a gain of
$167,000 on the sale of its Information Exchange Division, a gain of
$54,000 for the disposition of its Mediabank product line, and a gain of
$2,163,000 for the sale of its PDM division. eBT's fourth quarter results
for fiscal year 2000 include a loss of $2,337,000 for the sale of its PDM
division. (See Note 5 of "Notes to Consolidated Financial Statements").
59
eBT INTERNATIONAL, INC.
SCHEDULE II. VALUATION AND QUALIFYING ACCOUNTS
Years ended January 31, 2001, 2000, and December 31, 1998 and the one month
ended January 31, 1999
Additions
Balance at Additions charged to Reductions Balance at
beginning due to costs and Amounts due to end of
of year acquisitions expenses written off sales year
---------- ------------ ---------- ----------- ----------- ----------
2001
Allowance for doubtful
accounts............... $1,460,000 $ -- $1,435,000 $(1,416,000) $(1,094,000) $ 385,000
Allowance for returns
and refunds............ 1,679,000 -- 190,000 (466,000) (1,101,000) 302,000
---------- -------- ---------- ----------- ----------- ----------
Total............... $3,139,000 $ -- $1,625,000 $(1,882,000) $(2,195,000) $ 687,000
2000
Allowance for doubtful
accounts............... $1,938,000 $ -- $1,217,000 $ (751,000) $ (944,000) $1,460,000
Allowance for returns
and refunds............ 2,041,000 -- 791,000 (1,153,000) -- 1,679,000
---------- -------- ---------- ----------- ----------- ----------
Total............... $3,979,000 $ -- $2,008,000 $(1,904,000) $ (944,000) $3,139,000
1999 (one month)
Allowance for doubtful
accounts............... $2,043,000 $ 25,000 $ -- $ (130,000) $ -- $1,938,000
Allowance for returns
and refunds............ 2,063,000 -- -- (22,000) -- 2,041,000
---------- -------- ---------- ----------- ----------- ----------
Total............... $4,106,000 $ 25,000 $ -- $ (152,000) $ -- $3,979,000
1998
Allowance for doubtful
accounts............... $1,662,000 $438,000 $ 506,000 $ (563,000) $ -- $2,043,000
Allowance for returns
and refunds............ 748,000 -- 2,538,000 (1,223,000) -- 2,063,000
---------- -------- ---------- ----------- ----------- ----------
Total............... $2,410,000 $438,000 $3,044,000 $(1,786,000) $ -- $4,106,000
========== ======== ========== =========== =========== ==========
60
Item 14(a)
3. Exhibit Index
Exhibit Description Page
------- ----------- ----
2.1 Purchase and Sale Agreement dated October 18, 1999, by and *
among the Company, Inso Providence Corporation and ViewPort
Development AB and Enigma Information Systems Ltd. and Enigma,
Inc. and the First Amendment of the Purchase and Sale
Agreement dated as of October 28, 1999 by and among Enigma
Information Systems Ltd. and Enigma Information Retrieval
Systems, Inc. and the Company, Inso Providence Corporation and
ViewPort Development AB, incorporated by reference to Exhibit
2.1 to the Company's Current Report on Form 8-K dated October
29, 1999, filed with the Commission on November 15, 1999.
2.2 Stock Purchase Agreement dated January 5, 2000, between the *
Company and Structural Dynamics Research Corporation,
incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K dated January 5, 2000, filed with
the Commission on January 20, 2000.
2.3 Agreement and Plan of Merger, dated July 10, 2000, by and *
among IntraNet Solutions, Inc., IntraNet Chicago Acquisition
Corporation, IntraNet Kansas City Acquisition Corporation,
Inso Chicago Corporation, Inso Kansas City Corporation and
Inso Corporation (incorporated by reference to the Company's
Current Report on Form 8-K filed on July 25, 2000).
3.1 Restated Certificate of Incorporation of the Company dated *
June 21, 1996, incorporated by reference to Exhibit 4.1 to
Registration Statement Number 333-06845 on Form S-8 filed with
the Commission on June 26, 1996.
3.2 Restated By-laws of the Company, incorporated by reference to *
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998, filed with the
Commission on March 31, 1999.
3.3 Certificate of Ownership and Merger effecting the Company's
name change from Inso Corporation to eBT International, Inc.
4.1 Proof of Common Stock Certificate of the Company, incorporated *
by reference to Exhibit 4 to the Registration Statement No.
33-73996 on Form S-1 filed with the Commission on January 12,
1994 (the "Form S-1").
4.2 Rights Agreement, dated July 11, 1997, by and between the *
Company and State Street Bank & Trust Company, as Rights
Agent, incorporated by reference to Exhibit 4.1 to the
Company's Current Report on Form 8-K dated July 11, 1997,
filed with the Commission on July 16, 1997.
4.3 Amendment No. 1 to Rights Agreement, dated as of October 27, *
1999, by and between the Company and State Street Bank & Trust
Company, as Rights Agent, incorporated by reference to Exhibit
2 to the Company's Registration Statement of Form 8A/A, filed
with the Securities and Exchange Commission on October 28,
1999.
+10.1 1993 Stock Incentive Plan, as amended.
+10.2 1996 Stock Incentive Plan, as amended
+10.3 Restated 401(k) Plan dated October 1, 1997, incorporated by *
reference to Exhibit 10.5 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998, filed
with the Commission on March 31, 1999.
10.4 Office Lease, dated November 30, 1994, by and between the *
Company and MBL Life Assurance Corporation, incorporated by
reference to Exhibit 10.6 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
10.5 Lease to Premises, dated December 27, 1995, by and between *
Inso Chicago Corporation and International Business Machines
Corporation, incorporated by reference to Exhibit 10.7 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
61
Exhibit Description Page
------- ----------- ----
10.6 Lease to Premises, dated March 6, 1997, by and between the *
Company and The Foundry Associates, L.P., incorporated by
reference to Exhibit 10.8 to the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998, filed
with the Commission on March 31, 1999.
+10.7 Form of Management Retention Agreement by and between the *
Company and certain of its corporate officers, incorporated by
reference to the Exhibit 10.11 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998,
filed with the Commission on March 31, 1999.
+10.8 Amended and Restated Separation Agreement and Release between *
Paul A. Savage and the Company dated June 10, 1999,
incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 31,
1999, filed with the Commission on September 14, 1999.
+10.9 Amended and Restated Separation Agreement and Release between *
Betty J. Savage and the Company dated June 11, 1999,
incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 31,
1999, filed with the Commission on September 14, 1999.
+10.10 Agreement Relating to Warrants dated June 22, 1999, *
incorporated by reference to Exhibit 10.4 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 31,
1999, filed with the Commission on September 14, 1999.
+10.11 Separation Agreement and Release by and between Steven R. *
Vana-Paxhia and the Company dated September 28, 1999,
incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended October
31, 1999, filed with the Commission on December 15, 1999.
+10.12 Employment Agreement by and between Stephen O. Jaeger and the *
Company dated as of April 1, 1999, incorporated by reference
to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended October 31, 1999, filed with the
Commission on December 15, 1999.
+10.13 Letter Agreement by and between Paul R. Anderson and the *
Company dated as of October 6, 1999, incorporated by reference
to Exhibit 10.3 to the Company's Quarterly Report on Form 10-
Q for the quarter ended October 31, 1999, filed with the
Commission on December 15, 1999.
+10.14 Catastrophic Equity Protection Insurance Policy Number 859-62- *
16 by and between Illinois National Insurance Company and the
Company, incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
October 31, 1999, filed with the Commission on December 15,
1999.
+10.15 Agreement and Release between Kirby Mansfield and the Company *
dated April 11, 2000, incorporated by reference to Exhibit
10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 2000, filed with the Commission on
June 14, 2000.
+10.16 Letter Agreement between Stephen O. Jaeger and the Company *
dated February 15, 2000, incorporated by reference to Exhibit
10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 2000, filed with the Commission on
June 14, 2000.
+10.17 Amendment to Employment Agreement between Stephen O. Jaeger *
and the Company, dated April 13, 2000, incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended April 30, 2000, filed with the
Commission on June 14, 2000.
62
Exhibit Description Page
------- ----------- ----
+10.18 Amendment to Letter Agreement between Stephen O. Jaeger and *
the Company, dated April 13, 2000, incorporated by reference
to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q
for the quarter ended April 30, 2000, filed with the
Commission on June 14, 2000.
+10.19 Lease Agreement between OMV Associates Limited Partnership and *
the Company, dated March 3, 2000, incorporated by reference to
Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the quarter ended April 30, 2000, filed with the
Commission on June 14, 2000.
+10.20 Lease Termination Agreement between OMV Associates Limited *
Partnership and the Company, dated March 3, 2000, incorporated
by reference to Exhibit 10.6 to the Company's Quarterly Report
on Form 10-Q for the quarter ended April 30, 2000, filed with
the Commission on June 14, 2000.
+10.21 1993 Stock Purchase Plan, as amended through June 1, 2000, *
incorporated by reference to Exhibit 10.7 to the Company's
Quarterly Report on Form 10-Q for the quarter ended April 30,
2000, filed with the Commission on June 14, 2000.
+10.22 Amended and Restated 1996 Non-Employee Director Plan, *
incorporated by reference to Exhibit 10.8 to the Company's
Quarterly Report on Form 10-Q for the quarter ended April 30,
2000, filed with the Commission on June 14, 2000.
+10.23 Agreement and Release between Robert F. Dudley and the Company *
dated May 26, 2000, incorporated by reference to Exhibit 10.1
to the Company's Quarterly Report on Form 10-Q for the quarter
ended July 31, 2000, filed with the Commission on September
14, 2000.
+10.24 Agreement and Release between Bruce G. Hill and the Company *
dated May 12, 2000, incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the quarter
ended July 31, 2000, filed with the Commission on September
14, 2000.
+10.25 Agreement and Release between Elaine S. Ouellette and the *
Company dated May 26, 2000, incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended July 31, 2000, filed with the Commission
on September 14, 2000.
+10.26 Sublease Agreement between Houghton Mifflin and the Company, *
dated July 1, 2000, incorporated by reference to Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q for the quarter
ended July 31, 2000, filed with the Commission on September
14, 2000.
+10.27 Agreement and Release between Jonathan Levitt and the Company,
dated February 1, 2001.
+10.28 Form of Indemnity Agreement by and between the Company and
certain of its executive officers and directors.
21 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
- --------
* Incorporated herein by reference.
+ Management contract or compensatory plan or arrangement filed herewith, or
incorporated by reference, in response to Item 14(a)3 of the instructions to
Form 10-K.
63