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UNITED STATES SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT #1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JANUARY 30, 2003.
SCANSOFT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 000-27038 94-3156479
(State or other jurisdiction of (Commission (IRS Employer
incorporation) File Number) Identification No.)
9 CENTENNIAL DRIVE
PEABODY, MASSACHUSETTS 01960
---------------------
Address of principal executive offices
(978) 977-2000
---------------------
Registrant's telephone number, including area code
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On February 14, 2003, ScanSoft, Inc. (the "Registrant") filed a report on
Form 8-K with respect to the January 30, 2003 acquisition of the Speech
Processing Telephony and Voice Control business units (the "Business") from
Royal Philips Electronics N.V., a limited liability company organized under the
laws of the Netherlands ("Philips"). At that time, the Registrant stated in such
Form 8-K that it intended to file the required financial statements and pro
forma financial information within 60 days from the date of that filing. By this
amendment to such Form 8-K, the Registrant is amending and restating Item 7
thereof to include the required financial statements and pro forma financial
information.
2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired.
The following financial statements of the Business are filed with this
report:
PAGE
----
Report of Independent Auditors.............................. 5
Combined Balance Sheets as of December 31, 2001 and
September 29, 2002........................................ 6
Combined Statements of Operations and Comprehensive Loss for
the year ended December 31, 2001 and the nine-month period
ended September 29, 2002.................................. 7
Changes in the Net Investment of the Philips Group for the
year ended December 31, 2001 and the nine-month period
ended September 29, 2002.................................. 8
Combined Statements of Cash Flows for the year ended
December 31, 2001 and the nine-month period ended
September 29, 2002........................................ 9
Notes to Combined Financial Statements...................... 10
(b) Pro Forma Financial Information.
The following unaudited pro forma combined financial statements are filed
with this report:
PAGE
----
Introduction to Unaudited Pro Forma Combined Financial
Statements................................................ 27
Unaudited Pro Forma Combined Balance Sheet as of September
30, 2002.................................................. 28
Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 2001.............................. 29
Unaudited Pro Forma Combined Statement of Operations for the
Nine
Months Ended September 30, 2002........................... 30
Notes to Unaudited Pro Forma Combined Financial
Statements................................................ 31
(C) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1(1) Purchase Agreement, dated as of October 7, 2002, by and
between Koninklijke Philips Electronics N.V., a limited
liability company organized under the laws of The
Netherlands, and ScanSoft, Inc.
2.2(2) Amendment No. 1, dated as of December 20, 2002, to Purchase
Agreement, dated as of October 7, 2002, by and between
Koninklijke Philips Electronics N.V., a limited liability
company organized under the laws of The Netherlands, and
ScanSoft, Inc.
2.3(3) Amendment No. 2, dated as of January 29, 2003, to Purchase
Agreement, dated as of October 7, 2002, by and between
Koninklijke Philips Electronics N.V., a limited liability
company organized under the laws of The Netherlands, and
ScanSoft, Inc.
23.1 Consent of KPMG Accountants N.V.
99.1# Press Release as of January 30, 2003.
---------------
# Previously filed.
(1) Incorporated by reference from Exhibit 2.4 of the Company's Amendment No. 2
to Registration Statement on Form S-1 (No. 333-100647) filed with the
Securities and Exchange Commission on January 6, 2003.
(2) Incorporated by reference from Exhibit 2.5 of the Company's Amendment No. 4
to Registration Statement on Form S-1 (No. 333-100647) filed with the
Securities and Exchange Commission on February 7, 2003.
(3) Incorporated by reference from Exhibit 2.6 of the Company's Amendment No. 4
to Registration Statement on Form S-1 (No. 333-100647) filed with the
Securities and Exchange Commission on February 7, 2003.
3
ITEM 7(a). FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
4
INDEPENDENT AUDITORS' REPORT
The Supervisory Board of Royal Philips Electronics N.V.
We have audited the accompanying combined balance sheets of Philips Speech
Processing Telephony and Voice Control (A division of Royal Philips Electronics
N.V.) as of December 31, 2001 and September 29, 2002, and the related combined
statements of operations and comprehensive loss, changes in the net investment
of the Philips Group, and cash flows for the year ended December 31, 2001 and
the nine-month period ended September 29, 2002. These combined financial
statements are the responsibility of Philips Speech Processing Telephony and
Voice Control's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Philips Speech
Processing Telephony and Voice Control (A division of Royal Philips Electronics
N.V.) as of December 31, 2001 and September 29, 2002, and the results of its
operations and its cash flows for the year ended December 31, 2001 and the
nine-month period ended September 29, 2002, in conformity with generally
accepted accounting principles in the United States of America.
/s/ KPMG ACCOUNTANTS N.V.
Eindhoven, The Netherlands
November 15, 2002
5
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
COMBINED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 29,
2001 2002
------------ -------------
IN THOUSANDS OF EURO'S
ASSETS
CURRENTS ASSETS:
Cash...................................................... 23 12
Accounts receivable, net (Notes 3 and 16)................. 3,036 4,580
Receivables from related parties (Note 13)................ 512 724
Inventory, net (Note 4)................................... 662 773
Deferred income taxes (Notes 9 and 13).................... 25 0
Other current assets (Note 5)............................. 240 618
TOTAL CURRENT ASSETS........................................ 4,498 6,707
------ -----
Property, plant and equipment, net (Notes 6 and 15)......... 521 388
Intangible assets, net (Note 7)............................. 184 135
------ -----
TOTAL ASSETS................................................ 5,203 7,230
====== =====
LIABILITIES AND NET INVESTMENT OF THE PHILIPS GROUP
CURRENT LIABILITIES:
Accounts payable.......................................... 850 672
Deferred income........................................... 1,481 1,141
Payables to related parties (Note 13)..................... 1,541 2,023
Deferred income tax liability (Notes 9 and 13)............ 17 17
Other accrued liabilities (Note 8)........................ 2,153 2,349
TOTAL CURRENT LIABILITIES................................... 6,042 6,202
------ -----
Long-term provisions (Note 10).............................. 269 338
TOTAL LIABILITIES........................................... 6,311 6,540
------ -----
Commitments and contingencies (Note 14)
NET INVESTMENT OF THE PHILIPS GROUP......................... (1,108) 690
TOTAL LIABILITIES AND NET INVESTMENT OF THE PHILIPS GROUP... 5,203 7,230
====== =====
The accompanying notes are an integral part of these combined financial
statements.
6
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 29,
2001 2002
------------ -----------------
IN THOUSANDS OF EURO'S
Revenue, third parties...................................... 15,801 12,548
Revenue, related parties.................................... 2,890 389
------- ------
Total revenue............................................. 18,691 12,937
------- ------
Cost of sales............................................... 3,288 1,731
GROSS PROFIT................................................ 15,403 11,206
------- ------
Operating expenses:
Selling and marketing..................................... 15,066 8,581
Research and development (Note 13)........................ 13,512 7,874
General and administrative (Note 13)...................... 3,877 2,935
Total operating expenses.................................... 32,455 19,390
OPERATING LOSS.............................................. (17,052) (8,184)
Interest revenue, net (Note 13)............................. 2 6
LOSS BEFORE INCOME TAXES.................................... (17,050) (8,178)
Income tax benefit (Note 9)................................. 1,364 245
NET LOSS.................................................... (15,686) (7,933)
======= ======
Components of other comprehensive income:
Foreign currency translation adjustments.................. 58 (95)
COMPREHENSIVE LOSS.......................................... (15,628) (8,028)
======= ======
The accompanying notes are an integral part of these combined financial
statements.
7
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
CHANGES IN THE NET INVESTMENT OF THE PHILIPS GROUP
NET INVESTMENT OF THE
PHILIPS GROUP
---------------------
IN THOUSANDS OF
EURO'S
BALANCE DECEMBER 31, 2000................................... 972
Net cash transfer from Philips.............................. 13,548
Components of comprehensive income:
Net loss.................................................. (15,686)
Foreign currency translation adjustments.................. 58
BALANCE DECEMBER 31, 2001................................... (1,108)
Net cash transfer from Philips.............................. 9,826
Components of comprehensive income:
Net loss.................................................. (7,933)
Foreign currency translation adjustments.................. (95)
BALANCE SEPTEMBER 29, 2002.................................. 690
The accompanying notes are an integral part of these combined financial
statements
8
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 29,
2001 2002
------------ -----------------
IN THOUSANDS OF EURO'S
Cash flows from operating activities:
Net loss.................................................... (15,686) (7,933)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Deferred taxation......................................... (1,260) 25
Depreciation and amortization............................. 607 266
Change in assets and liabilities:
Accounts receivable, net............................... 1,033 (1,544)
Related parties, net................................... 2 270
Inventory, net......................................... 851 (111)
Other current assets................................... 207 (378)
Accounts payable....................................... (69) (178)
Deferred income and other accrued liabilities.......... (30) (144)
Long-term provisions................................... 85 69
Effect of exchange rate changes............................. (38) (6)
NET CASH USED IN OPERATING ACTIVITIES....................... (14,298) (9,664)
Cash flows from investing activities:
Purchases of property, plant and equipment................ (201) (84)
NET CASH USED IN INVESTING ACTIVITIES....................... (201) (84)
Cash flows from financing activities:
Net cash transferred from Philips......................... 13,606 9,731
Effect of exchange rate changes............................. 4 (59)
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 13,610 9,672
Effect of exchange rate changes............................. 34 65
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (855) (11)
Cash and cash equivalents, beginning of period.............. 878 23
Cash and cash equivalents, end of period.................... 23 12
Supplementary information:
Cash received from Philips for income taxes................. 9,897 105
Cash received from (paid to) Philips for interest........... (576) 2
The accompanying notes are an integral part of these combined financial
statements
9
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2001 AND SEPTEMBER 29, 2002
1. DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION
DESCRIPTION OF THE COMPANY
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL (PSP), a division of
Royal Philips Electronics N.V. (Philips and Philips Group) is active in the
field of speech processing technology. Starting from the traditional
tape-recorded dictation Philips in the past two decades has become a global
leader in the field of speech processing, offering a wide portfolio of
state-of-the-art products and technologies. Philips Speech Processing Telephony
is offering speech-enabled services including directory assistance, interactive
voice response and voice portal applications for enterprise customers, telephony
vendors and carriers. Philips Speech Processing Voice Control is operating on
the market for speech-enabled automotive and mobile products. It offers a
product portfolio including small footprint speech recognition engines for
embedded applications like voice controlled climate, navigation and
entertainment features within cars as well as voice dialing within mobile
phones. With presence in Aachen, Germany, Dallas, USA, and Taipei, Taiwan PSP is
able to cover the global market with products supporting more than 40 languages
and that can process a vocabulary of more than one million words.
Royal Philips Electronics N.V., the Netherlands, and ScanSoft, Inc., of
Peabody, MA, USA entered into a purchase agreement in which ScanSoft acquires
the business, employees and intellectual property of Philips Speech Processing
Telephony and Philips Speech Processing Voice Control. The transaction is
expected to close during the first quarter of 2003. See note 17 for additional
disclosure of the transaction.
BASIS OF PRESENTATION
The combined financial statements reflect the financial position, results
of operations, changes in net investment of the Philips Group, and cash flows of
the PSP business unit of Philips as if PSP had been a separate entity for all
periods presented. The combined financial statements have been prepared using
Philips' historical basis for PSP's assets and liabilities and results of
operations, which have been stated in conformity with accounting principles
generally accepted in the United States of America (U.S. GAAP). All significant
intercompany transactions and balances have been eliminated in preparation of
the combined financial statements.
Corporate overheads have been allocated to PSP from Philips at central,
regional and local levels for amounts, including directors remuneration,
marketing, management information systems, accounting and financial reporting,
treasury, human resources, legal, tax and security, based on the net sales of
PSP compared to the consolidated net sales of Philips. Management believes these
allocations are reasonable. However, the costs of these services charged to PSP
are not necessarily indicative of the costs that would have been incurred had
PSP operated as an entity independent of Philips, or as an autonomous public
company, for all periods presented.
PSP purchases components used in the production process, as well as
equipment and supplies under collective purchase agreements and purchase
conditions negotiated by Philips. Management believes that the benefits derived
from such agreements and conditions would unlikely have been obtained had PSP
been a stand-alone company.
The pension and other postretirement benefit costs attributable to PSP have
been based on the charge incurred by individual operations in respect of
specific plans of which employees of PSP are members. For the purposes of
presentation of the combined financial statements, the participation in the
Philips plans has been treated as participation in various multi-employer plans.
The charges included in the combined financial statements reflect the
arrangements of Philips and are therefore not necessarily indicative of the
10
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
pension and other postretirement benefit costs had PSP been a stand-alone
company. During the year ended December 31, 2001, PSP has benefited from
contribution holidays with respect to certain over-funded Philips pension plans.
During 2002 no contribution holidays existed anymore. Upon divestment, PSP will
not benefit from any contribution holidays, as the employees will no longer
participate in Philips' plans.
Because in the past PSP was not a separate legal group of companies or a
separate holding company within the Philips Group of companies, the proportion
of share capital and reserves attributable to PSP has been shown in the combined
balance sheets as part of the "Net investment of the Philips Group". For the
purpose of these combined financial statements, interest charge is calculated
based on the average rate of interest for long-term debt paid by Philips and the
average amount of net investment of the Philips Group invested in PSP during the
reporting periods, taking into account the debt-to-equity ratio reported by
Philips during the reporting periods. In addition, PSP has a number of
short-term balances with other Philips Group businesses. These balances arise
from trading transactions and services or other items and have been aggregated
on the combined balance sheets under the headings "Receivables from related
parties" and "Payables to related parties".
Historically, PSP's operations have been included in the combined income
tax returns filed by Philips in each of the countries where PSP is located
(country fiscal unity). Income tax expense in these combined financial
statements has been calculated on an as if separate tax return basis. The
current tax expense is assumed to be settled within the financial period
following the period in which it arises. Tax effects that may arise from PSP's
divestment from the Philips Group have not been reflected in PSP's combined
financial statements.
Other significant features of the PSP divestment from Philips are described
in Note 17.
The financial information included herein is not necessarily indicative of
the combined results of operations, financial position, changes in the net
investment of the Philips Group and cash flows of PSP in the future or what they
would have been for the periods presented had PSP been a separate stand-alone
entity.
REPORTING CURRENCY
The Euro is used as reporting currency. The financial statements of foreign
operations are translated into euros. Assets and liabilities are translated
using the exchange rates on the respective balance sheet dates. Income and
expense items are translated at average rates during the period.
2. SUMMARY OF ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Historically, Philips manages cash and cash equivalents on a centralized
basis. Cash receipts associated with PSP's business are transferred to Philips
on a daily basis and Philips funds PSP's disbursements. These cash transactions
are reflected in the caption "Net investment of the Philips Group". In certain
countries, however, PSP has dedicated bank accounts, operating under periodic
cash pooling with Philips. Furthermore, PSP entities have small amounts of petty
cash.
11
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS RECEIVABLE
Accounts receivables are stated at face value, net of allowances for
doubtful accounts.
INVENTORY
Finished goods inventories are valued at the lower of cost, as determined
by the first-in, first-out (FIFO) method, or net realizable value. Provision is
made for obsolescence. Work in process comprises deferred costs on uncompleted
contracts.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is calculated using the straight-line method over the
expected economic life of the asset. Costs related to maintenance activities are
expensed in the period in which they are incurred. Following are the expected
useful lives of the assets:
Machines and installations.................................. from 5 to 10 years
Other fixed assets.......................................... from 3 to 5 years
INTANGIBLE ASSETS
Intangible assets consists of acquired intellectual property rights
consisting of computer software for resale, which is being amortized on the
straight-line method over 5 years.
IMPAIRMENT OF LONG-LIVED ASSETS
Through December 31, 2001, PSP evaluated the recoverability of its
long-lived assets in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of". Whenever adverse events or changes in
business climate result in the expected undiscounted future cash flows from the
related asset being less than the carrying value of the asset, an impairment
loss would be recognized for the excess of the carrying value of the assets over
the expected discounted future cash flows.
On January 1, 2002, PSP adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 amends existing
guidance on asset impairment and provides a single accounting model for
long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for
classifying an asset as held-for-sale; and broadens the scope of businesses to
be disposed of that qualify for reporting as discontinued operations, and
changes the timing of recognizing losses on such operations. The adoption of
SFAS No. 144 on January 1, 2002 did not have an impact on the Company's combined
financial statements.
INCOME TAXES
Historically, PSP's operations have been included in the combined income
tax returns filed by Philips in each of the countries where PSP is located
(country fiscal unity). Income tax expense in these combined financial
statements has been calculated on an as if separate tax return basis.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
12
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets, including assets arising from
loss carry forwards, are recognized if it is more likely than not that the asset
will be realized.
REVENUE RECOGNITION
PSP recognizes revenue in accordance with Statement of Position 97-2,
Software Revenue Recognition, as amended by Statement of Position 98-9, and the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101 Revenue
Recognition in Financial Statements. Revenue from the sale of hardware and
software to end users is recognized upon delivery, provided that no significant
obligations remain, evidence of the arrangement exists, the fees are fixed or
determinable, and collectibility of the related receivable is reasonably
assured.
Revenue from royalties on sales of PSP's products by original equipment
manufacturers to third parties is recognized upon delivery to the third party
when such information is available, or when notified by the reseller that such
royalties are due as a result of a sale, provided that collectibility of the
related receivable is reasonably assured. Revenue from maintenance contracts is
recognized ratably over the contract term.
Revenue from development of custom software is recognized on a completed
contract basis. Accordingly, all project costs and progress payments are
deferred until the project is complete. Any anticipated losses are recognized
immediately.
RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Under SFAS No. 86 "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed", costs incurred in the research and
development of software products are expensed as incurred until technological
feasibility has been established. Once established, these costs would be
capitalized. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs requires considerable judgment
by management with respect to certain external factors, including, but not
limited to, anticipated future gross product revenues, estimated economic life
and changes in software and hardware technologies. In the year ended December
31, 2001 and the nine-month period ended September 29, 2002, costs eligible for
capitalization were not material.
PENSION AND OTHER POSTRETIREMENT BENEFITS
PSP accounts for the cost of pension plans and postretirement benefits
other than pensions in accordance with SFAS No. 87, "Employers Accounting for
Pensions" and SFAS No. 106, "Employers Accounting for Postretirement Benefits
Other Than Pensions", respectively. These plans are generally part of pension
and postretirement benefit plans within Philips, and are accounted for by PSP as
multi-employer plans.
STOCK-BASED COMPENSATION
PSP applies SFAS No. 123, "Accounting for Stock-Based Compensation", which
allows companies which have stock-based compensation arrangements with employees
to continue to apply the existing accounting required by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and to
provide pro forma disclosure of the accounting results of applying the fair
value method of SFAS No. 123. PSP accounts for stock-based compensation
arrangements (related to
13
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Philips stock options granted to PSP employees) under the intrinsic value method
of APB Opinion No. 25.
USE OF ESTIMATES
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect reported amounts in the
financial statements and the accompanying notes. While management bases its
assumptions and estimates on the facts and circumstances known at the balance
sheet date, actual results could materially differ from those estimates.
ACCOUNTING STANDARDS NOT YET ADOPTED
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No.
143 requires PSP to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development and/or normal use of the assets. PSP also records a
corresponding asset, which is depreciated over the life of the asset. Subsequent
to the initial measurement of the asset retirement obligation, the obligation
will be adjusted at the end of each period to reflect the passage of time and
changes in the estimated future cash flows underlying the obligation. PSP is
required to adopt SFAS No. 143 on January 1, 2003. PSP believes that the
adoption of SFAS No. 143 will not have a material impact on its financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(SFAS No. 145). SFAS No. 145 provides for the rescission of several previously
issued accounting standards, new accounting guidance for the accounting for
certain lease modifications and various technical corrections to existing
pronouncements that are not substantive in nature. SFAS No. 145 will be adopted
on January 1, 2003, except for the provisions relating to the amendment of SFAS
No. 13, "Accounting for Leases", which will be adopted as required for
transactions occurring subsequent to May 15, 2002. PSP believes that the
adoption of SFAS No. 145 will not have a material impact on its financial
statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" (SFAS No. 146). SFAS No. 146 addresses significant issues
regarding the recognition, measurement and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". The scope of
SFAS No. 146 also includes (1) costs related to terminating a contract that is
not a capital lease, and (2) termination benefits that employees who are
involuntarily terminated receive under the terms of a one-time benefit
arrangement that is not an ongoing benefit arrangement or an individual deferred
compensation contract. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. PSP believes that the
adoption of SFAS No. 146 will not have a material impact on its financial
statements.
14
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
DECEMBER 31, SEPTEMBER 29,
2001 2002
------------ -------------
IN THOUSANDS OF EURO'S
Trade accounts receivable................................... 4,503 5,751
Allowance for doubtful accounts............................. (1,467) (1,171)
Total accounts receivable, net.............................. 3,036 4,580
4. INVENTORY
Inventory consisted of the following:
DECEMBER 31, SEPTEMBER 29,
2001 2002
------------ -------------
IN THOUSANDS OF EURO'S
Work in process............................................. 606 568
Finished goods.............................................. 225 235
Allowance for obsolescence.................................. (169) (30)
Total inventory, net........................................ 662 773
5. OTHER CURRENT ASSETS
Other current assets consisted of the following:
DECEMBER 31, SEPTEMBER 29,
2001 2002
------------ -------------
IN THOUSANDS OF EURO'S
Royalties receivable........................................ 22 418
Prepaid expenses and sundry receivables..................... 218 200
Total Other current assets.................................. 240 618
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31, SEPTEMBER 29,
2001 2002
------------ -------------
IN THOUSANDS OF EURO'S
Machines and installations.................................. 1,374 1,243
Other fixed assets.......................................... 3,730 3,805
Accumulated depreciation.................................... (4,583) (4,660)
Total property, plant and equipment, net.................... 521 388
15
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INTANGIBLE ASSETS
Intangible assets consisted of the following:
DECEMBER 31, SEPTEMBER 29,
2001 2002
------------ -------------
IN THOUSANDS OF EURO'S
Computer software for resale, gross......................... 230 208
Accumulated amortisation.................................... (46) (73)
Intangible asset, net....................................... 184 135
Amortization of computer software costs was E46 thousand and E27 thousand
for the year ended December 31, 2001 and the nine-month period ended September
29, 2002, respectively. The estimated amortisation expense for the next three
years is E36 thousand per year.
8. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
DECEMBER 31, SEPTEMBER 29,
2001 2002
------------ -------------
IN THOUSANDS OF EURO'S
Salaries and wages, holiday allowance, year-end payment..... 1,245 1,376
Accrued holiday rights...................................... 335 377
Obligation towards former stock holders..................... 196 177
Accrued sales tax........................................... 56 49
Accrued commercial costs.................................... 83 92
Others...................................................... 238 278
Total other accrued liabilities............................. 2,153 2,349
9. INCOME TAXES
Historically, PSP's operations have been included in the combined income
tax returns filed by Philips in each of the countries where PSP is located
(country fiscal unity). The income tax expense reported and the determination of
deferred tax assets to be realized in PSP's combined financial statements is
based on an as if separate tax return basis.
The following table presents the principal reasons for the difference
between the effective income tax rate and statutory income tax rate in the
Netherlands:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 2001 SEPTEMBER 29, 2002
----------------- ------------------
IN PERCENTAGES
Statutory income tax rate in the Netherlands........ 35% 35%
Foreign rate differentials.......................... 4% 3%
Change in valuation allowance....................... (31)% (34)%
Others.............................................. 0% (1)%
Effective income tax rate........................... 8% 3%
16
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The income tax expense is as follows:
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 2001 SEPTEMBER 29, 2002
----------------- ------------------
IN THOUSANDS OF EURO'S
Income (loss) before income taxes:
The Netherlands................................... 0 0
Foreign........................................... (17,050) (8,178)
Income tax benefit (expense):
Current taxes
The Netherlands................................... 0 0
Foreign........................................... 105 270
Deferred taxes
The Netherlands................................... 0 0
Foreign........................................... 1,259 (25)
Income tax benefit.................................. 1,364 245
The sources of differences between the financial accounting and tax basis
of PSP's assets and liabilities that give rise to the net deferred tax assets
are as follows:
DECEMBER 31, SEPTEMBER 29,
2001 2002
------------ -------------
IN THOUSANDS OF EURO'S
Deferred tax assets:
Doubtful accounts......................................... 84 76
Accrued compensation...................................... 131 194
Taxes other than income taxes............................. 84 20
Jubilee provision......................................... 19 21
Others.................................................... 174 144
Property, plant and equipment............................. 110 92
Net operating losses...................................... 29,436 31,330
TOTAL GROSS DEFERRED TAX ASSETS............................. 30,038 31,877
Valuation allowance......................................... (29,978) (31,842)
NET DEFERRED TAX ASSETS..................................... 60 35
Deferred tax liabilities:
Fixed assets.............................................. 27 27
Accruals.................................................. 17 17
Others.................................................... 8 8
TOTAL GROSS DEFERRED LIABILITIES............................ 52 52
NET DEFERRED TAX ASSETS (LIABILITIES)....................... 8 (17)
Based upon an as if separate tax return basis, as at September 29, 2002 PSP
has incurred E22.1 million of operating loss carry forwards expiring at various
dates through 2022 and E56.8 million of operating loss carry forwards with no
expiration date.
17
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The valuation allowance for deferred tax assets as of December 31, 2001 and
September 29, 2002 was E30.0 million and E31.8 million, respectively. The net
change in total valuation allowance for the year ended December 31, 2001 and the
nine-month period ended September 29, 2002 was an increase of E4.1 million and
E1.8 million, respectively. In assessing the realizability of deferred tax
assets, PSP considers whether it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The ultimate realization of
deferred tax assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become deductible. PSP
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not that PSP will realize the benefits of those
deductible differences for which a valuation allowance has not been recorded.
10. LONG-TERM PROVISIONS
Long-term provisions consisted of the following:
DECEMBER 31, SEPTEMBER 29,
2001 2002
------------ -------------
IN THOUSANDS OF EURO'S
Provision for pensions...................................... 199 265
Provision for jubilee benefit obligations................... 70 73
Total long-term provisions.................................. 269 338
11. PENSION AND OTHER POST RETIREMENT COSTS
Employees of PSP participate in various defined benefit and defined
contribution pension plans of the Philips Group. For the purposes of the
preparation of these combined financial statements, PSP's participation in the
Philips plans has been treated as participation in various multi-employer plans.
Accordingly, the charges included in the combined financial statements may not
be indicative of the pension and other post retirement costs had PSP been a
stand alone entity.
Pension premium charged for the year ended December 31, 2001 and the
nine-month period ended September 29, 2002 were E86 thousand and E102 thousand,
respectively.
In addition to receiving pension benefits, PSP employees in certain
countries participate in other postretirement benefit plans of the Philips
Group. These other postretirement benefits under SFAS No. 106 are recorded at
the country central level and charged out to the various local entities as part
of human resource overhead (surcharge on salaries paid). The charge to PSP is
approximately E13 thousand and E32 thousand for the year ended December 31, 2001
and the nine-month period ended September 29, 2002, respectively.
12. EQUITY INCENTIVE PLANS
EXISTING PHILIPS INCENTIVE PLANS
Philips has granted stock options on its ordinary shares to members of
PSP's management and certain key employees under either a Euro (EUR) denominated
plan or a United States Dollar (USD) denominated plan. Under Philips' plans,
options are granted with an exercise price equal to the fair market value of the
underlying ordinary shares on the date of grant. Options are subject to vesting
periods typically of three years and expirations of five or ten years. A limited
number of options have also been
18
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
granted under variable plans, subject to achievement of certain financial
objectives during multi-year performance cycles. Exercise of all options is
restricted by Philips' rules on insider trading.
STOCK-BASED COMPENSATION
Pro forma net income information, as required by SFAS No. 123, has been
determined as if PSP had accounted for employee share options granted to PSP's
employees by Philips under SFAS No. 123's fair value method. The pro forma
amounts below are not necessarily representative of the effects of share-based
awards on future net income because the plans eventually adopted by PSP after
divestment from Philips may differ from Philips share options plans. Accordingly
future grants of employee stock options to PSP's employees may not be comparable
to awards made to employees while PSP was a part of Philips.
The pro forma effect of recognizing compensation expense in accordance with
SFAS No. 123 would have been as follows:
DECEMBER 31, SEPTEMBER 29,
2001 2002
------------ -------------
IN THOUSANDS OF EURO'S
Net loss, as reported....................................... (15,686) (7,933)
Pro forma net loss.......................................... (15,802) (8,112)
The fair value of each option was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
DECEMBER 31, SEPTEMBER 29,
2001 2002
------------ -------------
(EUR -- DENOMINATED)
Risk-free interest rate..................................... 4.66% 4.83%
Expected dividend yield..................................... 1.2% 1.2%
Expected option life........................................ 5 yrs 5 yrs.
Expected stock price volatility............................. 49% 53%
(USD -- DENOMINATED)
Risk-free interest rate..................................... 4.77% 4.62%
Expected dividend yield..................................... 1.2% 1.2%
Expected option life........................................ 5 yrs. 5 yrs.
Expected stock price volatility............................. 49% 49%
The assumptions were used for these calculations only and do not
necessarily represent an indication of management's expectations of future
development.
19
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about the number of Philips
share options granted to PSP's employees, those outstanding at December 31, 2001
and September 29, 2002 and changes during the period:
Fixed option plans:
DECEMBER 31, 2001 SEPTEMBER 29, 2002
-------------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- ------ ----------------
(IN EUR) (IN EUR)
Options outstanding, beginning of
period............................. 3,200 43.18 9,325 33.77
Options granted...................... 6,125 28.85 6,336 34.78
Options exercised....................
Options forfeited....................
Options outstanding, end of period... 9,325 33.77 15,661 34.18
Weighted average fair value of
options granted during the year in
EUR................................ 14.75 16.27
(IN USD) (IN USD)
Options outstanding, beginning of
period............................. 24,500 40.61 16,700 29.57
Options granted...................... 11,950 25.68 8,892 30.70
Options exercised....................
Options forfeited.................... (19,750) 40.90 (1,250) 42.28
Options outstanding, end of period... 16,700 29.57 24,342 29.33
Weighted average fair value of
options granted during the year in
USD................................ 11.90 13.48
Variable option plans:
DECEMBER 31, 2001 SEPTEMBER 29, 2002
-------------------------- -------------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- ------ ----------------
(IN EUR) (IN EUR)
Options outstanding, beginning of
period............................. 3,200 43.18 9,325 33.77
Options granted...................... 6,125 28.85
Options exercised....................
Options forfeited....................
Options outstanding, end of period... 9,325 33.77 9,325 33.77
Weighted average fair value of
options granted during the year in
EUR................................ 14.75
(IN USD) (IN USD)
Options outstanding, beginning of
period............................. 22,500 42.00 14,700 30.20
Options granted...................... 11,950 25.68
Options exercised....................
Options forfeited.................... (19,750) 40.90 (1,250) 42.28
Options outstanding, end of period... 14,700 30.20 13,450 29.08
Weighted average fair value of
options granted during the year in
USD................................ 11.90
20
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about stock options outstanding
at September 29, 2002:
Fixed option plans:
OPTIONS OUTSTANDING
-------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -----------------------------------
NUMBER AVERAGE NUMBER
OUTSTANDING AT REMAINING EXERCISABLE AT
SEPTEMBER 29, EXERCISE PRICE CONTRACTUAL LIFE SEPTEMBER 29, WEIGHTED PRICE PER
YEAR OF GRANT 2002 PER SHARE (YEARS) 2002 SHARE
------------- -------------- -------------- ---------------- -------------- ------------------
(PRICE IN EUR) (PRICE IN EUR)
2000................. 3,200 42.90 - 45.90 7.99 -- --
2001................. 6,125 24.35 - 29.14 8.57 -- --
2002................. 6,336 34.78 9.54 -- --
(PRICE IN USD) (PRICE IN USD)
1999................. 2,000 24.96 6.75 2,000 24.96
2000................. 3,000 36.65 - 43.05 7.71 -- --
2001................. 10,450 25.68 8.54 -- --
2002................. 8,892 30.70 9.54 -- --
TOTAL................ 40,003 2,000
Variable option plans:
OPTIONS OUTSTANDING
------------------------------------------------------ OPTIONS EXERCISABLE
WEIGHTED -----------------------------------
NUMBER AVERAGE NUMBER
OUTSTANDING AT REMAINING EXERCISABLE AT
SEPTEMBER 29, EXERCISE PRICE PER CONTRACTUAL LIFE SEPTEMBER 29, WEIGHTED PRICE PER
YEAR OF GRANT 2002 SHARE (YEARS) 2002 SHARE
------------- -------------- ------------------ ---------------- -------------- ------------------
(PRICE IN EUR) (PRICE IN EUR)
2000................. 3,200 42.90 - 45.90 7.99 -- --
2001................. 6,125 24.35 - 29.14 8.57 -- --
(PRICE IN USD) (PRICE IN USD)
2000................. 3,000 36.65 - 43.05 7.71 -- --
2001................. 10,450 25.68 8.54 -- --
TOTAL................ 22,775
13. TRANSACTIONS WITH RELATED PARTIES
PSP sells products to and purchases certain products and services from
Philips in the normal course of business. Transactions between PSP and Philips
are effected at prices that are intended to reflect the
21
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
market value of the products and services involved. The following table
summarizes transactions between PSP and Philips:
DECEMBER 31, SEPTEMBER 29,
2001 2002
------------ -------------
IN THOUSANDS OF EURO'S
STATEMENT OF OPERATIONS:
Sales to Philips group...................................... 2,890 389
Interest revenue............................................ 2 6
Corporate overhead allocation............................... 308 178
Corporate Research.......................................... 3,058 1,458
DECEMBER 31, SEPTEMBER 29,
2001 2002
------------ -------------
IN THOUSANDS OF EURO'S
BALANCE SHEET:
Income taxes receivable (included in Receivables from
related parties).......................................... 105 270
Trade accounts receivable from Philips Group................ 512 724
Trade accounts payable to Philips Group..................... 1,541 2,023
Deferred income taxes....................................... 8 (17)
Interest revenue in these combined financial statements is calculated based
on the average rate of interest for long-term debt paid by Philips and the
average amount of net investment of the Philips Group invested in PSP during the
reporting periods, taking into account the debt-to-equity ratio reported by
Philips during the reporting periods.
Income tax expense has been calculated on an as if separate tax return
basis. Tax effects that may arise from PSP's divestment from the Philips Group
have not been reflected in PSP's combined financial statements.
Corporate overheads have been allocated to PSP from Philips at central,
regional and local levels for amounts including, but not limited to, directors
remuneration, marketing, management information systems, accounting and
financial reporting, treasury, human resources, legal, tax and security, based
on the net sales of PSP compared to the consolidated net sales of Philips.
Management believes these allocations are reasonable. However, the costs of
these services charged to PSP are not necessarily indicative of the costs that
would have been incurred had PSP operated as an entity independent of Philips.
Philips Corporate Research is contracted by PSP to perform certain research
and development projects; the projects are determined on a yearly basis. The fee
charged is reported under Research & Development expenses.
14. COMMITMENTS AND CONTINGENCIES
PSP is potentially subject to lawsuits, claims and proceedings, which arise
in the ordinary course of business. There are no such matters pending that PSP
expects to be material in relation to its business, financial condition or
results of operations.
22
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
RENT AGREEMENTS
PSP has entered into certain short-term contracts to rent office and
warehouse facilities. The rent charged to income amounted to E1,112 thousand and
E827 thousand for the year ended December 31, 2001 and the nine-month period
ended September 29, 2002 respectively, of which E181 thousand and E201 thousand
respectively relates to charges from Philips based on square meters occupied.
The table below presents the amounts of rent payable under the present
contracts for the upcoming periods.
RENT AMOUNT
-----------
IN
THOUSANDS
OF EURO'S
Remainder of year 2002...................................... 218
Year 2003................................................... 779
Year 2004................................................... 531
Year 2005................................................... 531
Year 2006................................................... 133
Year 2007 and later......................................... 0
15. GEOGRAPHICAL INFORMATION
PSP operates and derives its revenue from all major regions in the world.
The geographical location of property, plant and equipment and the geographical
origin of revenues are as follows:
AMERICAS EUROPE ASIA PACIFIC TOTAL
-------- ------ ------------ ------
IN THOUSANDS OF EURO'S
December 31, 2001
Net sales....................................... 7,883 9,446 1,362 18,691
Property, plant and equipment, net.............. 129 378 14 521
September 29, 2002
Net sales....................................... 7,194 5,400 343 12,937
Property, plant and equipment, net.............. 60 322 6 388
16. CONCENTRATION OF RISKS AND FINANCIAL INSTRUMENTS
CONCENTRATION OF CREDIT RISK
Credit risk represents the risk that a loss would be recognized at the
reporting date if counter parties failed completely to perform as contracted.
Financial instruments which potentially subject PSP to a concentration of credit
risk consist principally of accounts receivable. Management believes it has
adequately provided for the collection risk in PSP's trade accounts receivable
by recording an allowance for doubtful accounts which reduces such amounts to
their net realizable value.
Due to the project nature of the speech processing business, PSP derives a
substantial portion of its revenues from a limited number of customers. In the
year 2001 and the nine-month period ended September 29, 2002, two and three
customers, respectively accounted for more than 10% of revenues each, and in the
aggregate for 28% and 32% of revenues, respectively.
23
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
FINANCIAL INSTRUMENTS
PSP's earnings, cash flows, and financial position are exposed to foreign
currency risk from foreign currency denominated receivables, payables,
forecasted transactions, as well as net investments in certain foreign
operations. These items are denominated in various foreign currencies, including
mainly the U.S. Dollar.
PSP periodically assesses its foreign currency exchange risk exposure. As
USA customers are invoiced from Dallas, USA, in US Dollars and European
customers are invoiced from Aachen, Germany, in Euro the currency risk exposure
is very limited. Accordingly, PSP does not enter into any hedging activities or
purchase derivative instruments.
During 2001, PSP recorded a net foreign currency transaction profit of E23
thousand and during the nine-month period ended September 29, 2002, a loss was
recorded of E9 thousand, which is included in cost of sales.
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The carrying values of accounts receivable and accounts payable approximate
fair value because of the short maturity of these instruments.
17. SUBSEQUENT EVENTS (UNAUDITED)
On October 7, 2002, Royal Philips Electronics N.V. and ScanSoft, Inc.
signed a purchase agreement for the sale of PSP's business, assets and
liabilities. All employees of PSP are expected to be hired by ScanSoft. On
January 30, 2003, ScanSoft, Inc. (the "Company") acquired from Royal Philips
Electronics N.V., a limited liability company organized under the laws of The
Netherlands ("Philips"), Philips Speech Processing Telephony and Voice Control
businesses (the "Business"). The consideration for the transaction comprises a
$27.5 million three-year, zero-interest convertible debenture, convertible at
any time into common shares of the Company at $6.00 per share; 4.1 million euros
in cash, of which 3.1 million euros was paid at closing and 1 million euros are
payable by December 31, 2003; and a 5 million euro 5% interest note due December
31, 2003. The cash payable is subject to adjustment in accordance with the
provisions of the Purchase Agreement, dated as of October 7, 2002, by and
between Philips and the Company (including amendments thereto) (the
"Agreement").
To provide for an orderly transfer and transition of PSP from Philips to
ScanSoft, various agreements will be executed that cover a wide range of
matters, including but not limited to:
- the transfer by Philips to ScanSoft of the business, employees, assets
and liabilities associated with PSP's business (Purchase Agreement, Local
Asset Transfer Agreements);
- the transfer or license by Philips to ScanSoft of certain intellectual
property rights (Technology Transfer and License Agreement, Trademark
Transfer and License Agreement);
- the provision by Philips of certain corporate and local human resource
management, finance and accounting, housing, information technology and
other services to ScanSoft (Transition Services Agreement).
STOCK INCENTIVE PLANS
The Philips stock options granted to the PSP employees will not be
converted into options for shares of ScanSoft. Upon closing, PSP employees with
outstanding exercisable options will have a limited period of time to exercise
these options and all unvested options will be cancelled. In addition, ScanSoft
has
24
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A DIVISION OF ROYAL PHILIPS ELECTRONICS N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
assumed no obligation towards the beneficiaries or towards Philips with respect
to these outstanding Philips' stock options.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In most countries PSP's employees have pension entitlements as part of
their benefit packages, and as it is common practice that in offering
transferring employees equivalent benefit packages, this equivalence also
extends to pension rights. In fact there exists a compulsory European Directive
obliging member states to implement legislation in each EC country to the effect
that in case of transfer of a business, all pension entitlements will transfer
with the transferred employees. In the Netherlands, this law has become
effective on July 1, 2002.
In some countries, the pension entitlements are part of a state scheme; in
many countries, however, the entitlements are specifically related to Philips,
and will require a per country approach on how to deal with pension rights going
forward and the treatment of accrued rights in the past. There are legal
requirements which will dictate a transfer of pension liabilities, but also if
there is not a strict legal requirement, in many cases taking into account the
justified interest of employees will be a precondition for a smooth transition
process in terms of consultation with works council and unions.
Pension entitlement for PSP's employees may be funded by way of a separate
pension fund, with an insurance company or by way of a book reserve system.
In case a book reserve system is used by Philips in a country, the pension
liabilities will transfer to ScanSoft and Philips shall include a provision in
the local balance sheet which is equal to the actuarial present value of pension
rights accrued up to the effective date as calculated under the relevant local
book reserve system concerned.
In case of a dedicated Philips pension fund, transferred employees will
either get a premium free policy or there will be a collective transfer of
liabilities and assets under the terms and rules set by the pertaining pension
fund.
25
ITEM 7(b). PRO FORMA FINANCIAL INFORMATION
SCANSOFT, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
26
SCANSOFT, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On October 7, 2002, ScanSoft, Inc. ("ScanSoft") entered into a definitive
agreement with Royal Philips Electronics ("Philips") to acquire the Philips
Speech Processing Telephony and Voice Control business units ("PSP") and related
intellectual property. On January 30, 2003, we completed the acquisition of the
Speech Processing Telephony and Voice Control business units of Royal Philips
Electronics, and related intellectual property on the terms set forth in the
purchase agreement dated October 7, 2002, as amended. As consideration for these
business units and intellectual property, we paid 3.1 million euros in cash at
closing, subject to adjustment in accordance with the provisions of the purchase
agreement, as amended, and agreed to pay an additional 1.0 million euros in cash
prior to December 31, 2003, issued a 5.0 million euro note due December 31, 2003
and bearing 5.0% interest per annum and issued a $27.5 million three-year,
zero-interest subordinated debenture, convertible at any time at Philips' option
into shares of our common stock at $6.00 per share.
On December 12, 2001, ScanSoft acquired substantially all of the speech and
language technologies operations ("SLT") of Lernout & Hauspie Speech Products
N.V. and certain of its affiliates ("L&H"). Consideration for the transaction
comprised $10 million in cash, a $3.5 million note due December 15, 2004 and 7.4
million shares of our common stock having a value of $27.8 million. The
operations acquired include text-to-speech, speech recognition and dictation,
and voice control technologies.
The unaudited pro forma financial information as of and for the nine months
ended September 30, 2002 gives effect to the acquisition of PSP as if ScanSoft
and PSP had been combined as of January 1, 2002 for statement of operations
purposes and as of September 30, 2002 for balance sheet purposes. The SLT
acquisition was consummated on December 12, 2001. Therefore, the balance sheet
impact of the acquisition is reflected in the historical balance sheet of
ScanSoft as of September 30, 2002.
The unaudited pro forma combined statement of operations for the year ended
December 31, 2001 gives effect to the acquisition by ScanSoft of SLT and the
proposed acquisition of PSP as if the acquisitions had occurred on January 1,
2001, combining the statement of operations of ScanSoft and the statement of
operations of PSP for the year ended December 31, 2001 and the statement of
revenues and direct operating expenses of SLT for the nine months ended
September 30, 2001 in satisfaction of one year of financial information in
accordance with Rule 3-06 of Regulation S-X.
The unaudited pro forma adjustments related to the acquisition of PSP are
based on estimates and assumptions that are preliminary and have been made
solely for purposes of developing such pro forma information. The estimated pro
forma adjustments arising from the acquisition of PSP are derived from the
estimates of the price to be paid for the acquisition and the estimated fair
values of the assets acquired and liabilities assumed. The final determination
of purchase price, fair value of the net assets acquired and resulting goodwill
may differ significantly from that reflected in the pro forma statement of
operations and balance sheet. No significant transactions occurred between
ScanSoft and PSP or SLT and PSP for the year ended December 31, 2001 or for the
nine months ended September 30, 2002 and no amounts were due to or from ScanSoft
or PSP as of September 30, 2002.
The historical PSP financial information has been derived from the audited
financial statements of PSP included in this Form 8-K/A and have been translated
from euros to US dollars using the exchange rates in effect at the end of the
period for the balance sheet and using average exchange rates for the respective
periods for the statements of operations.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the transactions had been consummated as of January
1, 2001 or January 1, 2002, as applicable, for the statements of operations or
September 30, 2002, for the balance sheet, nor is it necessarily indicative of
future operating results or financial position. The unaudited pro forma combined
financial information should be read in conjunction with the historical
financial statements and related notes thereto of PSP, included herein,
Scansoft, as filed in the companies 2001 Form 10-K, and SLT, as filed on Form
8-K/A on September 13, 2002.
27
SCANSOFT, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 2002
PRO FORMA PRO FORMA
SCANSOFT PSP ADJUSTMENTS COMBINED
---------- ------- ------------ ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash and cash equivalents................... $ 14,382 $ 12 $(3,412)(1)(2) $ 10,982
Accounts receivable, net.................... 15,868 4,462 20,330
Receivables from related parties............ 1,238 705 (705)(2) 1,238
Inventory................................... 1,562 753 2,315
Prepaid expenses and other current assets... 2,853 602 3,455
--------- ------ ------- ---------
Total current assets..................... 35,903 6,534 (4,117) 38,320
Goodwill...................................... 63,308 29,560(1) 92,868
Other intangible assets, net.................. 36,035 132 7,728(1)(2) 43,895
Property and equipment, net................... 2,933 378 3,311
Other assets.................................. 1,091 1,091
--------- ------ ------- ---------
Total Assets.................................. $ 139,270 $7,044 $33,171 $ 179,485
========= ====== ======= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ 5,541 655 6,196
Accrued expenses............................ 11,695 2,000(1) 13,695
Deferred revenue............................ 955 1,112 2,067
Note payable................................ 227 227
Payables to related parties................. -- 1,971 (1,971)(1)(2) --
Other current liabilities................... 1,720 2,305 914(1)(2) 4,939
--------- ------ ------- ---------
Total current liabilities................ 20,138 6,043 943 27,124
Deferred revenue.............................. 278 278
Convertible debt.............................. -- 27,500(1) 27,500
Long-term note payable, net of current
portion..................................... 3,101 5,400(1) 8,501
Other liabilities............................. 819 329 1,148
--------- ------ ------- ---------
Total liabilities........................ 24,336 6,372 33,843 64,551
--------- ------ ------- ---------
Stockholders' equity:
Preferred stock, $0.001 par value;
40,000,000 shares authorized; 3,562,238
shares issued and outstanding
(liquidation preference $4,631).......... 4,631 4,631
Common stock, $0.001 par value; 140,000,000
shares authorized; 65,334,366 shares
issued and 63,216,988 shares outstanding,
respectively............................. 65 65
Additional paid-in capital.................. 269,822 269,822
Treasury stock, at cost; 2,117,378 shares... (8,031) (8,031)
Deferred compensation....................... (199) (199)
Accumulated other comprehensive income...... 12 12
Net Investment of the Philips Group......... -- 672 (672)(2)
Accumulated deficit......................... (151,366) (151,366)
--------- ------ ------- ---------
Total stockholders' equity............... 114,934 672 (672) 114,934
--------- ------ ------- ---------
Total Liabilities and Stockholders' Equity.... $ 139,270 $7,044 $33,171 $ 179,485
========= ====== ======= =========
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
28
SCANSOFT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS PRO FORMA
SCANSOFT SLT PSP SLT PSP COMBINED
-------- -------- -------- ----------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue, third
parties............... $ 56,647 $ 34,173 $ 14,165 $(3,329)(12) $ -- $101,656
Revenue, related
party................. 7,208 -- 2,591 -- -- 9,799
-------- -------- -------- ------- ------- --------
Total revenue......... 63,855 34,173 16,756 (3,329) -- 111,455
-------- -------- -------- ------- ------- --------
Costs and expenses:
Cost of revenue....... 12,849 4,439 2,948 (41)(4) 20,195
Cost of revenue from
amortization of
intangible
assets............. 14,192 1,734 -- 100(7) 630(3) 16,656
Research and
development........ 13,968 28,440 12,114 -- 54,522
Selling general and
administrative..... 26,449 32,742 16,982 76,173
Amortization of
goodwill and other
intangible
assets............. 13,328 -- -- 889(3) 14,217
-------- -------- -------- ------- ------- --------
Total costs and
expenses.............. 80,786 67,355 32,044 100 1,478 181,763
-------- -------- -------- ------- ------- --------
Loss from operations.... (16,931) (33,182) (15,288) (3,429) (1,478) (70,308)
Other (expense) income,
net................... (263) -- 2 (315)(9) (226)(5)(6) (802)
-------- -------- -------- ------- ------- --------
Loss before income
taxes................. (17,194) (33,182) (15,286) (3,744) (1,704) (71,110)
Provision for (benefit
from) income taxes.... (317) -- (1,223) -- 1,223(8) (317)
-------- -------- -------- ------- ------- --------
Net loss................ $(16,877) $(33,182) $(14,063) $(3,744) $(2,927) $(70,793)
======== ======== ======== ======= ======= ========
Pro forma net loss per
common share(10):
Basic and diluted....... $ (0.34) $ (1.25)
======== ========
Weighted average common
shares used in pro
forma net loss per
share calculation(10):
Basic and diluted....... 49,693 6,989(11) 56,682
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
29
SCANSOFT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
PRO FORMA PRO FORMA
SCANSOFT PSP ADJUSTMENTS COMBINED
-------- ------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue, third parties.......................... $74,598 $11,633 $ -- $86,231
Revenue, related party.......................... 3,586 361 -- 3,947
------- ------- ------- -------
Total revenue................................. 78,184 11,994 -- 90,178
------- ------- ------- -------
Costs and expenses:
Cost of revenue............................... 12,937 1,605 (25)(4) 14,517
Cost of revenue from amortization of
intangible assets.......................... 7,494 -- 467(3) 7,961
Research and development...................... 21,310 7,300 -- 28,610
Selling general and administrative............ 32,051 10,676 42,727
Amortization of goodwill and other intangible
assets..................................... 1,446 -- 667(3) 2,113
Restructuring and other charges............... 1,041 1,041
------- ------- ------- -------
Total costs and expenses........................ 76,279 19,581 1,109 96,969
------- ------- ------- -------
Income (loss) from operations................... 1,905 (7,587) (1,109) (6,791)
Other (expense) income, net..................... (178) 6 (180)(5)(6) (352)
------- ------- ------- -------
Income (loss) before income taxes............... 1,727 (7,581) (1,289) (7,143)
Provision for (benefit from) income taxes....... (166) (227) 227(8) (166)
------- ------- ------- -------
Net income (loss)............................... $ 1,893 $(7,354) $(1,516) $(6,977)
======= ======= ======= =======
Pro forma net loss per common share(10):
Basic......................................... $ 0.03 $ (0.11)
======= =======
Diluted....................................... $ 0.03 $ (0.11)
======= =======
Shares used in pro forma net loss per share
calculation(10):
Basic......................................... 67,116 63,554
Diluted....................................... 72,451 63,554
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
30
SCANSOFT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
1. ACQUISITIONS
On October 7, 2002, ScanSoft, Inc. ("ScanSoft") entered into a definitive
agreement with Royal Philips Electronics ("Philips") to acquire the Philips
Speech Processing Telephony and Voice Control business units ("PSP") and related
intellectual property. On January 30, 2003, we completed the acquisition of the
Speech Processing Telephony and Voice Control business units of Royal Philips
Electronics, and related intellectual property on the terms set forth in the
purchase agreement dated October 7, 2002, as amended. As consideration for these
business units and intellectual property, we paid 3.1 million euros in cash at
closing, subject to adjustment in accordance with the provisions of the purchase
agreement, as amended, and agreed to pay an additional 1.0 million euros in cash
prior to December 31, 2003, issued a 5.0 million euro note due December 31, 2003
and bearing 5.0% interest per annum and issued a $27.5 million three-year,
zero-interest subordinated debenture, convertible at any time at Philips' option
into shares of our common stock at $6.00 per share.
On December 7, 2001, ScanSoft entered into an Asset Purchase Agreement (the
"Purchase Agreement") to acquire certain assets and intellectual property and
assume certain liabilities of L&H. The assets were purchased and liabilities
assumed in a closed auction proceeding. The transaction was approved by United
States bankruptcy court on December 11, 2001. The transaction was completed on
December 12, 2001, and ScanSoft's results of operations include the activities
related to the acquisition since that date.
Pursuant to the Purchase Agreement, ScanSoft acquired patents, trademarks,
trade names, products and customer contracts associated with certain of the
speech and language technology assets of L&H. In addition, ScanSoft obtained
rights to accounts receivable related to the customer contracts acquired and
certain fixed assets. ScanSoft also hired 223 of the approximately 500 remaining
employees from L&H. Scansoft did not acquire any significant property and
equipment or assume any leases for property and equipment or facilities.
ScanSoft paid $41.3 million in total consideration to the creditors as follows:
$10.0 million in cash. 7.4 million shares of ScanSoft's common stock valued at
$27.8 million (based on the average of the closing share price of our stock 3
days before and after the proposed acquisition was announced), and a 9%
promissory note in the principal amount of $3.5 million, to be repaid quarterly
in installments of $0.1 million of principal and interest commencing on March
15, 2002, for a total of eleven payments. All remaining principal and interest
on the note is due and payable on December 15, 2004. ScanSoft incurred
approximately $1.0 million of costs related to the acquisition.
On August 13, 2002, the U.S. Bankruptcy Court for the District of Delaware
approved, without objection, ScanSoft's agreement with representatives of L&H
Holdings USA. and Lernout & Hauspie Speech Products N.V. to repurchase shares of
ScanSoft common stock worth $7.0 million at a share price equal to the average
of the closing price for the 20 trading days beginning August 14, 2002, but no
less than $4.79 per share. In addition, ScanSoft agreed to issue 150,000 shares
of common stock to the holders of approximately six million shares remaining in
the event ScanSoft does not offer the remaining shares in a public offering by
December 15, 2002. ScanSoft further agreed to issue an additional 150,000 shares
of common stock to the holders of approximately six million shares remaining in
the event ScanSoft does not offer the remaining shares in a public offering by
February 15, 2003, and 100,000 shares of common stock if ScanSoft has not
registered the remaining shares by February 15, 2003. Additionally, if the
consummation of this offering does not occur by January 1, 2003, the outstanding
principal and interest under the $3.5 million promissory note that ScanSoft
issued in connection with the acquisition of the L&H operations would become
immediately due and payable.
31
SCANSOFT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
2. PRO FORMA ADJUSTMENTS
Pro forma adjustments reflect only those adjustments which are factually
determinable and, with respect to the PSP acquisition, do not include the impact
of contingencies which will not be known until the later of the closing of the
transaction or the resolution of the contingency. Pro forma adjustments include
the following:
(1) Adjustments to record the purchase accounting for the assets
acquired and the liabilities assumed of PSP, subject to adjustment pending
the completion of a post-closing review of the purchased net assets and
resolution of certain contingencies. The pro forma information reflects the
payment of $3.4 million in cash at the exchange rate on January 30, 2003 of
1.00 euro equaling $1.08, the issuance of a $5.0 million euro note due
December 31, 2003 and bearing 5.0% interest per annum and the issuance of a
$27.5 million three-year, zero-interest debenture, convertible at any time
into shares of our common stock at $6.00 per share. ScanSoft also has
accounted for $2.0 million for anticipated transaction fees, which include
legal, accounting, due diligence, tax structuring and filing fees. The fair
value of convertible debenture was determined to be $27.5 million based on
the present value of the expected cash outflows using ScanSoft's
incremental borrowing rate and the results of a Black-Scholes option
pricing calculation for the value of the conversion feature, using a fair
value of ScanSoft common stock of $3.50 per share, the closing price of
ScanSoft's common stock just prior to the parties entering into the
acquisition agreement.
Deferred revenue is comprised of (i) progress payments made by
customers under contracts for software licenses and services which
represent significant customization or modification of the software, (ii)
advance payments for services and (iii) up front payments for annual
software maintenance agreements. ScanSoft will assume legal obligations
under such contracts and will record the fair value of these obligations in
its final purchase accounting. The fair value of deferred revenue may
differ from the book value, however, our purchase price allocation is
preliminary because additional information is required to accurately
determine the fair value of the legal obligation that we assumed, certain
of which was not available at closing. The pro forma adjustments do not
include an adjustment to record the fair value of deferred revenue because
there is not yet sufficient information to make a factually supportable pro
forma adjustment.
Under the terms of the purchase agreement, the purchase price is
subject to adjustment based on a comparison of net assets at the closing
date to the net assets of PSP set forth in the agreement. Also, as a result
of the legal requirements related to labor matters in certain countries in
which PSP operates, primarily Germany, severance costs associated with the
restructuring actions described below are anticipated. ScanSoft will assume
the legal obligations of Philips with respect to severance benefits of the
PSP employees. Philips will reimburse ScanSoft for the costs associated
with restructuring actions related to German employees up to 5.0 million
euro through December 31, 2003. At the closing date, or as soon as
practicable thereafter, ScanSoft will record a liability for restructuring
costs and a related receivable for amounts to be reimbursed by Philips. To
the extent that the total costs exceed 5.0 million euro as of or at any
time prior to December 31, 2003, Philips will reimburse ScanSoft for
one-third of the excess costs and ScanSoft will be responsible for the
remaining two-thirds of any excess costs. The adjustment for any excess
costs will be recorded as additional purchase consideration and recorded as
goodwill.
The acquisition of PSP by ScanSoft will give rise to the elimination
of certain PSP personnel and excess facilities. ScanSoft anticipates
headcount reductions will occur across all functional areas of the combined
company. The total costs associated with the anticipated restructuring
actions will be dependent upon the outcome of required negotiations with
local labor councils, primarily in Germany. ScanSoft currently anticipates
that the restructuring activities will result in severance and
restructuring
32
SCANSOFT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
costs ranging from $2.8 million to $3.3 million. Of this amount,
approximately $1.8 million to $2.3 million will be reimbursed by Philips.
The remaining amounts will be recorded as additional purchase price in
accordance with Emerging Issue Task Force No. 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination." Had these
actions taken place on January 1, 2002 they would have resulted in
approximately $4.8 million of reduced expenses for the nine months ended
September 30, 2002.
ScanSoft believes these planned restructuring actions are an integral
component of the acquisition plan to enable the benefits of the combined
companies to be optimized and the benefits of the acquisition to be
realized. ScanSoft expects to complete these restructuring efforts within
one year of the closing.
A summary of the preliminary purchase price allocation is as follows
(in thousands):
Estimated consideration:
Cash................................................... $ 4,500
Note payable........................................... 5,400
Convertible debenture.................................. 27,500
Transaction costs...................................... 2,000
-------
Total estimated purchase consideration............... $39,400
=======
Preliminary allocation of the purchase consideration:
Net tangible assets acquired........................... $ 1,980
Identifiable intangible assets......................... 7,860
Goodwill............................................... 29,560
-------
$39,400
=======
ScanSoft believes that the $7.9 million of identifiable intangible
assets will be allocated to patents and core technology and completed
technology in the amount of $6.1 million and the remaining $1.8 million to
customer relationships and other contractual agreements. The $4.5 million
in cash is payable as follows: $3.4 million upon closing of the acquisition
and $1.1 million no later than December 31, 2003.
(2) Adjustments to eliminate historical assets and liabilities of PSP
that will not be acquired or assumed by ScanSoft including the $12,000 of
cash, $0.7 million of amounts due from Philips, $0.1 million of purchased
software, $2.0 million of payables to Philips, $0.2 million of other
liabilities and $0.7 million of net investment of the Philips Group which
will not be acquired or assumed by ScanSoft.
(3) Adjustment to record amortization expense for the identifiable
intangible assets. Finalization of the allocation of the purchase price to
tangible and identifiable intangible assets acquired and liabilities
assumed is preliminary pending completion of the transaction and collection
of data to evaluate estimates of future revenues and earnings to determine
a discounted cash flow valuation of certain intangibles that meet the
separate recognition criteria of SFAS No. 141. ScanSoft expects this
process and subsequent allocation of purchase price to be complete within
90 days of the closing of the transaction.
ScanSoft's preliminary assessment is that the weighted average useful
life of the patents and core technology and completed technology will be
approximately 10 years and other acquired identifiable
33
SCANSOFT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
intangible assets will be approximately 2 years. The pro forma adjustments
for amortization are based on the weighted average useful life using the
straight-line method. A change in the allocation between patents and core
technology and completed technology and goodwill of $1,000,000 would result
in a change in pro forma annual amortization expense of approximately $0.1
million. A change in the allocation between the other acquired identifiable
intangible assets and goodwill of $1,000,000 would result in a change in
pro forma annual amortization of expense of approximately $0.5 million. An
increase in the weighted average useful life of the patents and core
technology and completed from ten years to eleven years would result in a
decrease in the pro forma amortization expense of less of than $0.1 million
for both the year ended December 31, 2001 and the nine months ended
September 30, 2002. A decrease in the weighted average useful life of the
patents, core technology and completed from ten years to nine years would
result in an immaterial decrease in the pro forma amortization expense of
less of than $0.1 million for both the year ended December 31, 2001 and the
nine months ended September 30, 2002. An increase in the weighted average
useful life of the other acquired identifiable intangible assets from two
years to three years would result in a change in pro forma annual
amortization expense of approximately $0.3 million and $0.2 million for the
year ended December 31, 2001 and the nine months ended September 30, 2002.
(4) Adjustment to eliminate amortization expense related to intangible
assets of PSP existing prior to the proposed acquisition which will not be
acquired by ScanSoft. Amortization expense of $41,000 and $25,000 was
eliminated for the year ended December 31, 2001 and the nine months ended
September 30, 2002, respectively.
(5) Adjustment to record interest expense on the 5.0 million euro
promissory note to be issued as partial purchase consideration for the
acquisition, bearing interest at five percent per year, as if the
consideration was issued on January 1, 2001. Interest expense for the year
ended December 31, 2001 and for the nine months ended September 30, 2002
would have been $224,000 and $174,000, respectively.
(6) Adjustment to eliminate interest recorded on intercompany balances
between PSP and Philips. Interest income adjusted totaled $2 thousand and
$6 thousand for the year ended December 31, 2001 and for the nine months
ended September 30, 2002, respectively.
(7) Adjustment to eliminate amortization expense included in the
historical financial statements of SLT of $1.7 million and to record the
amortization of the fair value of other intangible assets recorded in the
acquisition as if the acquisition had occurred on January 1, 2001.
Intangible assets recorded in connection with the SLT acquisition included
$17.9 million of patents and core technology, $3.1 million of trademarks
and tradenames and $21.4 million of goodwill. In accordance with SFAS No.
142, no goodwill amortization is reflected for ScanSoft's goodwill
resulting from the acquisition of SLT. Other intangible assets are
amortized using the straight-line method over their estimated useful lives
of ten years for patents and core technology and twelve years for
trademarks and tradenames.
(8) Adjustment to eliminate income tax benefits recorded by PSP in its
historical statements of operations which would not have been realized by
ScanSoft had the acquisition occurred on January 1, 2001.
(9) Adjustment to record additional interest expense related to the
note payable issued in partial consideration for the SLT acquisition as if
the acquisition had occurred on January 1, 2001. The interest rate on the
note is 9%. The outstanding principal balance is assumed to be the original
principal balance of $3.5 million based on the payment schedule included in
the note agreement. The
34
SCANSOFT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
accompanying unaudited pro forma combined statement of operations does not
assume any permitted prepayments of principal.
(10) The pro forma net loss per share and the shares used in pro forma
net loss per share do not include the effects of the assumed conversion to
common stock of the convertible debenture to be issued to Philips as
partial purchase consideration for the PSP acquisition because the impact
would be antidilutive. The total shares of common stock to be issued upon
conversion of the debenture would be 4,583,333.
(11) Adjustment to reflect the 7.4 million shares of common stock
issued to L&H in connection with the SLT acquisition as if the acquisition
had occurred on January 1, 2001.
(12) Adjustment to eliminate historical SLT revenues associated with
the five asset group ScanSoft did not acquire. No pro forma adjustments
have been made to the operating expenses of SLT because it is impracticable
to determine the amounts with individual asset groups of SLT.
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SCANSOFT, INC.
/s/ GERALD C. KENT, JR
--------------------------------------
Gerald C. Kent, Jr.
Vice President, Controller &
Chief Accounting Officer
(Principal Accounting Officer)
Date: March 24, 2003
36
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1(1) Purchase Agreement, dated as of October 7, 2002, by and
between Koninklijke Philips Electronics N.V., a limited
liability company organized under the laws of The
Netherlands, and ScanSoft, Inc.
2.2(2) Amendment No. 1, dated as of December 20, 2002, to Purchase
Agreement, dated as of October 7, 2002, by and between
Koninklijke Philips Electronics N.V., a limited liability
company organized under the laws of The Netherlands, and
ScanSoft, Inc.
2.3(3) Amendment No. 2, dated as of January 29, 2003, to Purchase
Agreement, dated as of October 7, 2002, by and between
Koninklijke Philips Electronics N.V., a limited liability
company organized under the laws of The Netherlands, and
ScanSoft, Inc.
23.1 Consent of KPMG Accountants N.V.
99.1# Press Release as of January 30, 2003.
---------------
# Previously Filed.
(1) Incorporated by reference from Exhibit 2.4 of the Company's Amendment No. 2
to Registration Statement on Form S-1 (No. 333-100647) filed with the
Securities and Exchange Commission on January 6, 2003.
(2) Incorporated by reference from Exhibit 2.5 of the Company's Amendment No. 4
to Registration Statement on Form S-1 (No. 333-100647) filed with the
Securities and Exchange Commission on February 7, 2003.
(3) Incorporated by reference from Exhibit 2.6 of the Company's Amendment No. 4
to Registration Statement on Form S-1 (No. 333-100647) filed with the
Securities and Exchange Commission on February 7, 2003.