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Three Months Ended October 31, 1999 Compared to Three Months Ended October 31, 1998
Revenues for the three months ended October 31, 1999 increased $4,720,000, or 32%, to $19,421,000 compared to $14,701,000 for the three months ended October 31, 1998. Substantially all of the revenue increase was attributable to acquisitions made by the Company in last year's third and fourth fiscal quarters. Service revenues for the three months ended October 31, 1999 increased $5,748,000, or 307%, to $7,619,000 for the three months ended October 31, 1999 from $1,871,000 for the three months ended October 31, 1998 primarily due to the Company's fiscal year 1998 acquisitions.
Revenues from the eBusiness Technologies ("EBT") segment increased 15% from $3,867,000 in the three months ended October 31, 1998 to $4,428,000 in the three months ended October 31, 1999. The increase was primarily related to increases in DynaBase product and service revenue. Revenues from the Information Exchange ("IED") segment decreased by approximately 25% from $7,999,000 in the three months ended October 31, 1998 to $6,021,000 in the three months ended October 31, 1999. The decline in revenues in the IED division is primarily attributable to lower revenues from the sales of Quick View Plus due to lower volume from corporate customers. Revenues from the Product Data Management ("PDM") segment increased by approximately 216% from $2,835,000 in the three months ended October 31, 1998 to $8,972,000 in the three months ended October 31, 1999. The increase was primarily related to the addition of the PDM products acquired with the Sherpa Systems Corporation ("Sherpa") acquisition in December 1998.
Gross profit increased $2,403,000, or 20%, from $11,868,000 for the three months ended October 31, 1998 to $14,271,000 for the three months ended October 31, 1999. Gross profit as a percentage of revenues was 73% for the three months ended October 31, 1999 compared to 81% for the three months ended October 31, 1998. The decrease in gross margin in 1999 was primarily due to an increase in amortization expense for capitalized software and acquired license technology.
Total operating expenses increased $21,835,000 to $42,913,000 for the three months ended October 31, 1999 from $21,078,000 for the three months ended October 31, 1998. Included in total operating expenses for the three months ended October 31, 1999 were special charges of $24,256,000 for costs primarily relating to the write- down of intangible assets and capitalized software costs ($10,805,000) substantially all attributable to the PDM division, net premium costs for a major insurance carrier to assume financial risk associated with the class action litigation initiated against the Company in February 1999 ($13,451,000), and restructuring expenses of $4,353,000 for costs primarily relating to the Company's PDM division. Additionally, the operating expenses for the three months ended October 31, 1999 includes a credit of $3,093,000 to sales and marketing expenses for the termination of a 1998 international distributor agreement. Included in total operating expenses for the three months ended October 31, 1998 was an acquisition charge of $7,500,000 for certain purchased technology under research and development at the time of the Company's acquisition of the MediaBank media asset management system and related technologies. Excluding the aforementioned charges, operating expenses increased $3,819,000, or 28%, to $17,397,000, or 90% of revenues, for the three months ended October 31, 1999 as compared to $13,578,000, or 92% of revenues for the three months ended October 31, 1998. The increase was primarily related to costs to support the Company's 1998 acquisitions.
Sales and marketing expenses decreased $2,952,000 to $2,522,000 for the three months ended October 31, 1999 from $5,474,000 for the three months ended October 31, 1998. Sales and marketing expenses for the three months ended October 31, 1999 included a credit of $3,093,000 for the termination of a 1998 international distributor agreement. Excluding the international distributor credit, sales and marketing increased $141,000 to $5,615,000, or 29% of revenues for the three months ended October 31, 1999 compared to $5,474,000, or 37% of revenues for the three months ended October 31, 1998. The decrease in percentage of revenues from October 31, 1998 was primarily the result of revenues increasing faster than associated selling costs.
Product development expenses increased $1,470,000 from $4,455,000 for the three months ended October 31, 1998 to $5,925,000 for the three months ended October 31, 1999. The increase was due primarily to the Company's investment in development particularly in the EBT division as well as the 1998 acquisition of Sherpa. The Company's product development expenses were 31% of revenues for the three months ended October 31, 1999 compared to 30% of revenues for the three months ended October 31, 1998.
General and administrative expenses increased $1,561,000 to $4,824,000 for the three months ended October 31, 1999 compared to $3,263,000 for the three months ended October 31, 1998. The increase in general and administrative expenses was primarily due to additional costs for facilities, insurance, and personnel due to the Company's 1998 acquisitions. General and administrative expenses were 25% of revenues for the three months ended October 31, 1999 and 22% of revenues for the three months ended October 31, 1998.
In October 1999, the Company adopted a plan of restructuring aimed at reducing current operating costs at the Company's PDM Division, while retaining its technical assets and customer service and support infrastructure. The restructuring plan includes a PDM workforce reduction of approximately 40%, the consolidation of the PDM division's sales, service and support organizations, the consolidation of PDM development facilities and the abandonment of leasehold improvements and support assets associated with these locations. The plan also calls for a change in focus away from certain development activities. Therefore, the charge includes a write-down of licensed technology for discontinued development activities to their estimated future cash flows. As a result of the restructuring plan, the Company recorded a charge of $4,290,000 to the current year third fiscal quarter's results. The charge included approximately $1,000,000 of severance for employees in administrative, sales and development positions; $918,000 for the consolidation of sales, service and support organizations and development facilities; and $2,372,000 for write-down of licensed technology for discontinued development activities and the write- off of leasehold improvements and support assets associated with closed locations.
For the three months ended October 31, 1999, the Company incurred $24,256,000 of special charges in addition to the restructuring charges noted above. Of the total amount incurred, approximately $10,805,000 related to the write-down of intangible assets and capitalized software costs to their estimated future cash flows, substantially all attributable to the Company's PDM division and approximately $13,451,000 of net premium costs for a major insurance carrier to assume financial risk associated with the class action litigation initiated against the Company in February 1999 (see note 4 to the "Notes to Condensed Consolidated Financial Statements").
For the three months ended October 31, 1999, the Company recorded a gain of $14,549,000 for the sale of its DynaText/DynaWeb stand- alone technical document publishing product and its ViewPort browser technologies to Enigma Information System Ltd (see note 8 to the "Notes to Condensed Consolidated Financial Statements").
The Company has not recorded a benefit for net operating losses incurred during the three months ended October 31, 1999 due to certain provisions in the Internal Revenue Code concerning changes in ownership and after evaluating the Company's anticipated performance over its normal planning horizon. The Company's effective tax rate for the three months ended October 31, 1998 was 37%.
Net loss and net loss per share were $2,999,000 and $0.19 per share, respectively, for the three months ended October 31, 1999, before net special items including charges, credits and gains noted above, as compared to $183,000, and $0.01 per share, for the three months ended October 31, 1998 excluding the in-process research and development charge noted above.
Nine Months Ended October 31, 1999 Compared to Nine Months Ended October 31, 1998
Revenues for the nine months ended October 31, 1999 increased $5,387,000, or 12%, to $50,282,000 compared to $44,895,000 for the nine months ended October 31, 1998. Total revenues for the nine months ended October 31, 1998 included revenues of $6,251,000 from the Company's former lexical and linguistic operating segment, which was sold to Lernout & Hauspie Speech Products N.V. in April 1998. Excluding the revenues associated with the assets sold to Lernout & Hauspie, net revenues increased by approximately 30% for the nine months ended October 31, 1999 compared to the nine months ended October 31, 1998. Service revenues for the nine months ended October 31, 1999 increased $14,450,000, or 311%, to $19,093,000 from $4,643,000 for the nine months ended October 31, 1998, primarily due to the acquisition of Sherpa in December 1998. Additionally, of the total revenues in the nine months ended October 31, 1999, approximately 34% were revenues from the acquisitions made since July 1998.
Revenues from the EBT segment increased 14% from $7,006,000 in the nine months ended October 31, 1998 to $7,953,000 in the nine months ended October 31, 1999. The increase was primarily related to product and service revenue of the DynaBase product. Revenues from the IED segment decreased by approximately 15% from $22,497,000 in the nine months ended October 31, 1998 to $19,131,000 in the nine months ended October 31, 1999. The decline in revenues in the IED division is primarily attributable to lower revenues from the sales of Quick View Plus due to lower volume from the corporate customers. Revenues from the PDM segment increased by approximately 154% from $9,141,000 in the nine months ended October 31, 1998 to $23,198,000 in the nine months ended October 31, 1999. The increase was primarily related to the addition of the PDM products acquired with the Sherpa acquisition in December 1998. Revenues from the Lexical and Linguistic segment declined from $6,251,000 for the nine months ended October 31, 1998 to $0 for the nine months ended October 31, 1999 as a result of the sale of the linguistic software net assets to Lernout & Hauspie as mentioned above.
Gross profit decreased $4,816,000, or 13%, from $37,566,000 for the nine months ended October 31, 1998 to $32,750,000 for the nine months ended October 31, 1999. Excluding the gross profit associated with the assets sold to Lernout & Hauspie, gross profit decreased $855,000, or 3%, from $31,895,000 for the nine months ended October 31, 1998 to $32,750,000 for the nine months ended October 31, 1999. Gross profit as a percentage of revenues, excluding the revenues and gross profit associated with the assets sold to Lernout & Hauspie, was 65% for the nine months ended October 31, 1999 compared to 83% for the nine months ended October 31, 1998. The decrease in gross margin in 1999 was due in part to an increase in amortization expense for capitalized software and acquired license technology. Additionally, the cost to provide service revenues increased at a faster rate than the associated revenues, thereby contributing to the decline in gross margin.
Total operating expenses increased $46,566,000 to $97,494,000 for the nine months ended October 31, 1999 from $50,928,000 for the nine months ended October 31, 1998. Included in total operating expenses for the nine months ended October 31, 1999 were special charges of $27,693,000 for costs relating to the Company's 1998 restatement of financial results, costs relating to the related to the write-down of intangible assets and capitalized software costs substantially all attributable to the PDM Division and net premium costs for a major insurance carrier to assume financial risk associated with the class action litigation initiated against the Company in February 1999, and restructuring expenses of $11,068,000 for costs relating to the Company's PDM division and the Company's new divisional structure. Additionally, the operating expenses for the nine months ended October 31, 1999 includes a credit of $3,093,000 to sales and marketing expenses for the termination of a 1998 international distributor agreement. Included in total operating expenses for the nine months ended October 31, 1998 were acquisition charges of $8,100,000 for certain purchased technology under research and development by Viewpoint Development AB and MediaBank media asset management system and related technologies at the time of their acquisitions. Excluding the aforementioned charges as well as the operating expenses associated with the assets sold to Lernout & Hauspie, operating expenses increased $20,943,000, or 51%, to $61,826,000, or 123% of revenues for the nine months ended October 31, 1999 as compared to $40,883,000, or 106% of revenues for the nine months ended October 31, 1998. The increase is primarily due to the Company's 1998 acquisitions.
Sales and marketing expenses increased $1,982,000 to $18,075,000 for the nine months ended October 31, 1999 from $16,093,000 for the nine months ended October 31, 1998. Sales and marketing expenses for the nine months ended October 31, 1999 included a credit of $3,093,000 for the termination of a 1998 international distributor agreement. Excluding the credit noted above and the expenses associated with the assets sold to Lernout & Hauspie, sales and marketing expenses increased $5,470,000 to $21,168,000, or 42% of revenues for the nine months ended October 31, 1999 compared to $15,698,000, or 41% of revenues for the nine months ended October 31, 1998. The increase in absolute dollars from October 31, 1998 was primarily the result of higher expenses associated with the Company's acquisitions and increased expenses associated with customer communication such as user group conferences.
Product development expenses increased $6,745,000 from $14,174,000 for the nine months ended October 31, 1998 to $20,919,000 for the nine months ended October 31, 1999. Excluding the product development expenses associated with the assets sold to Lernout & Hauspie, product development expenses increased by $7,942,000, or 61%, for the nine months ended October 31, 1999 compared to the nine months ended October 31, 1998. The increase was due primarily to the Company's investment in development in the EBT division as well as the 1998 acquisitions, particularly in area of PDM products. The Company's product development expenses, excluding the product development expenses associated with the assets sold to Lernout & Hauspie, were 42% of revenues for the nine months ended October 31, 1999 compared to 34% of revenues for the nine months ended October 31, 1998. The increase in product development expenses as a percentage of revenues was due to the aforementioned acquisitions.
Amortization of intangible assets increased $2,507,000 to $3,523,000 for the nine months ended October 31, 1999 from $1,016,000 for the nine months ended October 31, 1998 due to the 1998 acquisitions.
General and administrative expenses increased $4,671,000 to $16,216,000 for the nine months ended October 31, 1999 compared to $11,545,000 for the nine months ended October 31, 1998. Excluding the administrative expenses associated with the assets sold to Lernout & Hauspie, general and administrative expenses increased $5,048,000, or 45%, for the nine months ended October 31, 1999 compared to the nine months ended October 31, 1998. The increase in general and administrative expenses was primarily due to additional costs for facilities, insurance, and personnel due to the Company's 1998 acquisitions. General and administrative expenses, excluding the expenses associated with the assets sold to Lernout & Hauspie, were 32% of revenues for the nine months ended October 31, 1999 and 29% of revenues for the nine months ended October 31, 1998.
The Company has not recorded a benefit for net operating losses incurred during the nine months ended October 31, 1999 due to certain provisions in the Internal Revenue Code concerning changes in ownership and after evaluating the Company's anticipated performance over its normal planning horizon. For the nine months ended October 31, 1998, the Company's effective tax rate was influenced by the $12,012,000 gain on sale of the assets sold to Lernout & Hauspie, the reduction of valuation allowance of approximately $4,000,000 related to the Company deeming that it is more likely than not that certain assets associated with the sale of assets to Lernout & Hauspie would be recoverable and the in-process research and development charge of $8,100,000 discussed above. Excluding these special items, the Company's effective tax rate for the nine months ended October 31, 1998 was 37%.
Net loss and net loss per share was $28,040,000 and $1.80 per share, respectively, excluding the restructuring expenses of $11,068,000, or $0.71 per share, the $27,693,000 or $1.78 per share relating to the special charges incurred by the Company, the $3,093,000, or $0.20 per charge credit to sales and marketing expenses for the termination of a 1998 international distributor agreement, the $14,549,000, or $0.93 per share gain on sale of the Company's DynaText/DynaWeb stand-alone technical document products and the $2,655,000, or $0.17 per share, for the write- down of the Company's investment in Information Please LLC as compared to $1,031,000, and $0.07 per share, for the nine months ended October 31, 1998, excluding the gain on the sale of the linguistic software net assets of $12,012,000 or $0.79 per share, and the $8,100,000, or $0.53 per share for purchased in-process research and development charges noted above.
Liquidity and Capital Resources
The Company's operating activities used cash of $32,493,000 for the nine months ended October 31, 1999 compared to providing cash of $431,000 for the nine months ended October 31, 1998. The decreased contribution from operating activities of $32,924,000 was due principally to the overall lower level of earnings in the nine months ended October 31, 1999 compared to the same period in 1998, net payment for the insurance agreement with a major AAA- rated insurance carrier pursuant to which the insurance carrier assumed complete financial responsibly for the defense and ultimate resolution of the securities class action suit filed in February 1999 (See Note 4 to the "Notes to Condensed Consolidated Financial Statements"), payment for the termination of a 1998 international distributor agreement (see Note 4 to the "Notes to Condensed Consolidated Financial Statements"), and the timing of payments relating to accounts payable and accrued liabilities.
The Company's investing activities provided cash of $37,589,000 for the nine months ended October 31, 1999 compared to $3,324,000 for the nine months ended October 31, 1998. The increased contribution of $34,265,000 was due to an increase in the sale of marketable securities of $33,168,000, lower payments of $8,886,000 relating to acquisitions, reduced investments in property and equipment due to the Company's restructuring activities and lower capitalized software costs offset by a decrease in proceeds received from dispositions of $10,853,000.
The Company's financing activities provided cash of $227,000 for the nine months ended October 31, 1999 compared to $10,275,000 for the nine months ended October 31, 1998. The decrease of $10,048,000 primarily relates to a lower level of stock option exercises and payments made under capitalized lease obligations.
On October 29, 1999, the Company sold its DynaText/DynaWeb stand-alone technical document publishing component of its PDM Division, along with its ViewPort browser technology assets, for $14,750,000. The purchase was in the form of a stock purchase. The purchase price was paid $9,000,000 in cash and $5,600,000 in the form of a promissory note, due and payable by April 30, 2000. The final payment of the note is subject to final closing adjustments allowed under the original agreement with Enigma. The promissory note bears interest as follows: (i) if the promissory note is paid by December 15, 1999 but prior to January 31, 2000, interest is at a rate of 6.5% per annum accrued from October 29, 1999 until the date on which the final payment is paid, and (iii) if the promissory note is paid after January 31, 2000, interest at a rate of 6.5% per annum accrued from October 29, 1999 through and until January 31, 2000 and 13.0% per annum accrued from February 1, 2000 through and until the date on which the final payment is paid. The promissory note is secured by a Stock Pledge Agreement of the stock of Inso Providence Corporation.
As of October 31, 1999, the Company had working capital of $13,645,000. Total cash, cash equivalents, and marketable securities at October 31, 1999 were $20,235,000. The Company believes that funds available, together with funds expected to be generated from operations, will be sufficient to finance the Company's operations through the foreseeable future.
On June 2, 1999, the Company was informed that the United States Securities and Exchange Commission has issued a Formal Order of Private Investigation in connection with matters relating to the Company's previously announced restatement of its 1998 financial results. The Company is cooperating with the Securities and Exchange Commission. The Company cannot predict the ultimate resolution of this action at this time, and there can be no assurance that the investigation will not have a material adverse impact on the Company's financial condition and results of operations. Additionally, while it is not feasible to predict the total costs, the Company expects to incur further professional fees with respect to the Formal Order of Private Investigation subsequent to announcement of the restatement.
On June 9, 1999, the bankruptcy estates of Microlytics, Inc. and Microlytics Technology Co., Inc. (together "Microlytics") filed an adversary proceeding against the Company in the United States Bankruptcy Court for the Western District of New York. The complaint seeks turnover of purported property of the estates and damages for the Company's alleged breaches of a license from Microlytics relating to certain computer software databases and other information. The complaint seeks damages of at least $11,750,000. On August 19, 1999, the Company filed a motion to withdraw the case from the Bankruptcy Court to the United States District Court for the Western District of New York. The motion is pending. Also, on August 19, 1999, the Company filed its Answer and Demand for Jury Trial. The Company believes that the claims are subject to meritorious defenses, which it plans to assert during the lawsuit. The Company cannot predict the ultimate resolution of this action at this time.
In December 1998, the Company acquired all of the outstanding stock of privately held Sherpa Systems Corporation for total consideration paid of $36,000,000. At the time of the Sherpa acquisition, the Company caused Sherpa to enter into employment and noncompetition agreements with key executives. The Company expects to make remaining payments of approximately $1,000,000 over the next two years under those agreements.
The Sherpa acquisition also included estimated costs of approximately $5,800,000 for direct transaction costs and costs relating to the elimination of excess and duplicative activities as a result of the merger. As of October 31, 1999, approximately $160,000 for such costs remained in the accrual. Since December 31, 1998, payments against the accrual consisted of the following: approximately $1,530,000 for employee severance for elimination of duplicate functions and closure of duplicate and excess operations; approximately $400,000 for professional fees consisting principally of appraisal, legal, and accounting fees; and other out-of-pocket expenses related to the acquisition. Employee terminations were essentially in the areas of sales, marketing and administrative functions. Additionally, at October 31, 1999, the Company reevaluated the estimated severance costs relating to the elimination of excess and duplicative activities as well as costs associated with certain contractual obligations, which existed at the time of the acquisition, and reduced the related accrual and goodwill by approximately $3,710,000. The majority of the payments relating to the remaining accrual are expected to be made prior to January 31, 2000 (see Note 5 to the "Notes to Condensed Consolidated Financial Statements").
In October 1999, the Company adopted a plan of restructuring aimed at reducing current operating costs in the Company's PDM division, while retaining its technical assets and customer service and support infrastructure. The restructuring plan includes a PDM workforce reduction of approximately 40%, the consolidation of the PDM division's sales, service and support organizations, the consolidation of PDM development facilities and the abandonment of leasehold improvements and support assets associated with these locations. The plan also calls for a change in focus away from certain development activities. Therefore, the charge includes a write-down of licensed technology for discontinued development activities to their estimated future cash flows. As a result of the restructuring plan, the Company recorded a charge of $4,290,000 to the current year third fiscal quarter's results. The charge included approximately $1,000,000 of severance for employees in administrative, sales and development positions; $918,000 for the consolidation of sales, service and support organizations and development facilities; and $2,372,000 for write-down of licensed technology for discontinued development activities and the write- off of leasehold improvements and support assets associated with closed locations. As of October 31, 1999, approximately $1,920,000 remained in accrued liabilities relating to this restructuring charge. The majority of the payments relating to the remaining accrual are expected to be made prior to January 31, 2000 (see Note 6 to the "Notes to Condensed Consolidated Financial Statements").
In July 1999, the Company adopted a plan of restructuring aimed at reducing current operating costs, as well as supporting the Company's new divisional structure. The Company's restructuring plan included a reduction of more than 20% from staff levels at the end of fiscal year 1998, the closure and/or combination of domestic and international sales and administrative facilities and the abandonment of leasehold improvements and support assets associated with these locations. The plan also called for a change in focus away from certain products. As a result of the restructuring plan, the Company recorded a charge of $6,234,000 to the second fiscal quarter's results. The charge included approximately $2,000,000 of severance for employees in administrative, sales and development positions; $960,000 for the closure and/or combination of domestic and international sales and administrative facilities; and $3,274,000 for write-down of capitalized product development costs and intangibles for certain discontinued products and the write-off of leasehold improvements and support assets associated with closed locations. The capitalized product development costs and intangibles were written-down to their estimated future cash flows. As of October 31, 1999, accrued liabilities of approximately $800,000 remained relating to this restructuring charge. The remaining accrual amount is expected to be paid by January 31, 2000 (see Note 6 to the "Notes to Condensed Consolidated Financial Statements").
In June 1998, the Financial Accounting Standards Board issued Statement of Accounting Standards No. 133, as amended by Statement of Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities" (collectively SFAS 133) effective for fiscal years beginning after June 15, 2000. SFAS 133 provides a comprehensive and consistent standard for the recognition and measurement of derivatives and hedging activities. The Company does not believe that the adoption of this standard will have a material impact on its financial position or results of operations.
In 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-9 (SOP 98-9) "Modification of SOP 97-2, Software Revenue Recognition with respect to Certain Transactions" effective for fiscal years beginning after March 15, 1999. SOP 98-9 defines vendor specific objective evidence of fair value in connection with software revenue recognition. The adoption of SOP 98-9 is not expected to have a material impact on the Company's financial position or results of operations.
Acquired In-Process Research and Development
In January 1999, the Company acquired AIS Software S.A. ("AIS") for approximately $3,000,000 using available cash. The AIS acquisition included the purchase of certain technology under research and development, which resulted in a charge of $500,000 to the Company's consolidated results for the one-month period ended January 31, 1999. Additionally, the Company's fiscal year 1998 acquisitions included certain material purchased in-process research and development charges for Venture Labs Inc, Sherpa Systems Corporation, and MediaBank totaling $21,300,000. 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 relates 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 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. As of October 31, 1999, the nature of the efforts required to develop the purchased in-process technology into commercially viable products was substantially completed.
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 October 31, 1999, the nature of the efforts required to develop the purchased in-process technology into commercially viable products was substantially completed.
Sherpa Systems Corporation
The primary purchased in-process technology acquired in the Sherpa Systems Corporation acquisition was the SherpaWorks Version 3 product. This technology is designed to implement a three-tier architecture which will provide out-of-the-box, configurable Product Data Management systems that are easy to use and that support open standards-based interfaces. SherpaWorks 3 is expected to provide an open user interface framework that allows application developers to implement an application or user role specific interface. The Company estimates that this project was approximately 85% complete at the date of the Sherpa acquisition. The Company has presently stopped development of SherpaWorks 3 given management's plans for the PDM division and its potential sale. As a result, it is not possible to estimate the costs that will be required to be expended to complete the remaining development work of SherpaWorks 3.
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 October 31, 1999, the nature of the efforts required to develop the first project into commercially viable products was substantially completed.
The second project provides content management capabilities based on the contents of text embedded in popular text formats that are stored in the database. In addition, the second project provides support for DB2, a popular relational database developed by IBM, and IBM's Digital Library product. The Company estimates that this project was 30% complete at the time of the MediaBank acquisition. As of October 31, 1999, the Company estimates that approximately $200,000 will be required to be expended to complete the remaining development of this product.
Year 2000
Many components of computers and the programs that run on them were designed with attention to only the last two digits of the calendar year. Any equipment or program recognizing only two digits may recognize a date using 00 as the year 1900 rather than the year 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail. The Year 2000 issue creates risk for the Company from unforeseen problems in its products or its own computer systems and from third parties with whom the Company transacts business worldwide. Failure of Year 2000 defects in the Company's and/or third parties' computer systems or Year 2000 defects in the Company's products could have a material impact on its ability to conduct business.
In late 1997, the Company commenced a phased Year 2000 Compliance Plan (the "Plan") to assess, remediate, test, and implement plans for all applications and products potentially affected by the Year 2000 issue. To accelerate overall completion, Plan activities are often concurrent rather than serial, but all phases are expected to be completed by the end of 1999. Specifically, the plan addresses the software the Company sells and all software on which it depends, the hardware, operating systems and software on which the Company runs its business and the third-party services on which the Company also depends. The Company's costs to date have not been material to the Company's operations and total costs of implementing the Plan are not expected to be material to the Company's fiscal year 2000 results. However, there can be no assurances that the Company will not incur material costs related to the Year 2000 issue, or that the Company's Year 2000 Compliance Plan will detect all potential Year 2000 issues. Internal staff are the primary resources working on the Plan, although the Company does not anticipate having to defer any other information technology ("IT") projects in its effort to become Year 2000 compliant. The Company expects to fund the costs of completing the Plan through its operating cash flows.
Inso Products
The Year 2000 issue could affect the products that the Company licenses. The Company's products that it will continue to sell in the Year 2000 have been tested for Year 2000 compliance. Additionally, the Company has completed its assessment of the products that it licenses as components of products that it sells. The product compliance statements are listed on the Company's Website, and where necessary, the Company is in the process of informing customers of the proper migration path to Year 2000 compliant versions. The Company's current products are not considered date dependent and any work to bring the current versions of these products to Year 2000 compliance has been incorporated into the normal update cycle. There are some of the Company's customers using products or product versions that the Company has not tested, and does not support, for Year 2000 compliance. The Company is encouraging these customers to migrate to current products or versions that meet the Company's Year 2000 compliance definition. In addition, the Company does not intend to test any of its custom code for Year 2000 compliance.
The costs of these efforts have not been material and the projected completion costs are not expected to be material. However, there can be no assurances that the Company will not incur material costs related to the Year 2000 issue.
Inso Internal Systems, Facilities and External Vendors
The Company has inventoried all mission critical hardware and software on which it develops the products and runs its internal systems. All inventoried items have been categorized as compliant, compliant with patches, or not compliant. The Company has substantially completed addressing the items in the compliant with patches category. The Company expects to complete the upgrade of these items in advance of December 31, 1999. In some cases, the Company is dependent upon vendors completing their patches to meet the calendar year 1999 targeted completion date for correcting these items. The Company has scheduled retirement and/or replacement of non-compliant items. The cost of this effort and the projected completion costs have not been material. However, the Company may experience material unanticipated problems and costs by undetected errors of technology used in its internal IT and non-IT systems.
The Company has contacted all mission critical utility and facilities vendors on which it depends. These vendors have provided compliance statements certifying that they will be year 2000 compliant by the end of calendar year 1999. The Company acknowledges that it is vulnerable, as are most organizations, to the inability of these external organizations to achieve Year 2000 readiness.
Contingency Plan
While the Company has not developed a formalized contingency plan, it has identified contingency measures representing those areas, which are deemed to be most critical. These contingency measures include short-term use of backup equipment or software, developing manual workaround processes and alternative third party suppliers for critical services and products. Additionally, the Company's technical support group and its professional services group will be made available to resolve any product issues that may arise.
The Company believes that an effective program to resolve the Year 2000 issue in a timely manner is in place. As noted above, the Company has not completed all phases of the Year 2000 Compliance Plan but expects to complete it prior to December 31, 1999. Based upon current information, the Company believes that the correction of the Year 2000 issues should not have a material adverse effect on its financial position or results of operations. However, there can be no assurances that the Company will not incur material costs related to the Year 2000 issue.
Future Operating Results This report, and other reports, proxy statements and other communications to stockholders, as well as oral statements by the Company's officers or its agents, may contain forward-looking statements with respect to, among other things, the Company's future revenues, operating income, earnings per share or cash flows. Please refer to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 for a description of certain factors which may cause the Company's actual results to vary materially from those forecasted or projected in any such forward-looking statements. Among the factors which may cause the Company's actual results to differ materially from historical results are the following: competitive pressures including price pressures; increased reliance on direct and distribution channels which results in lower operating margins; increased personnel costs and competition for experienced personnel; market acceptance of products based on eXtensible Markup Language; inability to continue to expand through acquisition; unexpected restructuring costs; inability to expand a service organization for enterprise-level solution selling; consolidation in the OEM business and potential competition from OEM customers; adverse economic changes in the markets in which the Company does business; difficulties integrating operations and personnel of acquired businesses; and increasing reliance on international markets.
Item 3. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's market risk disclosures set forth in its 1998 Annual Report filed on Form 10-K have not changed significantly.