<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 JUNE 30, 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, as of
August 10, 2000, was 143,154,761.
<PAGE>
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES
FORM 10-Q
---------
INDEX
-----
<TABLE>
<CAPTION>
Page
----
<S> <C>
EXPLANATORY NOTE....................................................... 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets at December 31, 1999
and June 30, 2000 (unaudited).................................. 4
Condensed Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1999 and 2000 (unaudited).. 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 2000 (unaudited)............ 6
Notes to Interim Condensed Consolidated Financial Statements... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 32
Item 2. Changes in Securities.......................................... 32
Item 3. Defaults Upon Senior Securities................................ 35
Item 4. Submission of Matters to a Vote of Security Holders............ 35
Item 5. Other Information.............................................. 39
Item 6. Exhibits and Interim Reports................................... 39
Signatures............................................................. 40
</TABLE>
2
<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.
In April 2000 we announced a two-for-one split of our common stock which was
distributed in May 2000. All data related to share and per share amounts for
all periods presented have been adjusted to reflect the stock split.
3
<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 JUNE 30, 2000
---------------------------------------------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 125,730 $ 199,393
Marketable securities................................. 4,900 288
Accounts receivable, net (1).......................... 104,020 237,067
Value added tax and other receivables................. 2,616 6,525
Inventory............................................. 3,700 27,125
Prepaid expenses and other current assets............. 12,498 60,699
--------- ----------
Total current assets....................... 253,464 531,097
--------- ----------
Deferred financing costs....................................... - 6,491
Deferred tax assets............................................ 7,435 7,702
Property and equipment, net of accumulated depreciation
of $25,914 and $72,078, respectively......................... 33,688 75,129
Investments.................................................... 14,433 35,310
Intangibles, net of amortization............................... 379,031 1,703,678
Software development costs, net of amortization................ 5,687 13,369
--------- ----------
Total assets............................... $ 693,738 $2,372,776
========= ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable......................................... $ 15,724 $ 251,907
Current portion of long-term debt..................... 8,490 3,404
Accounts payable...................................... 19,582 57,831
Accrued expenses...................................... 64,032 99,328
Deferred revenue...................................... 2,980 75,932
--------- ----------
Total current liabilities.................. 110,808 488,402
Long-term debt, less current portion........................... 18,665 234,297
--------- ----------
Total liabilities.......................... 129,473 722,699
--------- ----------
Minority interest.............................................. - 1,150
Company-obligated mandatorily redeemable
security of subsidiary trust holding solely
parent convertible subordinated debentures................... 146,672 117,757
Commitments and contingencies
Shareholders' equity:
Common shares, no par value: 114,415 and 142,592
shares issued and outstanding at December 31, 1999
and June 30, 2000, respectively..................... 113,498 120,472
Common shares, no par value: automatically
convertible stock, 896 shares issued and outstanding 494 494
Additional paid-in capital............................. 421,466 1,553,340
Accumulated deficit.................................... (107,898) (125,115)
Accumulated other comprehensive loss................... (9,967) (18,021)
--------- ----------
Total shareholders' equity................. 417,593 1,531,170
--------- ----------
Total liabilities and shareholders' equity......... $ 693,738 $2,372,776
========= ==========
</TABLE>
(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 Sprakteknologi 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
June 30, 2000 included a total of $13,134 from Microsoft Corporation,
LanguageWare.net Ltd., CellPort Labs Inc., Xiox Corporation, EHQ Inc., Iris
N.V., Phonetic Topographics N.V., Intel Corporation, Nordisk
Sprakteknologi AS, Speech Systems Inc., Hogadata Benelux N.V., BCB Voice
Systems Inc., ESL.com Ltd., Telekol Corporation, Cegeka Healthcare Systems
N.V., Computer Voice Dictation Solutions Inc., iSAIL Solutions N.V., Voice
com.net and Sail Labs N.V.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues(1):
Technologies and Solutions.................... $ 26,485 $ 78,904 $ 51,211 $ 137,790
Applications.................................. 28,984 50,440 51,552 78,433
Consulting and Services....................... 20,546 25,562 43,960 49,378
------------ ------------ ------------ ------------
Total revenues........................... 76,015 154,906 146,723 265,601
------------ ------------ ------------ ------------
Cost of Sales:
Technologies and Solutions.................... 2,554 14,021 5,342 19,551
Applications.................................. 4,680 16,963 8,541 23,587
Consulting and Services....................... 12,064 15,447 26,154 29,141
------------ ------------ ------------ ------------
Total cost of sales...................... 19,298 46,431 40,037 72,279
Selling, general and administrative.................. 23,133 56,510 45,181 87,225
Research and development, net........................ 10,810 23,811 20,615 40,090
Amortization of goodwill and other business
acquisition intangibles............................. 7,244 35,490 14,419 46,620
Write-off of in-process research and
development......................................... - 8,600 - 8,600
------------ ------------ ------------ ------------
Total operating expenses................. 60,485 170,842 120,252 254,814
------------ ------------ ------------ ------------
Operating income (loss).............................. 15,530 (15,936) 26,471 10,787
Other expenses (income):
Interest and other financing expenses........ 261 8,588 330 10,739
Interest income.............................. (2,707) (1,627) (4,976) (3,875)
Foreign exchange gains and losses, net....... 239 (3,556) (4,521) (9,373)
Share in losses of unconsolidated
affiliates................................ 366 2,409 830 5,465
------------ ------------ ------------ ------------
Total other expenses (income)............ (1,841) 5,814 (8,337) 2,956
------------ ------------ ------------ ------------
Income (loss) before income taxes and
minority interests.................................. $ 17,371 $ (21,750) $ 34,808 $ 7,831
Provision for income taxes........................... 6,654 11,305 11,880 23,428
------------ ------------ ------------ ------------
Income (loss) before minority interest............... 10,717 (33,055) 22,928 (15,597)
Minority interest, net of taxes...................... 1,131 612 2,277 1,622
------------ ------------ ------------ ------------
Net income (loss).................................... $ 9,586 $ (33,667) $ 20,651 $ (17,219)
============ ============ ============ ============
Net income per common share:
Basic............................................... $0.09 $(0.26) $0.19 $(0.14)
============ ============ ============ ============
Diluted............................................. $0.08 $(0.26) $0.18 $(0.14)
============ ============ ============ ============
Weighted average number of shares
outstanding:
Basic............................................... 111,605,554 131,354,671 110,391,182 124,968,811
Diluted............................................. 118,695,420 131,354,671 117,530,864 124,968,811
</TABLE>
(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 June 30,
1999 included $7.4 million from Microsoft Corporation and $200,000 from
Xiox Corporation Inc., Smartmove N.V., Oceania Inc., Excalibur Technologies
N.V., e-Docs.net Inc., Cellport Labs, Intel Atlantic Inc., Financial
Architects N.V. and Phonetic Topographics N.V. and for the three months
ended June 30, 2000 included $8.0 million from Microsoft Corporation and
$2.2 million from De Wilde CBT N.V., Nordisk Sprakteknologi AS, Intel
Corp., Cellport Labs, Telemessage and Voice net.com. Revenues for the six
months ended June 30, 1999 included $14.5 million from Microsoft
Corporation and $1.1 million from Speech Systems Inc., Mindmaker Inc., Xiox
Corporation Inc., Smartmove N.V., Oceania Inc., Excalibur Technologies
N.V., e-Docs.net Inc., Omnicontact Corporation, Cellport Labs, Intel
Atlantic Inc., Nordisk Sprakteknologi AS, Financial Architects N.V. and
Phonetic Topographics N.V. and for the six months ended June 30, 2000
included $15.3 million from Microsoft Corporation and $2.3 million from
LanguageWare.net Ltd., Phonetic Topographics N.V., De Wilde CBT N.V.,
Nordisk Sprakteknologi AS, Intel Corp., Cellport Labs, Telemessage and
Voice net.com.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------
1999 2000
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $ 20,651 $ (17,219)
Adjustments to reconcile net income to net cash provided by operating
activities:
Write-off of in-process research and development.......................... - 8,600
Depreciation.............................................................. 2,970 6,258
Amortization of other intangibles, including software development costs 2,344 8,480
Amortization of goodwill and other business acquisition intangibles....... 14,419 46,620
Deferred taxes............................................................ - (267)
Gain on sale of investments............................................... (163) (2)
Share in loss of unconsolidated affiliates................................ 830 5,389
Loss on sale of property and equipment.................................... 22 45
Changes in operating assets and liabilities:
Accounts receivable, net................................................ (16,738) (61,695)
Inventories, net......................................................... 278 (8,650)
Prepaid expenses and other current assets................................ (1,763) (7,109)
Accounts payable......................................................... (7,960) 20,877
Accrued expenses......................................................... 9,637 14,404
Deferred revenue......................................................... (716) 16,641
-------- ---------
Net cash provided by operating activities................................. 23,811 32,372
-------- ---------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired........................... (48,180) (102,974)
Licenses and software development costs capitalized....................... (7,007) (13,349)
Additions to property and equipment....................................... (3,999) (9,062)
Investments in and loans provided to unconsolidated joint ventures........ - (14,972)
Investments in and loans provided to associated companies................. (8,567) (9,703)
Proceeds from (purchases of) marketable securities........................ (37) 4,612
Proceeds from sale of property and equipment.............................. 921 76
-------- ---------
Net cash used for investing activities.................................... (66,869) (145,372)
-------- ---------
Cash flows from financing activities:
Repayment of notes payable to banks....................................... (6,239) (233,588)
Proceeds from notes payable to banks...................................... - 253,308
Repayment of long-term debt and capital lease obligations................. (26,901) (6,151)
Proceeds from long-term debt.............................................. 75 1,881
Proceeds from issuance of common and preferred shares..................... 52,404 175,940
-------- ---------
Net cash provided by financing activities................................. 19,339 191,390
-------- ---------
Effect of exchange rate changes on cash and cash equivalents.............. (12,656) (4,727)
-------- ---------
Increase (decrease) in cash and cash equivalents.......................... (36,375) 73,663
Cash and cash equivalents at beginning of period.......................... 188,464 125,730
-------- ---------
Cash and cash equivalents at end of period................................ $152,089 $ 199,393
======== =========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................................. $ 4,134 $ 4,597
Cash paid during the period for income taxes.............................. $ 1,470 $ 13,138
Noncash investing and financing transactions:
Conversion of convertible bonds to common shares.......................... $ 1,763 $ 25,903
Issuance of common shares for acquisitions................................ $ -- $ 936,224
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
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 10-K for the fiscal year ended December 31, 1999.
(2) INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31, 1999 June 30, 2000
----------------------------------------
<S> <C> <C>
Raw materials and work in process $ --- $ 4,358
Supplies and service parts 1,524 6,723
Finished goods 2,176 16,044
------ -------
Total inventories $3,700 $27,125
====== =======
</TABLE>
7
<PAGE>
(3) 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.
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 Six Months Ended
June 30, June 30,
---------------------------------------------------------------------------------
1999 2000 1999 2000
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 9,586 $ (33,667) $ 20,651 $ (17,219)
Weighted average number of common shares
outstanding during the period:
Basic 111,605,554 131,354,671 110,391,182 124,968,811
Dilutive stock options 6,677,156 --- 6,726,688 ---
Dilutive bonds 281,708 --- 279,430 ---
Dilutive warrants 131,002 --- 3,564 ---
------------ ------------ ------------ ------------
Diluted 118,695,420 131,354,671 117,530,864 124,968,811
Net income per common share:
Basic $ 0.09 $ (0.26) $ 0.19 $ (0.14)
Diluted $ 0.08 $ (0.26) $ 0.18 $ (0.14)
</TABLE>
The calculations of the common shares outstanding for the diluted
computations exclude the following potential common shares as of June 30, 2000:
(1) options to purchase 13,577,060 shares of common stock, and
(2) warrants to purchase 160,000 shares of common stock.
The inclusion of such potential common shares in the diluted per share
computations would be antidilutive since the Company incurred net losses for the
three and six months ended June 30, 2000.
8
<PAGE>
(4) SHAREHOLDERS' EQUITY
In February, 2000, the Company acquired Clockworks International
Limited. The Company issued two notes in the principal amounts of
IR(Pounds) 1,007,736 (approximately $1.2 million) and IR(Pounds) 1,492,264
(approximately $1.8 million), respectively. On April 3, 2000, the notes
automatically converted into a total of 54,954 shares of the Company's
common stock.
In April 2000, the Company issued 500,000 shares of common stock at a
purchase price of $56.50 per share to an institutional investor.
In April 2000, the Company issued 8,170 shares of common stock to BCB
Voice Systems Inc. in connection with its investment in BCB Voice Systems
Inc.
In May 2000, the Company issued 9,384,190 shares of common stock in
connection with its acquisition of Dictaphone Corporation.
In May 2000, the Company issued 6,987 shares of common stock to two
former shareholders of Emti Portugal. These shares were issued as
additional consideration for the Company's acquisition of Emti Portugal in
August 1997 which became payable upon the satisfaction of certain
performance targets being met for the year ended 1999.
In May 2000, the Company issued 12,347 shares of common stock to two
former shareholders of Emti Brazil. These shares were issued as additional
consideration for the Company's acquisition of Emti Brazil in August 1997
which became payable upon the satisfaction of certain performance targets
being met for the year ended 1999.
In June 2000, the Company issued 10,011,236 shares of common stock in
connection with its acquisition of Dragon Systems, Inc.
In June 2000, the Company issued 480,000 shares of common stock at a
purchase price of $44.80 per share to an institutional investor.
During the six months ended June 30, 2000, the Company issued an
aggregate of 1,049,319 shares of common stock in connection with the
conversion of approximately $28.9 million of Company-obligated mandatorily
redeemable securities of a subsidiary trust holding solely parent
convertible subordinated debentures.
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.
9
<PAGE>
(5) CONTINGENCIES
Contingent Consideration Payable for Acquisitions
As of June 30, 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 or other performance
targets are reached by these companies.
Litigation
On February 12, 1999, AllVoice Computing Plc of Devon, England filed a
lawsuit against Dragon Systems in the U.S. District Court for the District
of Massachusetts, which alleges infringement by Dragon of AllVoice's U.S.
Patent No. 5,799,273 and violation of Chapter 93A of the Massachusetts
General Laws. AllVoice is seeking injunctive relief and unspecified
damages, including treble damages.
The Company is a defendant in a number of additional lawsuits and
administrative proceedings, none of which the Company believes will have a
material adverse effect on the Company's consolidated financial position or
results of operations.
The Company does not believe that the ultimate resolution of the
litigation and administrative proceedings described above will have a
material adverse effect on the Company's consolidated financial position or
results of operations.
10
<PAGE>
(6) SEGMENT INFORMATION
The following tables summarize financial information by geographic area
(in thousands):
Revenues by Destination
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ ------------------------------
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
United States............ $18,691 $ 48,909 $ 38,845 $ 68,848
Belgium.................. 10,750 8,562 25,489 17,740
Europe, other............ 18,578 27,342 41,013 47,090
Singapore................ 25,436 890 35,866 1,392
Korea.................... 1,124 68,059 1,221 126,991
Far East, other.......... 1,436 1,144 4,289 3,540
------- -------- -------- --------
$76,015 $154,906 $146,723 $265,601
======= ======== ======== ========
</TABLE>
Long-lived Assets
<TABLE>
<CAPTION>
June 30,
---------------------------------
1999 2000
-------- ----------
<S> <C> <C>
United States............ $118,627 $1,485,044
Belgium.................. 123,913 140,085
Europe, other............ 91,883 127,496
Singapore................ 5,137 4,812
Korea.................... 1,132 65,927
Far East, other.......... 4,818 4,122
-------- ----------
$345,510 $1,827,486
======== ==========
</TABLE>
The following tables summarize financial information by business unit (in
thousands):
<TABLE>
<CAPTION>
Three months ended June 30, 1999
Technologies Consulting
& &
Solutions Applications Services Total
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues........................... $26,485 $28,984 $20,546 $76,015
Depreciation and amortization...... (3,631) (4,081) (1,479) (9,191)
Segment profit..................... 20,300 20,223 7,003 47,526
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Six months ended June 30, 1999
Technologies Consulting
& &
Solutions Applications Services Total
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues......................... $51,211 $ 51,552 $43,960 $146,723
Depreciation and amortization.... (6,187) (10,467) (3,079) (19,733)
Segment profit................... 39,682 32,544 14,727 86,953
<CAPTION>
Three months ended June 30, 2000
Technologies Consulting
& &
Solutions Applications Services Total
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues.............................. $ 78,904 $ 50,440 $25,562 $154,906
Depreciation and amortization......... (17,610) (24,089) (1,966) (43,665)
Write-off of in-process research and
development.......................... --- (8,600) --- (8,600)
Segment profit........................ 47,273 788 8,149 56,210
<CAPTION>
Six months ended June 30, 2000
Technologies Consulting
& &
Solutions Applications Services Total
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues.............................. $137,790 $ 78,433 $49,378 $265,601
Depreciation and amortization......... (26,344) (31,350) (3,664) (61,358)
Write-off of in-process research and
development.......................... --- (8,600) --- (8,600)
Segment profit........................ 91,895 14,896 16,573 123,364
</TABLE>
12
<PAGE>
Total assets and capital expenditures
<TABLE>
<CAPTION>
Technologies Consulting
& &
Solutions Applications Services Total
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
As per June 30, 1999:
--------------------
Segment assets........................ $169,099 $ 144,172 $101,378 $ 414,649
Capital expenditures.................. 2,000 1,122 877 3,999
As per June 30, 2000
--------------------
Segment assets........................ 724,434 1,189,541 115,269 2,029,244
Capital expenditures.................. 5,288 2,395 1,379 9,062
</TABLE>
Reconciliation of Segment Information
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 2000 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Profit for reportable segments........ $ 47,526 $ 56,210 $ 86,953 $123,364
Unallocated amounts:
General and administrative............ (21,184) (48,335) (39,867) (72,487)
Research and development.............. (10,810) (23,811) (20,615) (40,090)
Other income (expense)................ 1,839 (5,814) 8,337 (2,956)
-------- -------- -------- --------
Net income (loss) before income taxes $ 17,371 $(21,750) $ 34,808 $ 7,831
and minority interests ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
June 30,
-------------------------------------
1999 2000
-------- ----------
<S> <C> <C>
Total assets for reportable segments $414,649 $2,029,244
Unallocated amounts:
Cash 152,089 199,393
Marketable securities 1,077 288
Other current assets 15,975 94,348
Investments 18,006 35,310
Deferred financing costs --- 6,491
Deferred tax assets 4,507 7,702
-------- ----------
Total assets $606,303 $2,372,776
======== ==========
</TABLE>
13
<PAGE>
(7) 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.
A reconciliation of comprehensive income is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
1999 2000 1999 2000
------- -------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) as reported.............. $ 9,586 $(33,667) $ 20,651 $(17,219)
Change in the cumulative translation
adjustment................................ (4,667) (6,373) (15,635) (8,054)
------------------------------------------------------------
Comprehensive income (loss)................ $ 4,919 $(40,040) $ 5,016 $(25,273)
======= ======== ======== ========
</TABLE>
(8) 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.
14
<PAGE>
(9) ACQUISITIONS
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 purchase price has been allocated to the assets purchased
and the liabilities assumed based upon the fair value on the date of
acquisition, as follows (in thousands):
<TABLE>
<S> <C>
Assets acquired:
Working capital......................................................... $ 47,828
Property and equipment.................................................. 33,920
Goodwill................................................................ 850,687
Liabilities assumed........................................................ (433,508)
---------
$ 498,927
=========
</TABLE>
In connection with the Company's acquisition of Dictaphone, it
announced its intent to dispose of Dictaphone's contract manufacturing
business in Florida. Dictaphone is currently in discussions regarding the
sale of that business and expects to complete the sale by the end of 2000.
The expected net proceeds of the sale and cash flows of this business until
it is sold, less an allocation of interest expense for the holding period,
were allocated to net assets held for sale in the allocation of the
Dictaphone purchase price. Any difference between the actual and expected
amounts will result in an adjustment to goodwill. The business held for
sale had net income of $0.2 million from the date of acquisition to June
30, 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 purchase price has been allocated
to the assets purchased and the liabilities assumed based upon the fair
value on the date of acquisition, as follows (in thousands):
15
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Assets acquired:
Working capital......................................................... $(18,282)
Property and equipment.................................................. 2,320
Goodwill................................................................ 461,240
--------
$445,278
========
</TABLE>
The following summary pro forma condensed consolidated financial
information reflects the acquisitions of Dictaphone and Dragon Systems as
if they had occurred on January 1, 2000 for purposes of the statements of
operations. The summary pro forma information is not necessarily
representative of what the Company's results of operations would have been
had these acquisitions in fact occurred on January 1, 2000 and is not
intended to project the Company's results of operations for any future
period or date.
Pro forma condensed consolidated financial information for the six
months ended June 30, 2000 (in thousands except share and per share
amounts):
<TABLE>
<CAPTION>
Six Months
Ended June 30, 2000
-------------------------
<S> <C>
Net sales $ 370,703
Gross profit $ 230,569
Loss from operations $ (117,209)
Net loss $ (156,288)
Basic earnings per common share $ (1.11)
Diluted earnings per common share $ (1.11)
Basic weighted average number of shares outstanding 140,211,646
Diluted weighted average number of shares outstanding 140,211,646
</TABLE>
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.
(10) BANK FACILITIES AND SUBORDINATED NOTES
In connection with the acquisition of Dictaphone, 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. 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
16
<PAGE>
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 facilities. The new credit
facilities also provide that the Company must use the cash proceeds of any
sale of equity to prepay amounts outstanding under the short term facility,
provided that an aggregate of $50 million in cash proceeds of any sales of
equity made during the term of the short term facility may be used by the
Company for other purposes.
Initial funding of $200 million under the short-term facility and $30
million under the five year facility was used by the Company to repay
Dictaphone's existing bank debt and the outstanding preferred stock, to
satisfy other obligations in connection with the acquisition and to cover
closing costs. As of June 30, 2000, the Company had borrowed $200 million
under its short-term facility, $30 million under its five year facility and
$16.5 million under its Dictaphone facility.
As of June 30, 2000, Dictaphone had $200 million of senior
subordinated notes outstanding. These notes bear interest at 11 3/4% per
annum, are due in August 2005, and are redeemable by Dictaphone, at its
option, at a declining rate beginning at 105.875% of par commencing in
August 2000. The notes also contain financial and other covenants that are
applicable to Dictaphone. The notes remain separate obligations of
Dictaphone and have not been assumed or guaranteed by Lernout & Hauspie.
17
<PAGE>
(11) SUBSEQUENT EVENTS
On July 3, 2000, the Company acquired 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 pursuant to the agreement with Rodeers Systems, Inc. dated May 2000.
In July 2000, the Company borrowed an additional $55.0 million under
its five year bank facility to redeem approximately $41.5 million of
Dictaphone's senior subordinated notes that were put to Dictaphone by the
noteholders at 101% of par following the acquisition of Dictaphone and for
interest due on the redeemed notes and the remaining outstanding notes.
In August 2000, the United States District Court for the District of
Massachusetts dismissed with prejudice all claims under the class action
lawsuits, consolidated in that court in April 1999. The suit had alleged
that the Company and certain of its officers knowingly and improperly
accounted for write-offs of in-process research and development expenses in
connection with certain acquisitions.
In August 2000, several law firms announced that they have named the
Company in class action lawsuits that allege that the Company
misrepresented its financial condition by inflating its reported revenues.
The announcements contend that the Company's actions violated Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated under that Act. The announcements state that the lawsuits are
being filed on behalf of all purchasers of the Company's common stock
during varying periods, ranging from as early as December 28, 1999, through
August 7, 2000. The Company anticipates that these plaintiffs will be
seeking unspecified compensatory damages, attorneys' and experts' fees and
other relief. The Company believes that the claims against it in these
class action lawsuits are groundless, and it intends to vigorously defend
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.
18
<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,
the timing of the introduction of new products, technologies and solutions and
the sufficiency of our capital resources. 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, the early stage of development of the speech, language and medical
information technology markets, our ability to predict accurately the demand for
our products in these emerging markets and to develop strategies to address
these markets successfully, the ability of our customers to integrate
successfully our technology into their own product offerings and their ability
to commercialize those product offerings successfully, 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,
particularly in Korea and other Asia Pacific markets, 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 these statements are based.
ACQUISITION OVERVIEW
We have set forth below a summary of our more significant acquisitions
since March 31, 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 the medical and other 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 provide outside electronics manufacturing
services to original equipment manufacturers in the telecommunication, data
management, computer and electronics industries.
19
<PAGE>
We have announced our intention to dispose of Dictaphone's Contract
Manufacturing business, and are currently in discussions regarding the sale of
that business. Pending the sale, we intend to continue to operate this business.
We are accounting for the post-acquisition operation of Dictaphone's Contract
Manufacturing business segment as assets held for sale that are not reflected in
our revenue or net income. We cannot give assurance that we will be able to sell
the contract manufacturing business on favorable terms if at all.
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 $430.0 million of Dictaphone debt and other obligations as more
fully described under the caption Liquidity and Capital Resources below. We used
the purchase method to account for this acquisition. The post-acquisition
results of Dictaphone are included in our financial statements.
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 applications, such
as legal and medical, customized telephony solutions, and developers' tools.
In connection with the merger, we issued approximately 10.0 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 1.7 million shares of our common stock at a weighted average
exercise price of $20.15 per share. We used the purchase method to account for
this acquisition. The results of Dragon from the June 7, 2000 acquisition date
are included in our financial statements.
Rodeer Systems, Inc. Asset Acquisition
In July 2000, we acquired additional assets of Rodeer Systems, Inc., a
medical transcription company, 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 $25.0 million in
cash.
We intend to continue to supplement our development activities through the
acquisition or licensing of complementary businesses and technologies.
RESULTS OF OPERATIONS
In the second quarter of 2000, our total revenues were approximately $154.9
million, an increase of 104% over total revenues of $76.0 million in the second
quarter of 1999. In the first
20
<PAGE>
six months of 2000, our total revenues were approximately $265.6 million, an
increase of 81% over total revenues of $146.7 million in the first six months of
1999. Excluding post-acquisition revenues from Dictaphone of approximately $29.6
million and from Dragon of approximately $1.7 million, our revenues in the
second quarter of 2000 were approximately $123.6 million, a 63% increase from
revenues in the second quarter of 1999.
In the second quarter of 2000, we had net income, before one time charges,
amortization of goodwill and other business intangibles, write-off of acquired
in-process research and development, and unrealized foreign exchange gains or
losses, of approximately $7.1 million, or $0.05 per share on approximately 140
million weighted average diluted shares outstanding, compared to approximately
$17.3 million, or $0.15 per share, during the second quarter of 1999 on
approximately 119 million weighted average diluted shares outstanding. In the
second quarter of 2000, we amortized approximately $35.5 million of goodwill and
other business intangibles, wrote off approximately $8.6 million of in-process
research and development in connection with the Dragon acquisition, and had
unrealized foreign exchange gains of approximately $3.2 million, resulting in a
net loss of approximately $33.7 million, or $0.26 per share. In the second
quarter of 1999, we had net income of approximately $9.6 million, or $0.08 per
share.
In the first six months of 2000, we had net income, before one time
charges, amortization of goodwill and other business intangibles, write-off of
acquired in-process research and development, and unrealized foreign exchange
gains or losses, of approximately $30.5 million, or $0.23 per share on
approximately 133 million weighted average diluted shares outstanding, compared
to approximately $31.5 million, or $0.27 per share, during the first six months
of 1999 on approximately 118 million weighted average diluted shares
outstanding. In the first six months of 2000, we amortized approximately $46.6
million of goodwill and other business intangibles, wrote off approximately $8.6
million of in-process research and development, and had unrealized foreign
exchange gains of approximately $7.5 million, resulting in a net loss of
approximately $17.2 million, or $0.14 per share. In the first six months of
1999, we had net income of approximately $20.7 million, or $0.18 per share.
Our financial results for the second quarter and first six months of 2000
reflect the acquisitions of Dictaphone and Dragon, which initially have had an
overall negative effect on our net income. Both Dictaphone's and Dragon's post-
acquisition revenues and net income were adversely affected by their adoption of
our business practices and revenue recognition assumptions and estimates. We
anticipate that this will have an adverse impact on Dictaphone's and Dragon's
revenues and net income at least through the third quarter of this year. Our net
income was also adversely affected by approximately $10.7 million of interest
expense. The increased interest expense resulted from our assumption of
approximately $430 million of debt and other obligations in connection with our
acquisition of Dictaphone.
21
<PAGE>
The following table sets forth unaudited financial data for the periods
indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -----------------------
1999 2000 1999 2000
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Technologies and solutions......................... 35% 51% 35% 52%
Applications....................................... 38 33 35 29
Consulting and services............................ 27 16 30 19
---- ---- ---- ----
Total revenues.................................. 100 100 100 100
Cost of revenues:
Technologies and solutions......................... 3 9 3 7
Applications....................................... 6 11 6 9
Consulting and services............................ 16 10 18 11
---- ---- ---- ----
Total cost of revenues.......................... 25 30 27 27
Operating expenses:
General and administrative......................... 11 13 11 12
Marketing and sales................................ 20 23 19 21
Research and development........................... 14 15 14 15
Amortization and write-off of goodwill............. 10 23 10 18
Write-off of in-process research and development...
-- 6 -- 3
Other operating expense............................ -- -- 1 --
---- ---- ---- ----
Total operating expenses........................ 80 110 82 96
---- ---- ---- ----
Operating income (loss).............................. 20 (10) 18 4
---- ---- ---- ----
Other (income) expense............................... (2) 4 (6) 1
---- ---- ---- ----
Minority interests................................... 1 0 2 1
---- ---- ---- ----
Provision for income taxes........................... 9% 7% 8% 9%
---- ---- ---- ----
</TABLE>
Total Revenues. Total revenues increased 104% to approximately $154.9
million in the second quarter of 2000 from approximately $76.0 million in the
second quarter of 1999. For the first six months of 2000, total revenues
increased 81% to approximately $265.6 million from approximately $146.7 million
in the first six months of 1999.
Asia Pacific
Revenues from Asia Pacific increased substantially to approximately $70.1
million in the second quarter of 2000 from approximately $28.0 million in the
second quarter of 1999, and to approximately $131.9 million in the first six
months of 2000 from approximately $41.4 million in the first six months of 1999.
These increases were primarily attributable to revenues generated in Korea
following our acquisition of Bumil Information & Communication, Co., Ltd., a
developer of interactive voice, call center and other telephony and
telecommunications market applications, based in Seoul, South Korea. We acquired
Bumil in the third quarter of 1999. The increases in our Korean revenues were
partially offset by a decrease in revenues from Singapore. The economies in
Asia Pacific, including Korea, have only recently experienced recovery from an
economic downturn. Continued volatility in the currencies or economies of these
markets could have a material adverse affect on our business and operations.
Revenues from Korea increased to approximately $68.1 million in the second
quarter of 2000 from approximately $1.1 million in the second quarter of 1999,
and to approximately $127.0 million in the first six months of 2000 from
approximately $1.2 million in the first six
22
<PAGE>
months of 1999. Following our acquisition of Bumil, we accelerated the
introduction of our speech and language technologies, products, solutions and
services for enterprise and telephony into the Korean market. By combining our
technologies, products, solutions and services with Bumil's existing business,
we have been 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;
. 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 follow this Korean model and 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.
Revenues from Singapore decreased to approximately $0.9 million in the
second quarter of 2000 from $25.4 million in the second quarter of 1999, and to
approximately $1.4 million in the first six months of 2000 from approximately
$35.9 million in the first six months of 1999. In 1998, we opened our research
and development business center, which we refer to as our competence center, in
Singapore. Through this competence center, during 1999, we received up-front
license fees for the license of our development tools to various Asian strategic
partners for the development of versions of our technologies and applications in
additional Asian languages and for the development of intelligent agent
applications. We received no revenues from these licenses in 2000, as they
continue to be in the development phase.
Europe and North America
Our revenues from Europe, including Belgium, increased to approximately
$35.9 million in the second quarter of 2000 from approximately $29.3 million in
the second quarter of 1999, and decreased slightly to approximately $66.5
million in the first six months of 2000 from approximately $64.8 million in the
first six months of 1999. Our revenues in Europe were adversely affected by a
reduction in the value of the Belgian franc and Euro compared to the U.S.
dollar. The average rate of the Belgian franc and Euro to the U.S. dollar was
13% lower for the first six months of 2000 as compared to same period of 1999.
Our revenues from North America, predominately the United States, increased
to approximately $48.9 million in the second quarter of 2000 from approximately
$18.7 million in the second quarter of 1999, and to approximately $68.8 million
in the first six months of 2000 from approximately $38.8 million in the first
six months of 1999. The increases were primarily attributable to the post-
acquisition addition of revenue from Dictaphone and Dragon.
During 1999, we began to shift our strategy in Europe and North America
from licensing of our speech and language technology engines to the development
and licensing of speech and
23
<PAGE>
language applications and solutions, similar to our Korean model. We believe
that this shift in focus has resulted in a temporary flattening of our revenues
in these territories as we develop and begin to implement these new applications
and solutions.
Segment Revenues. Speech and language technologies and solutions revenue
increased by 198% to approximately $78.9 million in the second quarter of 2000
from approximately $26.5 million in the second quarter of 1999. In the first six
months of 2000, this revenue increased by 169% to approximately $137.8 million
from approximately $51.2 million in the first six months of 1999. These
increases were primarily attributable to increases in revenue associated with
the telecom and the personal computer, multimedia and embedded markets,
including the addition of $10.7 million of post-acquisition communications
recording systems revenue from Dictaphone in the second quarter of 2000. These
increases were partially offset by a decrease in revenues associated with the
license of our development tools. In the first six months of 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 $8.0
million of such revenue in the second quarter of 1999 and $14.0 million in the
first six months of 1999.
Speech and language applications revenue increased by 74% to approximately
$50.4 million in the second quarter of 2000 from approximately $29.0 million in
the second quarter of 1999. In the first six months of 2000, this revenue
increased by 52% to approximately $78.4 million from approximately $51.6 million
in the first six months of 1999. These increases were primarily attributable to
an increase in revenue for industry and professional solutions and retail and
other applications. These increases included the addition of revenue from our
recent acquisitions of medical transcription businesses, Dictaphone and Dragon.
In the second quarter of 2000, our applications revenue included approximately
$5.7 million from medical transcription businesses, approximately $10.1 million
from Dictaphone's healthcare business, approximately $8.8 million from
Dictaphone's integrated voice solutions business, and approximately $1.7 million
from Dragon. In the first six months of 2000, we had approximately $10.3
million of medical transcription revenue from our recent acquisitions. 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 six months 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 approximately $8.0 million in the second
quarter of 1999 and approximately $14.0 million in the first six months of 1999.
Speech and language consulting and services revenue increased by 24% to
approximately $25.6 million in the second quarter of 2000 from approximately
$20.5 million in the second quarter of 1999. In the first six months of 2000,
this revenue increased by 12% to approximately $49.4 million from approximately
$44.0 million in the first six months of 1999. Our speech and language
consulting and services revenue was adversely affected by the reduction in the
value of the Belgian franc and the Euro when compared to the U.S. dollar. In the
current year, revenues from Microsoft and its affiliates constituted 27.1% of
our translation services revenue in the second quarter of 2000 and 27.1% in the
first six months of 2000. This compares to 29.6% in the second quarter of 1999
and 27.1% in the first six months of 1999.
24
<PAGE>
Cost of Revenues. Total cost of revenues as a percentage of revenues
increased to 30% in the second quarter of 2000 from 25% in the second quarter of
1999, and remained unchanged at 27% in the first six months of 2000 and 1999.
This increase was primarily attributable to a decrease in margins that was
partially offset by a more favorable revenue mix among those divisions.
Cost of speech and language technologies and solutions revenue as a
percentage of such revenue increased to 18% in the second quarter of 2000 and
14% in the first six months of 2000, from 10% in the second quarter and first
six months of 1999. These increases were primarily attributable to the addition
of lower margin communications recording systems revenue from Dictaphone in the
second quarter of 2000. In the second quarter of 2000, the costs of Dictaphone's
recording systems revenue as a percentage of such revenue was 76%. Dictaphone's
technologies and solutions margins were adversely affected by volume
inefficiencies resulting from the initial reduced level of revenue recognized by
Dictaphone in connection with Dictaphone's implementation of our business
practices and revenue recognition assumptions and estimates. Excluding the
effects of the cost of Dictaphone's technologies and solutions revenue, our
costs of technologies and solutions revenue as a percentage of such revenue
would have improved to 8% in the second quarter of 2000, primarily as a result
of volume efficiencies.
Cost of speech and language applications revenue as a percentage of such
revenue increased to 34% in the second quarter of 2000 from 16% in the second
quarter of 1999, and to 30% in the first six months of 2000 from 17% in the
first six months of 1999. These increases were primarily attributable to the
addition of lower margin Dictaphone revenues in the second quarter of 2000 and
transcription services revenues. In the second quarter of 2000, the costs of
Dictaphone's applications revenue as a percentage of such revenue was 49%.
Dictaphone's applications revenues were adversely affected by volume
inefficiencies resulting from the initial reduced level of revenue recognized by
Dictaphone in connection with Dictaphone's implementation of our business
practices and revenue recognition assumptions and estimates. Excluding the
effects of the acquisitions of Dictaphone and Dragon, the costs of our speech
and language technologies and solutions revenue as a percentage of such revenue
would have increased to 25% in the second quarter of 2000, primarily as a result
of the addition of lower margin transcription service revenues.
Cost of consulting and services revenue as a percentage of such revenues
increased to 60% in the second quarter of 2000 from 58% in the second quarter of
1999, and remained substantially unchanged at 59% in the first six months of
2000 and 1999. The increase in the second quarter of 2000 reflected an increase
in the percentage of revenues attributable to an increase in lower margin
government contracts as well as increased initial costs associated with our
focus in expanding our web-based globalization and internet translation
business.
General and Administrative Expense. General and administrative expense
increased 140% to approximately $19.7 million, or 13% of total revenues, in the
second quarter of 2000 from approximately $8.2 million, or 11% of total
revenues, in the second quarter of 1999. In the first six months of 2000,
general and administrative expense increased 76% to approximately $30.3 million,
or 12% of total revenues, from approximately $17.2 million, or 11% of total
revenues, in the first six months of 1999. The increase in general and
administrative expense was primarily attributable to inclusion of general and
administrative expenses for our acquired businesses for the periods after their
acquisition, and to increased personnel and related costs, particularly in
Korea, to support our revenue growth.
25
<PAGE>
Marketing and Sales Expense. Marketing and sales expense increased 146% to
approximately $36.8 million, or 23% of total revenues, in the second quarter of
2000 from approximately $14.9 million, or 20% of total revenues, in the second
quarter of 1999. In the first six months of 2000, marketing and sales expense
increased 104% to approximately $56.9 million, or 21% of total revenues, from
approximately $27.9 million, or 19% of total revenues, in the first six months
of 1999. The increase in marketing and sales expense was primarily attributable
to our increased sales and associated sales and marketing personnel, including,
in the second quarter, the addition of sales and marketing expenses and
personnel from our acquired businesses.
Research and Development Expense. Research and development expense increased
120% to approximately $23.8 million, or 15% of total revenues, in the second
quarter of 2000, from approximately $10.8 million, or 14% of total revenues, in
the second quarter of 1999. In the first six months of 2000, research and
development expense increased 94% to approximately $40.1 million, or 15% of
total revenues, from approximately $20.6 million, or 14% of total revenues, in
the first six months 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, as well as
to support our broader product and technology portfolio.
Amortization of Goodwill and Other Business Acquisition Intangibles. Our
amortization of goodwill and other business intangibles increased to
approximately $35.5 million or 23% of total revenues, in the second quarter of
2000 from approximately $7.2 million or 10% of total revenues, in the second
quarter of 1999. In the first six months of 2000, our amortization of goodwill
and other business intangibles increased to approximately $46.6 million or 18%
of total revenues, from approximately $14.4 million or 10% of total revenues in
the first six months of 1999. This increase primarily reflects the increase in
our goodwill and other business intangibles resulting from our acquisitions.
Write-off of In-process Research and Development. In the second quarter
and first six months of 2000, we recorded a $8.6 million expense for the write-
off of in-process research and development in connection with our acquisition of
Dragon. We had no write-offs of in-process research and development in the
comparable periods in 1999.
Other (Income)/Expense. Our other (income)/expense includes interest
income and expense, bank charges, realized and unrealized foreign exchange gains
and losses and our share in the losses of unconsolidated affiliates. In 2000, we
recognized net other expense of approximately $5.8 million in the second quarter
and approximately $3.0 million in the first six months. This compares to net
other income of approximately $1.8 million in the second quarter 1999 and
approximately $8.3 million in the first six months of 1999. The following table
sets forth the major components of other (income)/expense for the reported
periods (dollars in millions):
26
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -------------------------
1999 2000 1999 2000
----- ----- ----- -----
<S> <C> <C> <C> <C>
Interest and other financial (income) expense, net........ $(2.4) $ 7.0 $(4.6) $ 6.9
Foreign exchange (gains) losses, net...................... 0.2 (3.6) (4.5) (9.4)
Share in loss of unconsolidated affiliates................ 0.4 2.4 0.8 5.5
</TABLE>
The increase in our interest expense was primarily attributable to our
assumption of approximately $430 million of debt and other obligations in
connection with our acquisition of Dictaphone.
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 expenses attributable to our share in the losses of unconsolidated
affiliates relate to losses incurred by companies in which we have a significant
investment, generally 20% or more. These companies are generally development
stage companies that are incurring ongoing losses.
Minority Interest. Our minority interest expense, net of taxes, relates to
our share of the distribution obligations under the preferred income equity
redeemable trust securities we issued in May 1998. Our minority interest
expense was $0.6 million in the second quarter of 2000 and $1.6 million in the
first six months of that year, compared to $1.1 million in the second quarter of
1999 and $2.3 million in the first six months of 1999. The decrease in this
expense was attributable to a reduction of the amount of the trust securities as
a result of the conversion of some of these securities into shares of our common
stock.
Provision for Income Taxes. Our provision for income taxes was $11.3 million
in the second quarter of 2000 and $23.4 million in the first six months of 2000.
Our provision for income taxes reflects the depletion of the tax 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 is exempt from taxation.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had working capital of approximately $42.7 million,
including approximately $199.7 million in cash, cash equivalents and marketable
securities. This
27
<PAGE>
compares to working capital of approximately $142.7 million as of December 31,
1999. Our reduction in working capital is primarily attributable to the funding
of a portion of the $430 million of obligations assumed in our acquisition of
Dictaphone with short-term debt as described in further detail below.
In the first six months of 2000, our operating activities provided
approximately $32.4 million of cash. Our non-cash expenses during this period
included $46.6 million of amortization of goodwill, $14.7 million of other
amortization and depreciation expenses and $8.6 million of write-off of acquired
in-process research and development. In addition, our sources of cash included
an increase in accounts payable of $20.9 million, accrued expenses of $14.4
million and deferred revenue of $16.6 million. A significant portion of the
increase in these accounts payable and accrued expenses relates to expenses
incurred in our acquisitions of Dictaphone and Dragon. The increase in deferred
revenue relates primarily to post-acquisition sales by Dictaphone for which we
have received cash but not recorded revenue. Our use of cash included an
increase in accounts receivable by approximately $61.7 million, an increase in
inventories of approximately $8.7 million and an increase in prepaid expenses of
approximately $7.1 million. The increase in accounts receivable included the
assumption of accounts receivable from Dictaphone and Dragon. As of June 30,
2000, our accounts receivable included $80.2 million of accounts receivable held
by Dictaphone. Our increase in inventories is also primarily attributable to
our acquisition of Dictaphone.
In the first six months of 2000, our investing activities used
approximately $145.4 million of cash, including approximately $103.0 million for
acquisitions, approximately $13.3 million for the acquisition of licenses and
capitalized software development costs, approximately $9.1 million in additions
to property and equipment, and approximately $24.7 million of investments in
unconsolidated joint ventures and associated companies. In July 2000, we
acquired additional transcription assets of Rodeer Systems, Inc. for an
aggregate cash purchase price of approximately $25.0 million.
In the first six months of 2000, our financing activities provided us
approximately $191.4 million of cash, including approximately $175.9 million
from the sale of our common stock.
As of June 30, 2000 we had outstanding short-term debt of $255.3 million,
including approximately $3.4 million of current portion of long-term debt, and
long-term debt of $234.3 million. This debt consists primarily of debt incurred
in connection with our acquisition of Dictaphone. In connection with that
acquisition, we were required to assume or refinance approximately $430.0
million of Dictaphone debt and other obligations.
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
$430.0 million in financing in connection with the acquisition. The acquisition
financing consisted of a $200.0 million short-term debt facility due March 31,
2001 which bears interest at LIBOR plus 100 basis points and a $230.0 million
five year declining balance facility which bears interest at LIBOR plus 175
basis points. In addition, Deutsche Bank has provided an ongoing $20.0 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
our other existing credit facilities. Borrowings under the five year facility
are for renewable terms of up to six months and therefore have been accounted
for as short-term debt.
28
<PAGE>
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 and the outstanding preferred stock, to satisfy other obligations in
connection with the acquisition and to cover closing costs. In addition, as of
June 30, 2000, Dictaphone had borrowed $16.5 million under its facility. In July
2000, we borrowed an additional $55.0 million under the five year facility for
redemption of approximately $41.5 million of Dictaphone's senior subordinated
notes that were put to Dictaphone by the noteholders at 101% of par following
our acquisition of Dictaphone and for interest due on the redeemed notes and the
remaining outstanding notes. The outstanding $158.5 million of Dictaphone's
senior subordinated notes remain separate obligations of Dictaphone and have not
been assumed or guaranteed by Lernout & Hauspie. The $145 million remaining
committed amount of our five year facility is available to partially cover our
redemption of the remaining balance of Dictaphone's senior subordinated notes,
should we elect to do so, and for general corporate purposes. These notes are
redeemable by Dictaphone, at its option, at a declining rate beginning at
105.875% of par commencing in August 2000.
The terms of our bank credit facilities provide that we must use the cash
proceeds of any sale of equity to prepay amounts outstanding under the short-
term facility, provided that an aggregate of $50 million in cash proceeds of any
sales of equity made during the term of the short-term facility may be used by
us for other purposes. Since we entered into the credit facility through August
1, 2000, we have received net proceeds in the sale of our common stock in the
aggregate amount of $20.5 million, the proceeds of which we used for purposes
other than prepayment of the short-term facility.
In connection with our acquisition of Dictaphone, we announced our intent
to dispose of Dictaphone's contract manufacturing business in Florida and are
currently in discussions regarding the sale of that business. We expect to
apply the cash proceeds from that sale to reduce our outstanding debt.
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 reduce our
outstanding indebtedness, including our $200 million short-term bank facility
due March 31, 2001, 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 and our annual report on Form 10-K for the
year ended December 31, 1999.
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. 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.
29
<PAGE>
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.
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.
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's debt obligations. The Company has no cash
flow exposure on the $200.0 million of 11.75% fixed interest rate Notes;
however, the Company does have cash flow exposure on the loans outstanding under
the Revolving Credit Facility associated with variable interest rates.
Accordingly, a percentage point change in variable interest rates would result
in an annual interest expense fluctuation of approximately $0.2 million.
30
<PAGE>
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 June 30, 2000, respectively, are as
follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Foreign currency Exchange rate to the U.S. Dollar
---------------------------------------------------------------------------------------
December 31, 1999 June 30, 2000
---------------------------------------------------------------------------------------
<S> <C> <C>
BEF 40.16 42.23
---------------------------------------------------------------------------------------
GBP 0.62 0.66
---------------------------------------------------------------------------------------
DEM 1.95 2.05
---------------------------------------------------------------------------------------
KRW 1,141.5 1,115.0
---------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In August 2000, the U.S. District Court for the District of Massachusetts
dismissed with prejudice all claims against us and all other defendants under
the class action law suits consolidated in that court in April 1999. The suit
had alleged that we and certain of our officers knowingly and improperly
accounted for write-offs of in-process research and development expenses in
connection with certain acquisitions.
In August 2000, several law firms announced that they have named us in
class action lawsuits that allege that we misrepresented our financial
condition by inflating our reported revenues. The announcements contend that our
actions violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated under that Act. The announcements state that the
lawsuits are being filed on behalf of all purchasers of our Common Stock during
the varying periods ranging from as early as December 28, 1999 through August 7,
2000. These plaintiffs seek unspecified compensatory damages, attorneys' and
experts' fees and other relief.
On February 12, 1999, AllVoice Computing Plc of Devon, England filed a
lawsuit against Dragon Systems in the U.S. District Court for the District of
Massachusetts, that alleges infringement by Dragon of AllVoice's U.S. Patent
No. 5,799,273 and violation of Chapter 93A of the Massachusetts General Laws.
AllVoice is seeking injunctive relief and unspecified damages, including treble
damages.
We believe that the claims against us in the class action and AllVoice
litigation are groundless and intend to vigorously defend ourselves. However,
litigation can be expensive and time consuming. Although we cannot make any
guarantees regarding the outcome of these actions, we believe that their
ultimate resolution will not have a material adverse effect on our consolidated
financial position or results of operations.
We are a defendant in a number of additional lawsuits and administrative
proceedings, none of which we believe will have a material adverse effect on our
consolidated financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES
ISSUANCE OF UNREGISTERED STOCK
On May 27 and June 4, 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 our Common
32
<PAGE>
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 shares of our Common Stock as set forth below:
<TABLE>
<CAPTION>
DATE SHARES ISSUED
----------------- -------------
<S> <C>
April 4, 2000 87,950
April 25, 2000 64,288
May 4, 2000 92,787
May 10, 2000 127,528
May 31, 2000 74,358
June 9, 2000 23,978
June 29, 2000 21,888
</TABLE>
Our 8% Convertible Subordinated Notes are convertible into shares of Common
Stock at a conversion price of $5.1256 per share, subject to adjustments under
certain circumstances. On the following dates, we issued shares of our Common
Stock to holders of our 8% Convertible Subordinated Notes upon conversion
thereof, as follows:
<TABLE>
<CAPTION>
DATE SHARES ISSUED
------------- -------------
<S> <C>
May 4, 2000 8,778
May 23, 2000 7,802
</TABLE>
On February 22, 2000, we acquired Clockworks International Limited. We
issued two notes in the principal amounts of IR(Pounds) 1,007,736 (approximately
$1.2 million) and IR(Pounds) 1,492,264 (approximately $1.8 million),
respectively. On April 3, 2000, the notes automatically converted into a total
of 54,954 shares of our Common Stock.
On April 10, 2000, we issued 8,170 shares of Common Stock to BCB Voice
Systems Inc. in connection with an investment in BCB Voice Systems Inc.
On May 5, 2000, we issued 9,384,190 shares of Common Stock to the
stockholders of Dictaphone Corporation in connection with our acquisition of
Dictaphone.
On May 31, 2000, we issued 6,987 shares of Common Stock to two former
shareholders of Emti Portugal. These shares were issued as additional
consideration for our acquisition of Emti Portugal in August 1997 which became
payable upon the satisfaction of certain performance targets being met for the
year ended 1999.
On May 31, 2000, we issued 12,347 shares of Common Stock to two former
shareholders of Emti Brazil. These shares were issued as additional
consideration for our acquisition of Emti Brazil in August 1997 which became
payable upon the satisfaction of certain performance targets being met for the
year ended 1999.
On June 7, 2000, we issued 10,011,236 shares of Common Stock to the
stockholders of Dragon Systems, Inc. in connection with our acquisition of
Dragon.
33
<PAGE>
With regard to all of the transactions mentioned above, we relied upon
Regulation S promulgated under the Securities Act of 1933, as amended, Section
4(2) of that Act and/or Regulation D promulgated under that 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.
MODIFICATION OF RIGHTS OF SECURITY HOLDERS
The stockholders approved the following amendments to the Restated Articles
of Organization at the Extraordinary Meeting of Stockholders held on April 27,
2000:
. Article 5.1 was modified in connection with the approved two-for-one
stock split to confirm expressly that the subscription and/or
conversion rights per warrant, (automatically) convertible bond,
automatically convertible share and other securities issued by the
Company will increase to the same extent by which the number of shares
of Common Stock, representing the share capital, is increased, whereby
the exercise price and/or conversion price will be proportionally
reduced.
. Article 13.2 was amended in connection with nomination rights to: (i)
reduce the shareholding of 15% to 10% required by L&H Holding N.V. and
the Netherlands Foundation LEHA ("LEHA"), jointly, as well as all
entities which, directly or indirectly, controlled by L&H Holding N.V.
or LEHA, separately or together, at the date of the nomination and at
the time of the stockholder's meeting electing such nominees, to
entitle L&H Holding N.V. to nominate candidates for nine positions on
the Board of Directors, and (ii) to entitle L&H Holding N.V. to
nominate candidates for the appointment of one director for each block
of 1.5% instead of 2% shareholding by L&H Holding N.V. and LEHA, in
the aggregate, calculated as set forth above, without any maximum in
the event the shareholding by L&H Holding N.V. and LEHA, in the
aggregate, calculated as set forth above, drops below 10%.
The stockholders approved the following amendments to the Restated Articles
of Organization at the Extraordinary Meeting of Stockholders held on June 5,
2000:
. Article 6.1.1.g was amended by extending for an additional three-year
term the authority granted to the Board of Directors to increase the
issued capital in one or more capital increases upon notification to
the Company by the Banking and Finance Commission of a public take-
over bid on the Company's shares;
. Article 11.2 was amended by extending for an additional three-year
term the authority of the Board of Directors, in compliance with
Belgian Company Law, to acquire through purchase or exchange, or
dispose of its own shares and profit sharing certificates, without
prior approval of the shareholders, in the event said acquisition is
required in order to prevent a serious ominous disadvantage for the
Company.
34
<PAGE>
. Article 11.3 was amended by extending for an additional eighteen
months the authority of the Board of Directors, in compliance with
Belgian Company Law, to acquire the maximum authorized number of
shares through purchase or exchange at a price ranging between (i) the
intrinsic value of shares of Common Stock and (ii) 110% of the closing
price of the Company's stock on NASDAQ on the day preceding the date
of purchase or exchange;
. Article 12bis was inserted requiring any person who sells or
acquires, directly or indirectly, the beneficial ownership of any of
the Company's voting securities resulting in such person becoming the
direct or indirect beneficial owner of more than 5% of such
securities, to notify the Company of such sale or purchase within 5
days of said transaction. Additionally, this article requires each
person to notify the Company within 5 days of any sale or purchase
which increases or decreases such person's beneficial ownership by any
multiple of 5%. This article suspends the voting rights of any person
who fails to adhere to the requirements of this article until the
later of (i) the day following the annual general shareholder's
meeting or (ii) six months following the receipt of such information
by the Company;
. Article 13.1 was amended to increase the Board of Directors from
fourteen to seventeen members;
. Article 13.5 was inserted providing that the Company's Chief Executive
Officer automatically be nominated to be elected as a director; and
. Article 26.1 was amended by changing the scheduled date for the
Company's Annual Meeting of Stockholders from the first Monday of May
to the first Monday of June.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held an Extraordinary Meeting of Stockholders on April 27, 2000. At the
Extraordinary Meeting, a total of 48,162,706 shares or 39.41% of the Common
Stock issued and outstanding as of the record date, were represented in person
or by proxy.
Set forth below is a brief description of each matter voted upon at the
Extraordinary Meeting and the voting results with respect to each matter.
1. A proposal to approve the enactment of a two-for-one stock split for
the outstanding shares of Common Stock. Pursuant to this two-for-one
stock split, article 5.1 of the Articles of Association must be
modified accordingly to confirm
35
<PAGE>
expressly that the subscription and/or conversion rights per warrant,
(automatically) convertible bond, automatically convertible share and
other securities issued by the Company will increase to the same
extent by which the number of shares of Common Stock, representing the
share capital, is increased, whereby the exercise price and/or
conversion price will be proportionally reduced.
For: 46,279,916 Against: 75,080 Abstain: 115,846
2. A proposal to amend article 13.2 of the Company's Restated Articles of
Incorporation to amend certain provisions with respect to nomination
rights. Article 13.2 of the Company's Restated Articles of
Incorporation would be amended to: (i) reduce the shareholding of 15%
to 10% required by L&H Holding N.V. and the Netherlands Foundation
LEHA ("LEHA"), with registered offices at 3012 CM Rotterdam, WEENA,
jointly, as well as all entities which, directly or indirectly,
controlled (as that term is defined in the Annexes to the Royal Decree
of October 6, 1976 regarding the annual accounts of companies) by L&H
Holding N.V. or LEHA, separately or together, at the date of the
nomination and at the time of the stockholder's meeting electing such
nominees, to entitle L&H Holding N.V. to nominate candidates for nine
positions on the Board of Directors, and (ii) to entitle L&H Holding
N.V. to nominate candidates for the appointment of one director for
each block of 1.5% instead of 2% shareholding by L&H Holding N.V. and
LEHA, in the aggregate, calculated as set forth hereabove, without any
maximum in the event the shareholding by L&H Holding N.V. and LEHA, in
the aggregate, calculated as set forth hereabove, drops below 10%.
For: 40,361,098 Against: 7,434,866 Abstain: 366,742
We held our Annual Meeting of Stockholders on May 22, 2000. At the
Annual Meeting, a total of 44,378,544 shares or 35.93% of the Common Stock
issued and outstanding as of the record date, were represented in person or by
proxy. We held an Extraordinary Meeting of Stockholders on June 5, 2000. At
the Extraordinary Meeting, a total of 42,155,940 shares or 31.94% of the Common
Stock issued and outstanding as of the record date, were represented in person
or by proxy.
Set forth below is a brief description of each matter voted upon at the
Annual Meeting and the voting results with respect to each matter.
1. A proposal to approve the annual accounts of the Company closed on
December 31, 1999 including the allocation of the results set forth
therein, in accordance with Belgian Law.
For: 44,376,778 Against: Abstain: 1,766
2. A proposal to grant discharge under Belgian Law to all directors of
the Company for the execution of their mandate for the fiscal year
ended December 31, 1999.
For: 44,377,978 Against: Abstain: 566
36
<PAGE>
3. A proposal to grant discharge under Belgian Law to the statutory
auditor of the Company for the execution of its mandate for the fiscal
year ended December 31, 1999.
For: 44,377,978 Against: Abstain: 566
Set forth below is a brief description of each matter voted upon at the
Extraordinary Meeting and the voting results with respect to each matter.
1. A proposal to approve the merger between the Company and Dictation
Consortium N.V.
For: 40,893,984 Against: 895,204 Abstain: 366,752
2. A proposal to approve the merger between the Company and Brussels
Translation Group N.V.
For: 40,882,806 Against: 897,518 Abstain: 375,616
3. A proposal to approve the merger between the Company and Flanders
Dialogue Company N.V.
For: 40,867,094 Against: 894,612 Abstain: 394,234
4. A proposal to adopt the Lernout & Hauspie Speech Products N.V. 2000
Restricted Stock Option Plan (the "2000 Plan").
For: 40,371,824 Against: 1,389,074 Abstain: 395,042
5. A proposal to approve (i) the special report of the Board of Directors
prepared in connection with the issuance of 3,000,000 warrants for
shares of Common Stock of the Company under the 2000 Plan (the
"Warrants"), (ii) the special report of the Board of Directors
prepared in connection with the deviation from the preemptive rights
upon the issuance of the Warrants under the 2000 Plan in favor of the
Dutch Foundation administering such warrants, (iii) the issuance under
the 2000 Plan of the Warrants on behalf of future participants in the
2000 Plan, and (iv) the capital increase of the Company under the
suspensive condition of exercising the Warrants with an amount equal
to the exercise price of the Warrants multiplied with the number of
shares resulting from the conversion of the Warrants and to approve
the deviation from the preemptive rights in favor of the Dutch
foundation, which shall subscribe to the Warrants for the purpose of
granting the Warrants further to the employees, directors and external
advisors of the Company and its subsidiaries.
For: 40,413,444 Against: 1,336,060 Abstain: 406,436
37
<PAGE>
6. A proposal to amend article 6.1.1.g of the Company's Restated Articles
of Incorporation with regard to the use of the authorized capital by
the Board of Directors.
For: 40,413,444 Against: 1,336,060 Abstain: 406,436
7. A proposal to amend article 11.2 and 11.3 of the Company's Restated
Articles of Incorporation with regard to the acquisition and
disposition by the Company of its own shares.
For:40,449,036 Against: 1,306,606 Abstain: 400,298
8. A proposal to insert a new article 12bis in the Company's Restated
Articles of Incorporation with regard to the transparency of the
stockholders' structure.
For: 40,802,512 Against: 935,374 Abstain: 418,054
9. A proposal to amend article 13.1 and 13.5 of the Company's Restated
Articles of Incorporation to amend certain provisions with respect to
the composition of the Board of Directors.
For: 40,801,538 Against: 944,922 Abstain: 409,480
10. A proposal to amend article 26.1 of the Company's Restated Articles of
Incorporation with regard to the date of the Annual Meeting of
Stockholders.
For: 40,785,942 Against: 914,036 Abstain: 455,962
11. A proposal to elect Gaston Bastiaens as director of the Company, to
hold office until the 2001 Annual Meeting of the Stockholders and
until his successor is duly elected and qualified.
For: 42,128,896 Against: 2,900 Abstain: 24,144
12. A proposal to elect Roel Pieper as director of the Company, to hold
office until the 2001 Annual Meeting of the Stockholders and until his
successor is duly elected and qualified.
For: 42,128,450 Against: 2,900 Abstain: 24,590
13. A proposal to elect Albert J. Fitzgibbons III as director of the
Company, to hold office until the 2001 Annual Meeting of the
Stockholders and until his successor is duly elected and qualified.
For: 40,867,688 Against: 901,402 Abstain: 386,850
38
<PAGE>
The directors of the Company whose terms of office as a director
continued after the Annual Meeting were: (1) Jo Lernout; (2) Pol
Hauspie; (3) Nico Willaert; (4) Fernand Cloet; (5) Marc De Pauw; (6)
Hubert Detremmerie; (7) Dirk Cauwelier; (8) Jan Coene; (9) RVD
Securities N.V. (represented by Erwin Vandendriessche); (10) Alex
Vieux; (11) Gerard Van Acker; (12) Bernard Vergnes; and (13) Francis
Vanderhoydonck.
ITEM 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND INTERIM REPORTS
(a) EXHIBITS
None
(b) INTERIM REPORTS
We filed the following reports on Form 8-K during the fiscal quarter ended
June 30, 2000:
1. On May 22, 2000 we filed a Form 8-K with regard to our
acquisition of Dictaphone Corporation.
2. On May 25, 2000, we filed a Form 8-K/A with regard to our
acquisition of Dictaphone Corporation in order to file the
Audited Consolidated Balance Sheets of Dictaphone Corporation and
Subsidiaries as of December 31, 1999 and 1998, and the related
Consolidated Statements of Operations, Stockholders' Equity
(deficit) and Cash Flows for each of the three years in the
period ended December 31, 1999 and certain exhibits.
3. On June 22, 2000, we filed a form 8-K with regard to our
acquisition of Dragon Systems, Inc.
4. On June 30, 2000, we filed a Form 8-K/A/2 with regard to our
acquisition of Dictaphone Corporation in order to file our
Unaudited Pro Forma Condensed Consolidated Financial Statements
for the Year Ended December 31, 1999 and the Three Months Ended
March 31, 2000.
39
<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.
August 14, 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)
40
