<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 0-27038
SCANSOFT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<CAPTION>
<S> <C>
DELAWARE 94-3156479
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
9 CENTENNIAL DRIVE
PEABODY, MA 01960
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
(978) 977-2000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
45,901,936 shares of the registrant's Common Stock, $0.001 par value,
were outstanding as of April 30, 2000
<PAGE> 2
SCANSOFT, INC.
FORM 10-Q
THREE MONTHS ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
a) Consolidated Statements of Operations for the three months
ended March 31, 2000 and March 31, 1999............................. 1
b) Consolidated Balance Sheets at March 31, 2000 and
December 31, 1999................................................... 2
c) Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and March 31, 1999............................. 3
d) Notes to Consolidated Financial Statements.......................... 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................................. 8
PART II: OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.................... 16
Item 6. Exhibits and Reports on Form 8-K....................................... 16
Signatures...................................................................... 17
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SCANSOFT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
UNAUDITED
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
------------- ---------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents......................................... $ 5,216 $ 5,162
Short-term investments............................................ 62 62
Accounts receivable, less allowances of $13,399 and $3,690........ 7,370 7,713
Inventory, net.................................................... 1,676 780
Deferred tax asset................................................ 3,650 --
Prepaid expenses and other current assets......................... 2,221 1,372
------------- ---------------
Total current assets........................................... 20,195 15,089
Goodwill and other intangible assets, net......................... 116,893 12,987
Property and equipment, net....................................... 4,340 1,546
Other assets...................................................... 2,836 360
------------- ---------------
TOTAL ASSETS $ 144,264 $ 29,982
============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short term bank borrowings........................................ $ 3,000 $ --
Note payable.................................................. -- 1,600
Accounts payable and accrued expenses............................. 12,467 2,226
Accrued sales and marketing expenses.............................. 1,083 1,425
Deferred revenue.................................................. 2,051 964
Other current liabilities......................................... 3,193 1,843
------------- ---------------
Total current liabilities...................................... 21,794 8,058
------------- ---------------
Deferred tax liability................................................. 5,919 --
------------- ---------------
Stockholders' equity:
Series B convertible preferred stock, 15,000,000 shares
authorized; 3,562,238 issued and outstanding;
liquidation value of $4,631 ................................... 4,631 4,631
Common stock, $0.001 par value; 140,000,000 shares authorized;
45,873,609 and 26,690,027 shares issued and outstanding,
respectively................................................... 46 27
Additional paid in capital, ...................................... 219,007 100,397
Accumulated deficit............................................... (107,069) (83,131)
Accumulated other comprehensive income............................ (64) --
------------- ---------------
Total stockholders' equity..................................... 116,551 21,924
------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................. $ 144,264 $ 29,982
============= ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 4
SCANSOFT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------------
2000 1999
----------------- -----------------
<S> <C> <C>
Revenue................................................................ $ 7,415 $ 4,508
Costs and expenses:
Cost of revenue................................................... 2,441 1,125
Research and development.......................................... 3,235 1,255
Selling, general and administrative............................... 5,437 2,603
Amortization of intangible assets................................. 1,914 158
Restructuring charges............................................. -- 346
Acquired in-process research and development...................... 18,291 3,944
----------------- -----------------
Total costs and expenses............................................... 31,318 9,431
Loss from operations................................................... (23,903) (4,923)
Other income, net...................................................... 35 898
----------------- -----------------
Loss before income taxes............................................... (23,868) (4,025)
Provision for income taxes............................................. 70 --
----------------- -----------------
Net loss............................................................... $ (23,938) $ (4,025)
================= =================
Net loss per share: basic.............................................. $ (0.78) $ (0.18)
================= =================
Net loss per share: diluted............................................ $ (0.78) $ (0.18)
================= =================
Weighted average common shares: basic.................................. 30,529 22,220
================= =================
Weighted average common and common equivalent shares: diluted.......... 30,529 22,220
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 5
SCANSOFT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
Three months ended
March 31,
---------------------------------------
2000 1999
---------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................................... $ (23,938) $ (4,025)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................................... 118 94
Accounts receivable allowances.................................. 4,471 767
Amortization of goodwill and other intangible assets............ 1,914 158
Net gain on sale of hardware business........................... -- (882)
Write off of acquired in-process research and development....... 18,291 3,944
Changes in assets and liabilities, net of effects from
acquisitions of Caere and ScanSoft, and sale of hardware assets:
Accounts receivable........................................... (2,690) (2,034)
Inventory..................................................... (613) (18)
Prepaid expenses and other assets............................. (229) (145)
Accounts payable and accrued expenses, accrued marketing
and other................................................... (488) (470)
---------------- -----------------
Net cash provided by (used in) operating activities.................... (3,164) (2,611)
---------------- ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales of short-term investments............................... -- 174
Proceeds from sale of hardware business........................... -- 6,782
Cash acquired in connection with Caere acquisition................ 1,419 --
Cash acquired in connection with ScanSoft acquisition............. -- 1,233
Capital expenditures for property and equipment................... (47) (9)
---------------- -----------------
Net cash provided by investing activities.............................. 1,372 8,180
---------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short term bank borrowings, net................................... 3,000 (6,000)
Repurchase of common stock........................................ -- (684)
Payment of notes payable.......................................... (1,600) --
Proceeds from the issuance of common stock, net................... 446 --
----------------- -----------------
Net cash provided by (used in) financing activities.................... 1,846 (6,684)
---------------- -----------------
Net increase (decrease) in cash and cash equivalents................... 54 (1,116)
Cash and cash equivalents at beginning of period....................... 5,162 7,659
---------------- -----------------
Cash and cash equivalents at end of period............................. $ 5,216 $ 6,544
================ =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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<PAGE> 6
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
BASIS OF PRESENTATION:
Prior to 1999, the results of the Company represented the activity of
Visioneer, Inc., which marketed and sold hardware and software. On January 6,
1999, the Company sold its hardware business to Primax Electronics, Ltd. On
March 2, 1999, the Company acquired Xerox Corporation's ScanSoft subsidiary and
subsequently renamed the Company ScanSoft, Inc. On March 13, 2000, the Company
acquired Caere Corporation ("Caere"). See "Caere Acquisition" note for
specific information on the acquisition.
The accompanying unaudited consolidated financial statements of
ScanSoft, Inc. (the "Company" or "ScanSoft") have been prepared in accordance
with generally accepted accounting principles. In the opinion of management,
these interim consolidated financial statements reflect all adjustments,
consisting of normal recurring adjustments, except with respect to the
adjustments made in relation to the Caere acquisition, necessary to present
fairly the financial position, results of operations, and cash flows at March
31, 2000, and for other periods presented. Although the Company believes that
the disclosures in these financial statements are adequate to make the
information presented not misleading, certain information normally included in
footnotes prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. The accompanying financial statements should
be read in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1999 and the unaudited pro forma financial statements of the Caere
acquisition included in Form S-4 filed with the Securities and Exchange
Commission on February 9, 2000.
The results for the three months ended March 31, 2000, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000, or any future period.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities on the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
BALANCE SHEET COMPONENTS:
The following table summarizes key balance sheet components (in
thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---------------- --------------
<S> <C> <C>
Inventory:
Raw Materials............................ $ 122 $ 524
Work-in-process.......................... -- --
Finished goods........................... 1,554 256
---------------- --------------
$ 1,676 $ 780
================ ==============
Other current liabilities:
Accrued compensation..................... $ 1,582 $ 721
Accrued royalties........................ 664 200
Accrued taxes payable.................... 335 351
Other current liabilities................ 612 571
---------------- --------------
$ 3,193 $ 1,843
================ ==============
</TABLE>
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<PAGE> 7
CAERE ACQUISITION:
On March 13, 2000, the Company acquired Caere Corporation, a company
that designs, develops and markets a range of optical character recognition
software tools, for approximately $48.5 million in cash, 19.0 million shares of
Common Stock of the Company, and the exchange of approximately 4.6 million
employee stock options to purchase Common Stock of the Company in exchange for
outstanding employee stock options of Caere. The common stock issued has been
valued using the average quoted price of common stock for the period a few days
preceding and the day of the consummation of the acquisition. The employee stock
options were fair valued using the Black Scholes option pricing model. In
addition, pursuant to a concurrent non-competition agreement and subject to
certain other conditions, the Company agreed to pay the former President and CEO
of Caere on the second anniversary of the merger the difference between $13.50
and the closing price of ScanSoft stock at that time, multiplied by the number
of beneficial shares owned by the former executive. The value of this stock
price guarantee is approximately $4.0 million and has been included in the total
purchase price of the acquisition. Additionally, in conjunction with the
acquisition, the Company incurred approximately $1.7 million of acquisition
related costs. The purchase price of Caere, including acquisition costs, was
$168.4 million, and was allocated to the assets acquired and liabilities assumed
based on the fair value of Caere's current assets, property and equipment, and
liabilities. The excess of the purchase price over the fair value of tangible
assets acquired has been allocated to intangible assets (IPRD, core technology,
developed technology, patents, favorable facility lease, non-compete agreements
and assembled workforce) acquired based on an independent appraisal.
This acquisition has been accounted for under the purchase method of
accounting. Accordingly, the results of operations of Caere and the fair market
value of acquired assets and assumed liabilities have been included in the
financial statements of the Company as of the date of acquisition. The Company
recorded a one-time write-off of $18.3 million in the quarter ended March 31,
2000 relating to the value of in-process research and development acquired as
part of the purchase.
The allocation of the purchase price was as follows (in thousands):
Property and equipment.......................................... $ 2,865
Current and other assets........................................ 58,400
Liabilities assumed............................................. (16,985)
Goodwill........................................................ 61,095
Core technology................................................. 17,905
Developed technology............................................ 16,340
Other identified intangible assets.............................. 10,448
Acquired in-process research and development.................... 18,291
--------
$168,359
========
The amounts allocated to identifiable tangible and intangible assets,
including acquired in-process research and development, were based on the
results of an independent appraisal. Goodwill represents the amount by which the
cost of acquired net assets exceeded the fair values of those net assets on the
date of purchase. Acquired in-process research and development represented
development projects that had not yet reached technological feasibility and had
no alternative future use. Accordingly, the amount of $18.3 million was
immediately charged to expense in the consolidated statements of operations upon
consummation of the acquisition.
The values of the core technology, developed technology and acquired
in-process technology were determined by a risk adjusted, discounted cash flow
approach. The value of in-process research and development, specifically, was
determined by estimating the costs to develop the in-process projects into
commercially viable products, estimating the resulting net cash flows from such
projects, discounting net cash flows back to their present values, and adjusting
that result to reflect the project's stage of completion. These include projects
(primarily major version upgrades) in each of Caere's major products, including
OmniPage, OmniForm, and Pagekeeper. The discount rates used were 14% for
developed technology, 19% for core technology, and 24% for in-process,
technology. The discount rate for in-process technology takes into consideration
the Company's weighted average cost of capital adjusted for the inherent
uncertainties surrounding the successful development of the in-process research
and development, the profitability levels of such technology and the uncertainty
of technological advances, which could potentially impact the estimates
described above.
The average percentage of completion of the projects ranged from 50%
to 67% at the date of the acquisition. Revenues are projected to be generated
late in fiscal 2000 for each of the product versions in development at the
acquisition date. If these projects are not successfully developed, future
revenue and profitability of ScanSoft may be adversely affected. Additionally,
the value of other intangible assets acquired may become impaired.
-5-
<PAGE> 8
The following identifies the intangible assets acquired in connection with Caere
and respective lives (in thousands):
Amount Life
Goodwill..................................... 61,095 6 Years
Core technology.............................. 17,905 5 Years
Developed technology......................... 16,340 2 Years
Other identified intangible assets........... 10,448 2-5 Years
--------
$105,788
========
Other identified intangible assets consist of a non-compete agreement, acquired
work force, a favorable lease agreement, and patents on the Caere technology.
These assets are being amortized over a period of 2, 3, 4 and 5 years,
respectively.
Pro forma Results (unaudited)
The following table reflects the unaudited pro forma results of operations of
the Company assuming that the acquisition of Caere had occurred at the beginning
of each fiscal period presented:
March 31, March 31,
2000 1999
----------- --------------
Revenue............................ $ 13,462 $ 23,553
Net loss.......................... (17,253) (5,915)
Net loss per share................. (0.38) (0.13)
These unaudited pro forma results of operations do not include the write-off of
the in-process research and development as this amount was non-recurring in
nature. The unaudited pro forma results of operations are not necessarily
indicative of the actual results that would have occurred had the transaction
actually taken place at the beginning of the periods.
RESTRUCTURING AND OTHER EMPLOYEE ACTIONS:
In connection with the acquisition of Caere, the Company identified
approximately 46 employees of Caere whose positions would be eliminated as part
of the acquisition. These positions include 22 in research and development, 14
in general and administrative functions, and 10 in sales and marketing.
Additionally, the former president and CEO position of Caere was eliminated. As
a result, the Company has established as part of the purchase price a
restructuring reserve in the amount of $487,000 for the severance payments to
employees, anticipated to be paid out over the next three quarters, and a
restructuring reserve of $1,065,000 for the former president and CEO of Caere,
whose severance and benefits will continue over the next 5 years.
The Company is obligated to pay over the next three quarters retention
bonuses amounting to approximately $650,000 relating to key employees who will
be used in the integration of the companies. These retention bonuses will be
expensed as incurred and have not been included in the purchase price of the
acquisition.
Additionally, approximately 24 employees of Caere have voluntarily terminated
their positions. The Company does not anticipate replacing those individuals.
-6-
<PAGE> 9
NET INCOME (LOSS) PER SHARE:
Net income (loss) per share is calculated in accordance with the
provisions of Statement of Financial Accounting Standards No. 128 - "Earnings
per Share" (SFAS No. 128). The following details the computation for basic and
diluted income (loss) per share:
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
------------ ----------
<S> <C> <C>
Net income (loss)................................................ $ (23,938) $ (4,025)
============ ===========
Weighted average common shares outstanding (basic)............... 30,529 22,220
Effect of dilutive options and convertible preferred stock....... -- --
------------ -----------
Weighted average common and common equivalent shares outstanding
(diluted)..................................................... 30,529 22,220
Income (loss) per share: basic.................................. $ (0.78) $ (0.18)
============ ===========
Income (loss) per share: diluted................................ $ (0.78) $ (0.18)
============ ===========
</TABLE>
BANK LINE OF CREDIT:
On March 14, 2000, the Company entered into a one year Credit Agreement
(the "Agreement") with a bank that consisted of a $10,000,000 revolving loan
(the "Revolver"). Borrowings under the Revolver bear interest at the rate of one
percent (1.0%) per annum above the Prime Rate. The maximum aggregate amount of
borrowings outstanding at any one time is limited to the lesser of (a) the
bank's total commitment and (b) the Borrowing Base. The Borrowing Base is equal
to fifty percent (50%) of eligible accounts receivables for which invoices have
been issued and are payable. At March 31, 2000, $4,583,000 was available under
the Revolver of which the Company had $3,000,000 of bank borrowings outstanding.
Pursuant to the Agreement, the Company is required to maintain certain financial
and non-financial covenants, as defined, including certain earnings levels,
liquidity ratios, restrictions on dividends and capital expenditures. Borrowings
under the Agreement are secured by substantially all of the Company's assets.
For the quarter ended March 31, 2000, the Company failed to comply with one
financial covenant and the bank has waived its requirement that the Company
comply thereunder.
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<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
Certain statements made in this report as well as oral statements made
by the Company from time to time, which are prefaced with words such as,
"expects", "anticipates", "believes", "projects", "intends", "plans", and
similar words and other statements of similar sense, are forward looking
statements. These statements are based on the Company's current expectations and
estimates as to prospective events and circumstances, which may or may not be in
the Company's control and as to which there can be no firm assurance given.
These forward looking statements, like any other forward looking
statement, involve risks and uncertainties that could cause actual results to
differ materially from those projected or anticipated. Such risks and
uncertainties are outlined later in this document and should not be construed as
exhaustive. The Company disclaims any obligation to subsequently revise forward
looking statements or to reflect events or circumstances after the date of such
statements or to reflect the occurrence of anticipated or unanticipated events.
Further discussions of risk factors are also available in the Company's
registration statements filed with the Securities and Exchange Commission. The
Company wishes to caution readers not to place undue reliance upon such
forward-looking statements, which speak only as of the date made.
OVERVIEW
On January 15, 2000, we entered into an agreement to acquire Caere
Corporation, a California based digital imaging software company. The
acquisition was completed on March 13, 2000 and Caere was merged into ScanSoft,
with ScanSoft continuing as the corporate entity. As a result, ScanSoft now
maintains control of the OmniPage and OmniForm family of products. The
acquisition was accounted for as a purchase and accordingly, the results of
operations of Caere are included in the Company's financial statements as of the
acquisition date. The Company's results of operations for the three-month period
ended March 31, 2000, include a pre-tax charge of $18.3 million for the value of
acquired in process research and development and amortization of $1.2 million
related to intangible assets recorded as a result of the acquisition. On March
2, 1999, we acquired Xerox's ScanSoft subsidiary and renamed the Company
ScanSoft, Inc. Many of the increases discussed below are related to the
inclusion of ScanSoft's results for the entire quarter in 2000 versus just one
month in 1999, and to the inclusion of Caere since March 13, 2000.
Our success in the future will depend on our ability to maintain
software gross margins and increase sales of our software products. This will
depend in part on our ability and the ability of our distributors, resellers and
OEM partners to convince end-users to adopt paper and image input systems for
the desktop and to educate end-users about the benefits of our products. There
can be no assurance that the market for our products will develop or that we
will achieve market acceptance of our products. Despite experiencing several
quarters of minor levels of profitability throughout our history, we have
incurred annual net losses since inception. There can be no assurance that we
will be able to reach quarterly profitability or attain annual profitability in
the near future. As of March 31, 2000, we had an accumulated deficit of $107
million.
-8-
<PAGE> 11
RESULTS OF OPERATIONS
The following table presents, as a percentage of total revenue, certain
selected financial data for the quarters ended March 31, 2000 and March 31,
1999:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
2000 1999
-------- ----------
<S> <C> <C>
Revenue: 100.0% 100.0%
Costs and expenses:
Cost of revenue 32.9% 25.0%
Research and development 43.6% 27.8%
Selling, general and admin 73.3% 57.7%
Restructuring charges 0.0% 7.7%
Amortization of goodwill and other intangible
assets 25.8% 3.5%
Acquired in-process research and development 246.7% 87.5%
------ -------
Total costs and expenses 422.3% 209.2%
------- -------
Income (loss) from operations (322.4%) (109.2%)
Other income, net 0.5% 19.9%
------- -------
Income (loss) before income taxes (321.9%) (89.3%)
Provision for income taxes (0.9%) 0.0%
------- -------
Net income (loss) (322.8%) (89.3%)
------- -------
</TABLE>
REVENUE
Net revenue of $7.4 million for the three months ended March 31, 2000 increased
by $2.9 million or 64%, from the same period in 1999. This was due to the
acquisition of Caere on March 13th. During the first quarter of 2000, the
company took several steps to position it to take full advantage of a growing
scanner and digital imaging market. The first was the previously mentioned
acquisition of Caere and it's product lines. In addition, the Company elected to
change its method of estimating revenue reserves to more closely align reported
revenues with end user purchases. This resulted in a reduction of revenue of
$3.7 million. The impact of the change also reflects higher distributor and
retail inventories resulting from acquisition related disruption and the timing
of new product introductions.
New products shipped in the first quarter include Pagis Millennium, TextBridge
Millennium, OmniPage Scanning Suite and PaperConverter, all of which were
released in the latter half of the quarter. The breakdown of recorded net
revenue by channel in the first quarter of 2000 is 28% retail, 24% direct, and
48% OEM and multi-user licenses.
COST OF REVENUE
Cost of revenue consists primarily of material costs, third party
royalties, fulfillment, and salaries for product support personnel. Cost of
revenue in the first quarter of 2000 was $2.4 million or 33% of revenue,
compared to $1.1 million or 25% of revenue in the first quarter of 1999. The
increase in percentage is due in part to increased revenue reserves and obsolete
inventory.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salary and
benefit costs of engineers. Research and development costs were $3.2 million or
44% of revenue in the first quarter of 2000, an increase of $1.9 million from
the $1.3 million reported during the same period in 1999. The increase in
research and development is partly due to the acquisition of Caere, inclusion of
ScanSoft for an entire quarter in 2000 versus just one month in 1999, and growth
in spending to increase product development activities.
-9-
<PAGE> 12
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses include salaries, commissions, advertising, direct
mail, public relations, trade shows, travel and other related sales and
marketing expenses. General and administrative expenses include personnel costs
for administration, finance, human resources, information systems, and general
management in addition to legal and accounting expenses and other professional
services.
Selling, general and administrative expenses during the first quarter
were $5.4 million or 73% of revenue, an increase of $2.8 million from the same
period reported in 1999. The increase in expenses is due in part from the
acquisition of Caere, including costs associated with the acquisition, as well
as growth in spending to support additional revenue growth.
OTHER COSTS AND EXPENSES
RESTRUCTURING AND OTHER EMPLOYEE ACTIONS:
In connection with the acquisition of Caere, the Company identified
approximately 46 employees of Caere whose positions would be eliminated as part
of the acquisition. These positions include 22 in research and development, 14
in general and administrative functions, and 10 in sales and marketing.
Additionally, the former president and CEO position of Caere was eliminated. As
a result, the Company has established as part of the purchase price a
restructuring reserve in the amount of $487,000, for the severance payments to
employees, anticipated to be paid out over the next three quarters, and a
restructuring reserve of $1,065,000 for the president and CEO of Caere, whose
severance and benefits will continue over the next 5 years.
The Company is obligated to pay over the next three quarters retention
bonuses amounting to approximately $650,000 relating to key employees that will
be used in the integration of the companies. These retention bonuses will be
expensed as incurred and have not been included in the purchase price of the
acquisition.
As of March 31, 2000, the Company had paid approximately $208,000
relating to severance actions and had accrued approximately $148,000 for
retention bonuses yet to be paid.
The Company has accounted for these items using the guidance
established in SEC Staff Accounting Bulletin No. 100 "Restructuring and
Impairment Charges" and Emerging Issues Task Force EITF No. 95-3 "Recognition of
Liabilities in Connection with a Purchase Business Combination". Accordingly,
only those items meeting the requirements of the pronouncements have been
included in the purchase price.
Restructuring charges of $346,000 in the first quarter of 1999 relate
to the acquisition of ScanSoft and the subsequent consolidation of research and
development operations and the move of the Company's headquarters to
Massachusetts, which resulted in the termination of 10 employees in California.
The major components of these costs were approximately $188,000 in severance
costs for the 10 employees and approximately $46,000 for disposed West Coast
equipment. Also included was $82,000 in non-refundable commitments associated
with the West Coast development team, as well as $30,000 in other exit costs.
All such costs have been fully paid as of March 31, 2000.
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<PAGE> 13
AMORTIZATION OF IDENTIFIED INTANGIBLE ASSETS AND IN-PROCESS RESEARCH AND
DEVELOPEMENT
Amortization of intangible assets of $1.9 million for the first quarter
2000 reflects the amortization of identified intangible assets from the Caere
acquisition of $1.2 million and $0.7 million relating to previously acquired
identifiable intangible assets. The useful lives of the intangible assets used
for amortization range from two to six years. Amortization of intangible assets
of $0.2 million for the first quarter 1999 reflects the amortization of
identifiable intangible assets acquired in the ScanSoft acquisition.
The amounts allocated to identifiable tangible and intangible assets,
including acquired in-process research and development, were based on the
results of an independent appraisal. Goodwill represents the amount by which the
cost of acquired net assets exceeded the fair values of those net assets on the
date of purchase. Acquired in-process research and development represented
development projects that had not yet reached technological feasibility and had
no alternative future use. Accordingly, the amount of $18.3 million was
immediately charged to expense in the consolidated statements of operations upon
consummation of the acquisition.
The values of core technology, developed technology and acquired
in-process technology were determined by a risk adjusted, discounted cash flow
approach. The value of in-process research and development, specifically, was
determined by estimating the costs to develop the in-process projects into
commercially viable products, estimating the resulting net cash flows from such
projects, discounting net cash flows back to their present values, and adjusting
that result to reflect the project's stage of completion. These include projects
(primarily major version upgrades) in each of Caere's major products, including
OmniPage, OmniForm, and Pagekeeper. The discount rates used were 14% for
developed technology, 19% for core technology and 24% for in-process
technology. This discount rate takes into consideration the inherent
uncertainties surrounding the successful development of the in-process research
and development, the profitability levels of such technology and the uncertainty
of technological advances, which could potentially impact the estimates
described above.
The average percentage of completion of the projects ranged from 50% to
67% at the date of the acquisition. Revenues are projected to be generated late
in fiscal 2000 for each of the product versions in development at the
acquisition date. If these projects are not successfully developed, future
revenue and profitability of ScanSoft may be adversely affected. Additionally,
the value of other intangible assets acquired may become impaired.
GAIN ON SALE OF THE HARDWARE BUSINESS
In the quarter ended March 31, 1999, the Company sold its hardware
business to Primax Electronics, Ltd., for approximately $6.8 million and
reported a non-operating gain of approximately $882,000. The most significant
assets and liabilities at January 3, 1999, of the hardware business were
receivables, inventories and accounts payable in the approximate amounts of
$12.7 million, $4.4 million and $10.7 million, respectively.
OTHER INCOME, NET
Other income, net consists primarily of interest earned on cash, cash
equivalents and short-term investments offset by interest incurred for
borrowings under credit facilities and short-term notes and exchange gains and
losses.
Other income, net decreased by $863,000 for the quarter ended March 31,
2000 to $35,000, as compared to $898,000 during the same period in 1999. The
decrease was attributable to the gain on sale of the hardware business in 1999.
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<PAGE> 14
TAXATION
At March 31, 2000, we recorded a tax provision of $70,000 related to
state taxes for those states in which the Company does business and no net
operating loss carryforwards were available. For the same period in 1999, we
had no tax provision due to our recorded losses.
As part of the acquisition, the Company acquired deferred tax assets
amounting to approximately $5,919,000, which is made up $3,650,000 of current
and $2,269,000 long-term. The long-term portion has been included in other
assets in the March 31, 2000 balance sheet. Additionally, in accordance with
Financial Accounting Standards Board No. 109 "Accounting for Income Taxes" the
Company established a deferred tax liability associated with the acquired
intangibles assets excluding goodwill. As a result a portion of the Company's
valuation allowance on deferred tax asset was released. This reduction in
valuation allowance was accounted for in the purchase accounting and not the
statement of operations.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had cash, cash equivalents and short-term
investments of $5.3 million and deficient working capital of $1.6 million, as
compared to $6.8 million in cash, cash equivalents and short-term investments
and $8.4 million of working capital at March 31, 1999
We used $3.2 million of cash for our operating activities for the first
quarter 2000, as compared to $2.6 million for the same period in 1999. The cash
was used to fund payment of salary and personnel costs, the prepayment of annual
insurance policies and other normal operating costs.
Cash provided by investing activities during the first quarter of 2000
was $1.4 million as compared to $8.2 million for the same period in 1999. The
decline is due to $6.8 million that was received for the sale of the hardware
business in the first quarter of 1999. Similarly to 1999, we had a first quarter
source of cash due to an acquisition. The first quarter 2000 saw $1.4 million of
cash associated with the Caere acquisition, while the 1999 ScanSoft acquisition
produced $1.2 million.
Cash provided from financing activities during the first quarter of
2000 was $1.8 million as compared to $6.7 million used for the same period in
1999. During the quarter ending March 31, 2000 the Company made a $3.0 million
draw on our line of credit and paid $1.6 million of notes payable.
Our principal sources of liquidity as of March 31, 2000 consisted of
approximately $5.3 million of cash, cash equivalents and short-term investments.
On March 13, 2000, we acquired Caere Corporation for approximately $168 million.
The acquisition consideration consisted of $49 million in cash, $95 million in
ScanSoft common stock and $24 million in stock compensation and other
transaction costs. The cash consideration was paid out of Caere's cash balance
of approximately $50 million. In addition, we have arranged a secured credit
facility for $10 million, subject to various borrowing constraints, to provide
funding for transactions costs associated with the Caere transaction. Based upon
these events and existing cash balances, we believe that our existing sources of
liquidity will provide adequate cash to fund our operations for at least the
next twelve months. However there can be no assurance that cash generated by
operations will be sufficient to satisfy our liquidity requirements, and we may
be required to sell additional equity or debt securities, or increase or obtain
additional lines of credit. The sale of additional equity or convertible debt
securities may result in additional dilution to our stockholders. It may be
difficult to sell additional equity or obtain debt financing, and this could
result in significant constraints on the Company's ongoing investments to grow
revenue and develop new products.
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<PAGE> 15
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. The Company
does not expect the application of FIN 44 to have a material impact on the
Company's financial position or results of operations.
In December 1999, the United States Securities and Exchange
Commission ("SEC") issued Staff Accounting Bulletin 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 provides the staff's views in
applying generally accepted accounting principles to selected revenue
recognition issues, as well as examples of how the staff applies revenue
recognition guidance to specific circumstances. Registrants may adopt a change
in accounting principle no later than the first quarter of the fiscal year
beginning after December 15, 1999 (January 1, 2000 for the Company). In March
2000, SAB 101A was issued by the SEC delaying the implementation date of SAB 101
for registrants until no later than the second quarter of the fiscal year
beginning after December 15, 1999 (April 1, 2000 for the Company). The Company
has determined that SAB 101 will not have a material impact on the Company's
financial position and results of operations.
YEAR 2000 COMPLIANCE
In prior years, the Company discussed the nature and progress of its
plans to become Year 2000 ready. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
The Company expensed approximately $50,000 during 1999 in connection with
remediation of its systems. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems,
or the products and services of third parties. The Company will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The anticipated benefits from merging with Caere will depend in part on
whether we can integrate our operations and technologies in an efficient and
effective manner. We cannot guarantee that this will occur. Successful
integration will require integration of each company's products and coordination
of each company's operating procedures, financial controls, development efforts
and sales and marketing efforts. This integration may be difficult to accomplish
smoothly or successfully, and may take longer than we expect. If serious
difficulties are encountered during integration, management will have to divert
its attention from normal business operations to address these issues, which
could have an adverse effect on the surviving corporation's business. In
addition, the merger may cause potential customers to cancel or delay orders as
the result of uncertainty over the successful integration of the two companies.
Furthermore, there could be an adverse effect on employee morale and on the
ability of the surviving corporation to retain key personnel. Failure to
effectively accomplish the integration of the two companies' operations could
have a material adverse effect on the surviving corporation's business,
operating results and financial condition.
The Company's business operates in an intensely competitive environment
and operations are subject to risks and uncertainties. Such risks and
uncertainties include, but are not limited to (1) the loss of, or a significant
curtailment of, purchases by any one or more principal customers; (2) the
cyclicality of the retail software industry; (3) inability to protect the
Company's proprietary technology and intellectual property; (4) the inability to
attract or retain skilled employees; (5) technological obsolescence of current
products and the inability to develop new products; (6) the inability to respond
to competitive technology and competitive pricing pressures; (7) quarterly
operating results that fluctuate and differ materially from one quarter to the
next which could have an impact on the Company's stock price.
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<PAGE> 16
There can be no assurance that cash generated by operations will be
sufficient to satisfy our liquidity requirements, and we may be required to sell
additional equity or debt securities, or increase or obtain additional lines of
credit. The sale of additional equity or convertible debt securities may result
in additional dilution to our stockholders. It may be difficult to sell
additional equity or obtain debt financing, and this could result in significant
constraints on the Company's ongoing investments to grow revenue and develop new
products.
For further discussion regarding these and other risks, refer to the Company's
Annual Report on Form 10-K for the year ended December 31, 1999 and the
Company's Prospectus/Proxy Statement dated February 9, 2000.
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<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
-15-
<PAGE> 18
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 13, 2000, the Company held a special meeting of Stockholders.
At such meeting, the following actions were voted upon:
a. To approve the issuance of shares of the Company Common Stock in the
merger of Caere Corporation with and into Scorpion Acquisitions
Corporation.
VOTES FOR VOTES AGAINST ABSTAINED BROKER NON-VOTES
--------- ------------- --------- ----------------
15,204,043 39,423 19,550
b. To approve the amendment of the certificate of incorporation of the
Company to increase the number of shares of ScanSoft capital stock
authorized for issuance.
VOTES FOR VOTES AGAINST ABSTAINED BROKER NON-VOTES
--------- ------------- --------- ----------------
15,102,086 137,733 23,197
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits listed on the Exhibit Index hereto are filed or
incorporated by reference (as stated therein) as part of this report on Form
10-Q.
(b) Reports on Form 8-K
March 13, 2000 Item 2. Reported March acquisition of Caere
Corporation
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this Report on Form 10-Q to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Peabody, State of
Massachusetts, on May 15, 2000.
SCANSOFT, INC.
By: /S/ GERALD C. KENT JR.
------------------------------
Gerald C. Kent, Jr.
Chief Accounting Officer
And Corporate Controller
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<PAGE> 20
EXHIBIT INDEX
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
Exhibit
No. Description of Exhibits
- -------- -----------------------
<S> <C>
2.1(1) Agreement and Plan of Merger dated December 2, 1998, between
Visioneer, Inc., a Delaware corporation, and ScanSoft, Inc., a
Delaware Corporation.
3.1(2) Bylaws of Registrant.
3.2(3) Amended and Restated Certificate of Incorporation of Registrant.
4.1(3) Specimen Common Stock Certificate.
4.2(4) Preferred Shares Rights Agreement, dated as of October 23, 1996,
between the Registrant and U.S. Stock Transfer Corporation,
including the Certificate of Designation of Rights, Preferences
and Privileges of Series A Participating Preferred Stock, the form
of Rights Certificate and Summary of Rights attached thereto as
Exhibits A, B and C, respectively.
4.3(5) Voting Agreement dated March 2, 1999 between Xerox, Xerox Imaging
Systems, Inc., Visioneer, Inc. and several holders of Visioneer
common stock.
27.1 Financial Data Schedule.
(1) Incorporated by reference from the Registrant's Registration Statement
on From S-4 (No. 333-70603) filed with the Commission on January 14,
1999.
(2) Incorporated by reference from the Registrant's Registration Statement
on Form S-1 (No. 333-98356) filed with the Commission on October 19,
1995.
(3) Incorporated by reference from the Registrant's Registration Statement
on Form S-8 (No. 333-74343) filed with the Commission on March 12,
1999.
(4) Incorporated by reference from the Registrant's current Report on Form
8-K dated October 30, 1996.
(5) Incorporated by reference from the Registrant's Annual Report on Form
10-K for the fiscal year ended January 3, 1999.
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET, STATEMENT OF OPERATIONS AND STATEMENT OF CASH FLOWS INCLUDED
IN THE COMPANY'S FORM 10-Q FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 2000,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
AND THE NOTES THERETO.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENT OF INCOME AND STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S
FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2000, AND IS QUALIFIED IN ITS
ENTRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
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<PERIOD-START> JAN-01-2000
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<ALLOWANCES> 13,399
<INVENTORY> 1,676
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