Form 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ---------------------- [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended September 30, 1998 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______to_______ Commission File No. 0-22292 INPUT SOFTWARE, INC. (Exact name of registrant as specified in its charter) A Delaware Corporation 77-0104275 ---------------------- ---------- (State or other jurisdiction of (I. R. S. Employer incorporation or organization) Identification No.) 1710 Fortune Drive, San Jose, California 95131 (Address of principal executive offices) Registrant's telephone number, including area code: (408) 435-8900 Cornerstone Imaging, Inc. --------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past ninety days. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of September 30, 1998: 5,061,363 Part 1. Financial Information Item 1. Financial Statements INPUT SOFTWARE, INC. CONSOLIDATED CONDENSED BALANCE SHEETS (In thousands) September December 31, 1998 1997 ----------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents .................... $10,755 $12,284 Accounts receivable........................... 4,280 2,946 Deferred income taxes and other current assets....................... 5,312 5,521 ----------- ----------- Total current assets........................ 20,347 20,751 Property and equipment, net..................... 765 1,056 Other assets.................................... 516 424 Net assets related to the discontinued display division.............. 3,757 15,462 ----------- ----------- $25,385 $37,693 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.............................. $308 $463 Deferred revenue.............................. 1,444 654 Accrued liabilities........................... 2,031 2,653 ----------- ----------- Total current liabilities................... 3,783 3,770 ----------- ----------- Stockholders' equity: Common stock.................................. 51 67 Paid in capital............................... 14,479 24,747 Retained earnings............................. 7,072 9,109 ----------- ----------- Stockholders' equity........................ 21,602 33,923 ----------- ----------- $25,385 $37,693 =========== =========== The accompanying notes are an integral part of these consolidated condensed financial statements INPUT SOFTWARE, INC. CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 1998 1997 1998 1997 --------- --------- --------- --------- Net revenues from continuing operations...................... $4,599 $3,158 $12,146 $8,647 Cost of revenues.................. 401 240 1,217 591 --------- --------- --------- --------- Gross profit 4,198 2,918 10,929 8,056 Sales and marketing............... 2,070 1,248 5,478 3,827 Research and development.......... 982 958 3,101 3,012 General and administrative........ 790 568 1,924 1,582 --------- --------- --------- --------- Operating income (loss)......... 356 144 426 (365) Interest and other income......... 166 111 459 514 --------- --------- --------- --------- Income before provision for income taxes............. 522 255 885 149 0 Provision for income taxes........ 168 87 277 51 --------- --------- --------- --------- Net income from continuing operations........ 354 168 608 98 Discontinued operations: Net Income (loss) from operations of Discontinued Display Division........................ -- (161) (361) 795 Estimated net loss on sale of Display Division................ -- -- (2,284) -- --------- --------- --------- --------- Net income (loss) from discontinued operations....... -- (161) (2,645) 795 --------- --------- --------- --------- Net income (loss)............... $354 $7 ($2,037) $893 ========= ========= ========= ========= Basic and diluted EPS: Income (loss) from continuing operations........ $0.07 $0.02 $0.10 $0.01 Income (loss) from discontinued operations...... 0.00 (0.02) (0.45) 0.11 --------- --------- --------- --------- Net income (loss)............... $0.07 $0.00 ($0.35) $0.12 ========= ========= ========= ========= Shares used in EPS calculations: Basic ......................... 5,352 7,095 5,890 7,312 Diluted........................ 5,440 7,105 5,995 7,340 ========= ========= ========= ========= The accompanying notes are an integral part of these consolidated condensed financial statements INPUT SOFTWARE, INC. CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED - IN THOUSANDS) Nine Months Ended September 30, ------------------- 1998 1997 --------- --------- Cash flows from operating activities: Net income (loss)...................................... ($2,037) $893 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization........................ 731 632 Discontinued operations 11,705 (7,427) (Increase) decrease in assets and liabilities: Accounts receivable................................. (1,334) (928) Deferred income taxes and other assets.............. 117 (634) Accounts payable.................................... (155) (68) Accrued liabilities and deferred revenue............ 168 936 --------- --------- Net cash provided by (used in) operating activities.. 9,195 (6,596) --------- --------- Cash flows from investing activities: Property and equipment additions....................... (440) (592) --------- --------- Net cash used in investing activities............... (440) (592) --------- --------- Cash flows from financing activities: Repurchase of common stock............................. (10,477) (4,704) --------- --------- Net cash used in financing activities............... (10,477) (4,704) --------- --------- Net decrease in cash and cash equivalents............... (1,529) (11,538) Cash and cash equivalents at beginning of period........ 12,284 18,486 --------- --------- Cash and cash equivalents at end of period.............. $10,755 $6,948 ========= ========= The accompanying notes are an integral part of these consolidated condensed financial statements INPUT SOFTWARE, INC. NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Interim Unaudited Financial Information: The accompanying interim unaudited consolidated condensed financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The December 31, 1997 balance sheet data was derived from audited financial statements contained in the Company's 1997 Annual Report on Form 10-k but does not include all disclosures required by generally accepted accounting principles. In addition, assets and liabilities related to the pending sale and discontinuation of the display division has been restated from the audited balance sheet. The unaudited financial statements for the nine month periods ended September 30, 1998 and 1997 include, in the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial information set herein. The results of operations for the interim periods are not necessarily indicative of the results to be expected for an entire year and should not be relied on as such. Recent Pronouncements: As of January 1, 1998 the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"("SFAS 130"). This statement establishes requirements for disclosure of comprehensive income and its components; however, the adoption of SFAS 130 had no impact on the Company's net income (loss) or stockholders' equity. In June 1997 the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about segments of an Enterprise on Related Information"("SFAS 131"), which changes the way public companies report information about operating segments. SFAS No. 131, which is based on the management approach to segment reporting, establishes requirements to report elected segment information quarterly and to report entity-wide disclosures about products and services, major customers and the major countries in which the entity holds assets and reports revenues. The Company has not yet evaluated the effects of this change or its reporting segment information. As of January 1, 1998 the Company has adopted the provisions of Statement of Position 97-2, ("SOP 97-2"), "Software Revenue Recognition, as amended by SOP 98-4 "Deferral of Effective Date of Certain Provisions of SOP 97-2". This statement establishes requirements for revenue recognition for software companies. Under SOP 97-2, the Company recognizes product revenues and license fees upon shipment if a signed contract exists, the fee is fixed and determinable, collection of resulting receivables is probable and product returns are reasonably estimable. In addition, for contracts with multiple obligations (e.g. deliverable and undeliverable products, service, and maintenance), revenue must be allocated to each component of the contract based on evidence of its fair value. Revenue allocated to undelivered products is recognized when the criteria for product and license revenue set forth above are met. Revenue allocated to maintenance fees for ongoing customer support and updates is recognized ratably over the period of the maintenance contract. Payments for maintenance fees are generally made in advance and are non-refundable. Revenue related to other services is recognized as the related services are performed. Royalty revenues that are contingent upon sale to an end user by OEMs are recognized upon receipt of a report of sale by the Company for the OEM. In April 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP 98-1") "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". This Statement of Position (SOP) provides guidance on accounting for the costs of computer software developed or obtained for internal use. The SOP applies to all nongovernmental entities and is effective for financial statements for fiscal years beginning after December 15, 1998. The Company has not yet determined the impact, if any, of the adoption of this statement on the financial statements of the Company. In June of 1998, the Financial Accounting Standards Board issued Statement of Financial Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company has not yet evaluated the effects of this change on its operations. The Company will adopt SFAS 133 as required for its first quarterly filing of the fiscal year 2000. 2. DIVESTITURES: On September 8, 1998, the Company sold its display division to the current management team led by John Noellert, General Manager of the display division. This business now operates as a private company named Cornerstone Peripherals Technology, Inc. Under the terms of the sale the Company sold certain assets and transferred certain liabilities associated with the display division. In addition, the Company retained certain assets, including accounts receivable and certain inventory. The value of the inventory will be realized by the Company through the sale, on its behalf, of that inventory by Cornerstone Peripherals Technology, Inc. The Company estimates it will receive, subsequent to September 30, 1998, proceeds in excess of $2.8 million for receivables and inventory less transaction expenses and certain display division liabilities. The Company also holds a minority equity interest in Cornerstone Peripherals Technology, Inc. As a result of the transaction, the Company recorded a loss of approximately $2.6 million for the quarter ended March 31, 1998. All financial statements have been restated to account for the display division as a discontinued operation. On February 4, 1997, the Company entered into an agreement to sell its ownership interest in Pegasus. Under the terms of the agreement, the Company received 35,000 shares of Cornerstone's common stock and a note receivable totaling approximately $200,000. The impact of this transaction on the financial position of the Company was not significant. 3. INCOME TAXES: The Company's provision for income taxes reflect the Company's estimated 1998 annualized effective tax rate of 31%. 4. STOCK REPURCHASE: On February 14, 1997, the Company's Board of Directors authorized the use of up to $5.0 million to repurchase the Company's common stock. This amount was increased to $15.0 million on September 17, 1997 and further increased to $20 million on August 12, 1998. Purchases have been, and will continue to be made from time-to-time on the open market or in privately negotiated transactions. The timing and volume of purchases will be dependent upon market conditions and other factors. The Company intends to use cash on hand to fund it purchases. During the nine months ended September 30, 1998, the Company repurchased 1,642,900 shares at an average cost per share of $6.45 bringing the cumulative repurchases since the inception of the program to 2.6 million shares. 6. STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS: On March 14, 1998, the Company's Board of Directors authorized an increase in the number of shares reserved for issuance under the Company's 1993 Stock Option/Stock Issuance Plan by 200,000 shares to 2,674,852 shares of common stock for issuance under the Plan. On the same date the Board also approved 100,000 shares for issuance under the 1998 Employee Stock Purchase Plan. The proposed increases were approved by stockholders on June 3, 1998 at the Company's Annual Stockholder's Meeting. - ------------------------------------------------------------------------ Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. This Quarterly Report on Form 10-Q may contain forward-looking statements that involve risks and uncertainties. The Company's actual results may differ materially from the results discussed in any such forward-looking statements. Factors that might cause such a difference include, but are not limited to those discussed below and in the section captioned RISK FACTORS in the Company's most recent Annual Report on Form 10-K. RESULTS OF OPERATIONS: Input Software, Inc. develops, markets, and services software products for enterprise computing applications. In 1994, the Company began providing software toolkits for scanning and document image processing ("DIP") applications. In November 1995, the Company began shipments of InputAccel-- a software product designed to automate the conversion of documents into electronic images. The Company's software tools allow integrators and software developers to save both time and money by offering stable, supported libraries of software code to drive DIP peripherals rather than having to develop such software themselves. Most of these tools are based on Input's Image & Scanner Interface Specification ("ISIS"), an industry standard interface for scanners. ISIS provides a key component for InputAccel. InputAccel is a data capture system that lets organizations integrate incoming documents-paper, fax, microfilm-with enterprise workflow and document management systems. InputAccel is a customizable, open architecture software product that runs under Windows NT platform. The Company's products are used by a diverse set of customers in a wide variety of applications, such as insurance claim processing, loan application processing, FDA submissions, and the storage of personnel records and technical manuals. Most often, data capture systems are used by large, service-oriented companies and government agencies for which document management or transaction processing is critical. Data capture, which is often used in conjunction with document image processing, document management, and other computer applications, enables multiple users to electronically capture, file, and retrieve documents. Hence the Company's products are often sold through, or in conjunction with, systems integrators and value added resellers. Net Revenues The Company's software revenues increased 46% in the third quarter of 1998 to $4.6 million from $3.2 million in the third quarter of 1997. For the nine months ending September 30, 1998, revenues increased 40% to $12.1 million from revenues of $8.6 in the first nine months of 1997. The increase in revenue is due primarily to increased revenues from InputAccel. Gross Profit Gross profit increased 44% to $4.2 million for the third quarter of 1998 from $2.9 million for the third quarter of 1997. For the nine months ending September 30, 1998, gross profit increased 36% to $10.9 million from gross profit of $8.1 in the first nine months of 1997. The gross margin was 91% and 92% for the third quarters of 1998 and 1997, respectively and was 90% and 93% for the nine months ended September 30, 1998 and 1997, respectively. The slight decrease in gross margin percent for both periods is largely due to the increased percentage of revenues derived from software maintenance and professional services, which have lower margins than revenues from product licensing. The Company expects revenues from maintenance and services to continue to increase as a percentage of overall revenues. Sales and Marketing Sales and marketing expenses increased 66% to $2.1 million in the third quarter of 1998 from $1.2 million in the third quarter of 1997, and for the nine month period ended September 30, 1998, increased 43% to $5.5 million from $3.8 million for the first nine months of 1997. Sales and marketing expenses as a percentage of revenue were 46% and 40% for the third quarter of 1998 and 1997, respectively and was 45% and 44% for the nine months ended September 30, 1998 and 1997, respectively. The Company expects that sales and marketing expenses will increase in the future, in absolute terms, as the Company continues to expand sales and marketing programs. Research and Development Research and development expenses remained flat at $1.0 million in the third quarter of 1998 and 1997, respectively and for the nine month period ended September 30, 1998, increased 3% to $3.1 million from $3.0 million for the first nine months of 1997. The first quarter of 1997 included a non-recurring purchase of technology of $240,000. Current staffing levels exceed those of prior periods. The Company believes that continued investment in research and development is critical to its future growth and will continue to commit substantial resources, as a percent to sales, to this area. As a result, quarterly research and development expenses are likely to increase during the remainder of 1998 and beyond. General and Administrative General and administrative expenses in the third quarter of 1998 increased by 39% to $790,000 from $568,000 in the third quarter of 1997 and for the nine month period ended September 30, 1998, increased by 22% to $1.9 million from $1.6 million in 1997. General and administrative expenses as a percentage of revenue were 17% and 18% for the third quarter of 1998 and 1997, respectively and was 16% and 18% for the nine months ended September 30, 1998 and 1997, respectively. The decreases, as a percent to sales, are primarily attributable to increased revenue levels. Certain general & administrative expenses have, to date, been absorbed by the recently sold display division. Accordingly, the Company expects general and administrative expenses to increase in succeeding future periods. Divestiture The sale of the display division resulted in a net loss of $2.6 million, or 45 cents per share. This charge includes a loss from display division operations in the first quarter of 1998, net of tax benefit, of $361,000. In addition, it includes an estimated loss of $2.3 million, net of tax benefit, on the sale of the net assets of the display division. This loss, recorded in the first quarter of 1998, includes expenses related to the pending transaction and a reduction in value of certain inventory, which is not strategic to the new display business. Provision for Income Taxes Provision for federal and state income taxes as a percentage of pretax income from operations was 32% for the third quarter of 1998 and 34% for the third quarter of 1997, and was 31% and 34% for the nine month ended September 30, 1998 and 1997, respectively. In addition, a tax benefit reserve of 35% has been netted against the estimated losses on the sale of the display division. Liquidity and Capital Resources At September 30, 1998, the Company had cash and cash equivalents of $10.8 million, compared to $12.3 million at December 31, 1997. Net cash provided by operating activities was $9.2 million in the first nine months of 1998 compared net cash used of $6.6 million in the first nine months of 1997. Net cash used in investing activities, exclusively additions to property and equipment, was $440,000 for the first nine months of 1998, compared to $592,000 in the first nine months of 1997. On February 14, 1997, the Company's Board of Directors authorized the use of up to $5.0 million to repurchase the Company's common stock. This amount was increased to $15.0 million on Sept 17, 1997 and further increased to $20 million on August 12, 1998 . The repurchased stock is expected to be held by the Company and may be used to meet the Company's obligations under its stock plans and for other corporate purposes. Purchases will be made from time-to-time on the open market or in privately negotiated transactions. The timing and volume of purchases will be dependent upon market conditions and other factors. The Company intends to use cash on hand to fund its purchases. During the nine month period ended September 30, 1998, the Company repurchased 1,642,900 shares at an average cost per share of $6.45. The Company believes that its cash and cash equivalents, together with cash flows from operations will be sufficient to meet the Company's liquidity and capital requirements for the next 12 months. The Company may, however, seek additional equity or debt financing to fund further expansion. The timing and amount of such capital requirements cannot be precisely determined at this time and will depend on a number of factors, including demand for the Company's products, product mix and competitive factors. Accordingly, the Company may require additional funds to support its working capital requirements or for other purposes and may seek to raise such additional funds through public or private equity or other sources. There can be no assurance that additional financing will be available at all or that it, if available, will be obtainable on terms favorable to the Company and would not be dilutive. RISK FACTORS: Limited Software Operating History; History of Losses; Future Operating Results Uncertain The Company has operated its Software Division since June 1994. Accordingly, the Company's prospects must be considered in light of the risks and difficulties frequently encountered by companies in the early stage of development, particularly companies in new and rapidly evolving markets. To address these risks, the Company must, among other things, respond to competitive developments, continue to attract, retain and motivate qualified personnel and continue to improve its products. For the past several years, the Company has been investing in its software business and as a result, on a stand-alone basis, the Software Division has not achieved operating profitability and has incurred operating losses in each quarter from inception through the quarter ending June 30, 1997. As of September 30, 1998, the Company's had cumulative pre- tax operating losses of approximately $3.0 million. The Company's operating losses have been due in part to the commitment of significant resources to the Company's research and development and sales and marketing departments. The Company expects to continue to devote substantial resources to these areas and as a result will need to achieve significant quarterly revenues to achieve profitability. In particular, the Company intends to continue to hire additional sales and research and development personnel in 1998 and beyond, which the Company believes is required if the Company is to achieve significant revenue growth in the future. Although the Company's software related revenues generally have increased in recent periods, there can be no assurance that the Company's revenues will grow in future periods, that they will grow at past rates or that the Company will remain profitable on a quarterly or annual basis in the future. Operating Results Subject to Significant Fluctuations; Seasonality The Company's quarterly revenues, expenses and operating results have varied significantly in the past and are likely to vary significantly in the future due to a variety of factors, such as demand for the Company's products, the size and timing of significant orders and their fulfillment, the number, timing and significance of product enhancements and new product announcements by the Company and its competitors, changes in pricing policies by the Company or its competitors, customer order deferrals in anticipation of enhancements or new products offered by the Company or its competitors, the ability of the Company to develop, introduce and market new and enhanced versions of its products on a timely basis, changes in the Company's level of operating expenses, budgeting cycles of its customers, product life cycles, software defects and other product quality problems, the Company's ability to attract and retain qualified personnel, changes in the Company's sales incentive plans, changes in the mix of domestic and international revenues, the level of international expansion, foreign currency exchange rate fluctuations, performance of indirect channel partners, changes in the mix of indirect channels through which the Company's products are offered, the impact of acquisitions of competitors and indirect channel partners, the Company's ability to control costs and general domestic and international economic and political conditions. The Company operates with virtually no order backlog because its software products are shipped shortly after orders are received, which makes product revenues in any quarter substantially dependent on orders booked and shipped throughout that quarter. As a result, if orders in the first month or two of a quarter fall short of expectations, it is unlikely that the Company will be able to meet its revenue targets for that quarter. In addition, the Company achieves a significant portion of revenues from indirect sales channels over which the Company has little or no control. Moreover, the Company's expense levels are based to a significant extent on the Company's expectations of future revenues and therefore are relatively fixed in the short term. If revenue levels are below expectations, operating results are likely to be adversely and disproportionately affected because only a small portion of the Company's expenses vary with its revenues. The Company's business has experienced and is expected to continue to experience seasonality, largely due to customer buying patterns. In recent years, the Company has had relatively stronger demand for its products during the quarter ending December 31 and demand has been relatively weaker in the quarter ending March 31. The Company believes that this pattern will continue. Based upon all of the factors described above, the Company believes that its quarterly revenues, expenses and operating results are likely to vary significantly in the future, that period-to-period comparisons of its operating results are not necessarily meaningful and that, in any event, such comparisons should not be relied upon as indications of future performance. The Company has limited ability to forecast future revenues, and it is likely that in some future quarter the Company's operating results will be below the expectations of public securities analysts and investors. In the event that operating results are below expectations, or in the event that adverse conditions prevail or are perceived to prevail generally or with respect to the Company's business, the price of the Company's Common Stock would likely be materially adversely affected. Significant Competition The market for the Company's products is intensely competitive and subject to rapid change. In addition, because there are relatively low barriers to entry in the software market, the Company may encounter additional competition from other established and emerging companies. Many of the Company's competitors have longer operating histories, significantly greater financial, technical, marketing and other resources than the Company, significantly greater name recognition and a large installed base of customers. As a result, the Company's competitors may be able to respond more quickly to new or emerging technologies and changes in customer requirements, or to devote greater resources to the development, promotion and sale of competitive products, than can the Company. There is also a substantial risk that announcements of competing products by large competitors could result in the cancellation of customer orders in anticipation of the introduction of such new products. In addition, current and potential competitors have established or may establish cooperative relationships among themselves or with third parties to increase the ability of their products to address customer needs and which may limit the Company's ability to sell its products through particular reseller partners. Accordingly, new competitors or alliances among current and new competitors may emerge and rapidly gain significant market share. The Company also expects that competition will increase as a result of software industry consolidation. Increased competition is likely to result in price reductions, fewer customer orders, reduced margins and loss of market share, any of which could materially adversely affect the Company. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that the competitive pressures faced by the Company will not materially adversely affect its business, operating results and financial condition. Product Concentration The Company currently expects the sale and license of its InputAccel products and software tools to account for substantially all of the Company's revenues for the foreseeable future. The Company's future operating results are, therefore, heavily dependent upon continued market acceptance of its InputAccel products and enhancements to these products. Consequently, a decline in the demand for, or market acceptance of, the Company's InputAccel products as a result of competition, technological change or other factors, would have a material adverse effect on the Company's business, operating results and financial condition. Dependence on Continued Growth of the Market for Document Management Applications Although demand for document capture software for document management applications has grown in recent years, this market is still emerging and there can be no assurance that it will continue to grow or that organizations will continue to adopt the Company's products. The Company has spent, and intends to continue to spend, considerable resources educating potential customers about the Company's software products and the document processing market generally. However, there can be no assurance that such expenditures will enable the Company's products to achieve any additional degree of market acceptance. The rate at which organizations have adopted the Company's products has varied significantly and the Company expects to continue to experience such variations in the future. There can be no assurance that the markets for the Company's products will continue to develop or that the Company's products will be accepted within such markets. If the markets for the Company's products fail to develop, or develop more slowly than the Company currently anticipates, the Company's business, operating results and financial condition would be materially adversely affected. Rapid Technological Change and New Products The market for the Company's products is characterized by rapid technological change, frequent new product introductions and enhancements, uncertain product life cycles, changes in customer demands and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards can render existing products obsolete and unmarketable. The Company's future success will depend upon its ability to continue to enhance its current products and to develop and introduce new products on a timely basis that keep pace with technological developments and satisfy increasingly sophisticated customer requirements. As a result of the complexities inherent in document image processing software, new products and product enhancements can require long development and testing periods. As a result, significant delays in the general availability of such new releases or significant problems in the installation or implementation of such new releases could have a material adverse effect on the Company's business, operating results and financial condition. The Company has experienced delays in the past in the release of new products and new product enhancements. There can be no assurance that the Company will be successful in developing and marketing, on a timely and cost effective basis, new products or new product enhancements that respond to technological change, evolving industry standards or customer requirements, that the Company will not experience difficulties that could delay or prevent the successful development, introduction or marketing of these products or that the Company's new products and product enhancements will achieve market acceptance. Risk of Software Defects Software products as complex as those offered by the Company may contain errors or defects, particularly when first introduced or when new versions or enhancements are released. The Company has in the past discovered software errors in certain of its new products after their introduction. There can be no assurance that, despite testing by the Company, defects and errors will not be found in current versions, new versions or enhancements of its products after commencement of commercial shipments, resulting in loss of revenues or delay in market acceptance, which could have a material adverse effect on the Company's business, operating results and financial condition. Year 2000 Compliance Many currently installed computer systems are not capable of distinguishing 21st century dates from 20th century dates. As a result, in less than two years, computer systems and/or software used by many companies in a very wide variety of applications will experience operating difficulties unless they are modified or upgraded to adequately process information involving, related to or dependent upon the century change. Significant uncertainty exists concerning the scope and magnitude of problems associated with the century change. The Company recognizes the need to ensure its operations will not be adversely impacted by Year 2000 software. Accordingly the Company has identified and will coordinate the implementation of changes to computer hardware and software applications that will attempt to ensure availability and integrity of the Company's information systems and the reliability of its operational systems. The Company is also assessing the potential overall impact of the impending century change on its business, results of operations and financial position. The Company has reviewed its development systems, business operations systems and computing infrastructure in order to identify those products, services or systems that are not Year 2000 compliant. Several of these key systems are scheduled for replacement in early 1999 with new, compliant systems. Others will undergo final testing in mid- 1999. These modifications and replacements are being, and will continue to be, made in conjunction with the Company's overall systems initiatives. The total cost of these Year 2000 compliance activities, has not been, and is not anticipated to be, material to the Company's financial position or its results of operations. Based on available information, the Company does not believe any material exposure to significant business interruption exist as a result of Year 2000 compliance issues. Accordingly, the Company has not adopted any formal contingency plan in the event its Year 2000 project is not completed in a timely manner. These costs and the timing in which the Company plans to complete its Year 2000 modification and testing processes are based on management's best estimates. However, there can be no assurance that the Company will timely identify and remediate all significant Year 2000 problems, that remedial efforts will not involve significant time and expense, or that such problems will not have a material adverse effect on the Company's business, results of operations or financial position. The Company also faces risk to the extent that suppliers of products, services and systems purchased by the Company and others with whom the Company transacts business on a worldwide basis do not comply with Year 2000 requirements. In the event any such third parties cannot provide the Company with products, services or systems that meet the Year 2000 requirements on a timely basis, or in the event Year 2000 issues prevent such third parties from timely delivery of products or services required by the Company, the Company's results of operations could be materially adversely affected. The Company believes that the purchasing patterns of customers and potential customers may be affected by Year 2000 issues in a variety of ways. Many companies are expending significant resources to correct or patch their current software systems for Year 2000 compliance. These expenditures may result in reduced funds available to purchase software products such as those offered by the Company. Potential customers may also choose to defer purchasing Year 2000 compliant products until they believe it is absolutely necessary, thus resulting in potentially stalled market sales within the industry. Conversely, Year 2000 issues may cause other companies to accelerate purchases, thereby causing an increase in short-term demand and a consequent decrease in long-term demand for software products. Additionally, Year 2000 issues could cause a significant number of companies, including current Company customers, to reevaluate their current software needs, and as a result switch to other systems or suppliers. Any of the foregoing could result in a material adverse effect on the Company's business, operating results and financial condition. Risks Associated with International Sales and Operations The Company anticipates that for the foreseeable future a significant portion of its revenues will be derived from sources outside North America and the Company intends to continue to expand its sales and support operations internationally. In order to successfully expand international sales, the Company must establish additional foreign operations, expand its international sales channel management and support organizations, hire additional personnel, customize its products for local markets, recruit additional international resellers and increase the productivity of existing international resellers. To the extent that the Company is unable to do so in a timely and cost- effective manner, the Company's sales growth internationally, if any, will be limited, and the Company's business, operating results and financial condition could be materially adversely affected. Even if the Company is able to successfully expand its international operations there can be no assurance that the Company will be able to maintain or increase international market demand for its products. The Company's international operations are generally subject to a number of risks, including costs of customizing products for foreign countries, protectionist laws and business practices favoring local competition, dependence on local vendors, compliance with multiple, conflicting and changing government laws and regulations, longer sales cycles, greater difficulty or delay in accounts receivable collection, import and export restrictions and tariffs, difficulties in staffing and managing foreign operations, foreign currency exchange rate fluctuations, multiple and conflicting tax laws and regulations and political and economic instability. To date, a majority of the Company's revenues and costs have been denominated in U.S. dollars. However, the Company believes that in the future, an increasing portion of the Company's revenues and costs will be denominated in foreign currencies. Although the Company may from time to time undertake foreign exchange hedging transactions to reduce its foreign currency transaction exposure, the Company does not currently attempt to eliminate all foreign currency transaction exposure. Dependence on Key Personnel The Company's success depends to a significant extent upon the efforts of its key management, sales and marketing, technical support and research and development personnel, none of whom are bound by an employment contract. The loss of key management or technical personnel could adversely affect the Company. The Company believes that its future success will depend in large part upon its continuing ability to attract and retain highly skilled managerial, sales and marketing, technical support and research and development personnel. Like other software companies, the Company faces intense competition for such personnel, and the Company has at times experienced and continues to experience difficulty in recruiting qualified personnel. There can be no assurance that the Company will be successful in attracting, assimilating and retaining additional qualified personnel in the future. The loss of the services of one or more of the Company's key individuals, or the failure to attract and retain additional qualified personnel, could have a material adverse effect on the Company's business, operating results and financial condition. Limited Protection of Proprietary Technology; Risks of Infringement; Use of Licensed Technology The Company relies primarily on a combination of copyright, trademark and trade secret laws, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company licenses its software products primarily under license agreements. There can be no assurance that others will not develop technologies that are similar or superior to the Company's technology or design around the copyrights and trade secrets owned by the Company. Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. Policing unauthorized use of the Company's products is difficult, and although the Company is unable to determine the extent to which piracy of its software products exists, software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect the Company's proprietary rights as fully as do the laws of the U.S. The Company is not aware that it is infringing any proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company of their intellectual property rights. The Company expects that software product developers increasingly will be subject to infringement claims as the number of products and competitors in the Company's industry segment grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time consuming to defend, result in costly litigation, divert management's attention and resources, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company, if at all. In the event of a successful claim of product infringement against the Company and failure or inability of the Company to either license the infringed or similar technology or develop alternative technology on a timely basis, the Company's business, operating results and financial condition could be materially adversely affected. The Company relies upon certain software that it licenses from third parties, including software that is integrated with the Company's internally developed software and used in its products to perform key functions. There can be no assurance that these third-party software licenses will continue to be available to the Company on commercially reasonable terms, if at all. The loss of or inability to maintain any such software licenses could result in shipment delays or reductions until equivalent software could be developed, identified, licensed and integrated such delays would materially adversely affect the Company's business, operating results and financial condition. Product Liability Although the Company's license agreements with its customers typically contain provisions designed to limit the Company's exposure to potential product liability claims, it is possible that such limitation of liability provisions may not be effective as a result of existing or future laws or unfavorable judicial decisions. The Company has not experienced any material product liability claims to date; however, the sale and support of the Company's products may entail the risks of such claims, which may be substantial in light of the use of the Company's products in business-critical applications. A successful product liability claim brought against the Company could have a material adverse effect on the Company's business, operating results and financial condition. PART II - OTHER INFORMATION Item 1. Legal Proceedings - Not Applicable Item 2. Changes in Securities - Not Applicable Item 3. Defaults Upon Senior Securities - Not Applicable Item 4. Submission of Matters to a Vote of Security Holders On June 3, 1998, the Company held its Annual Meeting of Stockholders at the Company's headquarters in San Jose, California. At the meeting, the stockholders were asked to: (1) elect Thomas T. van Overbeek, James Crawford III, E. David Crockett, Stephen J. Sheafor, Bruce Silver, Daniel D. Tompkins, and John Finegan as members of the Board of Directors for 1998; (2) approve an amendment to the company's Stock Option/Stock Issuance Plan to increase the number of shares of Common Stock for issuance thereunder by 200,000 shares; (3) approve the Company's 1998 Employee Stock Purchase Plan; and (4) ratify the selection of PricewaterhouseCoopers as the Company's independent auditors for fiscal year 1998. As of the April 14, 1998 record date established for the annual meeting, there were 7,666,676 shares of common stock issued and outstanding, all of which were entitled to vote. Present in person or by proxy at the meeting were stockholders representing 6,819,153 shares. Such shares represented 88%, a quorum, of the total number of shares outstanding and entitled to vote. All of the proposals, and all of the nominees to the board of directors, were approved by the stockholders. 6,338,202 shares voted for the approval of the nominees to the board of directors, 475,738 withheld, and 5,213 instructed. 5,962,274 shares voted for the approval of the amendment to the company's 1993 Stock Option/Stock Issuance Plan, 832,079 voted against, and 24,800 shares abstained. 6,629,265 shares voted for the approval of the 1998 Employee Stock Purchase Plan, 172,960 shares voted against, and 16,928 shares abstained. 6,792,949 shares voted for ratification of the selection of Cooper & Lybrand as the Company's independent auditors, 15,394 shares voted against, and 10,810 shares abstained. Item 5. Other Information The company is pleased to report the addition of Johannes Schmidt to the company's board of directors. Mr. Schmidt is a vice president and Chief Technology Officer and joined the company in connection with the company's acquisition of Pixel Transactions, Inc. in 1994. The Company also reported that David Crockett and Stephen Sheafor have retired from the board. Mr. Crockett was one of the original investors in the company and had been a member of the board since 1989. Mr Sheafor is one of the founders of the company and had been a member of the board since 1986. Proposals of stockholders intended to be presented at the Company's 1999 annual meeting of stockholders must be received at the Company's principal executive offices not later than December 21, 1998 in order to be included in the Company's proxy statement and form of proxy relating to the 1999 annual meeting. Pursuant to new amendments to Rule 14a-4(c) of the Securities Exchange Act of 1934,as amended, if a stockholder who intends to present a proposal at the 1999 annual meeting of stockholders does not notify the Company of such proposal on or prior to March 5, 1999 then management proxies would be allowed to use their discretionary voting authority to vote on the proposal when the proposal is raised at the annual meeting, even though there is no discussion of the proposal in the 1999 proxy statement. The Company currently believes that the 1999 annual meeting of stockholders will be held during the first week of June 1999. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 11.1 Statement of Computation of Earnings Per Share 27 Financial Data Schedule (b) Reports on Form 8-K - Not Applicable SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INPUT SOFTWARE, INC. ------------------------------ Registrant Date: November 13, 1998 /s/ John Finegan ------------------------------ John Finegan Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) EXHIBIT INDEX Exhibit Description - --------- ------------------------------------------------------------ 11.1 Statement of Computation of Earnings per Share 27 Financial Data Schedule