10-Q 1 b39290sie10-q.txt SCANSOFT INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED MARCH 31, 2001 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 01960 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (978) 977-2000 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No 46,132,288 shares of the registrant's Common Stock, $0.001 par value, were outstanding as of April 30, 2001 2 SCANSOFT, INC. FORM 10-Q THREE MONTHS ENDED MARCH 31, 2001 INDEX
PAGE ---- PART I: FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) a) Consolidated Balance Sheets at March 31, 2001 and December 31, 2000.......................................... 3 b) Consolidated Statements of Operations for the three months ended March 31, 2001 and March 31, 2000........... 4 c) Consolidated Statements of Cash Flows for the three months ended March 31, 2001 and March 31, 2000........... 5 d) Notes to Consolidated Financial Statements................................................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................................... 15 PART II: OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders............................................................. 16 Item 6. Exhibits and Reports on Form 8-K................................................................................ 16 Signatures............................................................................................................... 17
2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS SCANSOFT, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) UNAUDITED ASSETS
MARCH 31, DECEMBER 31, 2001 2000 --------- ------------ Current Assets: Cash and cash equivalents .................................................................... $ 2,777 $ 2,571 Short-term investments ........................................................................ 62 62 Accounts receivable, less allowances of $6,126 and $7,375 ..................................... 5,559 8,314 Inventory ..................................................................................... 689 806 Prepaid expenses and other current assets ..................................................... 1,444 1,610 --------- --------- Total current assets ....................................................................... 10,531 13,363 Goodwill and other intangible assets, net ..................................................... 85,217 92,051 Property and equipment, net ................................................................... 2,359 2,954 Other assets .................................................................................. 945 1,112 --------- --------- TOTAL ASSETS ....................................................................................... $ 99,052 109,480 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Short term bank borrowings .................................................................... $ 2,575 $ 3,400 Accounts payable .............................................................................. 6,246 7,945 Accrued sales and marketing expenses .......................................................... 1,583 1,880 Other accrued expenses ........................................................................ 5,167 5,538 Deferred revenue .............................................................................. 902 1,084 --------- --------- Total current liabilities .................................................................. 16,473 19,847 --------- --------- Deferred revenue ................................................................................... 2,137 2,172 --------- --------- Stockholders' equity: Series B convertible preferred stock, $0.001 par value; 40,000,000 shares authorized; 3,562,238 issued and outstanding; liquidation preference $4,631 ....................................... 4,631 4,631 Common stock, $0.001 par value; 140,000,000 shares authorized; 46,132,288 and 46,072,748 shares issued and outstanding, Respectively ........................................................ 46 46 Additional paid-in capital, ................................................................... 219,322 219,259 Accumulated deficit ........................................................................... (143,282) (136,382) Accumulated other comprehensive income ........................................................ (275) (93) --------- --------- Total stockholders' equity ................................................................. 80,442 87,461 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ......................................................... $ 99,052 $ 109,480 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 3 4 SCANSOFT, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) UNAUDITED
THREE MONTHS ENDED MARCH 31, 2001 2000 -------- -------- Net revenue ............................................. $ 12,801 $ 7,415 Costs and expenses: Cost of revenue .................................... 2,890 2,441 Research and development ........................... 3,197 3,235 Selling, general and administrative ................ 6,586 5,437 Amortization of goodwill and other intangible assets 6,834 1,914 Acquired in-process research and development ....... -- 18,291 -------- -------- Total costs and expenses ................................ 19,507 31,318 Loss from operations .................................... (6,706) (23,903) Other income (expense), net ............................. (133) 35 -------- -------- Loss before income taxes ................................ (6,839) (23,868) Provision for income taxes .............................. 61 70 -------- -------- Net loss ................................................ $ (6,900) $(23,938) ======== ======== Net loss per share: basic and diluted ................... $ (0.15) $ (0.78) ======== ======== Weighted average common shares: basic and diluted ....... 46,100 30,529 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 4 5 SCANSOFT, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) UNAUDITED
THREE MONTHS ENDED MARCH 31, 2001 2000 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss .................................................................. $ (6,900) $(23,938) Adjustments to reconcile net loss to net cash provided by (used) in operating activities: Depreciation and amortization ...................................... 489 118 Accounts receivable allowances ..................................... (1,249) 4,471 Amortization of goodwill and other intangible assets ............... 6,834 1,914 Gain on sale of property and equipment ............................. (92) -- Write off of acquired in-process research and development .......... -- 18,291 Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable .............................................. 4,004 (2,690) Inventory ........................................................ 117 (613) Prepaid expenses and other assets ................................ 333 (229) Deferred revenue ................................................. (182) -- Accounts payable and accrued expenses ............................ (2,402) (488) -------- -------- Net cash provided by (used in) operating activities ....................... 952 (3,164) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment ......................... 344 -- Cash of business acquired, net of cash paid .......................... -- 1,419 Capital expenditures for property and equipment ...................... (146) (47) -------- -------- Net cash provided by investing activities ................................. 198 1,372 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: (Payments on) proceeds from short term bank borrowings ................ (825) 3,000 Payment of notes payable ............................................. -- (1,600) Proceeds from the issuance of common stock, net ...................... 63 446 -------- -------- Net cash (used in) provided by financing activities ....................... (762) 1,846 -------- -------- Effects of exchange rate changes on cash and cash equivalents ............. (182) -- Net increase in cash and cash equivalents ................................. 206 54 Cash and cash equivalents at beginning of period .......................... 2,571 5,162 -------- -------- Cash and cash equivalents at end of period ................................ $ 2,777 $ 5,216 ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 5 6 SCANSOFT, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) BASIS OF PRESENTATION: 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 March 31, 2001, and for the three months ended March 31, 2001 and 2000. 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 has been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The accompanying financial statements should be read in conjunction with the audited financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000 filed with the Securities and Exchange Commission on April 12, 2001. The results for the three months ended March 31, 2001, are not necessarily indicative of the results that may be expected for the year ending December 31, 2001, or any future period. On March 13, 2000, the company merged with Caere Corporation ("Caere"), a California-based digital imaging software company. The acquisition was accounted for under the purchase method of accounting and, accordingly, the results of operations of Caere and the fair market value of acquired assets and assumed liabilities have been included in the Company's financial statements as of the acquisition dates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates included in the financial statements are accounts receivable and sales allowances, inventory valuation, and the recoverability of intangible assets including goodwill. Actual results could differ from those estimates. Reclassifications Certain prior year financial statement amounts have been reclassified to conform with the current year presentation. BALANCE SHEET COMPONENTS: The following table summarizes key balance sheet components (in thousands):
MARCH 31, DECEMBER 31, 2001 2000 -------- ------------ Inventory: Raw materials................................................... $ 358 $ 324 Finished goods.................................................. 331 482 ------ ------- $ 689 $ 806 ====== ======= Other accrued expenses: Accrued compensation............................................ $ 884 $ 1,188 Accrued restructuring........................................... 1,230 1,428 Accrued royalties............................................... 630 650 Accrued professional fees....................................... 421 638 Accrued taxes and other......................................... 2,002 1,634 ------ ------- $5,167 $ 5,538 ====== =======
CAERE ACQUISITION: On March 13, 2000, the Company acquired all of the outstanding capital stock of Caere Corporation, a California-based company that designed, developed and marketed a range of optical character recognition software tools, for approximately $48.5 million in cash, 19.0 million shares of common stock of the Company valued at $98.5 million, and the issuance of stock options for the purchase 6 7 of approximately 4.6 million shares of the Company's common stock valued at $15.5 million, in exchange for outstanding employee stock options of Caere. The fair value of the employee stock options was estimated using the Black-Scholes option pricing model. In addition, pursuant to a concurrent non-competition agreement and subject to certain other conditions, the Company agreed to pay the former Caere President and CEO on the second anniversary of the merger, March 13, 2002, in cash, the difference between $13.50 and the closing price per share of ScanSoft common stock at that time, multiplied by the number of beneficial shares owned by the former executive. The value of this stock price guarantee at the date of acquisition was approximately $4.1 million and has been included in the total purchase price of the acquisition. The amount paid, if any, will be recorded as a reduction in additional paid-in capital. Additionally, in conjunction with the acquisition, the Company incurred approximately $1.8 million of acquisition related costs. The purchase price of Caere, including acquisition costs was allocated as follows (in thousands): Property and equipment..................................................... $ 2,865 Current and other tangible assets.......................................... 58,400 Liabilities assumed........................................................ (16,985) Goodwill................................................................... 61,095 Core technology............................................................ 17,905 Developed technology....................................................... 16,340 Other identified intangible assets......................................... 10,448 Acquired in-process research and development............................... 18,291 --------- $168,359 =========
Acquired in-process research and development represented development projects that had not yet reached technological feasibility and had no alternative future use. Accordingly, the amount of $18.3 million was charged to operations upon consummation of the acquisition. During the year ended December 31, 2000, the Company, as a result of its June 2000 restructuring, wrote-off the acquired workforce and $2,416,000 of the favorable building lease established as part of the identifiable intangible assets acquired from Caere. The portion of the assets impaired related directly to the number of employees terminated and facility space vacated in connection with this restructuring action. This acquisition has been accounted for under the purchase method of accounting. Accordingly, the results of operations of Caere and the fair market value of acquired assets and assumed liabilities have been included in the financial statements of the Company as of the date of acquisition. Pro forma Results The following table reflects the unaudited pro forma results of operations of the Company assuming that the acquisition of Caere had occurred on January 1, 2000 (in thousands, except per share data):
March 31, 2000 --------- Revenue......................................................................................... $ 13,462 Net loss........................................................................................ (17,253) Net loss per share.............................................................................. (0.38)
These unaudited pro forma results of operations do not include the write-off of acquired in-process research and development as this amount is non-recurring in nature. The unaudited pro forma results of operations are not necessarily indicative of the actual results that would have occurred had the transaction actually taken place at the beginning of the periods. RESTRUCTURING AND OTHER CHARGES: In connection with the acquisition of Caere in the first quarter of 2000, the Company identified 46 employees of Caere whose positions were eliminated upon consummation of the acquisition. These positions included 22 in research and development, 14 in general and administrative functions, and 10 in sales and marketing. Additionally, the Caere president and CEO position was eliminated. As a result, the Company established as part of the purchase price allocation, a restructuring reserve of $487,000 for severance payments to employees, and a restructuring reserve of $1,065,000 for severance to the Caere former president and CEO, the payments of which will continue through March 2005. 7 8 In June 2000, the Company implemented a restructuring plan to strategically refocus the Company and bring operating expenses in line with net revenues. The process included a review of all potentially redundant functions and facilities. As part of this process, the Company determined it would be more cost effective to eliminate duplicative activities being performed in Los Gatos, California through relocating certain of these efforts to Peabody, Massachusetts and Budapest, Hungary. These activities consisted primarily of research and development, marketing, customer support and general and administrative functions. As a result, the Company eliminated 65 employee positions including 29 in research and development, 13 in general and administrative functions and 23 in support and marketing. The Company recorded a restructuring charge in the amount of $1,069,000 for severance payments to these employees, and a restructuring charge of $397,000 for certain termination fees to be incurred as a result of exiting the Los Gatos facility. Additionally, the Company wrote-off $3,490,000 of net intangible assets acquired as part of the Caere acquisition including the acquired work force of $1,074,000 and the favorable building lease of $2,416,000, which were impaired as a result of the restructuring action. For the quarter ended March 31, 2001, the Company paid $248,000 in severance payments related to these restructuring actions. The remaining severance balance of $1,230,000 will be paid through March 2005 as it primarily relates to severance for the former Caere President and CEO. The following table sets forth the 2001 restructuring reserve activity (in thousands):
EMPLOYEE LEASE RESTRUCTURING AND OTHER CHARGES RESERVE RELATED EXIT TOTAL COSTS --------------------------------------------------------------------------------------------------- Balance at December 31, 2000 $1,428 $ 50 $ 1,478 Cash payments (248) (248) --------------------------------------------------------------------------------------------------- Balance at March 31, 2001 $1,180 $ 50 $ 1,230 ---------------------------------------------------------------------------------------------------
The following table sets forth the 2000 restructuring reserve activity (in thousands):
EMPLOYEE LEASE INTANGIBLE RESTRUCTURING AND OTHER CHARGES RESERVE RELATED EXIT ASSET TOTAL COSTS IMPAIRMENT --------------------------------------------------------------------------------------------------------------- Restructuring reserve provided in March 2000 acquisition $1,552 $ 1,552 Restructuring and other charges for June 2000 restructuring 1,069 $ 397 $ 3,490 4,956 Additional Restructuring charges for June 2000 restructuring 276 276 Reversal of excess restructuring charges related to June 2000 (73) (347) (420) restructuring Non-cash write-off (276) (3,490) (3,766) Cash payments made (1,120) (1,120) --------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 $1,428 $ 50 $ -- $ 1,478 ---------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE: Diluted net loss per share excludes the weighted average effect of options and warrants to purchase common stock as well as the conversion of Series B preferred stock, of 4,503,570 shares and 7,984,064 shares for the three months ended March 31, 2001 and 2000, respectively. These potential common shares were excluded from the calculation of diluted net loss per share as their inclusion would have been anti-dilutive for all periods presented. BANK LINE OF CREDIT: On March 14, 2000, the Company entered into a one year Credit Agreement (the "Agreement") with its primary financial institution for a $10,000,000 revolving loan (the "Credit Facility"). Borrowings under the Credit Facility bear interest at the prime rate plus one percent (9.0% at March 31, 2001). The maximum aggregate amount of borrowings outstanding at any one time was limited to the lesser of (a) $10,000,000 or (b) the Borrowing Base. The Borrowing Base was equal to fifty percent (50%) of eligible accounts receivables. As of June 12, 2000, the Agreement was amended to modify the total commitment by the bank from $10,000,000 to $5,000,000 and the Borrowing Base requirement was removed. As described below, the Credit Facility is limited to the amount 8 9 outstanding at March 31, 2001, of $2,575,000. Pursuant to the Agreement, the Company was bound by certain financial and non-financial covenants, including maintaining certain earnings levels and liquidity ratios, restrictions on dividends and capital expenditures. Borrowings under the Agreement are collateralized by substantially all of the Company's assets. On October 18, 2000, the Company amended the Agreement to waive all financial covenants until December 29, 2000. In conjunction with this amendment, the interest rate was increased by one percent to two percent per annum above the bank's prime rate (10.0% at March 31, 2001), and the Company agreed not to re-borrow amounts that had been repaid. As a result, the Credit Facility was fully utilized as of March 31, 2001. Additionally, the maturity date of the line of credit was extended from March 12, 2001 until September 30, 2001, and a payment schedule was agreed to. On December 28, 2000, the Credit Facility was further amended to establish financial covenants for the quarter ending December 31, 2000 and the first three quarters of 2001. As of March 31, 2001, the Company was in compliance with all covenants under the amended Credit Facility. COMPREHENSIVE LOSS Total comprehensive loss, net of taxes, was approximately $7,082,000 and $24,002,000 for the three months ended March 31, 2001 and 2000, respectively, which consisted of net losses and the net changes in foreign currency translation adjustment. CONTINGENCIES As a normal incidence of the nature of the Company's business, various claims, charges and litigation have been asserted or commenced against the Company arising from or related to employee relations. Management does not believe these claims will have a material effect on the financial position or results of operations of the Company. SUBSEQUENT EVENTS On April 27, 2001, the Company announced that its largest institutional shareholder, the State of Wisconsin Investment Board (SWIB), had agreed to invest $5 million in the company in exchange for common stock. SWIB purchased an additional 4.76 million shares of ScanSoft common stock. As of December 31, 2000, SWIB owned 3.87 million shares, or approximately 8.4 percent of ScanSoft's outstanding common stock. The equity investment was completed on May 8, 2001. On May 10, 2001, the Company prepaid in full its remaining obligation on the Credit Facility, which included principle and interest amounting to $2,080,000. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS Certain statements made in this report as well as oral statements made by 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 statement, involve risks and uncertainties that could cause actual results to differ materially from those projected or anticipated. Such risks and uncertainties are outlined later in this document and should not be construed as exhaustive. 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. OVERVIEW ScanSoft, Inc. provides scanning and paper-to-digital solutions for individuals and workgroups. Our products are sold primarily through retail distributors or directly to retailers on a worldwide basis. On March 13, 2000, we merged with Caere Corporation, a California-based digital imaging software company. As a result, Caere became a wholly owned subsidiary of ScanSoft, continuing under the name Caere Corporation. As more fully discussed with-in, the Company undertook several restructuring actions during the first and second quarters of 2000 to align the two companies. Our success in the future will depend on our ability to maintain and improve software gross margins and to increase sales of our software products. This will depend in part on our ability and the ability of our distributors, resellers and OEM partners to convince end-users to adopt paper and image input systems for the desktop and to educate end-users about the benefits of our products. Since the Caere acquisition in the first quarter of 2000, we have experienced quarterly operating losses. There can be no assurance that we will be able to reach quarterly profitability or attain annual profitability in the near future. As of March 31, 2001, we had an accumulated deficit of $143.3 million. 10 11 RESULTS OF OPERATIONS The following table presents, as a percentage of net revenue, certain selected financial data for the quarters ended March 31, 2001 and 2000:
THREE MONTHS ENDED MARCH 31, 2001 2000 ------ ------ Net revenue: 100.0% 100.0% Costs and expenses: Cost of revenue 22.5% 32.9% Research and development 25.0% 43.6% Selling, general and administrative 51.5% 73.3% Amortization of goodwill and other intangible assets 53.4% 25.8% Acquired in-process research and development 0.0% 246.7% ------ ------ Total costs and expenses 152.4% 422.3% ------ ------ Loss from operations (52.4%) (322.4%) Other income (expense), net (1.0%) 0.5% ------ ------ Loss before income taxes (53.4%) (321.9%) Provision for income taxes (0.5%) (0.9%) ------ ------ Net loss (53.9%) (322.8%) ------ ------
REVENUE Net revenue of $12.8 million for the three months ended March 31, 2001 increased by $5.4 million or 73%, from the same period in 2000. Revenue growth came primarily from the Company's paper management products and European operations. Additional revenue growth came from the OCR products acquired as part of the Care acquisition, which was completed on March 13, 2000. The revenue split was 77% North America and 23% European versus 87% and 13%, respectively for the comparable period ending March 31, 2000. The increase in European revenue was attributed to the Caere acquisition completed on March 13, 2000. As part of the Caere acquisition the Company acquired four European offices. The breakdown of recorded net revenue by channel in the first quarter of 2001 was 55% retail, 11% direct 29% OEM and 5% Corporate , this compared to 41% retail, 14% direct, 44% OEM and 1% Corporate, for the same period in 2000. The respective increases and decreases quarter on quarter are related to increased revenue as a result of the full quarters revenue from the Caere acquisition being included in the quarter ended March 31, 2001. In terms of absolute dollars, revenue for each channel was up for the three months ended March 31, 2001 compared to the same period in 2000. Additionally, the increase in Corporate revenue is a result of additional sales resources being committed to Corporate multi-user license opportunities. We anticipate the revenue mix for the remainder of the year to be roughly consistent with the current quarter. COST OF REVENUE Cost of revenue consists primarily of material costs, third party royalties, fulfillment, and salaries for product support personnel. Cost of revenue in the first quarter of 2001 was $2.9 million or 23% of revenue, compared to $2.4 million or 33% of revenue in the first quarter of 2000. The decrease as a percentage of revenue is directly attributed to the consolidation of our manufacturing fulfillment activities and cost savings initiatives we introduced in the second quarter of 2000. The increase in cost of revenue of $0.5 million for the three months ended March 31, 2001 was attributed to the increased revenue for the quarter ended March 31, 2001, offset by the cost benefits noted above. We anticipate cost of revenue as a percentage of revenue to remain consistent for the remainder of the year. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses consist primarily of salary and benefit costs of engineers. Research and development costs were $3.2 million for the first quarter of both 2001 and 2000, or 25% and 44% of revenue, respectively. The decrease in research and development as a percent of revenue is directly attributable to increased revenues. Research and development expenses for the three months ended March 31, 2001, reflect the full impact of the Caere acquisition, and the restructuring and cost savings activities 11 12 undertaken in the first and second quarters of 2000, which was offset by additional investments made in our Budapest, Hungary development center. We anticipate research and developement expenses for the remainder of the year to decrease as a percent of revenue as expenses are projected to grow more slowly than revenue. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling expenses include salaries, commissions, advertising, direct mail, public relations, trade shows, travel and other related sales and marketing expenses. General and administrative expenses include personnel costs for administration, finance, human resources, information systems, and general management in addition to legal and accounting expenses and other professional services. Selling, general and administrative expenses during the first quarter of 2001 and 2000 were $6.6 million and $5.4 million, respectively or 51% and 73% of revenue respectively, an increase of $1.2 million from the same period reported in 2000. The increase in expense is due to the full impact of the Caere acquisition which was offset by restructuring and cost savings activities undertaken in the first and second quarters of 2000. These reductions were offset by the addition of 10 sales representatives during the first quarter of 2001. For the period ended March 31, 2000, the Caere sales and marketing organization was only included from March 13, 2000, the date of the Caere acquisition. We anticipate selling, general and administrative expenses for the remainder of the year to decline as a percent of revenues as expenses are projected to grow more slowly than revenue. OTHER COSTS AND EXPENSES RESTRUCTURING AND OTHER CHARGES: In connection with the acquisition of Caere in the first quarter of 2000, the Company identified 46 employees of Caere whose positions were eliminated upon consummation of the acquisition. These positions included 22 in research and development, 14 in general and administrative functions, and 10 in sales and marketing. Additionally, the Caere president and CEO position was eliminated. As a result, the Company established as part of the purchase price allocation, a restructuring reserve of $487,000 for severance payments to employees, and a restructuring reserve of $1,065,000 for severance to the Caere former president and CEO, the payments of which will continue through March 2005. In June 2000, the Company implemented a restructuring plan to strategically refocus the Company and bring operating expenses in line with net revenues. The process included a review of all potentially redundant functions and facilities. As part of this process, the Company determined it would be more cost effective to eliminate duplicative activities being performed in Los Gatos, California through relocating certain of these efforts to Peabody, Massachusetts and Budapest, Hungary. These activities consisted primarily of research and development, marketing, customer support and general and administrative functions. As a result, the Company eliminated 65 employee positions including 29 in research and development, 13 in general and administrative functions and 23 in support and marketing. The Company recorded a restructuring charge in the amount of $1,069,000 for severance payments to these employees, and a restructuring charge of $397,000 for certain termination fees to be incurred as a result of exiting the Los Gatos facility. Additionally, the Company wrote-off $3,490,000 of net intangible assets acquired as part of the Caere acquisition including the acquired work force of $1,074,000 and the favorable building lease of $2,416,000, which were impaired as a result of the restructuring action. For the quarter ended March 31, 2001, the Company paid $248,000 in severance payments related to these restructuring actions. The remaining severance balance of $1,230,000 will be paid through March 2005 as it primarily relates to severance for the former Caere President and CEO. AMORTIZATION OF IDENTIFIED INTANGIBLE ASSETS AND IN-PROCESS RESEARCH AND DEVELOPEMENT Amortization of intangible assets of $6.8 million and $1.9 million for the first quarter 2001 and 2000, respectively, reflects the amortization of intangible assets from the Caere acquisition and acquisitions completed in 1999. The useful lives of the intangible assets used for amortization range from three to seven years. The Company also recorded a write-off of acquired in-process research and development of $18.3 million during the first quarter of 2000. OTHER INCOME, NET 12 13 Other income (expense), net consists primarily of interest earned on cash and short-term investments offset by interest incurred for borrowings under credit facilities and exchange gains and losses. Other expense, net increased by $168,000 for the quarter ended March 31, 2001 to $133,000, as compared to other income of $35,000 during the same period in 2000. The increase was attributable to foreign exchange losses of $143,000 and interest expense of $129,000, offset by a $92,000 gain on the sale of property and equipment and interest income of $39,000. INCOME TAXES Tax provisions of $61,000 and $70,000 for the three months ended March 31, 2001 and 2000, respectively, represent taxes for foreign and state jurisdictions in which the Company does business and for which no net operating loss carryforwards are available. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2001, we had cash and short-term investments of $2.8 million and a working capital deficit of $5.9 million, as compared to $2.6 million in cash and short-term investments and a working capital deficit of $6.5 million at December 31, 2000. We generated $1.0 million of cash from our operating activities for the first quarter 2001, as compared to cash used for operations of $3.2 million for the same period in 2000. The cash generated from operations came primarily from decreased accounts receivables offset by lower accounts payable balances. Cash provided by investing activities during the first quarter of 2001 was $0.2 million as compared to $1.4 million for the same period in 2000. The $0.2 million consisted of $0.3 million from the sale of property and equipment offset by $0.1 million of capital assets acquired during the quarter. The first quarter 2000 included proceeds of $1.4 million of cash acquired in connection with the Caere acquisition. Cash used for financing activities during the first quarter of 2001 was $0.8 million as compared to $1.8 million provided from financing activities in 2000. During the quarter ending March 31, 2001, the Company made payments of $0.8 million on our line of credit. During the first quarter of 2000, the Company received proceeds of $3.0 million from our line of credit and paid $1.6 million of notes payable. Our principal sources of liquidity as of March 31, 2001 consisted of approximately $2.8 million of cash, cash equivalents and short-term investments. We have arranged a Credit Facility, as amended, for up to $5.0 million, subject to various borrowing constraints, which has been utilized. Pursuant to the Credit Facility, the Company is required to maintain certain financial and non-financial covenants, as defined, including certain earnings levels, liquidity ratios, and restrictions on dividends and capital expenditures. Borrowings under the facility are collateralized by substantially all of the Company's assets. On October 18, 2000, the Company amended the credit agreement. In conjunction with this amendment the interest rate was increased by one percent (1.0%) to two percent (2.0%) per annum above the Prime Rate (10.0% at March 31, 2001), and the Company agreed not to re-borrow amounts that had been repaid. As a result, the Credit Facility has been fully utilized as of March 31, 2001. Additionally, the maturity date of the line of credit was extended from March 12, 2001, to September 30, 2001, and a payment schedule was established. On December 28, 2000, the credit facility was further amended to establish financial covenants for the quarter ending December 31, 2000 and the first three quarters of 2001. As of March 31, 2001, the Company was in compliance with all covenants under the amended credit facility and owed $2.6 million on the line. In connection with the Caere acquisition, the Company entered into a non-competition and consulting agreement with the former Caere CEO. Under the terms of the agreement, the Company is obligated to pay the former CEO an amount in cash of up to $4.1 million on the second anniversary of the acquisition date, March 13, 2002, if the Company's stock price does not achieve a certain level during the two year period. The Company has sustained recurring losses and has working capital and accumulated deficits at March 31, 2001. Additionally, the Company has short-term borrowings that are due in full on September 31, 2001, with scheduled payments during each of the second and third quarters of 2001. Currently, the Company does not have any borrowing availability under its Credit Facility. Management believes that the actions taken in fiscal 2000, including restructuring actions and other cost reduction initiatives, have reduced operating expenses to levels which, in combination with expected future revenues, will result in continued positive cash flow. Therefore, management believes that cash flows from future operations in addition to cash on hand will be sufficient to meet the Company's obligations as they become due for the foreseeable future. Management also believes that, should revenue not achieve the 13 14 expected levels in 2001, it has the ability, and is committed, to reduce expenses further in order to continue to meet its obligations. Management is pursuing various actions in 2001, including potential equity financing and strategic alliances that may also provide additional liquidity. There can be no assurance that the Company will meet its planned operations, or will be able to reduce expenses quickly enough, or will be successful in obtaining equity financing or strategic alliances on terms favorable to the Company such that the Company will be able to meet its obligations as they become due in the foreseeable future. On May 8, 2001, the Company issued 4.76 million shares of its common stock to its largest institutional shareholder, the State of Wisconsin Investment Board, resulting in gross proceeds to the Company of $5.0 million. On May 10, 2001, the Company prepaid in full its remaining obligation on the Credit Facility, which included principle and interest amounting to $2,080,000. FOREIGN OPERATIONS As a result of the Caere acquisition, in March 2000, the Company significantly increased its presence in Europe. The Company conducts certain business transactions in the euro, and will change its functional currencies for the affected countries to the euro by the end of the three-year transition period. The conversion to the euro has not and is not expected to have a significant operational impact or a material financial impact on the results of operations, financial position, or the liquidity of the Company's European businesses. Changes in the value of the euro or other foreign currencies relative to the value of the U.S. dollar could adversely affect future revenues and operating results. Currently, the Company does not hedge any of its foreign-currency denominated transactions. FACTORS THAT MAY AFFECT FUTURE RESULTS The Company's business operates in an intensely competitive environment and operations are subject to risks and uncertainties. Such risks and uncertainties include, but are not limited to (1) the loss of, or a significant curtailment of, purchases by any one or more principal customers; (2) the cyclicality of the retail software industry; (3) inability to protect the Company's proprietary technology and intellectual property; (4) the inability to attract or retain skilled employees; (5) technological obsolescence of current products and the inability to develop new products; (6) the inability to respond to competitive technology and competitive pricing pressures; (7) quarterly operating results that fluctuate and differ materially from one quarter to the next which could have an impact on the Company's stock price. There can be no assurance that cash generated by operations will be sufficient to satisfy our liquidity requirements, and we may be required to sell additional equity or debt securities, or increase or obtain additional lines of credit. The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders. It may be difficult to sell additional equity or obtain debt financing, and this could result in significant constraints on the Company's ongoing investments to grow revenue and develop new products. For further discussion regarding these and other risks, refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2000 filed with the Securities and Exchange Commission on April 12, 2001. 14 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We develop our products in the United States and Hungary. We sell our products globally, primarily through an indirect reseller channel. As a result, our financial results are affected by factors such as changes in foreign currency exchange rates and weak economic conditions in foreign markets. We collect a portion of our revenue and pay a portion of our operating expenses in foreign currencies. As a result, changes in currency exchange rates from time to time may affect our operating results. Currently, we do not engage in hedging transactions to reduce our exposure to changes in currency exchange rates, although we may do so in the future. 15 16 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits The exhibits listed on the Exhibit Index hereto are filed or incorporated by reference (as stated therein) as part of this report on Form 10-Q. (b) Reports on Form 8-K None. 16 17 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 May 11, 2001. SCANSOFT, INC. By: /s/ GERALD C. KENT JR. ----------------------------- Gerald C. Kent, Jr. Chief Accounting Officer And Corporate Controller 17 18 EXHIBIT INDEX Exhibits (numbered in accordance with Item 601 of Regulation S-K)
EXHIBIT NO. DESCRIPTION OF EXHIBITS ---------- ----------------------- 2.1(1) Agreement and Plan of Merger dated December 2, 1998, between Visioneer, Inc., a Delaware corporation, and ScanSoft, Inc., a Delaware corporation. 2.2(2) Agreement and Plan of Reorganization, dated January 15, 2000, by and among ScanSoft, Inc., a Delaware corporation, Scorpion Acquisitions Corporation, a Delaware corporation and a wholly-owned subsidiary of ScanSoft, and Caere Corporation, a Delaware corporation. 3.1(3) Bylaws of Registrant. 3.2 Amended and Restated Certificate of Incorporation of Registrant. 4.1(4) Specimen Common Stock Certificate. 4.2(5) Preferred Shares Rights Agreement, dated as of October 23, 1996, between the Registrant and U.S. Stock Transfer Corporation, including the Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock, the form of Rights Certificate and Summary of Rights attached thereto as Exhibits A, B and C, respectively. 4.3(1) Common Stock Purchase Warrant. 4.4(1) Registration Rights Agreement, dated March 2, 1999, between the Registrant and Xerox Corporation.
---------- (1) Incorporated by reference from the Registrant's Registration Statement on Form S-4 (No. 333-70603) filed with the Commission on January 14, 1999. (2) Incorporated by reference from the Registrant's Registration Statement on Form S-4 (No. 333-96487) filed with the Commission on February 9, 2000. (3) Incorporated by reference from the Registrant's Registration Statement on Form S-1 (No. 333-98356) filed with the Commission on October 19, 1995. (4) Incorporated by reference from the Registrant's Registration Statement on Form S-1 (No. 33-98356) filed with the Commission on October 19, 1995. (5) Incorporated by reference from the Registrant's current Report on Form 8-K dated October 31, 1996. 18