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UNITED STATES
SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 12, 2001.
SCANSOFT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 000-27038 94-3156479
(State or other jurisdiction of (Commission (IRS Employer
incorporation) File Number) Identification No.)
9 CENTENNIAL DRIVE
PEABODY, MASSACHUSETTS 01960
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Address of principal executive offices
(978) 977-2000
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Registrant's telephone number, including area code
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1
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PRELIMINARY NOTE
On December 27, 2001, we filed a Current Report on Form 8-K to report our
acquisition of certain assets of the Speech and Language Technologies operations
of Lernout & Hauspie Speech Products N.V. ("L&H"). We reported the transaction
under Item 2 as an acquisition of assets and, accordingly, provided no financial
statements in the Form 8-K in accordance with Regulation S-X.
As previously disclosed in our Form 10-K, for the year ended December 31, 2001
we had ongoing discussions with the Staff regarding historical financial
statement requirements related to the acquisition. Following these discussions,
we have 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.
Accordingly, we are amending the information in Item 2 of the Form 8-K filed on
December 27, 2001 to report the transaction as an acquisition of a business and
are further amending the Form 8-K to include in Item 7 the audited financial
information with respect to the business that we acquired, as required by Rule
3-05 of Regulation S-X.
The Form 8-K is amended and restated to read as follows:
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
This Current Report on Form 8-K is filed by ScanSoft, Inc, a Delaware
corporation.
On December 12, 2001, we completed the acquisition of substantially all the
operating and technology assets of the Speech and Language Technologies
operations of Lernout & Hauspie Speech Products N.V. The U.S. Bankruptcy Court
for the District of Delaware approved the transaction on December 11, 2001.
Consideration for the transaction comprised $10 million in cash, a $3.5
million note and 7.4 million shares of our common stock having a value of $27.8
million. Funds used in the transaction were available from our general working
capital. The transaction will be accounted for as an acquisition of a business.
2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
The following financial statements of the Speech and Language
Technologies operations of Lernout & Hauspie Speech Products N.V. are filed with
this report:
Page
----
Report of Independent Accountants 4
Statement of Assets and Liabilities as
of September 30, 2001 5
Statement of Revenue and Direct Operating Expenses
for the Nine Months Ended September 30, 2001 6
Notes to Financial Statements 7
(b) PRO FORMA FINANCIAL INFORMATION.
The following unaudited pro forma combined financial statements are
filed with this report:
Page
----
Introduction to Unaudited Pro Forma Combined
Financial Statements 15
Unaudited Pro Forma Combined Balance Sheet
as of September 30, 2001 17
Unaudited Pro Forma Combined Statement of Operations
for the Nine Months Ended September 30, 2001 18
Notes to Unaudited Pro Forma Combined Financial Statements 19
(c) EXHIBITS.
2.1* Asset Purchase Agreement (Lots 1-3), By and Among ScanSoft,
Inc. and Lernout & Hauspie Speech Products N.V., L&H Holdings
USA, Inc. and the other Sellers Named on Annex A Attached
Hereto Dated as of December 7, 2001.
23.1 Consent of PricewaterhouseCoopers LLP
* Previously filed
3
ITEM 7(a). FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
ScanSoft, Inc.:
We have audited the accompanying statement of assets and liabilities of the
Speech and Language Technologies operations of Lernout & Hauspie Speech Products
N.V. (the "Business" as defined in Note 1) as of September 30, 2001 and the
related statement of revenue and direct operating expenses for the nine months
ended September 30, 2001 (herein referred to as the "financial statements").
These financial statements are the responsibility of the management of ScanSoft,
Inc. Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying financial statements were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in the Form 8-K/A of ScanSoft, Inc.) as described in
Note 1 and are not intended to be a complete presentation of the Business'
results of operations and financial position.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets and liabilities as of September 30, 2001
and the revenue and direct operating expenses (as described in Note 1 to the
financial statements) for the nine months ended September 30, 2001, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ PricewaterhouseCoopers LLP
September 6, 2002
Boston, Massachusetts
4
SPEECH AND LANGUAGE TECHNOLOGIES OPERATIONS
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
STATEMENT OF ASSETS AND LIABILITIES
SEPTEMBER 30, 2001
(DOLLARS IN THOUSANDS)
ASSETS:
Accounts receivable, net of allowance for
doubtful accounts of $767 $ 7,703
Inventory 138
Prepaid expenses and other current assets 126
Property and equipment, net 4,160
Intangible assets, net of accumulated amortization of $1,734 8,448
-------
Total assets $20,575
=======
LIABILITIES AND PARENT COMPANY INVESTMENT:
Accounts payable 4,694
Accrued liabilities 4,383
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Total liabilities 9,077
Commitments and contingencies (Note 7)
Parent company investment 11,498
-------
Total liabilities and parent company investment $20,575
=======
The accompanying notes are an integral part of these financial statements.
5
SPEECH AND LANGUAGE TECHNOLOGIES OPERATIONS
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
STATEMENT OF REVENUE AND DIRECT OPERATING EXPENSES
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(DOLLARS IN THOUSANDS)
Revenue $ 34,173
Direct operating expenses:
Cost of revenue 4,439
Research and development 28,440
Selling, general and administrative 32,742
Amortization of intangible assets 1,734
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Total direct operating expenses 67,355
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Excess of direct operating expenses over revenue $(33,182)
========
The accompanying notes are an integral part of these financial statements.
6
Speech and Language Technologies Operations of
Lernout & Hauspie Speech Products N.V.
Notes to Financial Statements
1. BASIS OF PRESENTATION
GENERAL. The accompanying financial statements have been prepared pursuant
to the transaction described below and present the assets and liabilities and
the revenue and direct operating expenses of the Speech and Language
Technologies operations of Lernout & Hauspie Speech Products N.V. ("L&H"),
hereinafter defined as the "Business" or "SLT." SLT was a provider of speech and
language software, which included the RealSpeak text-to-speech technology,
Dragon speech recognition software and other speech and voice-related
technologies aimed at the telecommunications, automotive and mobile device
markets. L&H did not maintain SLT as a separate business unit, but rather
operated the Business within Lernout & Hauspie Speech Products N.V. and several
of its subsidiaries, the most significant of which was L&H Holdings USA. In
November 2000, Lernout & Hauspie Speech Products N.V. and L&H Holdings USA, Inc.
filed for Chapter 11 bankruptcy protection in the United States Bankruptcy Court
for the District of Delaware. In order to facilitate the sale of its assets in
connection with the bankruptcy proceedings, L&H segregated the SLT operations
into eight speech and language technology asset groups.
On December 7, 2001, ScanSoft, Inc. ("ScanSoft") entered into an Asset
Purchase Agreement (the "Purchase Agreement") to acquire certain assets and
intellectual property and assume certain liabilities of the Speech and Language
Technologies operations of L&H. The acquisition was conducted in a closed
auction proceeding administered by the creditors' committee of the L&H entities
described above and approved by the United States bankruptcy court on December
11, 2001. The acquisition was completed on December 12, 2001.
Pursuant to the Purchase Agreement, ScanSoft acquired three of the eight
asset groups of SLT: Dragon Naturally Speaking ("DNS"), Text to Speech ("TTS")
and Automated Speech Recognition ("ASR"), which represented the majority of the
revenue-generating assets of SLT. The net assets acquired by ScanSoft consisted
of (1) patents, trademarks, trade names and products associated with the
acquired speech and language technology assets of L&H; (2) customer contracts
and relationships and certain obligations associated with such contracts; (3)
rights to accounts receivable related to the customer contracts acquired; and
(4) certain inventory, fixed assets and other liabilities. ScanSoft also hired
223 employees of the research and development, sales and marketing and general
and administrative organizations of SLT. ScanSoft paid total consideration of
$41.3 million as follows: $10.0 million in cash, 7.4 million shares of ScanSoft
common stock valued at $27.8 million (based on the average of the closing share
price of the common 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. All remaining principal and interest on the note
is due and payable on December 15, 2004.
On August 13, 2002, the U.S. Bankruptcy Court for the District of Delaware
approved, without objection, ScanSoft's agreement with representatives of L&H
Holdings USA and Lernout & Hauspie Speech Products N.V. to repurchase shares of
ScanSoft common stock worth $7.0 million at a share price equal to the average
of the closing price for the 20 trading days beginning August 14, 2002, but no
less than $4.79 per share. In addition, ScanSoft agreed to issue up to 300,000
shares of common stock to the holders of approximately six million shares
remaining in the event that Scansoft does not offer the remaining
shares in a public offering by February 15, 2003, and 100,000 shares of common
stock if ScanSoft has not registered the remaining shares by February 15, 2003.
BASIS OF PRESENTATION. As described above, L&H did not operate SLT as a
separate business unit, therefore, complete financial statements historically
were not prepared for SLT. The accompanying financial statements were derived
from the historical accounting records of L&H in order to present the statement
of assets and liabilities as of September 30, 2001, and the statement of revenue
and direct operating expenses for the nine months ended September 30, 2001, in
accordance with accounting
7
Speech and Language Technologies Operations of
Lernout & Hauspie Speech Products N.V.
Notes to Financial Statements, Continued
principles generally accepted in the United States of America. As noted above,
the three asset groups acquired by ScanSoft represented the majority of the
revenue-generating assets of SLT. Accordingly, the statement of assets and
liabilities and the statement of revenue and direct operating expenses reflect
all of the eight technology asset groups. All other assets, liabilities,
revenues, and operating expenses of L&H were excluded from the financial
statements, as they were not directly attributable to SLT.
Direct operating expenses are comprised primarily of employee-related
expenses, including employee salaries and benefits, and other direct costs
related to the operations of the Business such as cost of revenue, advertising,
depreciation and amortization. Direct operating expenses also include other
operating expenses, including facilities and related costs, which were allocated
to the Business based on the number of employees dedicated to the Business.
Additionally, the Business relied on L&H for certain administrative, management
and other support services, and the related expenses were also allocated to the
Business based on the number of employees dedicated to the Business. Management
believes the method used to allocate the direct operating expenses and other
infrastructure and support costs is reasonable. L&H did not segregate indirect
corporate expenses and interest income (expense); accordingly these items are
not included in the financial statements of the Business. The statement of
assets and liabilities includes liabilities which existed at the time of
bankruptcy filing. No adjustment to reflect the ultimate settlement of these
liabilities subsequent to September 30, 2001 has been reflected in these
financial statements. The financial statements are therefore stated at
historical cost.
The financial statements were prepared to substantially comply with the
rules and regulations of the Securities and Exchange Commission for business
combinations and are not intended to be a complete presentation of the Business'
financial position, results of operations and cash flows. The historical net
assets and historical revenue and direct operating expenses of the Business
could differ from those that would have resulted had the Business operated
autonomously or as an entity independent of L&H. Furthermore, the financial
statements reflect all of the operations of the Business; however, as described
above, ScanSoft did not acquire all of the net assets of SLT, did not retain a
significant number of personnel directly related to historical operations of the
Business, and did not continue to operate the facilities previously used by the
Business. Consequently, the historical operating results may not be indicative
of the results of operations of the Business in the future.
As described above, L&H did not maintain SLT as a separate business
unit. More specifically, SLT was defined by L&H during 2001 in connection with
bankruptcy proceedings. Since L&H did not have a policy of allocating certain
assets and liabilities and income and expense balances to the Business, such
amounts, as described above, have not been included in the financial statements.
Consequently, a full balance sheet, statement of operations and stockholders'
equity are impractical to prepare. Furthermore, a statement of cash flows is not
presented because the Business did not maintain a cash balance and was dependent
upon L&H for financing the cash flows of the operations.
In accordance with Rule 3-06 of Regulation S-X, the statement of
revenue and direct operating expenses is presented for the nine months ended
September 30, 2001 in satisfaction of the requirement for one year of audited
financial statements.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Revenue was derived primarily from the sale of software products to
end-users through distribution partners and value added resellers (VARs),
royalty revenues from OEM partners, and license fees from direct sales of
products to end-users.
8
Speech and Language Technologies Operations of
Lernout & Hauspie Speech Products N.V.
Notes to Financial Statements, Continued
SLT applied the provisions of Statement of Position 97-2 "Software
Revenue Recognition," as amended by Statement of Position 98-9 "Modification of
SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions" to
all transactions involving the sale of software products. In addition, SLT
applied the provisions of Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements."
SLT sold software products to distributors and resellers who in turn
sold the products to retailers and VARs. Title and risk-of-loss passed to the
distributor upon shipment, at which time payment was generally due. Revenue from
sales of products to distributors and resellers was recognized (i) upon shipment
by the distributor or reseller to the VAR or (ii) upon shipment by the retailer
to end-users of the products. Agreements with distributors and resellers
provided for rights of return which, in the case of VARs, generally lapsed upon
shipment to the VARs, and, in the case of sales to retailers, upon shipment to
end-users. Provisions for product returns were recorded as a reduction of
revenue.
From late 2000 to mid-2001, SLT changed the distribution channel of its
retail products from traditional distributors and resellers to republishers.
Republishers had sole responsibility for the marketing, manufacturing and
distribution of SLT's products to retailers. Under the republishing
arrangements, SLT earned a royalty based on the sale price of its products by
republishers to retailers, as reported by republishers. Republishing
arrangements generated proportionately lower revenue than did traditional
distribution channels since the seller received a royalty in lieu of the full
sales price. Similarly, the direct costs, primarily manufacturing and marketing,
were proportionately lower under republisher agreements than under agreements
with traditional distributors and resellers.
SLT entered into royalty-bearing agreements with original equipment
manufacturers (OEMs) and recognized revenue for royalty fees based on actual
royalties earned and reported or, where past history was indicative of future
royalties, based on estimated royalties earned for the period.
Revenue from the direct sales of licenses of SLT's software products to
end-users was recognized upon delivery, provided that no significant obligations
remained, evidence of the arrangement existed, the fees were fixed or
determinable, and collectibility was reasonably assured.
For arrangements with multiple elements (e.g., undelivered maintenance
and support bundled with perpetual licenses), SLT allocated revenue to the
delivered elements of the arrangement using the residual value method, deferring
revenue for undelivered elements based on evidence of the fair value of those
undelivered elements, which was specific to SLT. The vendor specific objective
evidence of fair values for the ongoing maintenance and support obligations was
based upon substantive renewal rates stated in the contractual arrangements.
Maintenance and support revenue, which was not significant to the results of
operations, was recognized ratably over the service period.
SLT also entered into fixed-fee contracts for software and related
services, which included significant customization or modification of the
software. As a result, SLT recognized revenue on the percentage-of-completion
basis of accounting. Under the percentage-of-completion basis of accounting,
revenue was recognized as the work progressed in amounts estimated to equal the
actual progress on the contract. In applying this method, SLT measured each
project's percentage-of-completion by the ratio of labor hours incurred to date
to the estimated total labor hours for the project. Losses on contracts were
recorded in the period they are determined, and the related obligations to
perform the remaining services were included in accrued liabilities. For
contracts in which SLT was unable to reasonably estimate the cost to complete
the contract, SLT recognized revenue upon completion of the contract.
9
Speech and Language Technologies Operations of
Lernout & Hauspie Speech Products N.V.
Notes to Financial Statements, Continued
Inventory
Inventory is stated at the lower of cost (determined on a first-in,
first-out basis) or market value. At September 30, 2001, inventory consisted
primarily of finished goods.
Property and Equipment
Property and equipment are stated at cost. Major improvements are
capitalized, while expenditures for maintenance, repairs, and minor improvements
are charged to expense. When assets are retired or otherwise disposed of, the
assets and related accumulated depreciation and amortization are eliminated from
the accounts and any resulting gain or loss is reflected in results of
operations. Depreciation was computed using the straight-line method over the
estimated useful lives of the assets for computer equipment, software,
furniture, fixtures and office equipment. Leasehold improvements are depreciated
over the term of the lease.
Intangible Assets
Intangible assets represent the original fair value of intangible
assets resulting from prior business or asset acquisitions, adjusted for
impairment charges to reduce the carrying value to its fair value at the time of
the impairment charge. Intangible assets were amortized using the straight-line
method over their estimated useful lives of 5 years. Amortization expense
amounted to $1.7 million for the nine months ended September 30, 2001.
Impairment of Long-Lived Assets
The recoverability of long-lived assets is evaluated upon indication of
possible impairment by measuring the carrying value of the assets against the
related undiscounted future cash flows. When an evaluation indicates that the
future undiscounted cash flows are not sufficient to recover the carrying value
of the asset, the asset is adjusted to its estimated fair value by recording an
impairment charge based on the excess of the carrying value of the assets over
the discounted estimated cash flows.
Research and Development
Research and development costs were expensed as incurred.
Foreign Currency Translation
The functional currencies for the Business were the U.S. Dollar and the
Euro as determined by the location of the operation. The financial information
recorded in the Euro was translated to U.S. dollars using the average exchange
rate for the nine months ended September 30, 2001. Translation gains and losses
were recorded as non-operating expense and therefore are not included in the
statement of revenues and direct operating expenses.
Income Taxes
No provision for income taxes was provided in the accompanying
statement of revenue and direct operating expenses because, on a separate return
basis, the business would have generated a taxable loss. No tax benefit
resulting from such taxable loss was recorded due to the uncertainty of
realizing such tax benefit.
10
Speech and Language Technologies Operations of
Lernout & Hauspie Speech Products N.V.
Notes to Financial Statements, Continued
There are no net deferred tax assets reflected in the accompanying
statement of assets and liabilities because, on a separate return basis, a full
valuation allowance would have been recorded due to the uncertainty of
realization of the net assets.
Concentration of Credit Risk
SLT sold its software products and services to channel partners or
customers located mainly in North America, Europe, and Asia-Pacific. SLT did not
require collateral from its customers. For the nine months ended September 30,
2001, no customer accounted for more than 10% of revenue. At September 30, 2001,
two customers accounted for 21% and 17% of net accounts receivable,
respectively.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities on the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at September 30, 2001
(in thousands):
USEFUL LIVES
IN YEARS
------------
Computer equipment and software 3 $ 19,108
Furniture, fixtures and office equipment 5-7 5,633
Leasehold improvements 6 2,724
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27,465
Accumulated depreciation (23,305)
--------
$ 4,160
========
Depreciation expense associated with property and equipment was $5.1
million for the nine months ended September 30, 2001.
4. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable at September 30, 2001 include $3.7 million of
liabilities that existed prior to the bankruptcy filings during 2000.
Accrued liabilities were comprised of the following at September 30,
2001 (in thousands):
11
Speech and Language Technologies Operations of
Lernout & Hauspie Speech Products N.V.
Notes to Financial Statements, Continued
Accrued employee compensation and benefits $2,546
Obligations to perform services under
customer development contracts 1,283
Accrued expenses 554
------
Total accrued liabilities $4,383
======
5. INTERCOMPANY COST ALLOCATIONS AND PARENT COMPANY INVESTMENT
Certain costs are allocated to the Business by the Parent, primarily
related to certain facilities, infrastructure and support services. The
estimated costs of such services have been allocated to the financial statements
of the Business based on employee headcount of the Business proportionate to the
headcount of the Parent. Management believes these allocations are reasonable.
See Note 1.
The Business obtained financing for its day-to-day operations from L&H
(the "Parent"). Parent company investment represents these investments made by
the Parent. Interest expense associated with the Parent's general corporate debt
has not been included in the financial statements because amounts were neither
charged nor allocated to the Business.
6. EMPLOYEE BENEFIT PLANS
Employee benefit costs included in direct operating expenses comprise
the cost of medical, dental, life insurance and other benefit costs. For U.S.
employees, employee benefit costs included employer contributions to a
retirement savings plan under Section 401(k) of the Internal Revenue Service,
which covered substantially all U.S. employees who met minimum age and service
requirements. Employer contributions represented a match of 50% of contributions
made by employees through payroll deductions in amounts allowed up to 3% of an
employee's salary. The employer contribution was capped at 50% of the statutory
maximums. The 401(k) employer contribution associated with the SLT employees for
the nine months ended September 30, 2001 was approximately $150,000.
7. COMMITMENTS AND CONTINGENCIES
Operating Leases
Operating leases for facilities were entered into by L&H. The Business'
operations were conducted from several of these facilities which also supported
other operations of L&H. Rent expense allocated to the Business was
approximately $3.0 million for the nine months ended September 30, 2001.
Commitments and Contingencies
L&H entered into arrangements with third-parties under which L&H
granted rights to the manufacturing, marketing and distribution of certain
products of the Business. Under certain of these agreements, L&H granted rights
to future products. As a result of the bankruptcy proceedings, and more
specifically the transfer to ScanSoft of the rights to the same products and
technologies, certain of these third parties claimed that L&H breached their
respective contracts. Subsequent to the acquisition of the Business by ScanSoft,
L&H, ScanSoft and certain of these third parties entered into settlement
agreements which required payments by each of the parties. The total amount due
to the third parties amounted to approximately $2.2 million, of which L&H was
obligated for approximately $0.7 million. No amounts have been recorded in the
historical financial statements of the Business at September 30,
12
Speech and Language Technologies Operations of
Lernout & Hauspie Speech Products N.V.
Notes to Financial Statements, Continued
2001 because the financial obligation arose in connection with the acquisition
by ScanSoft on December 12, 2001.
L&H established a Key Employee Retention Plan ("KERP") in order to
retain certain employees during 2001. Under the KERP, L&H was obligated to make
payments to employees, including SLT employees, only upon termination of
employment due to the acquisition by a third party of the assets of L&H. The
maximum KERP obligation related to SLT employees totaled $3.0 million at
September 30, 2001.
8. SEGMENT INFORMATION
SLT operated in one segment. The revenue and related cost of revenue
SLT attributed to geographic areas (based on the location in which the sale was
invoiced) was as follows for the nine months ended September 30, 2001 (in
thousands):
NORTH
AMERICA EUROPE TOTAL
------- ------ -------
Revenue $25,105 $9,068 $34,173
Cost of revenue $ 3,315 1,124 4,439
Property and equipment, net $ 3,135 $1,025 4,160
======= ====== =======
9. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141 ("SFAS 141"), Business
Combinations and No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets.
SFAS 141 requires business combinations initiated after June 30, 2001 to be
accounted for using the purchase method of accounting, and broadens the criteria
for recording intangible assets separate from goodwill. 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. In addition, SFAS 142 includes
provisions for the reclassification of certain existing recognized intangible
assets, such as acquired workforce, into goodwill. 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. SFAS 142 also provides specific guidance for testing goodwill for
impairment. The statement is effective for acquisitions that are completed after
June 30, 2002 and for existing acquisitions on January 1, 2002. The statement
would not have had a significant impact on the Business' financial position or
results of operations.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("SFAS 144"). SFAS 144 superseded SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and
provides a single accounting model, based on the framework established in SFAS
121, for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired. SFAS 144 is effective for financial statements
issued for fiscal years beginning after December 15, 2001. The statement would
not have had a significant impact on the Business' financial position or results
of operations.
13
Speech and Language Technologies Operations of
Lernout & Hauspie Speech Products N.V.
Notes to Financial Statements, Continued
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. EITF 01-9 would not have had a significant
impact on the Business' results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities ("SFAS No. 146"). This statement
addresses financial accounting and reporting for costs associated with exit or
disposal activities and nullifies EITF Issue No. 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring) ("EITF 94-3"). SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. EITF 94-3 allowed for an
exit cost liability to be recognized at the date of an entity's commitment to an
exit plan. SFAS 146 also requires that liabilities recorded in connection with
exit plans be initially measured at fair value. The provisions of SFAS 146 are
effective for exit or disposal activities that are initiated after December 31,
2002. The statement would not have had a significant impact on the Business'
financial position or results of operations.
14
ITEM 7(b). PRO FORMA FINANCIAL INFORMATION
INTRODUCTION TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following tables set forth certain unaudited pro forma combined
financial information giving effect to the acquisition by ScanSoft, Inc.
(ScanSoft) of certain speech and language technology assets of the Speech and
Language Technologies operations (SLT) of Lernout & Hauspie Speech Products N.V.
(L&H), hereinafter referred to as the "Business."
The unaudited pro forma combined balance sheet gives effect to the
acquisition as if it had occurred on September 30, 2001, combining the balance
sheet of ScanSoft with the statement of assets and liabilities of the Business
as of that date, and eliminating the specified assets and liabilities not
acquired or assumed by ScanSoft.
The unaudited pro forma combined statement of operations for the nine
months ended September 30, 2001 gives effect to the acquisition as if it had
occurred on January 1, 2001, combining the results of operations of ScanSoft for
the nine months ended September 30, 2001 and the revenues and direct operating
expenses of the Business for the nine months ended September 30, 2001.
As described in Note 1 to the historical audited financial statements
of the Business included elsewhere herein, ScanSoft acquired substantially all
of the revenue-generating assets of the Business. However, ScanSoft retained
only 223 of the approximately 500 remaining employees of the Business and did
not acquire significant property and equipment or assume any leases for property
and equipment or facilities. The pro forma adjustments include only those
adjustments that are factually supportable. The pro forma adjustment to reflect
the allocation of the purchase price to the assets acquired and liabilities
assumed as of September 30, 2001 assumes that the assets and liabilities are
carried at historical amounts which approximate fair market value. The actual
allocation of the consideration paid may differ from that reflected in the
unaudited pro forma combined financial statements based upon the difference
between the fair market value of the assets acquired and liabilities assumed at
September 30, 2001 as compared to their respective values at December 12, 2001,
the date of completion of the transaction.
The pro forma adjustments to the unaudited pro forma combined balance
sheet include adjustments to exclude the assets and liabilities which were not
acquired or assumed by ScanSoft in the acquisition. The pro forma adjustments to
the unaudited pro forma combined statement of operations do not include similar
adjustments because the direct operating expenses were incurred by the Business
as a whole and cannot be attributed to the individual asset groups of SLT.
The pro forma combined statement of operations is unaudited and does
not purport to represent the consolidated results that would have been obtained
had the transaction occurred at the date indicated or the results which may be
obtained in the future. The unaudited pro forma combined statement of operations
does not represent the results which may be obtained in the future because, as
noted above, ScanSoft did not retain all of the remaining employees of the
Business and did not acquire significant property and equipment or assume any
leases for property and equipment or facilities. Additionally, ScanSoft believes
that overhead and other operating costs will not continue at the same level as a
result of integration efforts and synergies related to the infrastructure and
distribution channels, among other factors. Therefore, the results of operations
reflected in the unaudited pro forma combined statement of
15
operations for the period presented are not necessarily indicative of the
results of operations which may be obtained in the future.
The unaudited pro forma combined financial information should be read
in conjunction with: (i) ScanSoft's historical quarterly financial statements
and notes thereto as of and for the nine months ended September 30, 2001
included in its Form 10-Q for the nine months ended September 30, 2001, (ii) the
audited consolidated financial statements of ScanSoft included in its Annual
Report on Form 10-K for the year ended December 31, 2001, and (iii) the audited
financial statements of the Speech and Language operations of L&H as of and for
the nine months ended September 30, 2001 included elsewhere in this report on
Form 8-K/A.
16
SCANSOFT, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 2001
(IN THOUSANDS)
PRO FORMA PRO FORMA
SCANSOFT SLT ADJUSTMENTS COMBINED
--------- --------- ----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 9,269 $ -- $ (10,000)a,b $ (731)
Accounts receivable, net 9,921 7,703 (2,895)c 14,729
Inventory 471 138 -- 609
Prepaid expenses and other current assets 1,175 126 (104)c 1,197
--------- --------- --------- ---------
Total current assets 20,836 7,967 (12,999) 15,804
--------- --------- --------- ---------
Goodwill and other intangible assets, net 71,551 8,448 33,462 a,d 113,461
Property and equipment, net 1,868 4,160 (3,885)c 2,143
Other assets 934 -- -- 934
--------- --------- --------- ---------
Total assets $ 95,189 $ 20,575 $ 16,578 $ 132,342
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 7,146 $ 4,694 $ (4,694)c $ 7,146
Accrued sales and marketing expenses 1,326 72 -- 1,398
Other accrued expenses 4,975 4,311 1,470 a,c,d 10,756
Deferred revenue 1,692 -- -- 1,692
Note payable -- -- 227 a 227
--------- --------- --------- ---------
Total current liabilities 15,139 9,077 (2,997) 21,219
--------- --------- --------- ---------
Deferred revenue 2,935 -- -- 2,935
Long-term note payable, net of current portion -- -- 3,273 a 3,273
--------- --------- --------- ---------
Total liabilities 18,074 9,077 276 27,427
--------- --------- --------- ---------
Stockholders' equity:
Preferred stock 4,631 -- -- 4,631
Common stock 51 -- 7 a 58
Additional paid-in capital 224,342 -- 27,793 a 252,135
Common stock held in treasury at cost (521) -- -- (521)
Accumulated other comprehensive loss (405) -- -- (405)
Deferred compensation (91) -- -- (91)
Accumulated deficit/parent company investment (150,892) 11,498 (11,498)d (150,892)
--------- --------- --------- ---------
Total stockholders' equity 77,115 11,498 16,302 104,915
--------- --------- --------- ---------
Total liabilities and stockholders' equity $ 95,189 $ 20,575 $ 16,578 $ 132,342
========= ========= ========= =========
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
17
SCANSOFT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
PRO FORMA PRO FORMA
SCANSOFT SLT ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
Revenue $ 44,945 $ 34,173 $ 79,118
Costs and expenses:
Cost of revenue 9,215 4,439 13,654
Research and development 10,016 28,440 38,456
Selling, general and administrative 19,759 32,742 52,501
Amortization of goodwill and other
intangible assets 20,500 1,734 $(200)e 22,034
-------- -------- ----- --------
Total costs and expenses 59,490 67,355 (200) 126,645
-------- -------- ----- --------
Loss from operations (14,545) (33,182) 200 (47,527)
Other (expense) income, net (126) -- (236)f (362)
-------- -------- ----- --------
Loss before income taxes (14,671) (33,182) (36) (47,889)
Provision (benefit) for income taxes (162) (162)
-------- -------- ----- --------
Net loss $(14,509) $(33,182) $ (36) $(47,727)
======== ======== ===== ========
Pro forma net loss per common share:
Basic and diluted $ (0.30) $ (0.85)
======== ========
Shares used in pro forma net loss
per share calculation:
Basic and diluted 48,638 7,400 56,038
======== ===== ========
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
18
ScanSoft Inc.
Notes to Unaudited Pro Forma Combined
Financial Statements
1. GENERAL
The accompanying unaudited pro forma combined balance sheet reflects
the acquisition of certain assets and the assumption of certain liabilities of
the Speech and Language Technologies operations ("SLT") of Lernout & Hauspie
Speech Products N.V. ("L&H"), discussed further in Note 2 as if the transaction
occurred on September 30, 2001. The accompanying unaudited pro forma combined
statement of operations for the nine months ended September 30, 2001 gives
effect to the business acquisition discussed in Note 2 as if such acquisition
had occurred on January 1, 2001.
2. ACQUISITION
On December 7, 2001, ScanSoft, Inc. ("ScanSoft") entered into an Asset
Purchase Agreement (the "Purchase Agreement") to acquire certain assets and
intellectual property and assume certain liabilities of L&H. The assets were
purchased and liabilities assumed in a closed auction proceeding administered by
the creditors' committee of L&H and certain of its subsidiaries which had
previously filed for Chapter 11 bankruptcy in the United States Bankruptcy Court
for the District of Delaware. The transaction was approved by United States
bankruptcy court on December 11, 2001. The transaction was completed on December
12, 2001, and ScanSoft's results of operations include the activities related to
the acquisition since that date.
Pursuant to the Purchase Agreement, ScanSoft acquired patents,
trademarks, trade names, products and customer contracts associated with certain
of the speech and language technology assets of L&H. In addition, ScanSoft
obtained rights to accounts receivable related to the customer contracts
acquired and certain fixed assets. ScanSoft also hired 223 employees from L&H.
ScanSoft paid $41.3 million in total consideration to the creditors as follows:
$10.0 million in cash, 7.4 million shares of ScanSoft'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 quarterly
in installments of $0.1 million of principal and interest commencing on March
15, 2002, for a total of eleven (11) payments. All remaining principal and
interest on the note is due and payable on December 15, 2004. ScanSoft incurred
approximately $1.0 million of acquisition-related costs.
On August 13, 2002, the U.S. Bankruptcy Court for the District of
Delaware approved, without objection, ScanSoft's agreement with representatives
of L&H Holdings USA. and Lernout & Hauspie Speech Products N.V. to repurchase
shares of ScanSoft common stock worth $7.0 million at a share price equal to the
average of the closing price for the 20 trading days beginning August 14, 2002,
but no less than $4.79 per share. In addition, ScanSoft agreed to issue up to
300,000 shares of common stock to the holders of approximately six million
shares remaining in the event that ScanSoft does not offer the remaining shares
in a public offering by February 15, 2003, and 100,000 shares of common stock if
ScanSoft has not registered the remaining shares by February 15, 2003.
3. PRO FORMA ADJUSTMENTS
The unaudited pro forma combined financial statements reflect several
adjustments. The adjustments are based upon information and assumptions as of
September 30, 2001, and therefore the actual adjustments will likely differ from
the pro forma adjustments.
Balance Sheet:
(a) Adjustment to record the total purchase consideration and transaction
costs totaling $42.3 million as follows: payment of cash of $10.0
million, accrual of transaction costs of $1.0 million, issuance of a
note payable of $3.5 million, and issuance of 7.4 million shares of
ScanSoft common stock with a value of $27.8 million.
19
ScanSoft Inc.
Notes to Unaudited Pro Forma Combined
Financial Statements
(b) The negative cash balance of $0.7 million at September 30, 2001 is a
result of the date of presentation of the pro forma balance sheet
which has been presented as of September 30, 2001. At December 12,
2001, the date of consummation of the acquisition, the $10.0 million
of cash purchase consideration was paid in full from available
operating cash balances.
(c) Adjustments to remove the historical assets and liabilities of the
Business at September 30, 2001 that were not included in the
acquisition pursuant to the Asset Purchase Agreement. The excluded
assets are comprised of $2.9 million of accounts receivable associated
with assets and customer contracts, $0.1 million of prepaid expenses
and other current assets and $3.9 million of property and equipment
that were not acquired by ScanSoft. The excluded liabilities are
comprised of $4.7 million of trade accounts payable and $2.7 million
of accrued liabilities which were not assumed by ScanSoft.
(d) Adjustment to record the allocation of the total purchase
consideration to the fair value of the assets acquired and liabilities
assumed and incurred directly in connection with the acquisition,
determined as of September 30, 2001. The adjustment includes: (1) the
elimination of net intangible assets of $8.4 million included in the
historical statement of assets and liabilities, (2) the recording of
the fair value of identifiable intangible assets of $21.0 million
(including $17.9 million related to patents and core technology and
$3.1 million related to trademarks and tradenames), (3) the recording
of the excess of the purchase price over the fair value of the
identifiable net assets acquired (goodwill) of $21.4 million, which is
not being amortized in accordance with Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, because the acquisition of the Business occurred after June
30, 2001, (4) the adjustment to record the fair value of liabilities
assumed or incurred directly related to the acquisition of $3.1
million, and (5) the elimination of parent company investment of $11.5
million.
Statement of Operations:
(e) Adjustment to eliminate amortization expense included in the
historical financial statements of the Business of $1.7 million and to
record the amortization of the fair value of other intangible assets
recorded in the acquisition as if the acquisition had occurred on
January 1, 2001. In accordance with SFAS No. 142, no goodwill
amortization is reflected for ScanSoft's goodwill resulting from the
acquisition of the Business. Other intangible assets are amortized on
the straight-line method over their estimated useful lives of ten
years for patents and core technology and twelve years for trademarks
and tradenames.
(f) Adjustment to record additional interest expense related to the note
payable issued in partial consideration for the acquisition described
in (a) above as if the acquisition had occurred on January 1, 2001.
The interest rate on the note is 9%. The outstanding principal balance
is assumed to be the original principal balance of $3,500,000 based on
the payment schedule included in the note agreement. The accompanying
unaudited pro forma combined statement of operations does not assume
any permitted prepayments of principal.
20
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 hereunto duly authorized.
SCANSOFT, INC.
/s/ RICHARD S. PALMER
------------------------------------------
Richard S. Palmer, Senior Vice President &
Chief Financial Officer (Principal
Financial Officer)
Date: September 13, 2002
21
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
------- ----------------------------------------------------------------------
2.1* Asset Purchase Agreement (Lots 1-3), By and Among ScanSoft, Inc. and
Lernout & Hauspie Speech Products N.V., L&H Holdings USA, Inc. and The
other Sellers Named on Annex A Attached Hereto Dated as of December 7,
2001.
23.1 Consent of PricewaterhouseCoopers LLP
* Previously filed
22