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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2002
OR
TRANSITION REPORT PURSUANT SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-27038
SCANSOFT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3156479
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
9 CENTENNIAL DRIVE
PEABODY, MA 01960
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(978) 977-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. X Yes No
---
64,087,679 shares of the registrant's Common Stock, $0.001 par value, were
outstanding as of April 30, 2002.
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SCANSOFT, INC.
FORM 10-Q/A
THREE MONTHS ENDED MARCH 31, 2002
INDEX
PAGE
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
a) Consolidated Balance Sheets at March 31, 2002
and December 31, 2001.......................................... 4
b) Consolidated Statements of Operations for the three months
ended March 31, 2002 and March 31, 2001........................ 5
c) Consolidated Statements of Cash Flows for the three months
ended March 31, 2002 and March 31, 2001........................ 6
d) Notes to Consolidated Financial Statements....................... 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......... 17
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders................. 18
Item 6. Exhibits and Reports on Form 8-K.................................... 18
Signatures................................................................... 19
Exhibit Index................................................................ 20
2
As more fully discussed in Note 2 of the Notes to Unaudited Consolidated
Financial Statements, the Company is restating its consolidated financial
statements as of and for the three months ended March 31, 2002 to reclassify to
goodwill from tangible and other intangible assets a portion of the purchase
price consideration paid in connection with the Company's acquisition of certain
assets of Lernout & Hauspie N.V. on December 12, 2001 and to reduce the related
amortization expense. This restatement is as a result of the change in the
accounting for the transaction as an acquisition of a business rather than as an
acquisition of assets as previously reported. As a result of this restatement,
our reported net loss for the three months ended March 31, 2002 decreased from
$3,494,000 or $0.06 per share to $2,882,000 or $0.05 per share as a result of
recording lower amortization expense for that period. The restatement had no
effect on our reported cash flows from operations.
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCANSOFT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, DECEMBER 31,
2002 2001
------------ ------------
(UNAUDITED)
(AS RESTATED)
ASSETS
Current Assets:
Cash and cash equivalents ............................................. $ 12,783 $ 14,324
Accounts receivable, less allowances of $7,333 and $6,273, respectively 13,790 14,266
Inventory ............................................................. 1,188 507
Prepaid expenses and other current assets ............................. 2,310 1,614
--------- ---------
Total current assets ............................................... 30,071 30,711
Goodwill, net ......................................................... 65,231 65,231
Other intangible assets, net .......................................... 40,476 43,301
Property and equipment, net ........................................... 2,582 2,150
Other assets .......................................................... 591 677
--------- ---------
TOTAL ASSETS ............................................................. $ 138,951 $ 142,070
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ...................................................... $ 6,744 $ 5,320
Accrued expenses ...................................................... 13,856 14,471
Deferred revenue ...................................................... 1,021 1,375
Note payable .......................................................... 627 227
Other current liabilities ............................................. 1,853 --
--------- ---------
Total current liabilities .......................................... 24,101 21,393
--------- ---------
Deferred revenue ......................................................... 348 2,534
Long-term notes payable, net of current portion .......................... 3,218 3,273
Other liabilities ........................................................ 1,638 336
--------- ---------
Total liabilities .................................................. 29,305 27,536
--------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value;
40,000,000 shares authorized; 3,562,238 shares issued and
outstanding (liquidation preference $4,631) ........................ 4,631 4,631
Common stock, $0.001 par value; 140,000,000 shares authorized;
63,596,748 and 62,754,211 shares issued and 62,940,748 and
62,098,211 shares outstanding, respectively ...................... 64 63
Additional paid-in capital ......................................... 262,831 264,893
Treasury stock, at cost (656,000 shares) ........................... (1,031) (1,031)
Deferred compensation .............................................. (250) (276)
Accumulated other comprehensive loss ............................... (458) (487)
Accumulated deficit ................................................ (156,141) (153,259)
--------- ---------
Total stockholders' equity ...................................... 109,646 114,534
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................... $ 138,951 $ 142,070
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
SCANSOFT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
-------- --------
(AS RESTATED)
Net revenue $ 23,765 $ 12,501
Costs and expenses:
Cost of revenue 4,129 2,890
Research and development 6,986 3,197
Selling, general and administrative 9,711 6,286
Amortization of goodwill and other intangible assets 4,499 6,834
Restructuring and other charges 1,041 --
-------- --------
Total costs and expenses 26,366 19,207
-------- --------
Loss from operations (2,601) (6,706)
Other income (expense), net (75) (133)
-------- --------
Loss before income taxes (2,676) (6,839)
Provision for income taxes 206 61
-------- --------
Net loss $ (2,882) $ (6,900)
======== ========
Net loss per share: basic and diluted $ (0.05) $ (0.15)
======== ========
Weighted average common shares outstanding: basic and diluted 62,304 46,100
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
SCANSOFT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS
ENDED
MARCH 31,
----------------------
2002 2001
-------- -------
(AS RESTATED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $ (2,882) $(6,900)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization ......................... 450 489
Amortization of goodwill and other intangible assets .. 4,499 6,834
Accounts receivable and sales allowances .............. 1,060 (1,249)
Non-cash portion of restructuring and other charges ... 113 --
Net gain on sale of property and equipment ............ -- (92)
Other ................................................. 26 --
Changes in operating assets and liabilities:
Accounts receivable ................................ (624) 4,004
Inventory .......................................... (688) 117
Prepaid expenses and other current assets .......... (754) 166
Other assets ....................................... 121 167
Accounts payable ................................... 1,593 (1,699)
Accrued expenses ................................... (175) (668)
Deferred revenue ................................... (2,540) (217)
-------- -------
Net cash provided by (used in) operating activities ......... 199 952
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for property and equipment .......... (661) (146)
Proceeds from sale of property and equipment ............. -- 344
Payment of notes payable related to acquisition .......... (55) --
Deferred payment agreement ............................... (1,000) --
Payment of acquisition related liabilities ............... (662) --
Acquisition of intangible assets ......................... (500) --
-------- -------
Net cash provided by (used in) investing activities ......... (2,878) 198
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank borrowings, net ......................... -- (825)
Payment of capital lease obligation ..................... (105) --
Proceeds from the issuance of common stock .............. 1,240 63
-------- -------
Net cash provided by (used in) financing activities ......... 1,135 (762)
-------- -------
Effects of exchange rate changes on cash and cash equivalents 3 (182)
-------- -------
Net increase (decrease) in cash and cash equivalents ........ (1,541) 206
Cash and cash equivalents at beginning of period ............ 14,324 2,571
-------- -------
Cash and cash equivalents at end of period .................. $ 12,783 $ 2,777
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
6
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of ScanSoft,
Inc. (the "Company", "we" or "ScanSoft") have been prepared in accordance with
accounting principles generally accepted in the United States of America. In the
opinion of management, these interim consolidated financial statements reflect
all adjustments, consisting of normal recurring adjustments, necessary to
present fairly the financial position, results of operations, and cash flows at
March 31, 2002, and for the three months ended March 31, 2002 and 2001. Although
the Company believes that the disclosures in these financial statements are
adequate to make the information presented not misleading, certain information
normally included in the footnotes prepared in accordance with generally
accepted accounting principles has been condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. The
accompanying financial statements should be read in conjunction with the audited
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001 filed with the Securities and
Exchange Commission on April 1, 2002.
The results for the three months ended March 31, 2002, are not necessarily
indicative of the results that may be expected for the year ending December 31,
2002, or any future period.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities on the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. The most significant estimates included in the financial statements are
accounts receivable and sales allowances, the useful lives and recoverability of
intangible assets including goodwill, and the valuation allowances on deferred
tax assets. Actual results could differ from those estimates.
(2) RESTATEMENT OF ACCOUNTING FOR ACQUISITION
On December 12, 2001, the Company acquired certain assets of Lernout & Hauspie
N.V. On December 27, 2001, the Company filed a Form 8-K reporting the
transaction as an acquisition of assets. As previously disclosed, the Company
has had ongoing discussions with the SEC regarding historical financial
statement requirements related to the acquisition. Following these discussions,
the Company has concluded that, for purposes of Rule 3-05 of Regulation S-X, the
L&H transaction was an acquisition of a business and not an acquisition of
assets. In connection with these discussions, and as previously disclosed, the
Company has also concluded that the transaction should be reported as the
acquisition of a business for accounting purposes rather than the acquisition of
assets, as previously reported. As a result, $23.0 million of the purchase price
previously allocated to tangible and other intangible assets has been
reclassified to goodwill and amortization expense has been reduced by $0.6
million.
A summary of the impact of this restatement on the consolidated financial
statements as of and for the unaudited three-month period ended March 31, 2002
is as follows:
THREE MONTHS ENDED,
(IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31, 2002
--------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------- -----------
Statement of Operations:
Amortization of goodwill and other intangible assets $ 5,111 $ 4,499
Loss from operations $(3,213) $(2,601)
Net loss $(3,494) $(2,882)
Net loss per share - basic and diluted $ (0.06) $ (0.05)
MARCH 31, 2002
-----------------------------
AS PREVIOUSLY
REPORTED AS RESTATED
------------------------------
Balance Sheet:
Goodwill, net $ 42,200 $ 65,231
Other intangible assets, net $ 62,638 $ 40,476
Property and equipment, net $ 2,838 $ 2,582
Accumulated deficit $(156,753) $(156,141)
7
(3) RECLASSIFICATIONS
Certain prior year financial statement amounts have been reclassified to
conform with the current year presentation.
(4) ACQUISITION OF LERNOUT & HAUSPIE (L&H) SPEECH PRODUCTS N.V. ASSETS:
On December 7, 2001, the Company entered into a definitive asset purchase
agreement (the "Purchase Agreement") to acquire certain assets and intellectual
property relating to the former L&H entities that were in bankruptcy under the
jurisdiction of both the U.S. Bankruptcy Court for the District of Delaware and
the Commercial Court of Ieper, Belgium. We purchased these assets in a closed
auction proceeding administered by the creditors committee of the former
entities and approved by both the U.S. and Belgium courts on December 11, 2001.
The transaction was completed on December 12, 2001 and the Company's results
from operations include L&H activities since that date.
Pursuant to the Purchase Agreement, the Company acquired patents,
trademarks, tradenames, product and customer contracts associated with certain
of the speech and language technology assets of L&H. In addition, the Company
obtained rights to accounts receivable related to the customer contracts
acquired and fixed assets. The Company also hired 223 employees from L&H. The
Company paid $41.3 million in total consideration to the creditors as follows:
$10.0 million in cash, 7.4 million shares of the Company's common stock valued
at $27.8 million (based on the average of the closing share price of our stock 3
days before and after the proposed acquisition was announced) and a 9%
promissory note in the principal amount of $3.5 million, to be repaid in
installments of $0.1 million of principal and interest quarterly commencing on
March 15, 2002, for a total of eleven (11) payments. All remaining principal and
interest shall become due on December 15, 2004. The Company incurred
approximately $1.0 million of acquisition related costs.
The purchase price was allocated to the tangible and intangible assets
acquired (patents and core technology and trade names and trademarks) and
liabilities assumed based on their respective fair market values. The total
identifiable tangible assets amounted to $21.0 million. The excess of the
purchase price over the fair value of the identifiable intangible assets and net
liabilities assumed amounted to $23.0 million and was allocated to goodwill.
Accordingly, the purchase price including acquisition costs was allocated as
follows (in thousands):
Identifiable intangible assets.............................. $20,970
Goodwill.................................................... 23,031
Net current liabilities assumed............................. (1,701)
-------
$42,300
=======
The information above has been updated to reflect the adjustments made as a
result of the restatement discussed in Note 2.
The values of the patents, core technology and trade names and trademarks
were determined using the income approach. The income approach requires a
projection of revenues and expenses specifically attributed to the intangible
assets. The discounted cash flow ("DCF") method is then applied to the potential
income streams after making necessary adjustments with respect to such factors
as the wasting nature of the identifiable intangible assets and the allowance of
a fair return on the net tangible assets and other intangible assets employed.
There are several variations on the income approach, including the
relief-from-royalty method, the avoided cost method and the lost profits method.
The relief-from-royalty method was used to value the patents, core technology
and trade names and trademarks. The relief-from-royalty method is used to
estimate the cost savings that accrue to the owner of the intangible assets that
would otherwise have to pay royalties or licensee fees on revenues earned
through the use of the asset. The royalty rate used in the analysis is based on
an analysis of empirical, market-derived royalty rates for guideline intangible
assets.
Typically, revenue is projected over the expected remaining useful life of
the intangible asset. The market-derived royalty rate is
8
then applied to estimate the royalty savings. The key assumptions used in
valuing the patents and core technology are as follows: royalty rate 5%,
discount rate 15%, tax rate 40% and estimated life of 10 years. The key
assumptions used in valuing the trade names and trademarks are as follows:
observed royalty rate 1%, discount rate 15%, tax rate 40% and estimated life of
12 years.
OEM contracts and customer relationships, as well as completed technology,
were determined to have de minimus values and, accordingly, no amount of the
purchase price was allocated to these intangible assets. A discounted cash flow
method was used to estimate the residual cash flows attributable to OEM
contracts and customer relationships. The projections included negative cash
flows over the early years of the relationship and, when combined with the
contributory asset charged for the other technology-based assets, such as
patents and core technology which are required to realize revenue under these
arrangements, resulted in de minimus value for the OEM contracts and the
customer relationships. The completed technology was valued using individual
cash flow projections for each technology, adjusted for capital charges, and
discounted to present value using a weighted average cost of capital. Cash flow
projections and operating profits are negative for the initial years and when
considered with the short life cycle of the application-based completed
technology, the value ascribable to the completed technology was de minimus.
In connection with the acquisition, we assumed certain liabilities for
products which were sold prior to the acquisition date and which are expected to
be upgraded with newer versions in 2002 and liabilities for development
contracts with customers. The actual amount of the liabilities may differ from
the estimated amounts. Differences between the actual and estimated amounts, if
any, will be recorded as an adjustment to the liability and goodwill.
The following table identifies the intangible assets acquired and their
respective lives over which the assets will be amortized on a straight-line
basis:
AMOUNT LIFE
(IN THOUSANDS) (IN YEARS)
-------------- ----------
Patents and core technology................... $17,870 10
Trade names and trademarks.................... 3,100 12
-------
$20,970
=======
The information above has been updated to reflect the adjustments made as a
result of the restatement discussed in Note 2.
(5) BALANCE SHEET COMPONENTS
The following table summarizes key balance sheet components (in thousands):
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
Inventory:
Raw materials.................... $ 268 $ 107
Finished goods................... 920 400
--------- ---------
$ 1,188 $ 507
========= =========
Other accrued expenses:
Accrued compensation............. $ 1,457 $ 2,775
Accrued sales and marketing...... 1,073 1,160
Accrued restructuring............ 1,440 634
Accrued royalties................ 742 750
Accrued professional fees........ 442 571
Accrued acquisition liabilities.. 5,905 6,065
Accrued transaction costs........ 369 882
Accrued taxes and other.......... 2,428 1,634
--------- ---------
$ 13,856 $ 14,471
========= =========
9
(6) GOODWILL AND OTHER INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets." SFAS 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets, including how goodwill and other
intangible assets should be accounted for after they have been initially
recognized. SFAS 142 provides that goodwill and intangible assets that have
indefinite useful lives not be amortized but rather be tested at least annually
for impairment; intangible assets with finite useful lives will continue to be
amortized over their useful lives.
The Company adopted SFAS 142 on January 1, 2002 and discontinued the
amortization of goodwill (including acquired workforce) of approximately $65.2
million. Upon adoption, the Company reclassified $31,000 of previously
amortizable acquired workforce to goodwill. The Company had previously been
recording amortization expense on goodwill and acquired workforce of $10.4
million annually or $2.6 million per quarter.
Intangible assets are amortized on a straight-line basis over their
estimated useful lives of three to twelve years. As required by SFAS 142, the
Company has reassessed the useful lives of its intangible assets, and has
determined that no adjustments are required.
SFAS 142 requires the Company to complete a transitional goodwill impairment
test within six months from the date of adoption. The Company has not yet
completed the impairment test, but does not expect the completion of the test to
result in an impairment charge.
The following summary reflects the condensed consolidated results of
operations as if SFAS 142 had been adopted at the beginning of the periods
presented (in thousands, except net loss per share amounts):
THREE MONTHS ENDED,
MARCH 31,
----------------------
2002 2001
-------- --------
(RESTATED)
Net loss:
Reported net loss $ (2,882) $ (6,900)
Effect of goodwill amortization -- 2,597
-------- --------
Adjusted net loss $ (2,882) $ (4,303)
======== ========
Basic and diluted net loss per share:
Reported basic and diluted net loss per share $ (0.05) $ (0.15)
Effect of goodwill amortization -- 0.06
-------- --------
Adjusted basic and diluted net loss per share $ (0.05) $ (0.09)
======== ========
Amortized intangible assets consist of the following:
MARCH 31, 2002 (IN THOUSANDS) GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ ------------
(RESTATED) (RESTATED) (RESTATED)
Core technology $ 48,130 $ 13,589 $ 34,541
Developed technology 16,340 16,340 --
Trademarks and patents 7,461 2,047 5,414
Non-competition agreement 4,048 4,048 --
Acquired favorable lease 553 553 --
OEM relationships 1,100 596 504
Other 200 183 17
---------- --------- ---------
$ 77,832 $ 37,356 $ 40,476
========== ========= =========
DECEMBER 31, 2001 (IN THOUSANDS) GROSS CARRYING ACCUMULATED NET CARRYING
AMOUNT AMORTIZATION AMOUNT
-------------- ------------ -----------
Core technology $ 46,456 $ 11,771 $ 34,685
Developed technology 16,340 14,714 1,626
Trademarks and patents 7,461 1,784 5,677
Non-competition agreement 4,048 3,646 402
Acquired favorable lease 553 355 198
OEM relationships 1,100 524 576
Assembled workforce 374 270 104
Other 200 167 33
--------- --------- ---------
$ 76,532 $ 33,231 $ 43,301
========= ========= =========
10
Aggregate amortization expense for the quarter ended March 31, 2002 was $4.5
million. Estimated amortization expense for each of the five succeeding fiscal
years is as follows:
YEAR ENDING (IN THOUSANDS) AMOUNT
-------------------------- ---------
(RESTATED)
2002 $ 11,152
2003 8,847
2004 7,977
2005 3,576
2006 2,327
Thereafter 11,096
(7) REVENUE RECOGNITION
In November 2001, the Emerging Issues Task Force ("EITF"), a committee of
the FASB, reached a consensus on EITF Issue 01-9, "Accounting for Consideration
Given by a Vendor to a Customer or Reseller of the Vendor's Products" ("EITF
01-9"). EITF 01-9 presumes that consideration from a vendor to a customer or
reseller of the vendor's products is a reduction of the selling prices of the
vendor's products and, therefore, should be characterized as a reduction of
revenue when recognized in the vendor's income statement and could lead to
negative revenue under certain circumstances. Revenue reduction is required
unless consideration relates to a separate identifiable benefit and the
benefit's fair value can be established, in which case such amounts may be
recorded as operating expenses. The Company implemented EITF 01-9 on January 1,
2002. The implementation resulted in a $0.1 million reduction to net revenue for
the three months ended March 31, 2002 and the reclassification of $0.3 million
from selling, general and administrative expenses to net revenue for the period
ended March 31, 2001.
11
(8) RESTRUCTURING AND OTHER CHARGES
In January 2002, the Company announced and in March 2002 completed a
restructuring plan to consolidate facilities, world-wide sales organizations,
research and development teams and other personnel following the December 12,
2001 acquisition of the L&H assets. As a result, the Company exited facilities
in both North America and Europe eliminating 21 employee positions including 12
in research and development and 9 in selling, general and administrative
functions. In the first quarter of 2002, the Company recorded a restructuring
charge in the amount of $0.6 million for severance payments to these employees,
and a restructuring charge of $0.4 million for certain termination fees to be
incurred as a result of exiting the facilities.
For the quarter ended March 31, 2002, the Company paid a total of $0.1 million
in severance payments, of which $70,000 relates to the March 2002 restructuring
with the balance of $50,000 relating to severance paid to the former Caere
President and CEO.
At March 31, 2002, the remaining restructuring accrual from the current and
prior restructuring activities amounted to $1.4 million. This balance is
comprised of $0.8 million of severance and lease exit costs resulting from the
2002 restructuring and $0.6 million of severance to the former Caere President
and CEO. All amounts relating to the 2002 restructuring will be paid in full
over the course of 2002. The severance due to the former Caere President and CEO
will be paid through March 2005.
The following table sets forth the 2002 and 2000 restructuring reserve activity
(in thousands):
RESTRUCTURING AND OTHER CHARGES RESERVE EMPLOYEE LEASE
RELATED EXIT COSTS TOTAL
-------- ---------- -------
Balance at December 31, 2001..................................... $ 634 $ -- $ 634
Restructuring and other charges for March 2002 restructuring..... 576 465 1,041
Non cash write-offs.............................................. -- (113) (113)
Cash payments.................................................... (122) -- (122)
------- ------ -------
Balance at March 31, 2002........................................ $ 1,088 $ 352 $ 1,440
======= ====== =======
(9) DEFERRED PAYMENT AGREEMENT
In connection with the Caere acquisition and pursuant to a concurrent
non-competition and consulting agreement, the Company agreed to pay in cash the
former Caere President and CEO on the second anniversary of the merger, March
13, 2002, the difference between $13.50 and the closing price per share of
ScanSoft common stock at that time, multiplied by 486,548. On March 5, 2002, the
Company negotiated a deferred payment agreement with the former Caere President
and CEO to terminate this agreement. Under the terms of the deferred payment
agreement, the Company paid $1.0 million in cash on March 5, 2002, with
remaining amounts payable in equal quarterly installments of approximately $0.4
million over the next two years.
The total consideration of this agreement was accounted for in the original
Caere purchase price and had no effect on operating income. As of March 31,
2002, the Company reclassified $4.3 million from additional paid-in capital to
other liabilities.
(10) NOTE PAYABLE
In connection with the purchase of the L&H audiomining assets in March 2002,
the Company issued a $0.4 million promissory note to L&H Holdings USA. The note
bears interest at 9% per annum, with principal and interest to be repaid in full
on July 31, 2002.
(11) NET LOSS PER SHARE
Diluted net loss per share excludes the weighted-average effect of options
and warrants to purchase common stock as well as the conversion of the Company's
Series B preferred stock, of 10,356,614 shares and 4,503,570 shares for the
three months ended March 31, 2002 and 2001, respectively. These potential common
shares were excluded from the calculation of diluted net loss per share as their
inclusion would have been anti-dilutive for all periods presented.
12
(12) COMPREHENSIVE LOSS
Total comprehensive loss, net of taxes, was approximately $2.9 million, as
restated, and $7.1 million for the three months ended March 31, 2002 and 2001,
respectively. Total comprehensive losses consisted of net losses and foreign
currency translation adjustments for the respective periods.
(13) CONTINGENCIES
As a normal incidence of the nature of the Company's business, various claims,
charges and litigation have been asserted or commenced against the Company
arising from or related to employee relations and other business matters.
Management does not believe these claims will have a material effect on the
financial position or results of operations of the Company.
(14) SUBSEQUENT EVENT
On April 12, 2002, the Company completed a private placement of 1.0 million
shares of common stock at a purchase price of $6.00 per share with a new
institutional investor, resulting in gross proceeds of $6.0 million.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements made in this report as well as oral statements made by
ScanSoft from time to time, which are prefaced with words such as, "expects",
"anticipates", "believes", "projects", "intends", "plans", and similar words and
other statements of similar sense, are forward-looking statements within the
meaning of the federal securities laws. These statements are based on ScanSoft's
current expectations and estimates as to prospective events and circumstances,
which may or may not be in ScanSoft's control and as to which there can be no
firm assurance given.
In this quarterly report, forward-looking statements include those
concerning the following: ScanSoft's expectations regarding revenue mix, cost of
revenue, research and development expenses and selling, general and
administrative expenses for the period ending December 31, 2002; ScanSoft's
beliefs and expectations regarding future positive cash flow and the sufficiency
of future cash levels; and ScanSoft's ability to reduce expenses as necessary or
to find additional sources of liquidity as needed. These forward-looking
statements, like any other forward-looking statement, involve risks and
uncertainties that could cause actual results to differ materially from those
projected or anticipated. Such risks and uncertainties are outlined later in
this document and should not be construed as exhaustive. ScanSoft disclaims any
obligation to subsequently revise forward-looking statements or to reflect
events or circumstances after the date of such statements or to reflect the
occurrence of anticipated or unanticipated events. Further discussions of risk
factors are also available in ScanSoft's registration statements filed with the
Securities and Exchange Commission. ScanSoft wishes to caution readers not to
place undue reliance upon such forward-looking statements, which speak only as
of the date made.
OVERVIEW
ScanSoft is a leading supplier of imaging, speech and language solutions
that make businesses more productive. Our portfolio of solutions and
technologies automate a range of manual processes to help consumers,
professionals and enterprises save time, increase productivity and improve
customer service.
Historically, ScanSoft has been a leader in paper-to-digital solutions and
document imaging applications and technologies. Our optical character
recognition, digital paper management and eForms applications are used by
leading corporations, government organizations and technology vendors to
instantly convert paper documents into digital information.
With the acquisition of certain Lernout & Hauspie ("L&H") assets in December
2001, ScanSoft added speech and language solutions to its portfolio of
productivity-enhancing applications and technologies. The group of assets
acquired includes the RealSpeak text-to-speech technology, Dragon speech
recognition software and other speech and voice-related technologies aimed at
the rapidly growing telecommunications, automotive and mobile device markets.
ScanSoft believes that its speech-based technology and intellectual property is
widely considered the finest in the industry.
13
ScanSoft, Inc. was incorporated as Visioneer, Inc. in March 1992 and through
December 1998, developed and sold scanner hardware and software products. On
January 6, 1999, Visioneer sold the hardware business and the Visioneer brand
name to Primax Electronics, Ltd., and on March 2, 1999, Visioneer acquired
ScanSoft, in a cash election merger, from Xerox Corporation. The corporate
entity "Visioneer" survived the merger, but changed its name to "ScanSoft, Inc."
In addition, Visioneer changed the ticker symbol for its common stock that
trades on the NASDAQ, to "SSFT."
Our success in the future will depend on our ability to maintain and improve
software gross margins and to increase sales of our software products. This will
depend in part on our ability and the ability of our distributors, resellers and
OEM partners to convince end-users to adopt paper and image input systems for
the desktop and to educate end-users about the benefits of our products. Since
the Caere acquisition in the first quarter of 2000, we have experienced
quarterly operating losses. There can be no assurance that we will be able to
reach quarterly profitability or attain annual profitability in the near future.
As of March 31, 2002, we had an accumulated deficit of $156.1 million.
As discussed in Note 2 to the Notes to Unaudited Consolidated Financial
Statements, the Company is restating its consolidated financial statements as of
and for the three months ended March 31, 2002 to reclassify to goodwill from
other tangible and intangible assets a portion of the purchase price
consideration paid in connection with the Company's acquisition of certain
assets of Lernout & Hauspie N.V. on December 12, 2001 and to reduce the related
amortization expense. This restatement is a result of the change in the
accounting for the acquisition as a business rather than as the acquisition of
assets as previously reported. As a result of this restatement, our reported net
loss for the three months ended March 31, 2002 decreased from $3,494,000 or
$0.06 per share to $2,882,000 or $0.05 per share as a result of recording lower
amortization expense for that period. The restatement had no effect on our
reported cash flows from operations. The accompanying Management's Discussion
and Analysis has been revised to reflect the effects of this restatement.
RECENT DEVELOPMENTS
On January 1, 2002, the Company adopted EITF 01-9, which requires amounts
paid to resellers to be treated as a reduction of revenue, unless the
consideration relates to an identifiable benefit, in which case such
consideration may be recorded as an operating expense. The Company evaluates its
marketing programs quarterly to ensure criteria are met for expense
classification.
RESULTS OF OPERATIONS
The following table presents, as a percentage of net revenue, certain
selected financial data for the three months ended March 31, 2002 and 2001:
THREE MONTHS ENDED MARCH 31,
----------------------------
2002 2001
---------- -------
(RESTATED)
Net revenue............................................... 100.0% 100.0%
Cost and expenses:
Cost of revenue........................................ 17.4% 23.1%
Research and development............................... 29.3% 25.6%
Selling, general and administrative.................... 40.9% 50.3%
Amortization of goodwill and other intangible assets... 18.9% 54.6%
Restructuring and other charges, net................... 4.4% 0.0%
----- -----
Total costs and expenses............................ 110.9% 153.6%
----- -----
Loss from operations...................................... (10.9)% (53.6)%
Other income (expense), net............................... (0.3)% (1.1)%
----- -----
Loss before income taxes.................................. (11.2)% (54.7)%
Provision for income taxes................................ 0.9% 0.5%
----- -----
Net loss.................................................. (12.1)% (55.2)%
----- -----
NET REVENUE
Net revenue of $23.8 million for the three months ended March 31, 2002
increased by $11.3 million or 90% from the comparable period in 2001. Revenue
growth resulted primarily from revenues generated by the speech and language
technology assets acquired
14
from L&H on December 12, 2001, particularly from sales of Dragon Naturally
Speaking products. Revenue growth in our digital imaging products came from
increased sales of the Company's OmniPage Pro 11 and PaperPort Deluxe products
and the recognition of revenue previously deferred on a significant long-term
OEM contract. Additionally, fees from licensing our RealSpeak text-to-speech
technology and embedded ASR revenues grew steadily throughout the quarter.
Geographic revenue classification is based on the country in which the sale
is invoiced. Revenue for the three months ended March 31, 2002 was 78% North
America and 22% international versus 77% and 23%, respectively for the
comparable period in 2001. A number of the Company's OEM partners distribute
their products throughout the world and do not provide us with the geographical
dispersion of their products. However, based on an estimate of our OEM partners'
geographical revenue mix to our revenues generated from these OEM partners,
revenue for the three months ended March 31, 2002 and 2001 was 70% North America
and 30% international.
The breakdown of net revenue for the three months ended March 31, 2002 was
40% VAR/retail, 14% direct and 46% licensing.
This compared to 54% VAR/retail, 12% direct and 34% licensing for the same
period in 2001. The change in the revenue mix for the three months ended March
31, 2002 as compared to the same period in 2001 is the result of the commitment
of additional resources to licensing, including an increased sales force hired
in connection with the L&H asset acquisition.
COST OF REVENUE
Cost of revenue consists primarily of material costs, third party royalties,
fulfillment, and salaries for product support personnel and related costs
associated with contracts, which are accounted for under the percentage of
completion method. Cost of revenue for the three months ended March 31, 2002 was
$4.1 million or 17% of revenue, compared to $2.9 million or 23% of revenue in
the comparable period of 2001. The decrease in cost of revenue as a percentage
of revenue is due to higher proportion of OEM and corporate licensing revenues
as well as higher product revenues over a relatively fixed cost base for certain
manufacturing costs. We anticipate that cost of revenue as a percentage of
revenue will continue to decline over the course of 2002, as a result of our
productivity initiatives and lower direct fulfillment costs.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salary and benefit
costs of engineers. Research and development costs were $7.0 million or 29% of
revenue in the three months ended March 31, 2002, compared to $3.2 million or
26% of revenue for the same three months in 2001. The increase in research and
development expenses as a percentage of revenue and in absolute dollars for the
period ended March 31, 2002 is the result of increased headcount and costs
associated with the L&H asset acquisition that was completed on December 12,
2001. We increased headcount by approximately 138 employees with the L&H asset
acquisition. We anticipate that research and development expenses as a
percentage of revenue for the remainder of 2002 will decline slightly compared
to the three month period ended March 31, 2002, as a result of future cost
savings associated with the restructuring action.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses include salaries, commissions, advertising, direct mail,
public relations, trade shows, travel and other related sales and marketing
expenses. General and administrative expenses include personnel costs for
administration, finance, human resources, information systems, and general
management in addition to legal, accounting and other professional services.
Selling, general and administrative expenses were $9.7 million or 41% of
revenue in the three months ended March 31, 2002, compared to $6.3 million or
50% of revenue for the same three months in 2001. The decrease in selling,
general and administrative expenses as a percentage of revenue is the result of
synergies associated with the L&H asset acquisition, focused marketing spending
and revenue growth. The decrease was partially offset by increased headcount and
added facility costs associated with the L&H asset acquisition. We increased
headcount by approximately 74 employees with the L&H asset acquisition. We
anticipate selling, general and administrative expenses as a percentage of
revenue for the remainder of 2002 to remain consistent with the three month
period ended March 31, 2002.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS
Amortization of goodwill and intangible assets for the three months ended
March 31, 2002 was $4.5 million compared to $6.8 million for the comparable
period in 2001. The decrease in amortization of intangible assets of $2.3
million is a result of the adoption
15
of SFAS 142, upon which the Company ceased amortization of goodwill, which
amounted to approximately $2.6 million per quarter. This reduction was offset by
$0.5 million of amortization expense associated with the L&H asset acquisition.
RESTRUCTURING AND OTHER CHARGES
In January 2002, the Company announced and in March 2002 completed a
restructuring plan to consolidate facilities, world-wide sales organizations,
research and development teams and other personnel following the December 12,
2001 acquisition of the L&H assets. As a result, the Company exited facilities
in both North America and Europe eliminating 21 employee positions including 12
in research and development and 9 in selling, general and administrative
functions. In the first quarter of 2002, the Company recorded a restructuring
charge in the amount of $0.6 million for severance payments to these employees,
and a restructuring charge of $0.4 million for certain termination fees to be
incurred as a result of exiting the facilities.
For the quarter ended March 31, 2002, the Company paid a total of $0.1
million in severance payments, of which $70,000 relates to the March 2002
restructuring with the balance of $50,000 relating to severance paid to the
former Caere President and CEO.
At March 31, 2002, the remaining restructuring accrual from the current and
prior restructuring activities amounted to $1.4 million. This balance is
comprised of $0.8 million of severance and lease exit costs resulting from the
2002 restructuring and $0.6 million of severance to the former Caere President
and CEO. All amounts relating to the 2002 restructuring will be paid in full
over the course of 2002. The severance due to the former Caere President and CEO
will be paid through March 2005.
The Company anticipates that the 2002 restructuring action will provide
future cost savings through December 31, 2002 of $1.3 million, of which $1.0
million relates to employee related costs and $0.3 million relates to lease exit
costs.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of interest earned on cash
and cash equivalents and short-term investments offset by interest incurred for
borrowings under credit facilities and notes payable, and currency exchange
gains and losses.
Interest income was $54,000 and $39,000 for the three-month period ended
March 31, 2002 and 2001, respectively. The increase in interest income was the
result of significantly higher cash and cash equivalents. Interest expense was
$85,000 and $129,000 for the three-month period ended March 31, 2002 and 2001,
respectively. The decrease in interest expense resulted from the repayment of
all bank borrowings under the bank credit facility during May 2001. This was
offset by interest expense on the L&H promissory notes issued in connection with
the L&H asset acquisitions that were completed in 2002 and 2001. The remaining
balance in other income (expense), net for the three months ended March 31, 2002
consists primarily of foreign currency losses. Other income (expense), net for
the three months ended March 31, 2001 includes foreign currency losses offset by
a gain on the sale of property and equipment.
TAXATION
The tax provision of $206,000 and $61,000 for the three months ended March
31, 2002 and 2001, respectively, represent taxes for foreign and state
jurisdictions in which the Company does business and for which no operating loss
carryforwards are available.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2002, we had cash and cash equivalents of $12.8 million and
net working capital of $5.9 million, as compared to $14.3 million in cash and
cash equivalents and net working capital of $9.3 million at December 31, 2001.
Net cash provided in operating activities for the three months ended March
31, 2002 was $0.2 million as compared to $1.0 million cash provided for the same
period in 2001. The cash provided in operations in 2002 came primarily from
operating results which included the recognition of revenue on a long-term
contract that was classified as deferred revenue at December 31, 2001 and for
which cash was collected in a prior period as well as higher balances in
accounts payable and other assets, which was offset by higher balances in
inventory and prepaid expenses.
Net cash used in investing activities during the three months ended March
31, 2002, was $2.9 million as compared to $0.2 million cash provided for the
same period in 2001. Net cash used in investing activities during 2002 consisted
of $0.7 million in capital expenditures to build-out facilities in both North
America and Europe, $0.5 million for the acquisition of the L&H audiomining
assets, $0.7 million related to the payment of acquisition related liabilities
and $55,000 in principal on a note payable that was issued in connection with
the acquisition of the L&H assets. Additionally, the
16
Company paid $1.0 million to the former Caere President and CEO in connection
with the settlement of the non-competition and consulting agreement. The
comparable period in 2001 included capital expenditures of $0.1 million, offset
by $0.3 million in proceeds from the sale of property and equipment.
Net cash provided by financing activities for the three months ended March
31, 2002 was $1.1 million as compared to $0.8 million used in financing
activities for the same period in 2001. Net cash provided by financing
activities during 2002 consisted of proceeds of $1.2 million from the exercise
of stock options, offset by a $0.1 million payment on our capital lease
obligation. The comparable period in 2001 included payments of $0.8 million on
our line of credit and proceeds of $60,000 from issuance of common stock.
On April 12, 2002, the Company completed the private placement of 1.0
million shares of common stock at a purchase price of $6.00 per share with a new
institutional investor, resulting in gross proceeds of approximately $6.0
million.
The Company has sustained recurring losses and had an accumulated deficit of
$156.1 million at March 31, 2002. We believe that operating expense levels in
combination with expected future revenues will result in positive cash flows
from operations for 2002. We also believe that we have the ability to reduce
operating expenses to levels commensurate with revenues to maintain positive
cash flows from operations. Therefore, we believe that cash flows from future
operations in addition to cash on hand will be sufficient to meet our working
capital, investing, financing and contractual obligations as they become due,
including stock repurchase programs and potential business or asset
acquisitions, for the foreseeable future.
FOREIGN OPERATIONS
We develop and sell our products throughout the world. As a result of the
Caere acquisition in March 2000, and the L&H acquisition in December 2001, we
significantly increased our presence in Europe and added operations in Asia.
With our increased international presence in a number of geographic locations
and with international revenues projected to increase in 2002, we are exposed to
changes in foreign currencies including the Euro, Japanese Yen and the Hungarian
Forint. Changes in the value of the Euro or other foreign currencies relative to
the value of the U.S. Dollar could adversely affect future revenues and
operating results. We do not generally hedge any of our foreign-currency
denominated transactions.
FACTORS THAT MAY AFFECT FUTURE RESULTS
ScanSoft's business operates in an intensely competitive environment and
operations are subject to risks and uncertainties. Such risks and uncertainties
include, but are not limited to (1) the loss of, or a significant curtailment
of, purchases by any one or more principal customers; (2) the cyclicality of the
retail software industry; (3) the inability to protect ScanSoft's proprietary
technology and intellectual property; (4) the inability to attract or retain
skilled employees; (5) technological obsolescence of current products and the
inability to develop new products; (6) the inability to respond to competitive
technology and competitive pricing pressures; and (7) the ability to sustain
product revenues upon the introduction of new products. Our quarterly operating
results may fluctuate and differ materially from one quarter to the next which
could have an impact on our stock price.
There can be no assurance that any cash generated by operations will be
sufficient to satisfy our liquidity requirements, and we may be required to sell
additional equity or debt securities, or obtain lines of credit. The sale of
additional equity or convertible debt securities may result in additional
dilution to our stockholders. It may be difficult to sell additional equity or
obtain debt financing, and this could result in significant constraints on
ScanSoft's ongoing investments to grow revenue and develop new products.
For further discussion regarding these and other risks, refer to ScanSoft's
Annual Report on Form 10-K for the year ended December 31, 2001 filed with the
Securities and Exchange Commission on April 1, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We develop our products in the United States, Belgium and Hungary. We sell
our products globally, primarily through an indirect reseller channel. As a
result, our financial results are affected by factors such as changes in foreign
currency exchange rates and weak economic conditions in foreign markets.
We collect a portion of our revenue and pay a portion of our operating
expenses in foreign currencies. As a result, changes in currency exchange rates
from time to time may affect our operating results. Currently, we do not engage
in hedging transactions to reduce our exposure to changes in currency exchange
rates, although we may do so in the future.
17
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index hereto are filed or incorporated by
reference (as stated therein) as part of this report on Form 10-Q/A*.
(b) Reports on Form 8-K
Settlement of the non-competition and consulting agreement with former Caere
President and CEO, dated as of March 5, 2002*.
* Previously filed
18
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant
has duly caused this Report on Form 10-Q to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Peabody, State of
Massachusetts, on August 14, 2002.
SCANSOFT, INC.
By: /s/ GERALD C. KENT, JR.
---------------------------------
Gerald C. Kent, Jr.
Vice President, Chief Accounting
Officer and Controller
19
EXHIBIT INDEX
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
EXHIBIT NO. DESCRIPTION OF EXHIBITS
----------- -----------------------
2.1(1) Agreement and Plan of Merger dated December 2, 1998, between
Visioneer, Inc., a Delaware corporation, and ScanSoft, Inc., a
Delaware corporation.
2.2(2) Agreement and Plan of Reorganization, dated January 15, 2000, by
and among ScanSoft, Inc., a Delaware corporation, Scorpion
Acquisitions Corporation, a Delaware corporation and a
wholly-owned subsidiary of ScanSoft, and Caere Corporation, a
Delaware corporation.
3.1(3) Bylaws of Registrant.
3.2(6) Amended and Restated Certificate of Incorporation of Registrant.
4.1(4) Specimen Common Stock Certificate.
4.2(5) Preferred Shares Rights Agreement, dated as of October 23, 1996,
between the Registrant and U.S. Stock Transfer Corporation,
including the Certificate of Designation of Rights, Preferences
and Privileges of Series A Participating Preferred Stock, the
form of Rights Certificate and Summary of Rights attached thereto
as Exhibits A, B and C, respectively.
4.3(1) Common Stock Purchase Warrant.
4.4(1) Registration Rights Agreement dated March 2, 1999, between the
Registrant and Xerox Corporation.
10.1(7) Termination Agreement, dated March 5, 2002, by and between
ScanSoft, Inc., a Delaware corporation and Robert Teresi
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
----------
(1) Incorporated by reference from the Registrant's Registration Statement on
Form S-4 (No. 333-70603) filed with the Commission on January 14, 1999.
(2) Incorporated by reference from the Registrant's Registration Statement on
Form S-4 (No. 333-96487) filed with the Commission on February 9, 2000.
(3) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (No. 333-98356) filed with the Commission on October 19, 1995.
(4) Incorporated by reference from the Registrant's Registration Statement on
Form S-1 (No. 33-98356) filed with the Commission on October 19, 1995.
(5) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated October 31, 1996.
(6) Incorporated by reference from the Registrant's Current Report on Form 10-Q
dated May 11, 2001.
(7) Incorporated by reference from the Registrant's Current Report on Form 8-K
dated March 7, 2002.
20