<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2000
--------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________ to __________
Commission file number 0-27296
-------
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
--------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
The Kingdom of Belgium N/A
---------------------- --------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
52 Third Avenue, Burlington, Massachusetts 01803
----------------------------------------------------------
(Address of Principal Executive Offices in the U.S. Zip Code)
Registrant's Telephone Number, Including Area Code: (781) 203-5000
--------------
_________________________________________________________
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
The number of shares outstanding of the Registrant's Common Stock, no par value,
as of June 27, 2000, was 141,980,366.
<PAGE>
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES
FORM 10-Q
---------
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
EXPLANATORY NOTE.................................................... 4
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
Condensed consolidated Balance Sheets at December 31,
1999 and March 31, 2000 (unaudited)........................ 5
Condensed consolidated Statements of Operations for
the Three Months Ended March 31, 1999
and 2000 (unaudited)....................................... 7
Condensed consolidated Statements of Cash Flows for
the Three Months Ended March 31, 1999
and 2000 (unaudited)....................................... 8
Notes to Interim Condensed Consolidated
Financial Statements....................................... 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk............................................... 33
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.......................................... 35
Item 2. Changes in Securities...................................... 35
Item 3. Defaults Upon Senior Securities............................ 37
Item 4. Submission of Matters to a Vote of Security Holders........ 37
Item 5. Other Information.......................................... 37
Item 6. Exhibits and Interim Reports............................... 37
Signatures......................................................... 39
</TABLE>
<PAGE>
EXPLANATORY NOTE
Until our acquisition of Dictaphone Corporation on May 5, 2000, we were a
foreign private issuer required to file annual reports on Form 20-F and interim
reports on Form 6-K with respect to our financial results and certain other
matters. On May 12, 2000 we filed a Form 6-K for our quarter ended March 31,
2000. This quarterly report on Form 10-Q is being filed voluntarily by us for
the same quarter to satisfy the filing requirements that would have been
applicable to us had we not been a foreign private issuer as of March 31, 2000.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, 1999 MARCH 31, 2000
---------------------------------------------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................ $ 125,730 $178,850
Marketable securities................................ 4,900 289
Accounts receivable, net (1)......................... 104,020 129,803
Value added tax and other receivables................ 2,616 3,442
Inventory............................................ 3,700 5,085
Prepaid expenses and other current assets............. 12,498 16,164
--------- --------
Total current assets..................... 253,464 333,633
--------- --------
Deferred tax assets............................................ 7,435 7,435
Property and equipment, net of accumulated depreciation
of $25,914 and $30,058, respectively......................... 33,688 36,870
Investments.................................................... 14,433 25,872
Intangibles, net of amortization............................... 379,031 417,340
Software development costs, net of amortization................ 5,687 8,054
--------- --------
Total assets............................... $ 693,738 $829,204
========= ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable......................................... $ 15,724 $ 14,454
Current portion of long-term debt..................... 8,490 8,208
Accounts payable...................................... 19,582 21,803
Accrued expenses...................................... 64,032 65,962
Deferred revenue...................................... 2,980 8,315
--------- --------
Total current liabilities.................. 110,808 118,742
Long-term debt, less current portion........................... 18,665 18,120
--------- --------
Total liabilities.......................... 129,473 136,862
--------- --------
Minority interest.............................................. - 183
Company-obligated mandatorily redeemable
security of subsidiary trust holding solely
parent convertible subordinated debentures................... 146,672 130,997
Commitments and contingencies
Shareholders' equity:
Common shares, no par value: 114,415 and 119,753
shares issued and outstanding at December 31, 1999
and March 31, 2000, respectively.................... 113,498 114,859
Common shares, no par value: automatically
convertible stock, 896 shares issued and outstanding 494 494
Additional paid-in capital............................. 421,466 548,908
Accumulated deficit.................................... (107,898) (91,451)
Accumulated other comprehensive loss.................. (9,967) (11,648)
--------- --------
Total shareholders' equity............... 417,593 561,162
--------- --------
Total liabilities and shareholders' equity......... $ 693,738 $829,204
========= ========
</TABLE>
<PAGE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
(1) The following summarizes accounts receivable, from companies partially
owned by the Company, FLV Fund, S.AI.L Trust and / or L&H Investment
Company and from certain other related parties. Accounts receivable at
December 31, 1999 included a total of $10,695 from Microsoft Corporation,
LanguageWare.net Ltd., CellPort Labs Inc., Xiox Corporation, Smartmove
N.V., EHQ Inc., Iris N.V., Transics N.V., Phonetic Topographics N.V., De
Wilde CBT N.V., Intel Corporation, Nordisk Spraktechnologi AS, e-DOCS. Net
Inc., Speech Systems Inc., Hogadata Benelux N.V., BCB Voice Systems Inc.,
ESL.com Ltd., Telekol Corporation, Financial Architects N.V., Vasco Data
Security International Inc, Cegeka Healthcare Systems N.V., Computer Voice
Dictation Solutions Inc., iSAIL Solutions N.V., and Sail Labs N.V. and at
March 31, 2000 included a total of $11,817 from Microsoft Corporation,
LanguageWare.net Ltd., CellPort Labs Inc., Xiox Corporation, Smartmove
N.V., EHQ Inc., Iris N.V., Phonetic Topographics N.V., Intel Corporation,
e-DOCS. Net Inc., Speech Systems Inc., Hogadata Benelux N.V., BCB Voice
Systems Inc., ESL.com Ltd., Telekol Corporation, Financial Architects N.V.,
Vasco Data Security International Inc, Cegeka Healthcare Systems N.V.,
Computer Voice Dictation Solutions Inc., iSAIL Solutions N.V., and Sail
Labs N.V.
2
<PAGE>
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------------
1999 2000
---- ----
<S> <C> <C>
Revenues/(1)/:
Technologies and Solutions............... $ 24,726 $ 58,886
Applications............................. 22,568 27,993
Consulting and Services.................. 23,414 23,815
------------ ------------
Total revenues...................... 70,708 110,694
------------ ------------
Cost of Sales:
Technologies and Solutions............... 2,788 5,530
Applications............................. 3,861 6,624
Consulting and Services.................. 14,091 13,694
------------ ------------
Total cost of sales............... 20,740 25,848
Selling, general and administrative............. 22,049 30,715
Research and development, net................... 9,805 16,279
Amortization of goodwill and other business
acquisition intangibles........................ ------------ ------------
7,175 11,130
------------ ------------
Total operating expenses . 59,769 83,972
------------ ------------
Operating income................................ 10,939 26,722
Other expenses (income):
Interest and other financing expenses... 69 2,151
Interest income......................... (2,269) (2,248)
Foreign exchange gains and losses, net.. (4,761) (5,817)
Share in losses of unconsolidated 464 3,056
affiliates............................. ------------ ------------
Total other expenses (income).... (6,497) (2,858)
------------ ------------
Income before income taxes and minority
interests...................................... $ 17,436 $ 29,580
Provision for income taxes...................... 5,226 12,123
------------ ------------
Income before minority interest................. 12,210 17,457
Minority interest, net of taxes................. 1,146 1,010
------------ ------------
Net income...................................... $ 11,064 $ 16,447
============ ============
Net income per common share:
Basic.......................................... $ 0.10 $0.14
============ ============
Diluted........................................ $ 0.10 $ 0.13
============ ============
Weighted average number of shares outstanding:
Basic.......................................... 109,163,316 118,582,950
Diluted........................................ 116,115,826 127,865,778
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
(1) The following summarizes revenues from companies partially owned by the
Company, FLV Fund, S.AI.L. Trust, and/or L&H Investment Company and from
certain other related parties. Revenues for the three months ended March
31, 1999 included $7.9 million from Microsoft Corporation, Associative
Computing Inc., Excalibur Technologies N.V., Nordisk Sprateknologi AS,
Omnicontact Corporation, Smartmove N.V., Xiox Corporation, Oceania Inc. and
e-DOCS.net Inc and for the three months ended March 31, 2000 included $7.4
million from Microsoft Corporation, Language Ware.net.Ltd., Phonetic
Topographics N.V., De Wilde CBT N.V., Nordisk Sprakteknologi AS, and Intel
Corp.
3
<PAGE>
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
--------------------
1999 2000
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income................................................. $ 11,064 $ 16,447
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................... 1,701 2,586
Amortization of goodwill and other business acquisition
intangibles............................................... 7,175 11,130
Amortization of other intangibles, including software
development costs......................................... 1,666 3,977
Share in loss of unconsolidated affiliates................. 464 3,056
Loss on sale of property and equipment..................... 10 1
Changes in operating assets and liabilities:
Accounts receivable, net.................................. (7,637) (26,475)
Inventories, net.......................................... (713) (1,019)
Prepaid expenses and other current assets................. (1,000) (2,198)
Accounts payable.......................................... (2,222) 4,393
Accrued expenses.......................................... (1,412) 4,312
Deferred revenue.......................................... 1,337 4,611
--------- ----------
Net cash provided by operating activities.................. 10,433 20,821
--------- ----------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired............ (1,145) (57,521)
Licenses and software development costs capitalized........ (3,347) (3,847)
Additions to property and equipment........................ (2,731) (5,112)
Investments in and loans provided to unconsolidated joint
ventures................. - (4,134)
Investments in and loans provided to associated companies.. (713) (8,610)
Proceeds from (purchases of) marketable securities......... (47) 4,604
Proceeds from sale of property and equipment............... 535 11
--------- ----------
Net cash used for investing activities..................... (7,448) (74,609)
--------- ----------
Cash flows from financing activities:
Repayment of notes payable to banks........................ (6,278) (5,204)
Proceeds from notes payable to banks....................... 210 5,417
Repayment of long-term debt and capital lease obligations.. (3,602) (448)
Proceeds from long-term debt............................... 30 147
Proceeds from issuance of common and preferred shares...... 16,251 108,345
--------- ----------
Net cash provided by financing activities.................. 6,611 108,257
--------- ----------
Effect of exchange rate changes on cash and cash
equivalents............................................... (9,936) (1,349)
--------- ----------
Increase (decrease) in cash and cash equivalents........... (340) 53,120
Cash and cash equivalents at beginning of period........... 188,464 125,730
--------- ----------
Cash and cash equivalents at end of period................. $188,124 $178,850
========= ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest................... $ 1,907 $ 2,320
Cash paid during the period for income taxes............... $ 862 $ 5,190
Noncash investing and financing transactions:
Conversion of convertible bonds to common shares........... $ 1,234 $ 13,768
Issuance of common shares for acquisitions................. $ -- $ 6,691
Issuance of convertible debt on acquisition of
subsidiaries.............................................. $ -- $ 3,033
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
<PAGE>
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Lernout & Hauspie (L&H) is a global leader in advanced speech and
language solutions for vertical markets, computers, automobiles,
telecommunications, embedded products, consumer goods and the Internet.
The Company is making the speech user interface (SUI) the keystone of
simple, convenient interaction between humans and technology, and is using
advanced translation technology to break down language barriers. The
Company provides a wide range of offerings, including; customized solutions
for corporations; core speech technologies marketed to OEMs; end user and
retail applications for continuous speech products in horizontal and
vertical markets; and document creation, human and machine translation
services, Internet translation offerings, and linguistics tools. L&H's
products and services originate in four basic areas; automatic speech
recognition (ASR), text-to-speech (TTS), digital speech and music
compression (SMC) and text-to-text (translation).
The condensed consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
normal and recurring adjustments which in the opinion of management are
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented. The results
of operations for the periods presented are not necessarily indicative of
the results to be expected for the full year. The accompanying unaudited
condensed consolidated financial statements should be read in conjunction
with the financial statements and notes included in the Company's Annual
Report on Form 20-F for the fiscal year ended December 31, 1999.
(2) PER SHARE INFORMATION
Per share information is based on the weighted average number of
common shares outstanding during each period for the basic computation and,
if dilutive, the weighted-average number of potential common shares
resulting from the assumed conversion of outstanding stock options, bonds
and warrants for the diluted computation.
5
<PAGE>
A reconciliation of the numerators and denominators of the basic and
diluted per share computation is as follows (in thousands except share and
per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------------------------
<S> <C> <C>
1999 2000
------------------------------------------
Net income $ 11,064 $ 16,447
Weighted average number of common shares
outstanding during the period:
Basic 109,163,316 118,582,950
Dilutive stock options 6,487,824 9,148,992
Dilutive bonds 342,524 ---
Dilutive warrants 122,162 133,836
--------------- --------------
Diluted 116,115,826 127,865,778
Net income per common share:
Basic $ 0.10 $ 0.14
Diluted $ 0.10 $ 0.13
</TABLE>
(3) Shareholders' Equity
On January 19, 2000, the Company issued 29,490 shares of common stock
within the framework of the asset purchase agreement entered into with
Colette Consulting Group.
On January 27, 2000, the Company issued 1,142,856 shares of common
stock at a purchase price of $26.25 per share to an institutional investor.
On February 1, 2000, the Company issued 1,142,858 shares of common
stock at a purchase price of $26.25 per share to an institutional investor.
On March 31, 2000, the Company issued 720,000 shares of common stock
at a purchase price of $55.75 per share to an institutional investor.
6
<PAGE>
(4) Contingencies
CONTINGENT CONSIDERATION PAYABLE FOR ACQUISITIONS
As of March 31, 2000, the Company was committed to pay the previous
shareholders of certain acquired companies a maximum amount of
approximately $31.75 million if certain financial performance targets of
profitability are reached by these companies.
Class Action Lawsuit
The Company is a named party in a consolidated class action lawsuit
which alleges, in general, that the Company improperly accounted for write-
offs of in-process research and development in connection with certain
acquisitions. The lawsuit contends that the Company's actions violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "34
Act") and Rule 10b-5 promulgated under the 34 Act. Plaintiffs filed these
lawsuits on behalf of all purchasers of the Company's common stock during
varying periods ranging from as early as April 28, 1997 through December 4,
1998. The plaintiffs seek: (1) unspecified compensatory damages; (2)
attorneys' and experts' fees; and (3) other relief.
The Company believes that the claims are groundless and is vigorously
defending itself. Nevertheless, class action litigation can be expensive
and time consuming. Although the Company cannot make any guarantees
regarding the outcome of these actions, it believes that the outcome will
not have a material adverse effect on the Company's business, financial
condition or results of operations.
(5) SEGMENT INFORMATION
The following tables summarize financial information by geographic
area (in thousands):
Revenues by Destination
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1999 2000
------------- ------------
<S> <C> <C>
United States............ $ 20,154 $ 19,939
Belgium.................. 14,739 9,178
Europe, other............ 22,435 19,748
Singapore................ 10,430 501
Korea.................... 97 58,932
Far East, other.......... 2,853 2,396
---------- ------------
$ 70,708 $ 110,694
========== ============
</TABLE>
7
<PAGE>
Long-lived Assets
<TABLE>
<CAPTION>
March 31,
-----------------------------
1999 2000
------------ ------------
<S> <C> <C>
United States............ $ 113,547 $ 170,768
Belgium.................. 54,503 136,365
Europe, other............ 96,749 113,534
Singapore................ 5,282 5,275
Korea.................... --- 57,807
Far East, other.......... 5,723 4,387
----------- ------------
$275,804 $ 488,136
=========== ============
</TABLE>
The following tables summarize financial information by business unit
(in thousands):
Three months ended March 31, 1999
<TABLE>
<CAPTION>
Technologies Consulting
& &
Solutions Applications Services Total
--------- ------------ -------- -----
<S> <C> <C> <C> <C>
Revenues........................... $ 24,726 $ 22,568 $ 23,414 $ 70,708
Depreciation and amortization...... (2,557) (6,385) (1,600) (10,542)
Segment profit..................... 19,382 12,320 7,724 39,426
Segment assets..................... 103,207 142,837 105,390 351,434
Capital expenditures............... 1,176 623 932 2,731
</TABLE>
Three months ended March 31, 2000
<TABLE>
<CAPTION>
Technologies Consulting
& &
Solutions Applications Services Total
--------- ------------ -------- -----
<S> <C> <C> <C> <C>
Revenues........................... $ 58,886 $ 27,993 $ 23,815 $110,694
Depreciation and amortization...... (8,734) (7,261) (1,698) (17,693)
Segment profit..................... 44,622 14,108 8,424 67,154
Segment assets..................... 281,402 196,947 113,718 592,067
Capital expenditures............... 3,619 917 576 5,112
</TABLE>
8
<PAGE>
Reconciliation of Segment Information
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
1999 2000
-------- --------
<S> <C> <C>
Total profit for reportable segments.... $ 39,426 $ 67,154
Unallocated amounts :
General and administrative.............. (18,682) (24,153)
Research and development................ (9,805) (16,279)
Other income............................ 6,497 2,858
Net income before income taxes and
minority interests..................... $ 17,436 $ 29,580
<CAPTION>
March 31,
------------------------------
1999 2000
-------- --------
<S> <C> <C>
Total assets for reportable segments.... $351,434 $592,067
Unallocated amounts:
Cash.................................... 188,123 178,850
Marketable securities................... 973 289
Other current assets.................... 14,525 24,691
Investments............................. 12,671 25,872
Deferred tax assets..................... 4,507 7,435
Total assets............................ $572,233 $829,204
</TABLE>
(6) Comprehensive Income
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income establishes standards for reporting and display of
comprehensive income and its components in the financial statements. The
Company's only item of other comprehensive income (loss) relates to the
change in the cumulative translation adjustment and is presented separately
on the balance sheet as required.
9
<PAGE>
A reconciliation of comprehensive income is as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
1999 2000
-------- --------
<S> <C> <C>
Total profit for reportable segments.... $ 39,426 $ 67,154
Net income as reported ................. $ 11,064 $ 16,447
Change in the cumulative translation
adjustment.................... (10,968) (1,681)
-------- --------
Comprehensive income.................... $ 96 $ 14,766
======== ========
</TABLE>
(7) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS 133
requires that derivative instruments be recognized as either assets or
liabilities in the consolidated balance sheet based on their fair values.
Changes in the fair values of such derivative instruments will be recorded
either in results of operations or in other comprehensive income, depending
on the intended use of the derivative instrument. The initial application
of SFAS 133 will be reported as the effect of a change in accounting
principle. SFAS 133, as amended, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. The Company will adopt the
requirements of SFAS 133 in its financial statements for the year ending
December 31, 2001. The Company has not yet determined the effect that the
adoption of SFAS 133 will have on its financial position, results of
operations or liquidity.
On March 31, 2000, the FASB issued FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock Compensation--An
Interpretation of APB Opinion No. 25 ("FIN 44"). FIN 44 provides guidance
for issues that have arisen in applying Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees. FIN 44 applies
prospectively to new awards, exchanges of awards in a business combination,
modifications to outstanding awards, and changes in grantee status that
occur on or after July 1, 2000. The Company has not yet determined the
effect that the provisions of FIN 44 will have on its financial position,
results of operations or liquidity.
(8) ACQUISITIONS
On January 19, 2000, the Company issued 29,490 shares within the
framework of an asset purchase agreement entered into with Colette
Consulting Group.
On January 19, 2000, the Company acquired the assets of Omni-Med
Transcription Inc. The Company paid $10 million in cash and $14 million
through a promissory note, payable in each case on April 3, 2000. In
addition, the Company is
10
<PAGE>
committed to pay up to an additional $6 million for this business
acquisition. The additional consideration will become payable if certain
financial targets are met in 1999 and 2000.
On January 27, 2000, the Company acquired Linguistic Technologies,
Inc. ("LTI") through the merger of LTI with a wholly-owned subsidiary of
the Company. The Company paid approximately $9.5 million in cash for LTI,
of which $1 million is being held in escrow to secure LTI's
indemnification obligations under the merger agreement. In addition, the
Company will be obliged to pay up to an additional $2.75 million to the
former shareholders of LTI if certain milestones are met by LTI before
April 27, 2001.
On February 18, 2000, the Company acquired Elan Informatique S.A.
("ELAN") for $5.1 million in cash. In addition the Company will be
obligated to pay up an additional $8 million to the former shareholders of
ELAN if certain milestones for the fiscal years 2000 and 2001 are met by
ELAN.
(9) SUBSEQUENT EVENTS
Stock split
In April 2000, the Company declared a two-for-one split of its common
shares which was effective in May 2000. All data related to shares and per
share amounts for all periods presented have been adjusted to reflect the
effect of the stock split.
Acquisition of Dictaphone Corporation.
On May 5, 2000, the Company acquired all of the outstanding capital stock
of Dictaphone Corporation through a merger of Dictaphone into one of its wholly-
owned subsidiaries. Dictaphone, headquartered in Stratford, Connecticut, is a
leader in selected vertical markets in the development, manufacture, marketing,
service and support of integrated voice and data management systems and
software, including dictation, voice processing, voice response, unified
messaging, records management, call center monitoring systems and communications
recording. In connection with the merger the Company issued a total of
approximately 9.4 million shares of its common stock in exchange for all of the
outstanding shares of Dictaphone common stock. The Company was also required to
assume or refinance approximately $430 million of Dictaphone debt and other
obligations. The Company will use the purchase method to account for this
acquisition.
Fortis Bank N.V., KBC Bank N.V., Artesia Banking Corporation N.V., Deutsche
Bank N.V. and Dresdner Bank Luxembourg S.A. collectively provided a total of
$430 million in financing in connection with the acquisition. The acquisition
financing consisted of a $200 million short-term debt facility due March 31,
2001 which bears interest at LIBOR plus 100 basis points and a $230 million five
year declining balance facility which bears interest at LIBOR plus 175 basis
points. In addition, Deutsche Bank has provided an ongoing $20 million
revolving credit facility to Dictaphone which bears interest at LIBOR plus 125
basis points. These credit facilities are unsecured and contain financial and
other covenants, including a covenant of the Company not to borrow any
additional amounts under its existing credit
11
<PAGE>
facilities. Borrowings under the five year facility will be for renewable terms
of up to six months and therefore may be required to be accounted for as short-
term debt.
Initial funding of $200 million under the short term facility and $30
million under the five year facility was used to repay Dictaphone's existing
bank debt, to satisfy other obligations in connection with the acquisition and
to cover closing costs. The remaining committed amount will be available to
cover the $200 million of Dictaphone's senior subordinated notes, should they be
put to the Company within 90 days of the closing by the noteholders at 101% of
par, as permitted by the terms of the notes. These notes are also redeemable by
Dictaphone at a declining rate beginning at 105.875% of par commencing in August
2000.
Acquisition of Dragon Systems, Inc.
On June 7, 2000, the Company acquired Dragon Systems, Inc. through its
merger with and into one of its wholly-owned subsidiaries. Dragon Systems,
headquartered in Newton, Massachusetts, is a leading developer and supplier of
speech and language technology. In connection with the merger, the Company
issued approximately 10.01 million shares of common stock to Dragon Systems
stockholders in exchange for all of the outstanding shares of Dragon Systems
common stock. In addition, the Company converted all outstanding Dragon Systems
stock options into options to acquire approximately 1.65 million shares of its
common stock at a weighted average exercise price of $20.15 per share. The
Company will use the purchase method to account for this acquisition.
Other Acquisitions
In April 2000, the Company acquired Interactive Systems Inc., a Pittsburgh-
based speech and language technology developer, for approximately $8.9 million
in cash with a $4 million earn out over 2 years.
In May 2000, the Company entered into an agreement to acquire additional
assets of Rodeer Systems, Inc., consisting of Rodeer's business operations in
the states of Arizona, Georgia, Minnesota, Oklahoma, Texas and some operations
in California for an aggregate purchase price of approximately $25 million in
cash.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Statements in this Report may constitute forward-looking statements. These
statements include, but are not limited to, statements involving our plans,
objectives, expectations and intentions, and may include statements involving
the financial and other contributions expected from our acquisitions,
development plans and recently introduced products, technologies and solutions,,
and the timing of the introduction of new products, technologies and solutions.
Actual results may be materially different than those anticipated in these
forward-looking statements. Factors that could cause actual results to
materially differ from those anticipated in these forward looking statements
include known and unknown risks, including uncertainty of new product
development, the risk that newly introduced products may contain undetected
errors or defects or otherwise not perform as anticipated, early stage of
development of the speech and language technology markets, our ability to manage
our growth and changing business, including our recent acquisitions of
Dictaphone Corporation and Dragon Systems, Inc., the retention of key technical
and other personnel, currency and other risks related to international
operations, rapid technological change and intense competition, as well as other
risks set forth in our filings with the Securities and Exchange Commission. We
caution readers not to place undue reliance upon any of our forward-looking
statements, which speak only as of the date made. We expressly disclaim any
obligation or undertaking to release publicly any updates or revisions to any of
these statements to reflect any change in our expectations or any change in
events, conditions or circumstance on which the statement is based.
STRATEGIC OVERVIEW
From 1994 through the middle of 1996, we were solely in the business of
developing and licensing core speech technologies. Commencing in the second half
of 1996, we started to expand our business into applications, solutions and
services. These applications, solutions and services have grown to include
dictation, machine and human translation, including Internet/intranet
translation, education, telephony, enterprise and embedded solutions, as well as
consulting and localization services. While expanding into these applications
and services, we have continued to strengthen our technology leadership in core
speech and language technologies. As a result, we believe that we offer the
broadest portfolio of speech and language technologies, including automatic
speech recognition, text-to-speech, speech and music compression, machine
translation and linguistic components. We further believe that our introduction
of breakthrough technologies, such as RealSpeak(TM) for text-to-speech, will
further strengthen our position in technology licensing and telephony solutions.
1997, we began licensing our software development kits and tools to
selected developers in various areas. Since that time, we have refined and
enhanced our development kits and tools. It is now our policy to expand our
licensing of these development kits and tools to strategic partners and
applications developers for the development and commercialization of speech and
language applications in a wide range of markets and languages.
We have further enhanced our competitive position by developing speech and
language technologies and applications for a number of languages. We have
traditionally developed these technologies and applications for twelve key
languages: American English; UK English; German; French; Italian; Spanish;
Portuguese; Dutch; Korean; Arabic; Chinese and Japanese.
13
<PAGE>
We believe that there may develop a significant demand for additional language
versions of our technologies and applications in response to many factors,
including the increasing use of speech as a user interface for computers, the
growth of the Internet and the potential demand of real-time translation, and
the globalization of telecommunication.
To address these large potential markets, beginning in the second half of
1998, we have implemented a strategy to expand the breadth of our speech and
language technologies to include a total of up to 36 languages. We have licensed
our software development kits and tools to strategic partners to develop
additional language versions of our technologies and applications. These
strategic partners take the financial risk and share in the rewards for speech
and language applications for these additional languages. During 1999 we
entered into strategic alliances for the development of Thai, Thamil, Hindo,
Turkish, Vietnamese, Urdu, Malay, Taiwanese, Arabic and Armenian languages.
Beginning in the third quarter of 1999, we further expanded our strategic
alliance program by licensing our software development kits and tools to
strategic partners to develop machine translation language pairs.
Recently, the Far East has become a major focus of our business strategy,
and, during 1999, our revenues from the Far East increased substantially. We
began developing speech engines for Asian languages in 1995 and introduced
Korean and Japanese versions of our text-to-speech and automatic speech
recognition technologies in 1996 and 1997. Since 1997, we have continued to
develop and enhance Asian language versions of our technologies and
applications. During 1998 and 1999, we expanded our Asian language offerings to
include specific solutions for telephony, embedded, automotive, translation and
intelligent content management applications.
We opened our research and development business center (competence center)
in Singapore in 1998. Through this competence center, during 1999, we licensed
our development tools to various Asian strategic partners for the development of
versions of our technologies and applications in additional Asian languages. We
also have expanded our business reach to Asian manufacturers of consumer,
automotive, embedded and telephony applications during 1998 and 1999.
In September 1999, we acquired Bumil Information & Communication, Co.,
Ltd., a developer of interactive voice, call center and other telephony and
telecommunications market applications, based in Seoul, South Korea. This
acquisition provides us with increased resources to apply our core technologies
to develop telephony applications and solutions. Following this acquisition, we
accelerated the introduction of our speech and language technologies, products,
solutions and services for enterprise and telephony into the Korean market. In
the fourth quarter of 1999, by combining our technologies, products, solutions
and services with Bumil's existing business, we were able to substantially
increase our revenues in Korea. In addition to licensing our core speech
technology, our offerings in Korea include the following products and services:
. Client services for call centers and automated attendants (currently in use
by banks, securities companies and other corporate customers);
. Client service solutions for on-line securities trading (currently in use in
over 15 securities companies in Korea);
. Applications for games, toys, and consumer appliances;
. Voice portals and speech services for stock quotes, news and sports;
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<PAGE>
. Integration of speech and language technology for document management; and
. Application of speech and language solutions for English as a second
language.
We intend to begin to introduce our enterprise and telephony applications,
solutions and services, including some of those listed above, to other markets,
including Japan and other countries in Asia, Europe and the Americas.
During 1999, we also began to shift our strategy in Europe and America from
pure licensing of our speech and language technologies to the licensing of our
technologies in the context of joint development projects with our customers for
the development of speech and language applications. The goal of this shift in
strategy is to increase our longer-term revenues by structuring our licensing to
achieve greater revenue-sharing with our customers. This shift has resulted in
a reduction of our receipt of up-front license fees for these products in both
Europe and America.
We also intend to focus on developing telephony applications and embedded
solutions for the wireless consumer and automotive electronics markets. In
addition, we intend to develop and apply our technologies to deliver corporate
solutions for Internet and e-commerce companies, as well as intranet and
client/server environments. In April 2000, together with Visteon Corporation, we
announced our intention to create a joint venture dedicated to advancing and
accelerating the speech interface in automotive applications.
In connection with our expansion of our business into speech and language
applications, we have successfully entered the dictation, machine translation
and education markets. Our award winning Voice Xpress products have facilitated
our entry into the retail computer application market. We have also expanded our
reach into the medical dictation market. We intend to leverage our position in
this market where we believe the estimated $6 billion transcription market, as
well as the medical record market, represent a large potential area of growth
for us.
During the past year, we have been developing and acquiring resources with
a goal of creating a technology-enhanced enterprise dictation and transcription
solution for the healthcare industry. During the third quarter of 1999, we
acquired the Articulate Systems division of Fonix Corporation. This acquisition
provided us with additional resources to create enterprise dictation and
transcription solutions for the healthcare market. In furtherance of this
strategy, in November 1999, we acquired the southern-Florida based medical
transcription business of Rodeer Systems, Inc. and in January 2000, pursuant to
agreements entered into in December 1999, we acquired OmniMed Transcription,
Inc. and Linguistic Technologies, Inc. OmniMed is a medical transcription
company based in Madison, Wisconsin. Linguistic Technologies, located in Edina,
Minnesota, is a speech recognition technology company focused on the medical
transcription market. Linguistic Technologies has developed advanced software
designed to help make the traditional medical transcription process more
efficient. The southern Florida medical transcription offices of Rodeer add a
southeast component to our planned enterprise dictation and transcription
solution. In addition to these acquisitions, in May 2000, we acquired
Dictaphone, a leader in the medical dictation and patient record market. We
believe that our acquisition of Dictaphone will provide us with a wide range of
assets to further our healthcare business strategies. Dictaphone's healthcare
market assets include approximately 5,000 medical industry customers,
approximately 100 sales representatives, a national network of technical service
15
<PAGE>
representatives and a broad range of solutions for medical industry dictation
and data management. We have also recently entered into an agreement to acquire
several additional territories of Rodeer's medical transcription business.
We have traditionally provided our translation and localization services to
large corporations in the information technology, telephony, automotive and
aerospace markets. These projects are often multi-million dollar, long-term
projects. We have recently introduced our Internet Translation service, which we
believe will enable us to further expand our existing translation services
business.
ACQUISITION OVERVIEW
Following our formation in 1987, we initially focused on the development of
our core speech technologies. Beginning in the third quarter of 1996, we began
expanding our business, moving into applications, solutions and services,
through internal development and acquisitions. We have set forth below a
summary of our more significant acquisitions and acquisitions under agreement,
since January 1, 2000.
Dictaphone Corporation
On May 5, 2000, we acquired all of the outstanding capital stock of
Dictaphone Corporation through a merger of Dictaphone into one of our wholly-
owned subsidiaries. Dictaphone, headquartered in Stratford, Connecticut, is a
leader in selected vertical markets in the development, manufacture, marketing,
service and support of integrated voice and data management systems and
software, including dictation, voice processing, voice response, unified
messaging, records management, call center monitoring systems and communications
recording. Dictaphone has two operating segments, System Products and Services
and Contract Manufacturing. The System Products and Services segment consists
of the sale and service of system-related products to dictation and voice
management and communications recording system customers in selected vertical
markets. The Contract Manufacturing segment consists of the manufacturing
operations which provides outside electronics manufacturing services to original
equipment manufacturers in the telecommunication, data management, computer and
electronics industries. During 1999, Dictaphone had total revenues of $353.7
million and a net loss of $8.9 million.
In connection with the merger we issued a total of approximately 9.4
million shares of our common stock in exchange for all of the outstanding shares
of Dictaphone common stock. We were also required to assume or refinance
approximately $430 million of Dictaphone debt and other obligations as more
fully described under the caption Liquidity and Capital Resources below. We will
use the purchase method to account for this acquisition.
Dragon Systems, Inc.
On June 7, 2000, we acquired Dragon Systems, Inc. through its merger with
and into one of our wholly-owned subsidiaries. Dragon Systems, headquartered in
Newton, Massachusetts, is a leading supplier of speech and language technology.
Dragon Systems' product offerings include continuous and discrete dictation
products for consumer, business and professional markets, command and control
programs, vertical market add-on vocabularies for specialized
16
<PAGE>
applications, such as legal and medical, customized telephony solutions, and
developers' tools. During 1999, Dragon Systems had total revenues of $60.0
million and a net loss of $21.8 million.
In connection with the merger we issued approximately 10.01 million shares
of our common stock to Dragon Systems stockholders in exchange for all of the
outstanding shares of Dragon Systems common stock. In addition, we converted
all outstanding Dragon Systems stock options into options to acquire
approximately 1.65 million shares of our common stock at a weighted average
exercise price of $20.15 per share. We will use the purchase method to account
for this acquisition.
Other Significant Acquisitions
. In January 2000 we acquired OmniMed Transcription, Inc. and Linguistic
Technologies, Inc. OmniMed is a medical transcription company based in
Madison, Wisconsin. Linguistic Technologies, located in Edina, Minnesota, is
a speech recognition technology company focused on the medical transcription
market. The purchase price for the three acquisitions totaled approximately
$38.6 million. Up to an additional $4.8 million is payable should the
acquired businesses meet agreed upon performance criteria.
. In February 2000, we acquired Elan Informatique S.A., a France-based text-to-
speech technology provider, for approximately $5.1 million in cash. In
addition, we will be obligated to pay up to an additional $8 million to the
former stockholders of ELAN if certain financial milestones are met by ELAN
during the years 2000 and 2001.
. In April 2000, we acquired Interactive Systems Inc., a Pittsburgh-based
speech and language technology developer, for approximately $8.9 million in
cash with a $4 million earn-out over 2 years. The assets from this
acquisition will provide us with additional expertise with which to further
natural language understanding, a technology that figures prominently in data
mining, data management, audio mining, clinical language understanding and
other processes needed for comprehensive healthcare and telecommunications
solutions.
. In May 2000, we entered into an agreement to acquire additional assets of
Rodeer Systems, Inc., consisting of Rodeer's business operations in the
states of Arizona, Georgia, Minnesota, Oklahoma, Texas and some operations in
California for an aggregate purchase price of approximately $25 million in
cash.
We intend to continue to supplement our development activities through the
acquisition or licensing of complementary businesses and technologies.
17
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain unaudited financial data for the
periods indicated as a percentage of total revenues ($ are in thousands):
<TABLE>
<CAPTION>
Three Months Ended THREE MONTHS ENDED
MARCH 31, MARCH 31,
<S> <C> <C>
1999 2000
---- ----
Total Revenues:
Technologies & Solutions....................... 35% 53%
Applications................................... 32 25
Consulting & Services.......................... 33 22
---- ----
Total Revenues . 100 100
COST OF REVENUES:
Technologies & Solutions....................... 4 5
Applications................................... 5 6
Consulting & Services.......................... 20 12
---- ----
Total Cost of Revenues...................... 29 23
OPERATING EXPENSES:
General & administrative....................... 13 10
Marketing & sales.............................. 18 18
Research & development......................... 14 15
Amortization and write-off of goodwill......... 10 10
---- ----
Total Operating Expenses.................... 85 76
Operating Income 15 24
---- ----
Other (income) expense (9) (3)
----
Minority interests 2 1
---- ----
Provision for income taxes 7% 16%
---- ----
</TABLE>
For the first quarter of 2000, total revenues were $110.7 million, an
increase of 57% over total revenues of $70.7 million for the first quarter 1999.
This increase was attributable to increases in revenues of all of our divisions.
This increase was primarily attributable to increases in revenues of our
Technologies and Solutions, and Applications divisions, primarily from the Far
East where our revenues increased substantially due to revenues generated in the
Korean market as a result of combining our technologies, products, solutions and
services with Bumil's existing business. In the first quarter of 2000 our
revenues from Korea increased to $58.9 million from $97,000 in the first quarter
of 1999.
Speech and language technologies and solutions revenue increased by 138% to
approximately $58.9 million in the first quarter of 2000 from approximately
$24.7 million in the first quarter of 1999. This increase was primarily
attributable to increases in revenue associated with the telecom and the
personal computer, multimedia and embedded markets. These increases were
partially offset by a decrease in revenues associated with the license of our
development tools and our intelligent content management technologies. In the
first quarter of
18
<PAGE>
2000, we had no technologies and solutions revenue attributable to nonrefundable
up-front license fees from strategic partners in connection with the license of
our development tools to develop additional language versions and language pairs
for our core speech and language technologies, compared to approximately $6.3
million of such revenue in the first quarter of 1999.
Speech and language applications revenue increased by 24% to approximately
$28.0 million in the first quarter of 2000 from approximately $22.6 million in
the first quarter of 1999. This increase was primarily attributable to an
increase in revenue for industry and professional solutions, including the
addition of medical transcription revenue as a result of our recent
acquisitions, and retail and other applications. In the first quarter of 2000,
we had approximately $6.0 million of medical transcription revenue, compared to
no such revenue in the first quarter of 1999. These increases were partially
offset by a decrease in revenues associated with the license of our development
tools to develop additional language versions and language pairs for our
applications products. In the first quarter of 2000, we had no applications
revenues attributable to nonrefundable up-front license fees from strategic
partners in connection with the license of our development tools to develop
additional language versions and language pairs for our applications products,
compared to $6.3 million of such revenue in the first quarter of 1999.
Speech and language consulting and services revenue increased slightly to
approximately $23.8 million in the first quarter of 2000 from approximately
$23.4 million in the first quarter of 1999. In the first quarter of 2000,
revenues from Microsoft and its affiliates constituted 27% of our consulting and
services revenue, compared to 25% in the first quarter of 1999.
Cost of Revenues. Total cost of revenues as a percentage of revenues
decreased to 23% in the first quarter of 2000 from 29% in the first quarter of
1999. This decrease was primarily attributable to an improvement in margins of
our technologies and solutions division, and an increase in the percentage of
our revenues derived from that division.
Costs of speech and language technologies and solutions revenue as a
percentage of such revenue decreased to 9% in the first quarter of 2000 from 11%
in the first quarter of 1999. Our improvement in margins was primarily
attributable to a more favorable mix of sales of products and technologies and
volume efficiencies associated with our increased revenues.
Costs of speech and language applications revenue as a percentage of such
revenue increased to 24% in the first quarter of 2000 from 17% in the first
quarter of 1999. This increase was primarily attributable to the addition of
revenue for medical transcription services and a decrease in revenues from our
license of development tools.
Cost of consulting and services revenue as a percentage of such revenues
decreased to 58% in the first quarter of 2000 from 60% in the first quarter of
1999. This decrease was primarily attributable to a more favorable mix of our
sales of these services.
General and Administrative Expense. General and administrative expense
increased by 17% to approximately $10.6 million, or 10% of total revenues, in
the first quarter of 2000 from approximately $9.0 million, or 13% of total
revenues, in the first quarter of 1999. The increase in general and
administrative expense was primarily attributable to the inclusion of general
and
19
<PAGE>
administrative expenses of our acquired businesses for the periods after their
acquisition, and to increased personnel and related costs to support our revenue
growth.
Marketing and Sales Expense. Marketing and sales expense increased by 55%
to approximately $20.1 million, or 18% of total revenues, in the first quarter
of 2000 compared to approximately $13.0 million, or 18% of total revenues, in
the first quarter of 1999. The increase in marketing and sales expense was
primarily attributable to increased sales.
Research and Development Expense. Research and development expense
increased 66% to approximately $16.3 million, or 15% of total revenues, in the
first quarter of 2000 from approximately $9.8 million, or 14% of total revenues,
in the first quarter of 1999. This increase was primarily attributable to our
increase in research and development efforts and personnel, through acquisitions
and internal growth, to address our expansion in different markets, in
particular the Asian markets, as well as to support our broader product and
technology portfolio.
Amortization and Write-off of Goodwill. Our amortization of goodwill
increased 55% to approximately $11.1 million, or 10% of total revenues, in the
first quarter of 2000, from approximately $7.2 million, or 10% of total
revenues, in the first quarter of 1999. This increase reflects goodwill
resulting from our acquisitions.
Other (Income)/Expense. Our other (income)/expense includes interest income
and expense, bank charges, realized and unrealized foreign exchange gains and
losses, our share in the losses of unconsolidated affiliates and debt conversion
expense. We recognized other income of approximately $2.9 million in the first
quarter of 2000 compared to other income of approximately $6.5 million in the
first quarter of 1999. This other income recognized in the first quarter of 2000
was primarily a result of interest income attributable to our cash and
investment balances and foreign exchange gains. Our foreign exchange gains and
losses have been primarily attributable to unrealized exchange gains resulting
from the increase and decrease in the value of the U.S. dollar in relation to
the Belgian franc and other functional currencies of our non-U.S. subsidiaries,
principally the Korean won and euro, as well as the increase and decrease in our
dollar denominated assets. A significant portion of our cash and short-term
investments are denominated in U.S. dollars. Because our functional currency for
our non-U.S. operations is their local currency, we are required to recognize
unrealized foreign exchange gains with respect to our U.S. dollar denominated
assets of these operations when the value of the U.S. dollar increases in
relation to their functional currency and unrealized foreign exchange losses
when the relative value of the U.S. dollar decreases. Our unrealized foreign
exchange gains were $4.2 million in the first quarter of 2000. Our interest
income and foreign exchange gains in the first quarter of 2000 were partially
offset by $3.1 million of expenses attributable to our share in the losses of
unconsolidated affiliates.
Minority Interest. Our minority interest expense, net of taxes, relates to
our share of the distribution obligations under the $156.0 million of preferred
income equity redeemable trust securities we issued in May 1998. Our minority
interest expense decreased to $1.0 million in the first quarter of 2000 compared
to $1.1 million in the first quarter of 1999.
Provision for Income Taxes. In the first quarter of 2000, we recognized
income tax expense of approximately $12.1 million, compared to approximately
$5.2 million in the first quarter of 1999. The increase in our provision for
income taxes reflects the depletion of the tax
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<PAGE>
loss carry-forwards of our Belgian parent company, as well as tax charges for
our businesses outside Belgium. In the first quarter of 2000, our Korean
subsidiary obtained a special tax status, which provides that its income
relating to the sale of products developed in Korea will be exempt from
taxation.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we had working capital of approximately $214.9 million,
including approximately $179.1 million in cash and marketable securities.
In the first three months of 2000, our operating activities provided
approximately $20.8 million of cash. Our net income of approximately $16.4
million included non-cash expenses of approximately $11.1 million of
amortization of goodwill, $4.0 million of amortization of other intangibles,
including software development costs, and $2.6 million of depreciation. Our
uses of cash included an increase in accounts receivable of approximately $26.5
million. The increase in accounts receivable was primarily attributable to our
increased revenues and to several large contracts entered into at the end of the
quarter.
In the first three months of 2000, our investing activities used
approximately $74.6 million of cash, including approximately $57.5 million for
acquisitions, approximately $3.8 million for the acquisition of licenses and
capitalized software development costs, approximately $5.1 million in additions
to property and equipment, and approximately $12.7 million of investments in
unconsolidated joint ventures and associated companies.
On May 5, 2000, we acquired Dictaphone Corporation. Fortis Bank N.V., KBC
Bank N.V., Artesia Banking Corporation N.V., Deutsche Bank N.V. and Dresdner
Bank Luxembourg S.A. collectively provided a total of $430 million in financing
in connection with the acquisition. The acquisition financing consisted of a
$200 million short-term debt facility due March 31, 2001 which bears interest at
LIBOR plus 100 basis points and a $230 million five year declining balance
facility which bears interest at LIBOR plus 175 basis points. In addition,
Deutsche Bank has provided an ongoing $20 million revolving credit facility to
Dictaphone which bears interest at LIBOR plus 125 basis points. These credit
facilities are unsecured and contain financial and other covenants, including a
covenant not to borrow any additional amounts under the Company's existing
credit facilities. Borrowings under the five year facility will be for
renewable terms of up to six months and therefore may be required to be
accounted for as short term debt.
Initial funding of $200 million under the short term facility and $30
million under the five year facility was used to repay Dictaphone's existing
bank debt, to satisfy other obligations in connection with the acquisition and
to cover closing costs. The remaining committed amount will be available to
cover the $200 million of Dictaphone's senior subordinated notes, should they be
put to the Company within 90 days of the closing by the noteholders at 101% of
par, as permitted by the terms of the notes. These notes are also redeemable by
Dictaphone at a declining rate beginning at 105.875% of par commencing in August
2000.
In June 2000, we acquired Dragon Systems, Inc. in an all stock transaction.
In connection with that acquisition, we repaid a $3 million term loan on behalf
of Dragon. From March 31, 2000 through June 8, 2000, we acquired additional
businesses, other than Dragon
21
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and Dictaphone, for a total purchase price of $16.4 million in cash. In
addition, we are required to pay up to an additional $4.0 million for these
acquisitions if performance targets are met. In May 2000, we entered into an
agreement to acquire additional assets of Rodeer Systems, Inc. for an aggregate
purchase price of approximately $25 million in cash.
In the first three months of 2000, our financing activities provided us
approximately $108 million of cash, primarily attributable to the sale of common
stock, including approximately $98.4 million from the sale of a total of
3,005,714 shares of our common stock to institutional investors.
We are a defendant in a consolidated class action lawsuit which alleges, in
general, that we improperly accounted for write-offs of in-process research and
development in connection with certain acquisitions. The lawsuit contends that
the Company `s actions violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 (the "34 Act") and Rule 10b-5 promulgated under the 34 Act.
Plaintiffs filed these lawsuits on behalf of all purchasers of the Company's
common stock during varying periods which range from as early as April 28, 1997
through December 4, 1998. These plaintiffs seek unspecified compensatory
damages, attorneys' and experts' fees and other relief. We believe that the
claims are groundless and are vigorously defending ourselves. Nevertheless,
class action litigation can be expensive and time consuming. Although we cannot
make any guarantees regarding the outcome of these actions, we believe that the
outcome will not have a material adverse effect on our business, financial
condition or results of operations.
We believe that our existing resources, including our new bank lines of
credit, and the anticipated cash generated from operations, will be sufficient
to fund our planned operations for at least the next 12 months. However, we
intend to seek additional sources of cash during the year to increase our
financial flexibility or to fund acquisitions. The sufficiency of our resources
to fund working capital needs is subject to known and unknown risks,
uncertainties and other factors which may materially harm our business,
including without limitation the factors set forth in the introduction to this
Item 2.
YEAR 2000 READINESS
We did not experience any material difficulties related to the Year 2000
problem on December 31, 1999 and have not experienced any such difficulties that
we are aware of since that date. In addition, our operations have not, to date,
been adversely affected by any difficulties experienced by any of our suppliers
or customers in connection with the Year 2000 problem. We intend to continue to
monitor our systems for potential difficulties through the remainder of the
year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risks (i.e., the risk of loss arising from adverse
changes in market rates and prices) to which we are exposed are:
. interest rates on debt; and
. foreign exchange rates.
22
<PAGE>
The following risk management discussion and the estimated amounts
generated from the analytical techniques are forward-looking statements of
market risk assuming certain market conditions occur. Actual results in the
future may differ materially from these projected results due to actual
developments in the global financial markets. The analysis methods that we use
to assess and mitigate the risks discussed above should not be considered
projections of future events or losses.
INTEREST RATES
We centrally manage our debt and overall financing strategies using a
combination of short-term and long-term debt with either fixed or variable
interest rates. We generally do not hedge our exposure to interest rate
fluctuations through the use of derivative instruments.
Certain financial instruments used to obtain capital are subject to
market risks from fluctuations in interest rates. As of March 31, 2000, the
Company has approximately $37.8 million in fixed rate debt.
FOREIGN EXCHANGE
Operating in international markets involves exposure to movements in
currency exchange rates. Currency exchange rate movements typically affect
economic growth, inflation, interest rates, governmental actions and other
factors.
Changes in currency exchange rates that would have the largest impact on
translating our non-U.S. dollar operating profit include the Belgian franc, the
British pound, the German mark and the Korean Won. The currency exchange rates
to the U.S. dollar at December 31,1999 and March 31, 2000, respectively, are as
follows:
<TABLE>
<CAPTION>
Foreign currency Exchange rate to the U.S. Dollar
----------------------------------------------------------------------------
December 31,1999 March 31,2000
----------------------------------------------------------------------------
<S> <C> <C>
BEF 40.16 42.23
----------------------------------------------------------------------------
GBP 0.62 0.63
----------------------------------------------------------------------------
DEM 1.95 2.05
----------------------------------------------------------------------------
KRW 1,141.5 1,108.3
----------------------------------------------------------------------------
</TABLE>
23
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
No Material Developments.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(All data in this Item 2 related to shares and per share amounts have been
adjusted to reflect a two-for-one stock split of the Company's common stock
distributed on May 12, 2000 to stockholders of record on April 28, 2000.)
On May 27th and June 4th 1998, L&H Capital Trust I (the "Trust") issued in
a registered offering an aggregate of $156 million in principal amount of trust
preferred income equity redeemable securities (the "PIERS"). The PIERS are
convertible into shares of the Company's common stock at a conversion price of
$28.425 per share (subject to certain adjustments in certain transactions). On
the following dates certain of the holders of the PIERS converted their PIERS
into the amount of common stock of the Company set forth below:
<TABLE>
<CAPTION>
DATE COMMON STOCK ISSUED
---- -------------------
<S> <C>
January 7, 2000 17,590
January 12, 2000 17,590
January 18, 2000 124,802
February 1, 2000 121,986
February 23, 2000 35,706
March 6, 2000 145,642
March 13, 2000 5,276
March 17, 2000 87,950
</TABLE>
The Company's 8% Convertible Subordinated Notes are convertible into shares
of the Company's common stock at a conversion price of $5.1256 per share,
subject to adjustments under certain circumstances. On the following dates, the
Company issued shares of its common stock to holders of its 8% Convertible
Subordinated Notes upon conversion thereof, as follows:
<TABLE>
<CAPTION>
DATE COMMON STOCK ISSUED
---- -------------------
<S> <C>
January 13, 2000 5,852
January 19, 2000 3,706
January 28, 2000 7,802
February 29, 2000 3,900
March 9, 2000 14,240
</TABLE>
24
<PAGE>
On January 19, 2000, the Company issued 29,490 shares of common stock to
Collette Consulting Group ("CCG") in connection with its acquisition of CCG and
pursuant to the asset purchase agreement dated January 11, 2000.
In December 1999, the Company acquired Linguex S.A. The Company issued a
note in the principal amount of $4.9 million. On January 27, 2000 the note was
automatically converted into 184,602 shares of the Company's common stock.
On January 31, 2000, the Company issued 19,036 shares of common stock to
Matra Nortel Communications in connection with its acquisition of Matra.
On May 16, 1997, the Company acquired 100% of the issued and outstanding
shares of GMS, a company incorporated under the laws of Germany. The Company
paid approximately $8.5 million in cash, net of cash received in the
acquisition. On March 9, 2000, the Company issued 74,720 shares of the
Company's common stock to the former stockholders of GMS following the
satisfaction of certain conditions in the acquisition agreement.
On March 29, 2000, the Company issued 72,000 shares of common stock to
Medquist Inc. in connection with the conversion of warrants held by Medquist.
With regard to all of the transactions mentioned above, the Company relied
upon Regulation S promulgated under the Securities Act of 1933, as amended (the
"Act"), and/or Section 4(2) of the Act as exemptions from the registration
requirements of the Act. No commissions were paid to any underwriter in
connection with the securities issued in any of the foregoing transactions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND INTERIM REPORTS
----------------------------
(a) Exhibits None
-------------------
(B) INTERIM REPORTS
-------
We filed the following reports on Form 6-K and Form 8-K during the fiscal
quarter ended March 31, 2000:
25
<PAGE>
1. On February 14, 2000, we filed a Form 6-K concerning our 1999
Fourth Quarter results.
2. On February 24, 2000, we filed a Form 6-K concerning (i) a legal
dispute between the Company and Medquist, Inc., and (ii) certain
unaudited pro forma financial information for the 1999 Fourth
Quarter.
3. On March 9, 2000, we filed a Form 6-K regarding the Company's
definitive agreement to acquire Dictaphone Corporation.
4. On March 22, 2000, we filed a Form 6-K concerning our acquisition
of Dictaphone Corporation.
5. On March 30, 2000, we filed a Form 6-K concerning (i) the
settlement of the lawsuit of Medquist Transcriptions Ltd., and
(ii) the Company's definitive agreement to acquire Dragon
systems, Inc.
26
<PAGE>
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 thereunto duly authorized.
June 30, 2000
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
By: /s/ Gaston Bastiaens
--------------------
Gaston Bastiaens
President and Chief Executive Officer
(Principal Executive Officer)
By: /s/ Carl Dammekens
------------------
Carl Dammekens
Senior Vice President of Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
27
