-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JI89szwOcBcM98Qmv+PDZqRPKl8Pf6QJqk2vaTkpp/5M1Ci3L9eF3g8/rQNBufLP M0WWLobydniTerNxX+nUWw== 0000950008-99-000212.txt : 19990817 0000950008-99-000212.hdr.sgml : 19990817 ACCESSION NUMBER: 0000950008-99-000212 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCANSOFT INC CENTRAL INDEX KEY: 0001002517 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 943156479 STATE OF INCORPORATION: DE FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27038 FILM NUMBER: 99691086 BUSINESS ADDRESS: STREET 1: 9 CENTENNIAL DRIVE CITY: PEABODY STATE: MA ZIP: 01960 BUSINESS PHONE: 9789772000 MAIL ADDRESS: STREET 1: 2560 W BAYSHORE RD CITY: PALO ALTO STATE: CA ZIP: 94303 FORMER COMPANY: FORMER CONFORMED NAME: VISIONEER INC DATE OF NAME CHANGE: 19951020 10-Q 1 QUARTERLY REPORT ON FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 1999 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 OF (IRS EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 9 CENTENNIAL DRIVE PEABODY, MA 01970 (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. Yes [X] No [ ] 26,446,964 shares of the registrant's Common Stock, $0.001 par value, were outstanding as of August 1, 1999. ================================================================================ SCANSOFT, INC. FORM 10-Q THREE AND SIX MONTHS ENDED JUNE 30, 1999 INDEX PAGE ---- PART I: FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) a) Consolidated Statements of Income for the three and six months ended June 30, 1999 and June 30, 1998................ b) Consolidated Balance Sheets at June 30, 1999 and December 31, 1998........................................... c) Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and June 30, 1998....................... d) Notes to Consolidated Financial Statements.................. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................ PART II: OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders.............. Item 6. Exhibits and Reports on Form 8-K................................. Signatures................................................................. -i- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SCANSOFT, INC. CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
Three months ended Six months ended June 30, June 30, --------------------------------- ------------------------------ 1999 1998 1999 1998 --------------- --------------- --------------- ------------- Revenue...................................................$ 10,268 $ 20,276 $ 14,776 $ 40,241 Costs and expenses: Cost of revenue...................................... 2,308 15,544 3,433 29,713 Research and development............................. 2,168 1,214 3,423 2,346 Selling, general and administrative.................. 4,451 5,320 7,054 9,886 Amortization of intangible assets.................... 475 -- 633 -- Restructuring charges................................ -- -- 346 -- Gain on sale of hardware business, net............... -- -- (882) -- Acquired in-process research and development......... -- -- 3,944 -- ------------- ------------- ------------- ------------- Total costs and expenses.................................. 9,402 22,078 17,951 41,945 ------------- ------------- ------------- ------------- Income (loss) from operations............................. 866 (1,802) (3,175) (1,704) Other income, net......................................... 57 40 74 277 ------------- ------------- ------------- ------------- Income (loss) before income taxes......................... 923 (1,762) (3,101) (1,427) Provision for income taxes................................ 100 -- 100 -- ------------- ------------- ------------- ------------- Net income (loss).........................................$ 823 $ (1,762) $ (3,201) $ (1,427) ============= ============= ============= ============= Net income (loss) per share: basic........................$ 0.03 $ (0.09) $ (0.13) $ (0.07) ============= ============= ============= ============= Net income (loss) per share: diluted......................$ 0.03 $ (0.09) $ (0.13) $ (0.07) ============= ============= ============= ============= Weighted average common shares: basic..................... 26,409 19,687 24,403 19,646 ============= ============= ============= ============= Weighted average common and common equivalent shares: diluted............................................. 31,557 19,687 24,403 19,646 ============= ============= ============= =============
The accompanying notes are an integral part of these financial statements. -1- SCANSOFT, INC. CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS ) ASSETS
June 30, December 31, 1999 1998 ------------- --------------- (Unaudited) Current Assets: Cash and investments.............................................. $ 5,185 $ 7,861 Restricted cash................................................... -- 262 Accounts receivable, less allowances of $3,917 and $4,171......... 8,232 13,512 Inventory, net.................................................... 654 4,777 Prepaid expenses and other current assets......................... 707 929 ------------- --------------- Total current assets........................................... 14,778 27,341 Property and equipment, net....................................... 882 1,039 Acquired intangible assets, net................................... 14,275 -- Other assets...................................................... 232 65 ------------- --------------- TOTAL ASSETS $ 30,167 $ 28,445 ============= =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short term bank borrowings........................................ $ -- $ 6,000 Note payable...................................................... 1,600 -- Accounts payable.................................................. 1,331 11,053 Accrued sales and marketing expenses.............................. 1,088 1,165 Deferred revenue.................................................. 477 843 Other accrued expenses............................................ 4,372 1,711 ------------- --------------- Total current liabilities...................................... 8,868 20,772 ------------- --------------- Other liabilities...................................................... -- 91 ------------- --------------- Stockholders' equity: Non-voting Preferred stock, $0.001 par value; 3,562,238 shares authorized, issued and outstanding............................. 4 -- Common stock, $0.001 par value; 50,000,000 shares authorized; 26,778,830 and 19,852,952 shares issued and outstanding, respectively................................................... 26 20 Treasury stock, 331,740 shares.................................... (684) -- Additional paid in capital, Common................................ 100,909 87,995 Additional paid in capital, Preferred............................. 4,628 -- Deferred compensation relating to stock options................... -- (50) Accumulated deficit............................................... (83,584) (80,383) ------------- --------------- Total stockholders' equity..................................... 21,299 7,582 ------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $ 30,167 $ 28,445 ============= ===============
The accompanying notes are an integral part of these financial statements. -2- SCANSOFT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) UNAUDITED
Six months ended June 30, -------------------------------- 1999 1998 ------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss)............................................................. $ (3,201) $ (1,427) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................................... 151 981 Accounts receivable allowances.................................. 2,327 185 Amortization of intangible assets............................... 633 -- Net gain on sale of hardware business........................... (882) -- Write off of acquired in-process research and development....... 3,944 -- Other........................................................... -- 78 Changes in assets and liabilities, net of effects from acquisitions and sale of hardware business assets............. (6,203) (3,673) ------------- ------------- Net cash used in operating activities................................. (3,231) (3,856) ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net sales of short-term investments............................... 397 1,355 Proceeds from sale of hardware business........................... 6,782 -- Cash received in ScanSoft acquisition, net........................ 1,233 -- Cash used for MetaCreations acquisition........................... (1,011) -- Capital expenditures for property and equipment................... (79) (170) ------------ ------------- Net cash provided by investing activities.............................. 7,322 1,185 ------------ ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Short term bank borrowings, net................................... (6,000) 5,164 Acquisition of Treasury stock..................................... (684) -- Proceeds from issuance of common stock, net....................... 52 236 ------------ ------------- Net cash provided by (used in) financing activities.................... (6,632) 5,400 ------------ ------------- Net increase (decrease) in cash and cash equivalents................... (2,541) 2,729 Cash and cash equivalents at beginning of period....................... 7,659 11,423 ------------ ------------- Cash and cash equivalents at end of period............................. 5,118 14,152 Investments............................................................ 67 1,674 ------------ ------------- Cash and investments................................................... $ 5,185 $ 15,826 ============ =============
The accompanying notes are an integral part of these financial statements. -3- SCANSOFT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION Prior to 1999, the results of the Company represented the activity of Visioneer, Inc., which marketed and sold both hardware and software. On January 6, 1999, the Company sold its hardware business to Primax Electronics, Ltd. On March 2, 1999, the Company acquired Xerox Corporation's ScanSoft subsidiary and subsequently renamed the Company ScanSoft, Inc. The accompanying unaudited consolidated financial statements of ScanSoft, Inc. (the "Company" or "ScanSoft") have been prepared in accordance with generally accepted accounting principles. 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 June 30, 1999, and for other periods presented. 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 footnotes prepared in accordance with generally accepted accounting principles have 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 January 3, 1999. The results for the three and six months ended June 30, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999, 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. Actual results could differ from those estimates. Effective in the first quarter of 1999, the Company changed its year and quarter ends. The Company's fiscal year now ends on December 31. The Company reports quarterly results on the last day of the calendar quarter. The Company previously used the Sunday closest to the calendar month end. -4- BALANCE SHEET COMPONENTS The following table summarizes key balance sheet components:
June 30, December 31, 1999 1998 ------------- ----------- Inventory: Raw Materials............................ $ 408 $ 429 Work-in-process.......................... -- 2,261 Finished goods........................... 246 2,087 ------------- ----------- $ 654 $ 4,777 ============= =========== Other accrued liabilities: Accrued wages............................ $ 895 $ 216 Accrued royalties....................... 513 457 Accrued taxes payable.................... 389 158 Warranty accrual......................... 200 200 Estimated liability, acquired products... 1,200 -- Other accrued liabilities................ 1,175 680 ------------- ----------- $ 4,372 $ 1,711 ============= ===========
ACQUISITION OF SCANSOFT The Company acquired ScanSoft, a company that develops, markets, distributes and supports software that captures, communicates and prints documents at the desktop, effective March 2, 1999 for approximately 6.8 million shares of Common Stock of the Company, 3.6 million shares of non-voting Preferred Stock of the Company and exchange of 1.7 million employee stock options to purchase Common Stock of the Company in exchange for outstanding employee stock options of ScanSoft. Additionally, in conjunction with the acquisition, the Company incurred approximately $1.1 million of acquisition related costs. The purchase price of ScanSoft, including acquisition costs, was $18.6 million, and was allocated to the assets acquired and liabilities assumed based on the fair value of ScanSoft's current assets, property and equipment, and liabilities. The excess of the purchase price over the fair value of tangible assets acquired has been allocated to intangible assets (IPRD, core technology, trade mark and trade name, and assembled workforce) acquired based on an independent appraisal. This acquisition has been accounted for under the purchase method of accounting and the results of operations of ScanSoft have been included in the consolidated statements of operations of the Company from the date of acquisition. The Company recorded a one time write-off of approximately $3.9 million in the quarter ended March 31, 1999 relating to the value of in-process research and development acquired as part of the purchase. -5- The allocation of the purchase price was as follows (in thousands): Property and equipment.......................... $ 909 Current and other assets........................ 4,813 Liabilities assumed............................. (2,166) Identified intangible assets.................... 11,096 Acquired in-process research and development.... 3,944 ------------- $ 18,596 ============= IN-PROCESS RESEARCH AND DEVELOPMENT Management estimates that $3.9 million of the purchase price of ScanSoft represents acquired in-process technology that has not yet reached technological feasibility and has no alternative future use. Accordingly, this amount was immediately charged to expense in the consolidated statements of income upon consummation of the acquisition. The value assigned to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility has not been established. These include projects (primarily major version upgrades) in each of ScanSoft's major products, including ScanWorks, Pagis, TextBridge and API. The value was determined by estimating the revenue contribution of each of these products and the amount of the revenues attributable to the core/developed technology, the in-process - completed, the in-process - to be completed and the future yet-to-be-defined elements. The net cash flows for the in-process - completed were then discounted utilizing a weighted average cost of capital of 25%. This discount rate takes into consideration the inherent uncertainties surrounding the successful development of the in-process research and development, the profitability levels of such technology and the uncertainty of technological advances which could potentially impact the estimates described above. The split between the in-process - completed and the in-process - to be completed amounts were estimated based on the time and related costs incurred in development before the close of the acquisition and estimated to be incurred after the close of the acquisition. The average percentage of completion of the projects ranged from 73% to 95% at the date of the acquisition. Revenue is projected to be generated in fiscal 1999 for each of the product versions in development at the acquisition date. If these projects are not successfully developed, future revenue and profitability of ScanSoft may be adversely affected. Additionally, the value of other intangible assets acquired may become impaired. RESTRUCTURING Restructuring costs of $346,000 in the first quarter of 1999 include $188,000 related to a workforce reduction. The workforce reduction costs primarily include severance costs related to the involuntary termination of employment for approximately 10 employees from research and development in California. The terminations were necessary in order to consolidate the Company's research and development efforts to the new corporate headquarters in Massachusetts. Also included was approximately $46,000 in fixed assets and $82,000 in non-refundable commitments associated with the California operation which were no longer required once the headquarters were moved to Massachusetts, and $30,000 in other exit costs. Severance costs and other exit costs were determined in accordance with EITF No. 94-13, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." SALE OF HARDWARE BUSINESS On December 3, 1998, the Company entered into an agreement to sell its hardware assets, liabilities and intellectual property to Primax Electronics, Ltd ("Primax") for approximately $6.8 million in cash. The terms of the agreement also granted to Primax a software license agreement that allows them -6- to "bundle," market and sell the Company's PaperPort software with Primax hardware products. The agreement requires the payment of certain royalties by Primax to the Company. On January 6, 1999 the agreement with Primax was completed. Accordingly, in the quarter ended March 31, 1999, the Company reported a non-operating gain of approximately $882,000 related to the sale of the hardware business. The most significant assets and liabilities at January 3, 1999, of the hardware business were receivables, inventories and accounts payable in the approximate amounts of $12.7 million, $4.6 million and $10.7 million, respectively. In addition, Primax assumed the lease of the Company's corporate facilities in California. The Company entered into an agreement with Primax to pay Primax rent for the Company's use of this facility until the move of the corporate offices to Peabody, Massachusetts after the acquisition of ScanSoft on March 2, 1999. As a result of the sale of the hardware business on January 6, 1999, the Company derived no revenues and incurred no material operating expenses related to the hardware business during the six months ended June 30, 1999. ACQUISITION OF PRODUCT LINES On June 30, 1999, the Company entered into a definitive asset purchase agreement (the "Purchase Agreement") and license agreement (the "License") to acquire and license certain assets and intellectual property relating to the photo imaging software products business of MetaCreations Corporation which include Kai's Photo Soap 1.0, Kai's Photo Soap 2.0, Kai's SuperGoo 1.0, Kai's PowerGoo 1.0 and Kai's Power Show 1.1 (the "Products") from MetaCreations Corporation (the "Products"). The acquisition was closed on June 30, 1999. Pursuant to the Purchase Agreement, the Company purchased all of the inventory, intangibles, books and records, marketing materials and MetaCreations' website content relating to the Products. The Company paid MetaCreations $600,000 plus assumed the obligations to fulfill sales orders relating to the Products, all liabilities under all original equipment manufacturer and other agreements pertaining to the Products, and up to $950,000 of product return liability relating to Products sold prior to the date of the Purchase Agreement. In addition, the Purchase Agreement includes contingent financial performance incentive payments under which the Company will pay MetaCreations up to $1,000,000, based on the sale of the Products and certain other technology licensed in the License Agreement. Under the License Agreement, MetaCreations granted the Company a non-exclusive, royalty free license to use, reproduce, license, sell and distribute the intellectual property relating to the Products and other related software technology. Pursuant to the License Agreement, for a period of two years, MetaCreations and the Company have agreed that neither will market, license, reproduce, distribute or sell the intellectual property subject to the License Agreement in any manner or for any purpose that would compete with current MetaCreations products or Company products. The Company paid MetaCreations $400,000 in cash and signed a promissory note in the principal amount of $1,600,000 for the License. The promissory note accrues interest at the rate of seven percent (7%) and is due on June 30, 2000. -7- NET INCOME (LOSS) PER SHARE Net income (loss) per share is calculated in accordance with the provisions of Statement of Financial Accounting Standards No. 128 - "Earnings per Share" (SFAS No. 128). The following details the computation for basic and diluted income (loss) per share:
Three months ended Six months ended June 30, June 30, ------------------------------- -------------------------------- 1999 1998 1999 1998 -------------- -------------- --------------- --------------- Net income (loss).............................. $ 823 $ (1,762) $ (3,201) $ (1,427) Basic: Weighted average common shares outstanding..... 26,409 19,687 24,403 19,646 ============== ============== =============== =============== Net income (loss) per share.................... $ 0.03 $ (0.09) $ (0.13) $ (0.07) ============== ============== =============== =============== Diluted: Weighted average common shares outstanding..... 26,409 19,687 24,403 19,646 Effect of diluted options and warrants......... 5,148 -- -- -- -------------- -------------- --------------- --------------- Weighted average common shares outstanding..... 31,557 19,687 24,403 19,646 ============== ============== =============== =============== Net income (loss) per share.................... $ 0.03 $ (0.09) $ (0.13) $ (0.07) ============== ============== =============== ===============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW During 1997 we implemented a strategy to focus our research and development efforts on software development rather than hardware development and to leverage the engineering resources of our manufacturing partners to design future hardware products. In furtherance of this strategy, on January 6, 1999, we sold our hardware business and the Visioneer brand name to Primax, and acquired Xerox Corporation's ScanSoft subsidiary on March 2, 1999. Following the sale to Primax and the acquisition of ScanSoft, our business now focuses on software products that capture, communicate, and print documents including the PaperPort, TextBridge and Pagis product lines. Our success in the future will depend on our ability to maintain software gross margins and 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. There can be no assurance that the market for our products will develop or that we will achieve market acceptance of our products. We have incurred annual net losses since inception. There can be no assurance that we will be able to attain annual profitability in the near future. As of June 30, 1999, we had an accumulated deficit of $83.5 million. -8- RESULTS OF OPERATIONS Revenue of $10,268,000 for the three months ended June 30, 1999 decreased 49% from $20,276,000 from the comparable period in 1998. Revenue of $14,776,000 for the six months ended June 30, 1999 decreased 63% from the comparable period in 1998. These decreases were due to the sale of the hardware business on January 6, 1999, which contributed $17,173,000 and $33,004,000 of revenue for the three and six months ended June 30, 1998, respectively. Excluding hardware revenue in 1998, revenue increased 232% and 106% for the three and six months ended June 30, 1999, respectively. These increases result from the incremental revenue generated from the acquisition of ScanSoft on March 2, 1999. Cost of revenue consists primarily of material costs, third party royalties, fulfillment, and salaries for product support personnel. Cost of revenue for the three months ended June 30, 1999 was $2,308,000 or 22% of revenue, compared to $15,544,000 or 77% in the comparable period of 1998. The variance in absolute dollars and percentage of revenue is primarily attributable to the sale of the hardware business which incurred $14,697,000 in cost of revenue in the three months ended June 30, 1998. Excluding the hardware business from the 1998 revenue and cost of revenue, cost of revenue for the three months ended June 30, 1998 was $847,000 or 27% of revenue. Cost of revenue for the six months ended June 30, 1999 was $3,433,000 or 23% of revenue, compared to $29,713,000 or 74% in the comparable period of 1998. The variance in absolute dollars and percentage of revenue is primarily attributable to the sale of the hardware business which incurred $27,745,000 in cost of revenue in the six months ended June 30, 1998. Excluding the hardware business from the 1998 revenue and cost of revenue, cost of revenue for the six month period ended June 30, 1998 was $1,968,000 or 28% of revenue. Research and development expenses consist primarily of salary and benefit costs of engineers. Research and development costs were $2,168,000 or 21% of revenue in the three months ended June 30, 1999, an increase of $954,000 from the corresponding period in 1998. Research and development costs for the six months ended June 30, 1999 were $3,423,000 or 23% of revenue, an increase of $1,077,000 from the same period in 1998. The increase in research and development spending for both the three and six month periods is due to the added software engineering headcount from the acquisition of ScanSoft on March 2, 1999. 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 and accounting expenses and other professional services. Selling, general and administrative expenses in the three months ended June 30, 1999 were $4,541,000 or 43% of revenue, a decrease of $869,000 from the comparable period of 1998. Selling, general and administrative expenses for the six months ended June 30, 1999 were $7,054,000 or 48% of revenue, a decrease of $2,832,000 from the comparable period of 1998. The decrease in selling, general, and administrative expenses from 1998 to 1999 for both the three and six month periods ended June 30, 1999, is due primarily from lower administrative expenses from the transition of the hardware and software business to a "software only" business and include lower compensation costs, depreciation and other operational expenses. This transition occurred when the hardware business was sold on January 6, 1999, and ScanSoft was acquired on March 2, 1999. -9- Restructuring charges of $346,000 for the six months ended June 30, 1999 relate to the acquisition of ScanSoft and the subsequent consolidation of research and development operations and the move of the Company's headquarters to Massachusetts. On January 6, 1999, the Company sold its hardware business to Primax Electronics, Ltd., for approximately $7 million and reported a non-operating gain of approximately $882,000. Amortization of intangible assets of $475,000 and $633,000 for the three and six months ended June 30, 1999, respectively, reflect the amortization of identified intangible assets from the ScanSoft acquisition. The useful lives of the intangible assets used for amortization range from three to seven years. The in-process research and development charge of $3,944,000 for the six months ended June 30, 1999, reflects that portion of the purchase price of ScanSoft representing acquired in-process technology that has not yet reached technological feasibility and has no alternative future use. Accordingly, this amount was immediately charged to expense in the consolidated statements of income upon consummation of the acquisition. The value assigned to acquired in-process technology was determined by identifying research projects in areas for which technological feasibility has not been established. These include projects (primarily major version upgrades) in each of ScanSoft's major products, including ScanWorks, Pagis, TextBridge and API. The value was determined by estimating the revenue contribution of each of these products and the amount of the revenues attributable to the core/developed technology, the in-process - completed, the in-process - to be completed and the future yet-to-be-defined elements. The net cash flows for the in-process - completed were then discounted utilizing a weighted average cost of capital of 25%. This discount rate takes into consideration the inherent uncertainties surrounding the successful development of the in-process research and development, the profitability levels of such technology and the uncertainty of technological advances which could potentially impact the estimates described above. The split between the in-process - completed and the in-process - to be completed amounts were estimated based on the time and related costs incurred in development before the close of the acquisition and estimated to be incurred after the close of the acquisition. The average percentage of completion of the projects ranged from 73% to 95% at the date of the acquisition. Revenue is projected to be generated in fiscal 1999 for each of the product versions in development at the acquisition date. If these projects are not successfully developed, future revenue and profitability of ScanSoft may be adversely affected. Additionally, the value of other intangible assets acquired may become impaired. Other income, net, consists primarily of interest earned on cash investments. Other income, net was $57,000 for the three months ended June 30, 1999 compared to $40,000 for the comparable period in 1998. Other income, net was $74,000 for the six months ended June 30, 1999 compared to $277,000 for the comparable period in 1998. The decrease from 1998 to 1999 for the six months ended June 30, is due primarily to less interest income as a result of lower investment balances in the respective periods. The provision for taxes for both the three and six months ended June 30, 1999, was $100,000 and substantially lower than a provision at statutory rates would yield. The lower tax provision reflects the usage of net operating losses to reduce our taxable income. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1999, we had cash and investments of $5,185,000, compared to $7,861,000 of cash and investment balances at December 31, 1998. -10- We used $3,230,000 in cash for operating activities in the six months ended June 30, 1999. The cash was used to fund payment of salary and personnel costs, the prepayment of annual insurance policies, and other normal operating costs. Cash provided by investing activities in the six months ended June 30, 1999 was $7,322,000. Approximately $6,782,000 was received in connection with the sale of the hardware business in the January, 1999. Cash used in financing activities for the six month period ended June 30, 1999 was $6,632,000. The cash was used to buy back common stock from existing stockholders in connection with the acquisition of ScanSoft and to pay off outstanding short term bank borrowings of approximately $6,000,000. We believe that our current cash and investments balance, together with cash generated from operations will satisfy our working capital and capital expenditures needs through 1999. YEAR 2000 COMPLIANCE We are aware of the potential business risks associated with the "Year 2000" millennium issue. Based upon this potential business risk, we have developed a strategy to examine the potential effect of this issue. The following strategy outlines the process by which we are trying to minimize the potential risk associated with the "Year 2000" millennium issue. We have assessed the potential affects of the "Year 2000" millennium change on our business systems and processes, including facilities, software and components used by our employees, as well as our outsourcing vendors and critical suppliers. Our Year 2000 project is proceeding on schedule. The project goal is to ensure that our business is not adversely impacted by the date transitions associated with the Year 2000. Our Year 2000 project plan is coordinated by a team that reports to senior management. The project team is evaluating the Year 2000 compliance of our business systems and processes, including facilities, software and components used by our employees, as well as our outsourcing vendors and critical suppliers who provide services relating to our business. Our Year 2000 project is comprised of the following phases: - Phase 1 - Inventory all business systems and processes, including facilities, software and components used by our employees, in order to assign priorities to potentially impacted systems and services. This phase was completed by January 31, 1999 and a complete inventory was compiled. - Phase 2 - Assess the Year 2000 compliance of all inventoried business systems and processes, including facilities, software and components used by our employees, and determine whether to renovate or replace any non-Year 2000 compliant systems and services. This phase was completed by March 31, 1999. - Phase 3 - Complete remediation, if any is required, of any non-compliant business systems and processes, including facilities, software and components used by our employees and outsourcing vendors. Conduct procurements to replace any other non-Year 2000 compliance business systems and processes, including facilities, software and components used by our employees and outsourcing vendors that won't be remediated. This phase was completed by June 30, 1999. -11- - Phase 4 - Test and validate remediated and replacement systems, if any such remediation or replacement is required, to ensure inter-system compliance and mission critical system functionality. This phase was completed by July 31, 1999. - Phase 5 - Deploy and implement remediated and replacement systems, if any deployment or implementation is required, after the completion of successful testing and validation. We expect to complete the deployment and implementation of the remediated or replacement systems, if any is required, by September 30, 1999. - Phase 6 - Design contingency plan and business continuation plans in the event of the failure of business systems and processes, facilities, data networking infrastructure, software and components used by our employees due to the Year 2000 millennium change. We expect that the initial contingency and business continuation plan will be in place by November 30, 1999. Based on our inventory and assessment to date, we believe that our internal mission critical systems are Year 2000 compliant and that our facilities can be Year 2000 compliant. In addition, we are seeking assurances from our facilities' landlords and equipment vendors and data circuit providers regarding the Year 2000 compliance of their facilities and equipment. At this time, we believe that our incremental remediation costs, if any, needed to make our current business systems and processes, including facilities, software and components used by our employees and outsourcing vendors, are not material. While we are incurring some incremental costs, our incurred costs through June 30, 1999 were less than $60,000. Our expected total costs, including remediation and replacement costs, if any, are estimated to be between $100,000 and $200,000 over the life of the Year 2000 project. We are contacting our hardware and software vendors, other significant suppliers, manufacturers, outsourcing service providers and other contracting parties to determine the extent to which we are vulnerable to any one of their failures to achieve Year 2000 compliance for their own systems. At the present time, we do not expect Year 2000 issues of any such third parties to materially affect our business. Should we fail to solve a Year 2000 compliance problem to our critical business systems and processes, the result could be a failure or interruption to normal business operations. Despite the assurances of our third-party suppliers, hardware and software vendors, and outsourcing service providers regarding Year 2000 compliance of their products and services, the potential exists that a Year 2000 problem relating to such third-party suppliers, vendors and outsourcing service providers products and services could have a material impact on our business. We are conducting monthly discussions with our critical outsourcing service providers to determine the progress of their Year 2000 compliance programs. Despite extensive preparation and effort to ensure Year 2000 compliance, implementation of our business continuation contingency plan for a very short time may be required while we remediate the Year 2000 problem. Despite our belief that our mission critical computer software applications and systems are Year 2000 compliant and our expectation that our enhancement effort will result in Year 2000 compliant systems, we are currently developing a business continuation contingency plan. We expect to finalize our initial contingency plan to complete the testing of all existing systems by November 30, 1999. -12- The information in this section is a "Year 2000 Readiness Disclosure" as defined in the Year 2000 Information Readiness and Disclosure Act of 1998 enacted on October 19,1998. The foregoing Year 2000 discussion contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, including without limitation, anticipated costs and the dates by which certain actions are expected to be completed, are based on management's best current estimates, which were derived utilizing numerous assumptions about future events, including the continued availability of certain resources, representations received from third parties and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the ability to identify and remediate all relevant systems, results of Year 2000 testing, adequate resolution of Year 2000 issues by governmental agencies, businesses and other third parties who are outsourcing service providers suppliers and vendors, unanticipated system costs, the adequacy of and ability to implement contingency plans and similar uncertainties. The "forward-looking statements" made in the foregoing Year 2000 discussion speak only as of the date on which such statements are made, and management does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. FORWARD LOOKING STATEMENTS Certain Statements made in this report (including statements regarding the Year 2000 issue), as well as oral statements made by the Company 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. These statements are based on the Company's current expectations and estimates as to prospective events and circumstances, which may or may not be in the Company's control and as to which there can be no firm assurance given. These forward-looking statements, like any other forward-looking statements, involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties include (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) inability to protect the Company's proprietary technology and intellectual property; (4) inability to attract or retain skilled employees; (5) technological obsolescence of current products and the inability to develop new products; and (6) inability to respond to competitive technology and pricing pressures. The foregoing list should not be construed as exhaustive and the Company 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 the Company's registration statements filed with the Securities and Exchange Commission. The Company wishes to caution readers not to place undue reliance upon such forward-looking statements, which speak only as of the date made. -13- PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 29, 1999, the Company held its Annual Meeting of Stockholders. At such meeting the following actions were voted upon: (a) To elect a Board of six (6) directors to hold office until the next annual meeting of stockholders or until their respective successors have been elected and qualified: DIRECTOR VOTES FOR WITHHELD -------- --------- -------- Michael K. Tivnan 25,106,274 40,270 Paul A. Ricci 25,106,274 40,270 J. Larry Smart 25,101,994 44,550 William J. Harding 25,106,274 40,270 David F. Marquardt 25,106,244 40,300 Mark B. Myers 25,106,274 40,270 (b) To approve the amendment of the Company's 1995 Employee Stock Purchase Plan increasing the number of shares available for issuance: VOTES FOR VOTES AGAINST ABSTAIN BROKER NON-VOTES ---------- ------------- ------- ---------------- 24,931,090 176,200 39,254 -- (c) To ratify the appointment of PricewaterhouseCoopers LLP as independent public accountants for the period ending December 31, 1999: VOTES FOR VOTES AGAINST ABSTAIN BROKER NON-VOTES ---------- ------------- ------- ---------------- 25,103,951 31,878 10,715 -- 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. (b) Reports on Form 8-K April 9, 1999 Item 8. Reported change in fiscal year to calendar year end. July 14, 1999 Item 2. Reported June acquisition of assets from and license agreement with MetaCreations Corporation -14- 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 13, 1999. SCANSOFT, INC. By: /s/ John J. Rogers, Jr. ------------------------------- John J. Rogers, Jr. Chief Financial Officer (Duly authorized officer and principal financial officer) -15- 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. 3.1(2) Bylaws of Registrant. 3.2(3) Amended and Restated Certificate of Incorporation of Registrant. 4.1(3) Specimen Common Stock Certificate. 4.2(4) 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(5) Voting Agreement dated March 2, 1999 between Xerox, Xerox Imaging Systems, Inc., Visioneer, Inc. and several holders of Visioneer common stock. 10.1 Employment Agreement, dated April 29, 1999, by and between ScanSoft, Inc. and John Rogers, Jr. 27.1 Financial Data Schedule. - -------------- (1) Incorporated by reference from the Registrant's Registration Statement on From 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-1 (No. 333-98356) filed with the Commission on October 19, 1995. (3) Incorporated by reference from the Registrant's Registration Statement on Form S-8 (No. 333-74343) filed with the Commission on March 12, 1999. (4) Incorporated by reference from the Registrant's current Report on Form 8-K dated October 30, 1996. (5) Incorporated by reference from the Registrant's Annual Report on Form 10-K for the fiscal year ended January 3, 1999. EX-10.1 2 ROGERS EMPLOYMENT AGREEMENT April 29, 1999 John J. Rogers, Jr. 3 Singletary Way Hopkinton, MA 02114 Dear John, Congratulations! It is with great pleasure that I confirm our final employment offer to you, for the position of Chief Financial Officer, reporting directly to me. The tentative start date for your new position is, Tuesday, June 1, 1999. The starting annual base salary for your new position is $175,000, paid on a semi-monthly basis. In addition to your base salary, you will also be eligible to participate in our 1999 Incentive Bonus Program with targeted pay out of 35%, of your base salary, prorated for your period of employment during the calendar year. As a part of your hiring agreement, you will receive guaranteed pay out of a minimum of 50% of your targeted bonus for your first year of employment. We do anticipate being able to offer you a new hire grant in the ScanSoft, Inc. Employee Stock Option Plan in the amount of 400,000 shares. The details of this grant will be provided to you when the grant is finalized. All new hire grants are subject to the approval of the Board of Directors. Additionally, your position, as CFO, is eligible for accelerated vesting of all options granted, per the ScanSoft, Inc. Vesting Agreement, in the event that there is a change of ownership or control of the company. Per the ScanSoft, Inc. Separation Policy, your position as Chief Financial Officer, would be provided with 6 (six) months' severance pay in the event that the position is eliminated due to a change of control of the business or ownership of the company. As a part of your hiring agreement, you are eligible for an additional 6 months of severance pay in the event that your position is severed for any reasons other than for Cause or Voluntary Resignation, during your first year of employment. Additionally, we understand that resigning your position with your current employer will require that you repay a signing bonus of $25,000. We would like to assist you with your repayment costs of up to 50% of the negotiated repayment amount; to a maximum of $12,500. As a full-time employee, you will be eligible for our comprehensive benefits package. You will also be eligible to participate in the 401(k) plan effective July 1, 1999. The enclosed material outlines all of our benefits to which you are entitled as a ScanSoft, Inc. employee. Please be advised that ScanSoft, Inc. is an employment-at-will employer and this offer is not to be construed as an employment contract. This offer is contingent upon your satisfying the conditions of hire, including providing proof of your eligibility to work in the United States. Please read it carefully and call me if you have any questions. April 29, 199 J. Rogers Offer Confirmation Letter Page Two We, at ScanSoft, Inc., are proud of our reputation and we feel confident that you will be a positive addition to the Senior Management Team and a strong financial leader for our organization. John, we are also confident that the CFO role will provide you with rewarding challenges and will afford you the opportunity to continue to grow your professional, financial and business skill sets. John, we would appreciate it if you would confirm your acceptance of our employment offer, by signing this offer confirmation letter, indicating your planned start date in the space provided, and returning it to my attention as soon as possible. If you have further questions regarding our offer, feel free to contact me at 978-977-2003. Further questions regarding new hire process or benefit programs should be directed to Candace Richter at 978-977-2106. I look forward to our working together and your joining the ScanSoft, Inc. organization. Sincerely, /s/ Michael K. Tivnan Michael K. Tivnan President /csr cc: Human Resources Enclosures/Forms: Employment Eligibility Verification Form, Benefits Summary, Proprietary Information and Conflict of Interest Agreement. I ACCEPT THE OFFER OF EMPLOYMENT AS STATED ABOVE: /S/ JOHN ROGERS, JR. - ------------------------------------- ---------------------------------- NEW HIRE SIGNATURE DATE OF ACCEPTANCE MY FULL TIME START DATE WILL BE: _____________________ EX-27.1 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the balance sheet, statement of income and statement of cash flows included in the Company's Form 10-Q for the six months ended June 30, 1999, and is qualified in its entirety by reference to such financial statements and the notes thereto. 1000 6-MOS DEC-31-1999 JAN-1-1999 JUN-30-1999 5,185 0 12,149 3,917 654 14,778 2,912 (2,030) 30,167 8,868 0 0 4 26 (684) 30,167 14,776 14,776 3,433 3,433 14,518 0 0 (3,101) 100 (3,201) 0 0 0 (3,201) (0.13) (0.13)
-----END PRIVACY-ENHANCED MESSAGE-----