<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, 1999
-------------
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
of incorporation or organization) Identification No.)
52 Third Avenue, Burlington, Massachusetts 01803
------------------------------------------ -----------
(Address of principal executive (Zip code)
offices in the U.S.)
Registrant's telephone number including area code: (781) 203-5000
--------------
_________________________________________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
The number of shares outstanding of the Registrant's Common Stock, no par value,
as of October 31, 1999, was 113,514,484.
<PAGE>
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES
FORM 10-Q
---------
INDEX
-----
PAGE
----
EXPLANATORY NOTE 3
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
Condensed consolidated Balance Sheets at
December 31, 1998 and June 30, 1999 (unaudited) 4
Condensed consolidated Statements of Operations for the Three
and Six Months Ended June 30, 1998 and 1999 (unaudited) 6
Condensed consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1998 and 1999 (unaudited) 8
Notes to Interim Condensed Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 28
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 29
Item 2. Changes in Securities 29
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information. 31
Item 6. Exhibits and Interim Reports 32
Signatures 33
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. On November 1, 1999, we filed a Form 6-K/A/2 for our quarter and six
months ended June 30, 1999 (the "Prior Quarterly Report"). This quarterly
report on Form 10-Q is being filed voluntarily by us for the same periods as the
Prior Report to satisfy the filing requirements that would have been applicable
to us had we not been a foreign private issuer as of June 30, 1999. Except for
the adjustment of all data relating to shares and per share amounts to reflect
our two-for-one stock split which was distributed on May 12, 2000, this report
speaks as of the date of the Prior Quarterly Report as if this report were filed
on that date. Reference is made to our reports filed with the Securities an
Exchange Commission for subsequent periods, for updated information regarding
our business, results of operations and financial condition.
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, 1998 JUNE 30, 1999
---------------------------------------------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 188,464 $ 152,089
Marketable securities............................... 965 1,077
Accounts receivable, net (1)........................ 81,212 87,145
Value added tax and other receivables............... 2,312 2,409
Inventory........................................... 2,649 2,718
Prepaid expenses and other current assets........... 8,347 10,848
--------- ---------
Total current assets.................. 283,949 256,286
--------- ---------
Deferred tax assets......................................... 4,507 4,507
Property and equipment, net of accumulated depreciation of
$21,476 and $22,694, respectively.......................... 23,298 21,663
Investments................................................. 12,103 18,006
Intangibles, net of amortization............................ 245,467 302,913
Software development costs, net of amortization............. 2,210 2,928
--------- ---------
Total assets.......................... $ 571,534 $ 606,303
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable....................................... $ 6,652 $ 463
Current portion of long-term debt................... 17,653 13,954
Accounts payable.................................... 22,684 19,853
Accrued expenses.................................... 37,149 36,330
Deferred revenue.................................... 2,754 770
--------- ---------
Total current liabilities....................... 86,892 71,370
Long-term debt, less current portion........................ 20,004 12,337
--------- ---------
Total liabilities..................... 106,896 83,707
--------- ---------
Minority interest........................................... 9 -
Company-obligated mandatorily redeemable
security of subsidiary trust holding solely
parent convertible subordinated debentures............. 149,223 149,998
Commitments and contingencies...............................
Shareholders' equity:
Common shares, no par value: 108,744 and 112,663 shares
issued and outstanding at December 31, 1998 and June
30, 1999, respectively.................................. 111,911 113,509
Additional paid-in capital............................... 353,838 404,417
Accumulated deficit...................................... (149,640) (128,990)
Accumulated other comprehensive loss..................... (703) (16,338)
--------- ---------
Total shareholders' equity............. 315,406 372,598
--------- ---------
Total liabilities and shareholders' equity............... $ 571,534 $ 606,303
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
(1) The following summarizes accounts receivable from companies partially owned
by the Company, FLV Fund, FLV Foundation and / or L&H Investment Company
and from certain other related parties. Accounts receivable at December
31, 1998 included a total of $6,135 due from Speech Systems Inc. Microsoft
Corporation, Mindmaker Inc., Xiox Corporation Inc., Creator Ltd., FLV
Telecom N.V., Hogodata Benelux N.V., Vasco Data Security International
Inc., Smartmove N.V., BCB Holdings Inc., ViA Inc., Telekol Corporation,
Speech Machines Plc., Oceania Inc., Oncuity Inc., Excalibur Technologies
N.V. and e-DOCS.net Inc. Accounts receivable at June 30, 1999 included a
total of $6,009 due from Speech Systems Inc., Microsoft Corporation,
Mindmaker Inc., Xiox Corporation Inc., Hogodata Benelux N.V., Vasco Data
Security International Inc., Smartmove N.V., BCB Holdings Inc., Telekol
Corporation, Speech Machines Plc., Oceania Inc., Excalibur Technologies
N.V., e-DOCS.net Inc., Cellport Labs., Intel Atlantic Inc., Nordisk
Sprateknologi AS, Financial Architects N.V. and Phonetic Topographic N.V.
5
<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,
---------------------------------------------------------
1998 1999 1998 1999
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues (1):
Technologies and Solutions................. $ 20,261 $ 26,485 $ 35,582 $ 51,211
Applications............................... 11,373 28,984 19,264 51,552
Consulting and Services.................... 13,357 20,546 25,210 43,960
----------- ------------ ----------- ------------
Total revenues........................ 44,991 76,015 80,056 146,723
----------- ------------ ----------- ------------
Cost of Sales:
Technologies and Solutions................. 2,892 2,554 5,163 5,342
Applications............................... 4,533 4,680 7,165 8,541
Consulting and Services.................... 7,750 12,064 14,789 26,154
----------- ------------ ----------- ------------
Total cost of sales................... 15,175 19,298 27,117 40,037
----------- ------------ ----------- ------------
Selling, general and administrative............... 12,655 23,133 22,458 45,181
Research and development, net..................... 5,105 10,810 9,857 20,615
Amortization of goodwill and other business
acquisition intangibles.......................... 3,165 7,244 9,151 14,419
Write-off of in-process research and development.. 26,881 --- 34,410 ---
----------- ------------ ----------- ------------
Total operating expenses.............. 62,981 60,485 102,993 120,252
----------- ------------ ----------- ------------
Operating income (loss)........................... (17,990) 15,530 (22,937) 26,471
Other expenses (income):
Interest and other financing expenses..... 566 261 1,413 330
Interest income........................... (1,617) (2,707) (3,444) (4,976)
Foreign exchange gains and losses, net.... 1,221 239 (3,006) (4,521)
Share in losses of unconsolidated 533 366 1,066 830
affiliates...............................
Debt conversion expense................... 690 --- 891 ---
----------- ------------ ----------- ------------
Total other expenses (income)......... 1,393 (1,841) (3,080) (8,337)
----------- ------------ ----------- ------------
Income (loss) before income taxes and minority
interests........................................ $ (19,383) $ 17,371 $ (19,857) $ 34,808
Provision for income taxes (benefit).............. 545 6,654 888 11,880
----------- ------------ ----------- ------------
Income (loss) before minority interest............ (19,928) 10,717 (20,745) 22,928
----------- ------------ ----------- ------------
Minority interest, net of taxes....... 698 1,131 698 2,277
----------- ------------ ----------- ------------
Net income (loss)................................. $ (20,626) $ 9,586 $ (21,443) $ 20,651
=========== ============ =========== ============
Net income (loss) per common share:
Basic................................. $(0.21) $0.09 $(0.22) $0.19
=========== ============ =========== ============
Diluted............................... $(0.21) $0.08 $(0.22) $0.18
=========== ============ =========== ============
Weighted average number of shares outstanding:
Basic................................. 97,968,760 111,605,554 96,376,446 110,391,182
Diluted............................... 97,968,760 118,695,420 96,376,446 117,530,864
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
(1) The following summarizes revenues from companies partially owned by the
Company, FLV Fund, FLV Foundation and/or L&H Investment Company and from
certain other related parties. Revenues for the six months ended June 30,
1998 included $15.8 million from Microsoft, Dictation Consortium, Speech
Systems Inc., ACI, Greater FLV Telecom and Hogadata Benelux N.V. and for the
six months ended June 30, 1999 included $15.6 million due from Speech
Systems Inc., Microsoft Corporation, 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 Topographic N.V.
Revenues for the three months ended June 30, 1998 included $ 10.1million
from Microsoft Corporation, Speech Systems Inc. FLV Telecom N.V. and
Hogadata Benelux N.V. and for the three months ended June 30, 1999 included
$7.6 million from Microsoft Corporation., 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
Topographic N.V.
7
<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,
-------------------------
1998 1999
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)....................................................... $(21,443) $ 20,651
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Write-off of in-process research & development........................... 34,410 -
Depreciation............................................................. 1,942 2,970
Amortization of other intangibles, including software development costs.. 1,422 2,344
Amortization of goodwill and other business acquisition intangibles...... 9,151 14,419
Gain on sale of investments.............................................. - (163)
Share in loss of unconsolidated affiliates............................... 1,066 830
Loss (gain) on sale of property and equipment............................ - 22
Changes in operating assets and liabilities:
Accounts receivable, net............................................... (11,518) (16,738)
Inventories, net....................................................... (1,283) 278
Prepaid expenses and other current assets.............................. (1,356) (1,763)
Deferred financing costs............................................... 746 -
Accounts payable....................................................... 5,803 (7,960)
Accrued expenses....................................................... 1,788 9,637
Deferred revenue....................................................... 835 (716)
-------- --------
Net cash provided by operating activities................................ 21,563 23,811
-------- --------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired.......................... (54,504) (48,180)
Licenses and software development costs capitalized...................... (8,259) (7,007)
Additions to property and equipment...................................... (3,646) (3,999)
Investments in and loans provided to associated companies................ (4,655) (8,567)
Purchases of marketable securities....................................... - (37)
Proceeds from sale of property and equipment............................. - 921
-------- --------
Net cash used for investing activities................................... (71,064) (66,869)
-------- --------
Cash flows from financing activities:
Repayment of notes payable to banks...................................... (86) (6,239)
Repayment of long-term debt and capital lease obligations................ (2,570) (26,901)
Proceeds from long-term debt............................................. - 75
Proceeds from company-obligated mandatorily redeemable security of
subsidiary trust holding solely parent convertible subordinated
debentures.............................................................. 146,703 -
Proceeds from issuance of common and preferred shares.................... 10,328 52,404
-------- --------
Net cash provided by financing activities................................ 154,375 19,339
-------- --------
Effect of exchange rate changes on cash and cash equivalents............. (503) (12,656)
-------- --------
Increase in cash and cash equivalents.................................... 104,371 (36,375)
Cash and cash equivalents at beginning of period......................... 127,822 188,464
-------- --------
Cash, cash equivalents at end of period.................................. $232,193 $152,089
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest................................. $ 655 $ 4,134
Cash paid during the period for income taxes............................. $ 1,002 $ 1,470
Noncash investing and financing transactions:
Conversion of convertible bonds to common shares......................... $ 20,836 $ 1,763
Issuance of common shares for acquisitions............................... $ 10,679 $ 0
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
8
<PAGE>
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
Lernout & Hauspie (L&H) is a global leader in advanced speech and
language solutions for vertical markets, computers, automobiles,
telecommunications, embedded products, consumer goods and the Internet.
The Company is making the speech user interface (SUI) the keystone of
simple, convenient interaction between humans and technology, and is using
advanced translation technology to break down language barriers. The
Company provides a wide range of offerings, including; customized solutions
for corporations; core speech technologies marketed to OEMs; end user and
retail applications for continuous speech products in horizontal and
vertical markets; and document creation, human and machine translation
services, Internet translation offerings, and linguistics tools. L&H's
products and services originate in four basic areas; automatic speech
recognition (ASR), text-to-speech (TTS), digital speech and music
compression (SMC) and text-to-text (translation).
The condensed consolidated financial statements included herein have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. The financial statements reflect all
normal and recurring adjustments which in the opinion of management are
necessary for a fair presentation of the financial position, results of
operations and cash flows for the interim periods presented. The results
of operations for the periods presented are not necessarily indicative of
the results to be expected for the full year. The accompanying unaudited
condensed consolidated financial statements should be read in conjunction
with the financial statements and notes included in the Company's Annual
Report on Form 20-F for the fiscal year ended December 31, 1998.
(2) PER SHARE INFORMATION
Per share information is based on the weighted average number of
common shares outstanding during each period for the basic computation and,
if dilutive, the weighted-average number of potential common shares
resulting from the assumed conversion of outstanding stock options ,bonds
and warrants for the diluted computation.
9
<PAGE>
A reconciliation of the numerators and denominators of the basic and
diluted per share computation is as follows (in thousands except share and
per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------------------------
1998 1999 1998 1999
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ (20,626) $ 9,586 $ (21,443) $ 20,651
Weighted average number of common shares
outstanding during the period:
Basic 97,968,760 111,605,554 96,376,446 110,391,182
Dilutive stock options ----- 6,677,156 ----- 6,726,688
Dilutive bonds ----- 281,708 ----- 279,430
Dilutive warrants ----- 131,002 ----- 133,564
----------- ------------ ----------- ------------
Diluted 97,968,760 118,695,420 96,376,446 117,530,864
Net income (loss) per common share:
Basic $ (0.21) $ 0.09 $ (0.22) $ 0.19
Diluted $ (0.21) $ 0.08 $ (0.22) $ 0.18
</TABLE>
(3) BUSINESS ACQUISITIONS
In June 1999, the Company acquired Brussels Translation Group N.V.
("BTG") for approximately $41.5 million in cash, net of cash received.
Immediately after the acquisition, the Company paid off the debt in BTG to
the banks for approximately $17 million. The purchase price has been
allocated to the assets purchased and the liabilities assumed based upon
the fair value on the date of acquisition, as follows (in thousands):
Assets acquired:
Working capital.......................................$ (2,737)
Goodwill and other intangibles........................ 62,093
Liabilities assumed..................................... (16,998)
--------
$ 42,358
10
<PAGE>
The following summary pro forma condensed consolidated financial
information reflects the acquisition of BTG as if it had occurred on
January 1, 1999 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 the BTG acquisition in
fact occurred on January 1, 1999 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 period
ended June 30, 1999 (in thousands except share and per share amounts):
<TABLE>
<CAPTION>
Ended June 30, 1999
------------------------
<S> <C>
Net sales $ 144,745
Gross profit $ 105,489
Income from operations $ 22,413
Net income $ 14,892
Basic earnings per common share $ 0.13
Diluted earnings per common share $ 0.13
Basic weighted average number of shares outstanding 110,391,182
Diluted weighted average number of shares outstanding 117,530,864
</TABLE>
In June 1999, the Company acquired Flanders Dialogue Company N.V.
("FDC") for approximately $3.0 million in cash, net of cash received.
Immediately after the acquisition, the Company paid off the debt in FDC for
approximately $2.4 million. The purchase price has been allocated to the
assets purchased and the liabilities assumed based upon the fair value on
the date of acquisition, as follows (in thousands):
Assets acquired:
Working capital......................$ 772
Property and equipment............... 66
5,562
Goodwill.............................
Liabilities assumed.................. (2,363)
-------
$ 4,037
=======
(4) SHAREHOLDERS' EQUITY
On March 19, 1999 Microsoft Corporation exercised warrants to purchase
1,714,284 shares of Common Stock with an exercise price of $8.75 per share.
11
<PAGE>
On May 5, 1999 Intel Atlantic Inc. invested $30 million by subscribing
to 895,932 automatically convertible shares. Each share is convertible
into one share of Common Stock, subject to adjustment in certain
circumstances.
(5) CONTINGENCIES
Class Action Lawsuits
The Company is a named party in several class actions lawsuits which
allege, in general, that the Company improperly accounted for write-offs of
in-process research and development in connection with certain
acquisitions. The lawsuits contend that the Company's actions violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "34
Act") and Rule 10b-5 promulgated under the '34 Act. Plaintiffs filed these
lawsuits on behalf of all purchasers of the Company's common stock during
varying periods which range from as early as April 28, 1997 through
December 4, 1998. These plaintiffs seek: (1) unspecified compensatory
damages; (2) attorneys' and experts' fees; and (3) other relief.
The Company believes that the claims are groundless and is vigorously
defending itself. Nevertheless, class action litigation can be expensive
and time consuming. Although the Company cannot make any guarantees
regarding the outcome of these actions, it believes that the outcome will
not have a material adverse effect on the Company's business, financial
condition or results of operations.
(6) SEGMENT INFORMATION
The following tables summarize financial information by geographic area (in
thousands):
<TABLE>
<CAPTION>
Revenues by Destination
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------------------- --------------------------------
1998 1999 1998 1999
----------------------------------------------- --------------------------------
<S> <C> <C> <C> <C>
United States $19,958 $18,691 $34,171 $ 38,845
Europe, other 23,787 29,328 43,402 66,502
Singapore --- 25,436 --- 35,866
Korea..................... 150 1,124 245 1,221
Far East,other............ 1,096 1,436 2,238 4,289
------- ------- ------- --------
$44,991 $76,015 $80,056 $146,723
======= ======= ======= ========
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Long-lived Assets
June 30,
-------------------------------------------
1998 1999
-------------------------------------------
<S> <C> <C>
United States.... $ 48,569 $118,627
Belgium.......... 49,125 123,913
Europe, other.... 50,889 91,883
Singapore........ --- 5,137
Korea............ --- 1,132
Far East,other... 3,071 4,818
-------- --------
$151,654 $345,510
======== ========
</TABLE>
The following tables summarize financial information by business unit (in
thousands):
Three months ended June 30, 1998
<TABLE>
<CAPTION>
Technologies Consulting
& &
Solutions Applications Services Total
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues.............................. $20,261 $ 11,373 $13,357 $ 44,991
Depreciation and amortization......... (2,535) (2,174) (803) (5,512)
Write off of in-process research and
development.......................... (5,381) (21,500) --- (26,881)
Segment profit (loss)................. 9,453 (16,834) 4,803 (2,578)
</TABLE>
Six months ended June 30, 1998
<TABLE>
<CAPTION>
Technologies Consulting
& &
Solutions Applications Services Total
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues.............................. $ 35,582 $ 19,264 $25,210 $ 80,056
Depreciation and amortization......... (7,089) (3,825) (1,600) (12,515)
Write off of in-process research and
development.......................... (12,910) (21,500) --- (34,410)
Segment profit (loss)................. 10,420 (13,226) 8,820 6,014
</TABLE>
13
<PAGE>
Three months ended June 30, 1999
<TABLE>
<CAPTION>
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>
Six months ended June 30, 1999
<TABLE>
<CAPTION>
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
</TABLE>
Total assets and capital expenditures
<TABLE>
<CAPTION>
Technologies Consulting
& &
Solutions Applications Services Total
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
As per June 30,1998:
--------------------
Segment assets........................ $ 71,366 $ 64,788 $ 46,960 $183,114
Capital expenditures.................. 1,900 1,057 689 3,646
As per June 30,1999:
--------------------
Segment assets........................ $169,099 $144,172 $101,378 $414,649
Capital expenditures.................. 2,000 1,122 877 3,999
</TABLE>
14
<PAGE>
Reconciliation of Segment Information
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------------------------------
1998 1999 1998 1999
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Profit (loss) for reportable segments. $ (2,578) $ 47,526 $ 6,014 $ 86,953
Unallocated amounts:
General and administrative.......... (10,307) (21,184) (19,094) (39,867)
Research and development............ (5,105) (10,810) (9,857) (20,615)
Other income (expense).............. (1,393) 1,839 3,080 8,337
-------- -------- -------- --------
Profit (loss) before income taxes $(19,383) $ 17,371 $(19,857) $ 34,808
and minority interest...............
</TABLE>
<TABLE>
<CAPTION>
June 30,
----------------------------------
1998 1999
----------------------------------
<S> <C> <C>
Total assets for reportable segments...................... $183,114 $414,649
Unallocated amounts :
Cash................................................... 232,193 152,089
Marketable securities.................................. --- 1,077
Other current assets................................... 10,191 15,975
Investments............................................ 11,294 18,006
Deferred financing costs............................... 68 ---
Deferred tax assets.................................... 4,124 4,507
-------- --------
Total assets.............................................. $440,984 $606,303
======== ========
</TABLE>
15
<PAGE>
(7) COMPREHENSIVE INCOME (LOSS)
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income establishes standards for reporting and display of
comprehensive income (loss) 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 (loss) is as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ----------------------------
June 30, June 30,
--------------------------- ----------------------------
1998 1999 1998 1999
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Net (loss) income as reported............ $(20,626) $ 9,586 $(21,443) $ 20,651
Change in the cumulative translation
adjustment.. ........................... 3,121 (4,667) (678) (15,635)
-------- ------- -------- --------
Comprehensive (loss) income.............. $(17,505) $ 4,919 $(22,121) $ 5,016
======== ======= ======== ========
</TABLE>
(8) RECENT ACCOUNTING PRONOUNCEMENTS
In the first quarter of 1998, the American Institute of Certified
Public Accountants issued Statement of Position No. 98-1, "Accounting for
Costs of Computer Software Developed or Obtained for Internal Use" (SOP 98-
1), which requires that certain internal and external costs to develop or
obtain software for internal use be expensed or capitalized when incurred.
Generally, costs incurred during the preliminary project stage and post-
implementation /operation stages must be expensed. SOP 98-1 is effective
for fiscal years beginning after December15, 1998. The Company's adoption
of SOP 98-1 , as of January 1,1999, is not expected to have a material
impact on its consolidated financial position or results of operations.
In the first quarter of 1998, the American Institute of Certified
Public Accountants issued Statement of Position No. 98-5, "Reporting on the
Costs of Start-up Activities" (SOP 98-5), which requires that the cost of
start-up activities be expensed as incurred. SOP 98-5 will amend provisions
of a number of existing SOPs and audit and accounting guides. SOP 98-5 will
be effective for fiscal years beginning after December 15, 1998. The
Company's adoption of SOP 98-5 is not expected to have a material impact on
its consolidated financial position or results of operations.
During 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and
reporting standards for derivative instruments and for hedging activities.
This Statement will be effective for all quarters of fiscal years beginning
after June 15, 2000. The Company has not yet determined the effect the
Statement will have on its financial position or results of operations.
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(9) SUBSEQUENT EVENTS
Stock split
In April 2000, the Company declared a two-for-one split of its common
shares which was effective in May 2000. All data related to shares and per
share amounts for all periods presented have been adjusted to reflect the
effect of the stock split.
Acquisitions
On September 1, 1999, pursuant to an asset purchase agreement dated
May 19, 1999, between the Company and Fonix Corporation, a Delaware
corporation, the Company purchased substantially all the assets of Fonix's
Articulate Division based in Woburn, Massachusetts. The Company acquired
Fonix's Articulate Division for a total of $24 million in cash (subject to
adjustment), with an additional earn-out of up to $4 million spread over
two years based upon performance.
On September 10, 1999, the Company acquired Bumil Information &
Communications, Co. Ltd. ("Bumil"), a developer of interactive voice, call
center and other telecommunications market applications based in Seoul,
Korea, for a total of $25 million in cash, with up to an additional $25
million earn-out to be paid in January 2001, based upon performance.
On October 1, 1999, pursuant to an asset purchase agreement dated
August 6, 1999, between the Company and Milestone Group Holdings Limited, a
company incorporated in England and Wales, the Company purchased the assets
of Computer Aided Medical Supplies Limited ("CAMS") based in the United
Kingdom. The Company acquired CAMS for a total of (Pounds)3.8 million
(approximately $6 million) in cash. This includes a (Pounds)2 million
(approximately $3.2 million) earn-out based upon certain financial targets
and conditions.
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PART I - FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
Certain statements in this Quarterly Report, including the narrative text,
captions, and graphics may constitute forward-looking statements. These
statements include, but are not limited to, statements involving the financial
and other contributions expected from our acquisitions, development plans and
recently introduced products, and the timing of the introduction of new
products, technologies and solutions. There can be no assurance that actual
results will not be materially different than those anticipated in these
forward-looking statements. Factors that could cause actual results to
materially differ from those anticipated in these forward looking statements
include known and unknown risks, including uncertainty of new product
development, the risk that newly introduced products may contain undetected
errors or defects or otherwise not perform as anticipated, early stage of
development of the speech and language technology markets, our ability to manage
our growth and changing business, the retention of key technical and other
personnel, currency and other risks related to international operations, rapid
technological change and intense competition, as well as other risks set forth
in the company's filings with the Securities and Exchange Commission. We caution
readers not to place undue reliance upon any such 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 such statements
to reflect any change in our expectations or any change in events, conditions or
circumstance on which any such statement is based.
STRATEGIC OVERVIEW
From 1994 through the middle of 1996, we were solely in the business of
developing and licensing core speech technologies. Commencing in the second
half of 1996, we started to expand our business into applications and services.
These applications and services have grown to include dictation, machine and
human translation, including Internet/intranet translation, education, telephony
and embedded solutions, as well as consulting and localization services. While
expanding into these applications and services, we have continued to strengthen
our technology leadership in core speech and language technologies. As a
result, we believe that we offer the broadest portfolio of speech and language
technologies, including automatic speech recognition, text-to-speech, speech and
music compression, machine translation and linguistic components. We further
believe that our introduction of breakthrough technologies, such as
RealSpeak(TM) for text-to-speech, will further strengthen our position in
technology licensing and telephony solutions.
We have further enhanced our competitive position by developing speech and
language technologies and applications for a number of languages. We have
traditionally developed these technologies and applications for twelve key
languages: American English; UK English; German; French; Italian; Spanish;
Portuguese; Dutch; Korean; Arabic; Chinese and Japanese. We believe that there
may develop a significant demand for additional language versions of our
technologies and applications in response to many factors, including the
increasing use of speech as a user interface for computers, the growth of the
Internet and the potential demand of real-time translation, and the
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<PAGE>
globalization of telecommunication. To address these large potential markets,
beginning in the second half of 1998, we have implemented a strategy to expand
the breadth of our speech and language technologies to include up to a total of
36 languages. We have licensed our software development kits and tools to
strategic partners to develop additional language versions of our technologies
and applications. These strategic partners generally take the financial risk
and share in the rewards for speech and language applications for these
additional languages. Through June 30, 1999 we had entered into strategic
alliances for the development of Bahassa, Czech, Farsi, Greek, Hungarian,
Polish, other Slavic languages, Thai, Tamil, Hindu, Turkish, Vietnamese, Urdu,
Malay, Taiwanese, and Scandinavian languages.
In 1997, we began licensing our software development kits and tools to
selected developers in various areas. Since that time, we have refined and
enhanced our development kits and tools. It is now our policy to expand our
licensing of these development kits and tools to strategic partners and
applications developers for the development and commercialization of speech and
language applications in a wide range of markets and languages.
We also intend to focus on developing telephony applications and embedded
solutions for the wireless consumer and automotive electronics markets. In
addition, we intend to develop and apply our technologies to deliver corporate
solutions for Internet and e-commerce companies, as well as intranet and
client/server environments. We recently announced our intention to form a
development company with Intel to develop e-commerce and telephony solutions
based on our technologies. This company, iSAILSolutions, was formed in July
1999. We believe that this company will represent part of the foundation for
our focus in these areas.
In connection with our expansion of our business into speech and language
applications, we have successfully entered the dictation, machine translation
and education markets. Our award winning Voice Xpress products have facilitated
our entry into the retail computer application market. We have also expanded
our reach into the medical dictation market. We intend to leverage our position
in this market where we believe the estimated $6 billion transcription market,
as well as the medical record market, represent a large potential area of growth
for us. Our pending acquisition of the Articulate Systems division of Fonix
Corporation is targeted at this market. We believe that Articulate's technology
together with our medical solutions will enable us to offer compelling solutions
for the medical dictation market to reduce the cost of transcription and
integrating transcribed information with medical record charts. We have also
introduced end-user applications for the educational and machine translation
markets, as well as vertical dictation markets such as legal and law
enforcement.
We have traditionally provided our translation and localization services to
large corporations in the information technology, telephony, automotive and
aerospace markets. These projects are often multi-million dollar, long-term
projects. We have recently introduced our Internet Translation service, which
we believe will enable us to further expand our existing translation services
business.
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FINANCIAL OVERVIEW
In 1998 we operated and reported our revenues and associated costs in four
divisions: core speech technologies; dictation technologies; language
technologies; and translation services. In January 1999, we reorganized our
business into three customer-focused divisions: Speech and language
technologies and solutions; speech and language applications; and speech and
language consulting and services.
Our speech and language technologies and solutions division focuses on
licensing our core speech and language technologies and development tools for
those technologies. We derive our speech and language technologies and solutions
revenue primarily from the licensing of these technologies and tools to
applications developers, strategic partners, original equipment manufacturers,
component manufacturers and software vendors, that incorporate our technologies
in their products or products under development. Payments under our license
agreements include nonrefundable, up-front license fees, including up-front
minimum royalties, ongoing license fees, engineering fees or any combination of
these payments. Nonrefundable up-front license fees are often based upon a
percentage of projected sales volume over the term of the license agreement and
have represented a majority of our core technologies and solutions revenue. We
also received nonrefundable up-front license fees in connection with the license
of our development tools to strategic partners to develop additional language
versions of our core speech technology products. Ongoing license fees are based
upon sales of products incorporating our technologies. Due to licenses to
customers that ultimately sell products incorporating our technologies to end-
users through retail channels, we anticipate that future revenues from our
speech and language technologies and solutions division will be seasonal, with
higher revenues in the third and fourth quarters.
Our speech and language applications division offers a wide range of end-user
applications, including dictation software that enables users to dictate text
and generate documents by speaking naturally without pausing between words, PC
and Internet-based translation software and educational software. Markets
addressed by these applications include healthcare, legal, public safety and
general personal computer markets. We generally license these products through
retail channels, directly to hospitals and large institutions, and through value
added resellers. Our speech and language applications revenue also includes
nonrefundable up-front license fees received from strategic partners in
connection with the license of our development tools to develop additional
language versions of our applications products. We anticipate that revenue from
sales of speech and language applications to the general personal computer
market will be seasonal, with higher revenue in the third and fourth quarters.
Our speech and language consulting and services division provides a wide range
of linguistic services, which included document translation and software
localization services, including our recently introduced Internet/intranet based
machine translation services. We provide our linguistic services in various
languages to a wide range of customers, with an emphasis on the computer and
consumer product industries. As a result, these revenues tend to be somewhat
seasonal, with lower revenues in the first and second quarters.
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Our business is conducted worldwide, primarily in Western Europe, the United
States and Asia. Our revenues, other than translation services revenue, are
primarily denominated in U.S. dollars. Translation services revenue is
primarily denominated in local currencies. We incur expenses primarily in
Belgian francs and U.S. dollars, as well as in a number of other currencies.
Our business will be subject to risks of currency fluctuations as well as other
risks generally associated with international sales. The average exchange rates
used for converting Belgian francs to U.S. dollars for our results of operations
were 37.30 and 37.12 Belgian francs per U.S. dollar for the first six months of
1998 and 1999, respectively.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ---------------------------
1998 1999 1998 1999
-------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Technologies & solutions................................... 45% 35% 44% 35%
Applications............................................... 25 38 24 35
Consulting & services...................................... 30 27 32 30
---- ---- ---- ----
Total revenues.......................................... 100 100 100 100
Cost of revenues:
Technologies & solutions................................... 7 3 6 3
Applications............................................... 10 6 9 6
Consulting & services...................................... 17 16 18 18
---- ---- ---- ----
Total cost of revenues.................................. 34 25 33 27
Operating expenses:
General & administrative................................... 11 10 12 11
Marketing & sales.......................................... 17 20 16 19
Research & development..................................... 11 14 12 14
Amortization and write-off of goodwill..................... 7 10 12 10
Write-off of in-process research and development........... 60 -- 43 --
Other operating expense.................................... -- -- -- 1
---- ---- ---- ----
Total operating expenses................................ 140 79 128 82
---- ---- ---- ----
Operating income (loss)...................................... (40) 21 (28) 18
---- ---- ---- ----
Other (income) expense....................................... 3 (2) (4) (6)
---- ---- ---- ----
Minority interests........................................... 2 1 1 2
---- ---- ---- ----
Provision for income taxes................................... 1% 9% 1% 8%
---- ---- ---- ----
</TABLE>
21
<PAGE>
Revenues. Total revenues increased 69% to approximately $76.0 million in the
second quarter of 1999 from approximately $45.0 million in the second quarter of
fiscal 1998. For the first six months of 1999, total revenues increased 83% to
approximately $146.7 million from approximately $80.0 million in the first six
months of 1998. These increases were attributable to increases in revenues of
all of our divisions.
Speech and language technologies and solutions revenue increased by 31% to
approximately $26.5 million in the second quarter of 1999 from approximately
$20.3 million in the second quarter of 1998. In the first six months of 1999,
this revenue increased by 44% to approximately $51.2 million from approximately
$35.6 million in the first six months of 1998. The increases were primarily
attributable to the addition of revenue associated with the license of our
development tools and an increase in license revenues associated with the
telecom market. In the second quarter and first six months of 1999, our
technologies and solutions revenue included approximately $8.0 million and $14.0
million, respectively, in nonrefundable up-front license fees from strategic
partners in connection with the license of our development tools to develop
additional language versions of our core speech and language technologies. These
increases were partially offset by the elimination of engineering revenue
associated with the Brussels Translation Group project. In the second quarter
and first six months of 1998, we had approximately $2.3 million and $4.5
million, respectively, of engineering revenue from the Brussels Translation
Group, compared to only $1.0 million of such revenue in the first quarter of
1999.
Speech and language applications revenue increased by 155% to approximately
$29.0 million in the second quarter of 1999 from approximately $11.4 million in
the second quarter of 1998. In the first six months of 1999, this revenue
increased by 167% to approximately $51.5 million from approximately $19.3
million in the first six months of 1998. These increases were primarily
attributable to an increase in product revenue in both the industry solutions
and retail channels, as well as the addition of revenue associated with the
license of our development tools. In the second quarter and first six months of
1999, our applications revenue included approximately $8.0 million and $14.0
million, respectively, in nonrefundable up-front license fees from strategic
partners in connection with the license of our development tools to develop
additional language versions of our applications products. These increases were
partially offset by the elimination of engineering revenue associated with the
Brussels Translation Group project that was completed in the first quarter of
this year. In the second quarter and first six months of 1998, we had
approximately $2.3 million and $4.5 million, respectively, of engineering
revenue from the Brussels Translation Group, compared to only $1.0 million of
such revenue in the first quarter of 1999.
Speech and language consulting and services revenue increased by 54% to
approximately $20.5 million in second quarter of 1999 from approximately $13.3
million in the second quarter of 1998. In the first six months of 1999, this
revenue increased by 74% to approximately $44.0 million from approximately $25.2
million in the first six months of 1998. These increases were primarily
attributable to our acquisition of additional translation services businesses as
well as internal growth. In the second quarter and first six months of 1999,
revenues from Microsoft and its affiliates constituted 9.9% and 10.5%,
respectively, of our translation services revenue. Revenues in this division
had decreased 12%, or approximately $2.9 million in the second quarter of 1999
compared to the first quarter of the year. We attribute this decrease to a
delay in receiving major translation
22
<PAGE>
and localization projects from some of our larger customers and to the
seasonality of this business. We expect revenues in this division to increase in
the third quarter of 1999 as a result of major translation and localization
contracts entered into in the beginning of that quarter.
Cost of Revenues. Total cost of revenues as a percentage of revenues
decreased to 25% in the second quarter of 1999 from 34% in the second quarter of
1998, and to 27% in the first six months of 1999 from 33% in the first six
months of 1998. These increases were primarily attributable to an improvement
in margins of both our technologies and solutions, and applications divisions.
Costs of speech and language technologies and solutions revenue as a
percentage of such revenue decreased to 10% in the second quarter and first six
months of 1999 from 14% in the second quarter of 1998 and 15% in the first six
months of 1998. Our improvement in margins was primarily attributable to a more
favorable mix of sales of products and technologies with relatively lower costs
of sales in 1999 compared to 1998.
Costs of speech and language applications revenue as a percentage of such
revenue decreased to 16% in the second quarter of 1999 from 40% in the second
quarter of 1998 and to 17% in the first six months of 1999 compared to 37% in
the first six months of 1998. This improvement was primarily attributable to
the effect of price reductions and rebate programs for older versions of our
dictation and other applications products in 1998 upon our introduction of new
products and product enhancements and in response to competition, and to the
increased percentage of license revenue which provides us with high gross
margins.
Cost of consulting and services revenue as a percentage of such revenues
remained substantially unchanged at 58% in the second quarters of 1999 and 1998
and 59% in the first six months of those years.
General and Administrative Expense. General and administrative expense
increased 55% to approximately $8.0 million, 10% of total revenues, in the
second quarter of 1999 from approximately $5.1 million, 11% of total revenues,
in the second quarter of 1998. In the first six months of 1999, general and
administrative expense increased 63% to approximately $16.3 million, 11% of
total revenues, from approximately $10.0 million, 12% of total revenues, in the
first six months of 1998. 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, to
increased personnel and related costs to support our revenue growth. The
increase was also attributable to non-recurring legal and accounting expenses
incurred in connection with the U.S. Securities Exchange Commission review of
our registration statements and associated filings. This review was completed
in April 1999.
Marketing and Sales Expense. Marketing and sales expense increased 99% to
approximately $14.9 million, 20% of total revenues, in the second quarter of
1999 compared to approximately $7.5 million, 17% of total revenues, in the
second quarter of 1998. In the first six months of 1999, marketing and sales
expense increased 124% to approximately $27.9 million, 19% of total revenues,
from approximately $12.5 million, 16% of total revenue, in the first six months
of 1998. The
23
<PAGE>
increase in marketing and sales expense was primarily attributable to increased
sales as well as our increased marketing efforts relating to our introduction
and building brand awareness for our dictation and other products in the retail
channel.
Research and Development Expense. Research and development expense
increased 112% to approximately $10.8 million, 14% of total revenues, in the
second quarter of 1999 from approximately $5.1 million, 11% of total revenues,
in the second quarter of 1998. In the first six months of 1999, research and
development expense increased 109% to approximately $20.6 million, 14% of total
revenues, from approximately $9.9 million, 12% of total revenues, in the first
six months of 1998. This increase was primarily attributable to inclusion of
research and development expenses for our acquired businesses for the periods
after their acquisition, increased staffing and reallocation of personnel to
research and development.
Amortization and Write-off of Goodwill. Our amortization of goodwill
increased 129% to approximately $7.2 million, 10% of total revenues, in the
second quarter of 1999, from approximately $3.2 million, 7% of total revenues,
in the second quarter of 1998. In the first six months of 1999, our amortization
of goodwill, exclusive of write-offs, increased 165% to approximately $14.4
million, 10% of total revenues from approximately $5.4 million, 7% of total
revenues, in the first six months of 1998. In addition, during the first
quarter of 1998, we wrote-off $3.7 million of goodwill associated with our
acquisition of Berkeley Speech Technologies, Inc. and BeSTspeech Products, Inc.
At the end of the second quarter of 1999, we acquired Brussels Translation Group
for a total purchase price of approximately $42.3, of which approximately $62.1
million has been allocated to goodwill.
Write-off of In-process Research and Development. In the first six months
of 1999 we recorded no charges for the write-off of in-process research and
development. This compares to approximately $34.4 million of such write-offs in
the first six months of 1998. These charges were incurred primarily in
connection with our acquisitions of Applications Technology, Inc., the
linguistic components division of Inso Corporation, and Dictation Consortium
N.V.
Other Income/Expense. Our other income/expense includes interest income
and expense, bank charges, realized and unrealized foreign exchange gains and
losses, our share in loss of unconsolidated affiliates and debt conversion
expense. We recognized net other income of approximately $8.3 million in the
first six months of 1999, compared to net other income of approximately $3.1
million in the comparable period in 1998. This increase was primarily a result
of increased net interest income attributable to our increased cash and
investment balances, and to an increase in our foreign exchange gains. Our
foreign exchange gains and losses have been primarily attributable to unrealized
exchange gains resulting from the increase and decrease in the value of the U.S.
dollar in relation to the Belgian franc and other functional currencies of our
non-U.S. subsidiaries, principally the Korean won and euro, as well as the
increase and decrease in our dollar denominated assets. A significant portion
of our cash and short-term investments is 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
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<PAGE>
of the U.S. dollar decreases. Our net foreign exchange gains were $4.5 million
in the first six months of 1999.
Minority Interest. Our minority interest expense net of tax benefit
relates to our share of the distribution obligations under the $156.0 million of
preferred income equity redeemable trust securities we issued in May 1998. Our
minority interest expense increased to $1.1 million and $2.3 million in the
second quarter and first six months of 1999, respectively, compared to $0.7
million in the comparable periods in 1998.
Provision for Income Taxes. In the second quarter and the first six
months of 1999 we recognized an income tax expense of approximately $6.7 million
and 11.9 million, respectively, compared to approximately $545,000 and $888,000
in the comparable periods in 1998. The increase in 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 acquired businesses outside of
Belgium.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, we had working capital of approximately $184.9 million,
including approximately $153.2 million in cash and marketable securities.
In the first six months of 1999, our operating activities provided
approximately $23.8 million of cash. Our net income of approximately $20.7
million included non-cash expenses of approximately $14.4 million of
amortization of goodwill, $2.3 million of amortization of software development
costs, $3.0 million of depreciation. An increase in accrued expenses net of
accounts payable also provided $1.7 million of cash. Our uses of cash included
an increase in accounts receivable of approximately $16.7 million and an
increase in prepaid expenses and other current assets of approximately $1.8
million. The increase in accounts receivable was primarily attributable to our
increased revenues. Our sales days outstanding of our accounts receivable
decreased to 103 at June 30, 1999 from 112 at March 31, 1999.
In the first six months of 1999, our investing activities used
approximately $66.9 million of cash, including approximately $48.2 million for
acquisitions, approximately $7.0 million for the acquisition of licenses and
software development costs capitalized, approximately $4.0 million in additions
to property and equipment, and approximately $8.6 million of investments in
associated companies. In May 1999, we entered into an agreement to purchase the
assets of the Articulate Systems Division of Fonix Corporation. The agreement,
which is subject to customary conditions to closing, including the approval of
Fonix stockholders, will require us to pay Fonix a purchase price of
approximately $24.0 of cash at closing. We will also be required to pay Fonix
up to a maximum of $4.0 million following the closing if financial performance
targets are reached during a two year period following the acquisition. In
June 1999, we acquired 100% of the outstanding shares of Brussels Translation
for aggregate consideration consisting of approximately $42.3 million in cash
and the assumption of approximately $17.0 million in debt. We expect to
continue to seek acquisition candidates in our targeted markets. We also expect
to continue to incur capital expenditures to support our anticipated growth.
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In the first six months of 1999, our financing activities provided us
approximately $19.3 million of cash, primarily attributable to approximately
$52.4 million from the sale of common stock, including $15.0 million from the
investment by Microsoft and approximately $28.0 million from the investment by
Intel. These sources of cash were partially offset by a total of approximately
$26.9 million in repayment of our long term debt and capital lease obligations.
We are a defendant in several class action lawsuits that allege, in
general, that we improperly accounted for write-offs of acquired in-process
research and development. The plaintiffs filed these lawsuits on behalf of all
purchasers of our common stock during varying period which range from as early
as April 1997 through December 4, 1998. These plaintiffs seek unspecified
compensatory damages, attorneys' and experts' fees and other relief. We believe
that the claims are groundless and are vigorously defending ourselves.
Nevertheless, class action litigation can be expensive and time consuming.
Although we cannot make any guarantees regarding the outcome of these actions,
we believe that the outcome will not have a material adverse effect on our
business, financial condition or results of operations.
We believe that our existing resources, including our 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 may seek
additional sources of cash during the year to increase our financial flexibility
or to fund acquisitions. The sufficiency of our resources to fund working
capital needs is subject to known and unknown risks, uncertainties and other
factors which may materially harm our business, including without limitation the
risk factors referred to above.
YEAR 2000 READINESS DISCLOSURE
The year 2000 problem is the potential for system and processing failure of
date-related data as the result of computer-controlled systems using two digits
rather than four to define the applicable year. This could result in system
failure or miscalculations causing disruptions of operations, including loss of
customers or orders, increased operating costs, disruptions in product
shipments, or other business interruptions of a material nature, as well as
claims of mismanagement, misrepresentations, or breach of contract. Undetected
year 2000 problems may cause us to experience negative consequences and
significant costs. Our vendors, suppliers and customers could also experience
negative consequences and significant costs that could materially harm our
business.
We may be affected by year 2000 issues related to non-compliant information
technology systems or non-information technology systems we use internally. The
computer software and hardware we operate represent the primary internal
elements subject to year 2000 risk. Computer software and hardware include
networking, operating and applications software that we currently use, as well
as those that we plan to install prior to the year 2000, and the hardware
platforms upon which the operating and software applications operate. Other
internal elements subject to risk include fax machines, security systems,
heating and air conditioning systems, telephone and other telecommunications
systems, copiers and sprinklers.
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We have substantially completed our assessment of the systems and products
we sell to customers. We are not currently aware of any year 2000 problems
relating to systems or products we sell that would materially harm our business.
However, we cannot assure that we will not in the future identify material
noncompliant systems. Furthermore, if we do identify any material noncompliant
systems, we cannot assure that the steps that we take will be sufficient to make
such systems compliant. We have discovered an instance of a noncompliant
product based on Microsoft's DOS operating system. We have notified customers
that use this product of the potential problem and have proposed a solution. We
do not believe that this problem will materially harm our business.
We believe that we have taken reasonable steps to confirm that all third
party equipment and software we incorporate into our products and software is
year 2000 compliant. These steps include verbal and written confirmation with
the relevant third parties and, in some cases, internal testing of software or
products. However, we cannot assure that we will identify material noncompliant
systems operated by third parties. Furthermore, if we do identify any such
material noncompliant systems, we cannot assure that the steps, if any, that
such third parties take will be sufficient to make such systems compliant.
Our products and software are often sold to be integrated into or interface
with third party products or software. We have not taken, and do not plan to
take, steps to contact customers or other third parties into whose products our
products and software may be integrated or interfaced regarding year 2000
issues. We depend upon the success of our customers to develop and market
products incorporating our technology for a significant portion of our revenue.
Accordingly, failures by our customers to operate properly with regard to year
2000 issues or to adequately address year 2000 issues could materially harm our
business.
Even if third parties such as our suppliers, service providers and
customers are year 2000 compliant, they could experience difficulties resulting
from year 2000 issues affecting other third parties with whom they do business.
Because the cost and timing of year 2000 compliance by third parties is not
within our control, we cannot give any assurance with respect to such efforts or
any potential adverse effects to us of any failure by third parties to achieve
year 2000 compliance. As a result, although we do not currently anticipate that
we will experience any material shipment delays from our material product
suppliers or any material sales delays from our major customers due to year 2000
issues, such third parties may directly or indirectly experience year 2000
problems. Any such problems may materially harm our business.
As we can give no assurance as to the readiness or compliance of third
parties with respect to the year 2000, we have established a team of individuals
to be on call during the beginning of January 2000 to respond quickly should any
unanticipated year 2000 problems arise. We cannot assure that this team will be
able to respond effectively.
We have not incurred in the past, and do not expect to incur in the future,
material expenses in connection with the year 2000 issue. We may, however, be
incorrect in our assessment of the year 2000 impact upon our business. In the
case of an incorrect assessment, we may incur material expenses in connection
with the year 2000 issue in the future.
27
<PAGE>
To the extent that we fail to identify material noncompliant information
technology systems or non-information technology systems that we operate or that
third parties operate, the most reasonably likely worst case year 2000 scenario
is a systemic failure beyond our control. A systemic failure could take the
form of a prolonged telecommunications or electrical failure, or a general
disruption in global business activities.
We believe that the primary business risks, in the event of such failure or
other disruption, would include, but not be limited to:
. loss of customers or orders;
. increased operating costs;
. disruptions in product shipments; and
. other business interruptions of a material nature such as claims of
mismanagement, misrepresentation, or breach of contract.
Any of these business risks could materially harm our business.
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.
Certain financial instruments used to obtain capital are subject to market
risks from fluctuations in interest rates. As of June 1999, the Company has
approximately $20.4 million in fixed rate debt.
28
<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 and the German mark. The currency exchange rates to the U.S.
dollar at December 31,1998 and June 30,1999, respectively, are as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Foreign currency Exchange rate to the U.S. Dollar
---------------------------------------------------------------------------
December 31,1998 June 30,1999
---------------------------------------------------------------------------
<S> <C> <C>
BEF 34.57 39.06
---------------------------------------------------------------------------
GBP 0.61 0.64
---------------------------------------------------------------------------
DEM 1.68 1.89
---------------------------------------------------------------------------
</TABLE>
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
No Material Developments.
ITEM 2. CHANGES IN SECURITIES
(All data in this Item 2 related to shares and per share amounts have
been adjusted to reflect a two-for-one stock split of the Company's common stock
distributed on May 12, 2000 to stockholders of record on April 28, 2000.)
The Company's 8% Convertible Subordinated Notes are convertible into
shares of the Company's common stock at a conversion price of $5.1256 per
share, subject to adjustment under certain circumstances.
On following dates, the Company issued shares of its common stock to
holders of its 8% Convertible Subordinated Notes upon conversion thereof, as
follows:
DATE COMMON STOCK ISSUED
----------------- -------------------
May 6, 1999 31,214
June 8, 1999 37,068
June 16, 1999 61,454
On May 5, 1999, the Company, Intel Atlantic Inc. ("Intel"), and Stichting
Administratiekantoor L&H-ACS, a Dutch Trust Foundation (the "Trust") entered
into a Securities Subscription Agreement, pursuant to which Intel invested $30
million in the Company via the Trust. The Trust subscribed to 895,932 shares of
Automatically Convertible Stock ("ACOs") of the Company at a price of $33.484684
per share. The Trust holds the ACOs in trust and on behalf of Intel and
exercises the voting rights and all other rights attached to the ACOs. In
exchange for the acquisition and holding in trust of the ACOs, the Trust issued
to Intel the Trust Foundation Certificates which are exchangeable on and after
November 5, 2000 into shares of the ACOs or upon conversion thereof, into shares
of the common stock of the Company. Each ACO is currently convertible into two
shares of the Company's common stock.
29
<PAGE>
With regard to the transaction mentioned above, the Company relied upon
Regulation S promulgated under the Securities Act of 1933, as amended (the
"Act"), and Section 4(2) of the Act as exemptions from the registration
requirements of the Act. No commissions were paid to any underwriter in
connection with the securities issued in any of the foregoing transactions..
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Stockholders on May 21, 1999. At the
meeting, a total of 20,031,796 shares or 36% 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
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, 1998 including the allocation of the results set forth
therein, in accordance with Belgian Law.
For: 19,965,098 Against: 27,012 Abstain: 39,686
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, 1998.
For: 19,897,307 Against: 78,918 Abstain: 55,571
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, 1998.
For: 19,919,783 Against: 58,392 Abstain: 53,621
4. A proposal to elect Gerard Van Acker as director of the Company, to
hold office until the 2001 Annual Meeting of Stockholders and until
his successor is duly elected and qualified.
For: 19,961,029 Against: 34,170 Abstain: 36,597
30
<PAGE>
5. A proposal to elect Francis Vanderhoydonck as director of the Company,
to hold office until the 2001 Annual Meeting of Stockholders and until
his successor is duly elected and qualified.
For: 19,954,953 Against: 36,810 Abstain: 40,033
6. A proposal to appoint Klynveld Peat Marwick Goerdeler
Bedrijfsrevisoren as independent statutory auditors of the Company for
a three-year period ending on the Annual Meeting of Stockholders in
2002.
For: 19,968,908 Against: 34,840 Abstain: 28,048
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)
Hebert Detremmerie; (7) Dirk Cauwelier; (8) Jan Coene; (9) RVD
Securities N.V.; (10) Alex Vieux; (11) Gerard Van Acker; (12) Bernard
Vergnes; and (13) Francis Vanderhoydonck.
ITEM 5. OTHER INFORMATION
In June 1999, the Company acquired all the outstanding shares of Brussels
Translation Group N.V. ("BTG") for an aggregate purchase price of
approximately $42.3 million and the assumption of approximately $17.0
million in debt. The Company paid $41.5 million of the purchase price for
BTG in cash from our working capital. The consideration for this
acquisition was determined through arms' length negotiation.
In March, 1997, the Company entered into a software development and
commercialization agreement with BTG (the "BTG Agreement") in which the
Company agreed to provide engineering services for the development of
BTG's Machine Translation Software. The Company completed the work under
the BTG Agreement in early 1999. In addition, during 1998 and the six
months ended June 30, 1999, BTG paid the Company $18.0 million and $2.0
million respectively, for engineering work performed under the BTG
Agreement. Beyond these relationships, prior to the transaction
described above, neither BTG nor the stockholders of BTG had any material
relationship with the Company or any of its affiliates, directors or
officers or any associate of any such director or officer.
BTG, a private organization, is predominantly dedicated to the
development of our iTranslator services. This development was primarily
facilitated through the BTG Agreement. The Company intends to continue
the business of BTG.
31
<PAGE>
Item 6. EXHIBITS AND INTERIM REPORTS
----------------------------
EXHIBIT INDEX
-------------
(a) REPORTS ON FORM 6-K
-------------------
During the fiscal quarter ended June 30, 1999, we were a foreign private
issuer, and therefore, were not required to report on Form 8-K. Instead, we
were required to report on Form 6-K. We filed the following reports on Form 6-K
during the fiscal quarter ended June 30, 1999:
1. On April 13, 1999, we filed a Form 6-K/A (in connection with our
Form 6-K for August 1998) concerning certain 1998 Second Quarter
financial information.
2. On April 13, 1999, we filed a Form 6-K/A (in connection with our
November 1998 Form 6-K) concerning our acquisition of TikSoft LLC
and certain 1998 Second Quarter financial information.
3. On April 13, 1999, we filed a Form 6-K/A (in connection with our
Form 6-K for August 1998) concerning certain pro forma 1998
Second Quarter financial information.
4. On April 13, 1999, we filed a Form 6-K concerning certain 1998
Third Quarter financial information.
5. On April 19, 1999, we filed a Form 6-K concerning our 1998 Fourth
Quarter results.
6. On April 30, 1999, we filed a Form 6-K concerning certain
unaudited 1998 financial information and certain pro forma
financial information.
7. On May 12, 1999, we filed a Form 6-K concerning certain audited
1998 financial information.
8. On May 24, 1999, we filed a Form 6-K concerning proxy materials
for our Annual Meeting and Extraordinary meeting of Stockholders
held on May 21, 1999.
9. On June 1, 1999, we filed a Form 6-K concerning our 1998 Annual
Report to Shareholders.
10. On June 1, 1999, we filed a Form 6-K concerning our 1999 First
Quarter results.
32
<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.
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
By: /s/ Gaston Bastiaens
------------------------------------
Gaston Bastiaens
President and Chief Executive Officer
(Principal Executive Officer)
Date: June 30, 2000 By: /s/ Carl Dammekens
--------------------- ---------------------------------
Carl Dammekens
Senior Vice President of Finance and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
33
