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 SEPTEMBER 30, 1999
------------------
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission file number 0-27296
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LERNOUT & HAUSPIE SPEECH PRODUCTS N.V.
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(Exact name of registrant as specified in its charter)
The Kingdom of Belgium N/A
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
52 Third Avenue, Burlington, Massachusetts 01803
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(Address of principal executive (Zip code)
offices in the U.S.)
Registrant's telephone number including area code: (781) 203-5000
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(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.
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES
FORM 10-Q
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INDEX
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PAGE
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EXPLANATORY NOTE 3
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Condensed consolidated Balance Sheets at December 31, 1998
and September 30, 1999 (unaudited) 4
Condensed consolidated Statements of Operations for the Three
and Nine Months ended September 30, 1998 and 1999 (unaudited) 6
Condensed consolidated Statements of Cash Flows for the Nine
Months ended September 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 30
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 31
Item 2. Changes in Securities 31
Item 3. Defaults Upon Senior Securities 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 5. Other Information 32
Item 6. Exhibits and Interim Reports 32
Signatures 34
-2-
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 December 23, 1999, we filed a Form 6-K for our quarter and nine
months ended September 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 September 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 regarding our business, results of operations and
financial condition.
-3-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
DECEMBER 31, 1998 SEPTEMBER 30, 1999
----------------- ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents........................... $ 188,464 $ 90,196
Marketable securities............................... 965 489
Accounts receivable, net (1)........................ 81,212 122,871
Value added tax and other receivables............... 2,312 3,944
Inventory........................................... 2,649 3,965
Prepaid expenses and other current assets........... 8,347 14,654
--------- ---------
Total current assets....................... 283,949 236,119
--------- ---------
Deferred tax assets......................................... 4,507 4,507
Property and equipment, net of accumulated depreciation of
$21,476 and $24,072, respectively.......................... 23,298 24,940
Investments................................................. 12,103 13,538
Intangibles, net of amortization............................ 245,467 357,844
Software development costs, net of amortization............. 2,210 3,385
--------- ---------
Total assets............................... $ 571,534 $ 640,333
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable....................................... $ 6,652 $ 4,499
Current portion of long-term debt................... 17,653 13,425
Accounts payable.................................... 22,684 19,122
Accrued expenses.................................... 37,149 43,161
Deferred revenue.................................... 2,754 2,580
--------- ---------
Total current liabilities.................. 86,892 82,787
Long-term debt, less current portion........................ 20,004 13,411
--------- ---------
Total liabilities.......................... 106,896 96,198
--------- ---------
Minority interest........................................... 9 -
Company-obligated mandatorily redeemable
security of subsidiary trust holding solely
parent convertible subordinated debentures............. 149,223 149,079
Commitments and contingencies...............................
Shareholders' equity:
Common shares, no par value: 108,744 and
113,432 shares issued and outstanding at
December 31, 1998 and September 30, 1999,
respectively...................................... 111,911 113,728
Additional paid-in capital.......................... 353,838 411,387
Accumulated deficit................................. (149,640) (118,544)
Accumulated other comprehensive loss................ (703) (11,515)
--------- ---------
Total shareholders' equity................. 315,406 395,056
--------- ---------
Total liabilities and shareholders' equity.......... $ 571,534 $ 640,333
========= =========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-4-
(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 September 30, 1999 included
a total of $10,907 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.,
EHQ Inc., Accent Software International, Transics N.V., ESL.com Ltd.,
Saillabs N.V. and IRIS N.V.
-5-
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(in thousands, except share and per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------------------
1998 1999 1998 1999
------------------------------------------------------------
Revenues(1):
Technologies and Solutions.......... $ 20,471 $ 31,033 $ 56,053 $ 82,244
Applications........................ 16,295 32,107 35,559 83,659
Consulting and Services............. 18,094 24,333 43,304 68,293
------------ ------------ ----------- ------------
Total revenues................. 54,860 87,473 134,916 234,196
------------ ------------ ----------- ------------
Cost of Sales:
Technologies and Solutions.......... 3,754 5,122 8,917 10,464
Applications........................ 4,078 4,709 11,243 13,250
Consulting and Services............. 10,098 14,139 24,887 40,294
------------ ------------ ----------- ------------
Total cost of sales............ 17,930 23,970 45,047 64,008
------------ ------------ ----------- ------------
Selling, general and administrative........ 14,730 25,500 37,189 69,747
Research and development, net.............. 6,436 12,473 16,293 33,088
Amortization of goodwill and other
business acquisition intangibles.......... 3,970 8,703 13,121 23,122
Write-off of in-process research
and development......................... 44,613 --- 79,023
Other operating expense.................... 1,821 --- 1,821 ---
Non-recurring expense...................... --- --- --- 935
------------ ------------ ----------- ------------
Total operating expenses....... 89,500 70,646 192,494 190,900
------------ ------------ ----------- ------------
Operating income (loss).................... (34,640) 16,827 (57,578) 43,296
Other expenses (income):
Interest and other financing expenses. 483 460 1,896 790
Interest income....................... (2,555) (1,765) (5,999) (6,741)
Foreign exchange gains and losses, net 4,101 (672) 1,095 (5,193)
Share in losses of unconsolidated
affiliates........................... 427 92 1,493 922
Debt conversion expense............... --- --- 891 ---
------------ ------------ ----------- ------------
Total other expenses (income)..... 2,456 (1,885) (624) (10,222)
------------ ------------ ----------- ------------
Income (loss) before income taxes and
minority interests........................ $ (37,096) $ 18,712 $ (56,954) $ 53,518
Provision for income taxes................. 1,002 7,178 1,890 19,058
------------ ------------ ----------- ------------
Income (loss) before minority interest..... (38,098) 11,534 (58,844) 34,460
------------ ------------ ----------- ------------
Minority interest, net of taxes............ 1,651 1,087 2,349 3,364
------------ ------------ ----------- ------------
Net income (loss).......................... $ (39,749) $ 10,447 $ (61,193) $ 31,096
============ ============ =========== ============
Net income (loss) per common share:
Basic...................................... $ $(0.39) $ 0.09 $ (0.62) $ 0.28
============ ============ =========== ============
Diluted.................................... $ (0.39) $ 0.09 $ (0.62) $ 0.26
============ ============ =========== ============
Weighted average number of shares
outstanding:
Basic...................................... 101,243,416 114,829,508 98,016,598 112,247,880
Diluted.................................... 101,243,416 121,028,870 98,016,598 118,212,530
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-6-
(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 nine months ended
September 30, 1998 included $24,477 million from Microsoft Corporation,
Dictation Consortium N.V., Speech Systems Inc., ACI, Greater FLV Telecom,
BCB Holdings Inc., ViA Inc., Telekol Corporation, Speech Machines Plc. and
Hogadata Benelux N.V. and for the nine months ended September 30, 1999
included $24.4 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., Phonetic Topographic N.V., EHQ Inc., Accent Software
International, Transics N.V., ESL.com Ltd. and IRIS N.V.
Revenues for the three months ended September 30, 1998 included
$ 8.0 million from Microsoft Corporation, Speech Systems Inc., BCB Holdings
Inc., ViA Inc., Telekol Corporation and Speech Machines Plc. and for the
three months ended September 30, 1999 included $8.8 million from 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., Phonetic Topographic N.V., EHQ Inc., Accent
Software International, Transics N.V., ESL.com Ltd. and IRIS N.V.
-7-
LERNOUT & HAUSPIE SPEECH PRODUCTS N.V. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
Nine Months Ended
September 30,
---------------------
1998 1999
---- ----
Cash flows from operating activities:
Net income (loss)...................................... $(61,193) $ 31,096
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Write-off of in-process research & development......... 79,023 -
Depreciation........................................... 2,539 5,282
Amortization of other intangibles, including software
development costs...................................... 1,139 3,430
Amortization of goodwill and other business
acquisition intangibles................................ 13,121 23,122
Gain on sale of investments............................ - (163)
Share in loss of unconsolidated affiliates............. 1,493 922
Loss (gain) on sale of property and equipment.......... - 69
Changes in operating assets and liabilities:
Accounts receivable, net............................. (24,587) (46,308)
Inventories, net..................................... (1,250) 170
Prepaid expenses and other current assets............ (1,460) (826)
Deferred financing costs............................. 822 -
Accounts payable..................................... 7,933 (2,805)
Accrued expenses..................................... (2,422) 7,009
Deferred revenue..................................... 1,898 (186)
-------- --------
Net cash provided by operating activities.............. 17,056 20,812
-------- --------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired........ (61,794) (99,945)
Licenses and software development costs capitalized.... (9,304) (17,452)
Additions to property and equipment.................... (4,975) (8,254)
Investments in and loans provided to associated
companies.............................................. (7,383) (5,758)
Purchases of marketable securities..................... 71 568
Proceeds from sale of property and equipment........... - 453
-------- --------
Net cash used for investing activities................. (83,385) (130,388)
-------- --------
Cash flows from financing activities:
Repayment of notes payable to banks.................... (1,084) (4,060)
Repayments of long-term debt and capital lease
obligations.......................................... (23,832) (28,573)
Proceeds from long-term debt........................... - 1,828
Proceeds from company-obligated mandatorily redeemable
security of subsidiary trust holding solely parent
convertible subordinated debentures.................. 150,713 -
Proceeds from issuance of common and preferred shares.. 17,475 54,379
-------- --------
Net cash provided by financing activities.............. 143,272 23,574
-------- --------
Effect of exchange rate changes on cash and cash
equivalents.......................................... (193) (12,266)
-------- --------
Increase (decrease) in cash and cash equivalents....... 76,750 (98,268)
Cash and cash equivalents at beginning of period....... 127,822 188,464
-------- --------
Cash and cash equivalents at end of period............. $204,572 $ 90,196
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest............... $ 845 $ 6,161
Cash paid during the period for income taxes........... $ 1,171 $ 6,217
Noncash investing and financing transactions:
Conversion of convertible bonds to common shares....... $ 14,099 $ 2,942
Issuance of common shares for acquisitions............. $113,177 $ 3,485
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-8-
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-
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):
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------------------------
1998 1999 1998 1999
-----------------------------------------------------------------------
Net income (loss) $ (39,749) $ 10,447 $ (61,193) $ 31,096
Weighted average number of common
shares outstanding during the period:
Basic 101,243,416 114,829,508 98,016,598 112,247,880
Dilutive stock options -- 5,841,152 -- 5,601,876
Dilutive bonds -- 230,280 -- 238,606
Dilutive warrants -- 127,930 -- 124,168
------------ ------------ ----------- ------------
Diluted 101,243,416 121,028,870 98,016,598 118,212,530
Net income (loss) per common share:
Basic $ (0.39) $ 0.09 $ (0.62) $ 0.28
Diluted $ (0.39) $ 0.09 $ (0.62) $ 0.26
(3) BUSINESS ACQUISITIONS
In June 1999, the Company acquired Brussels Translation Group N.V.
("BTG") for approximately $41 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............... 62,347
Liabilities assumed............................ (16,998)
--------
$ 42,612
========
-10-
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 September 30, 1999 (in thousands except share and per share amounts):
Nine Months
Ended September 30,
1999
-----------------------
Net sales........................................ $ 232,218
Gross profit..................................... $ 168,991
Income from operations........................... $ 39,238
Net income....................................... $ 25,337
Basic earnings per common share.................. $ 0.23
Diluted earnings per common share................ $ 0.21
Basic weighted average number of shares
outstanding.................................... 112,247,880
Diluted weighted average number of shares
outstanding.................................... 118,212,530
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
Goodwill........................................ 5,574
Liabilities assumed.............................. (2,363)
------------
$ 4,049
============
-11-
In September 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 approximately $23.8 million in cash, with
an additional earn-out of up to $4 million spread over two years based upon
performance. 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................................. $ (515)
Property and equipment.......................... 137
Goodwill........................................ 25,316
Liabilities assumed.............................. (49)
------------
$ 24,889
============
In September 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 approximately $25 million in cash, with up to an additional
$25 million earn-out to be paid in January 2001, based upon performance.
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................................. $ (108)
Property and equipment.......................... 927
Goodwill........................................ 25,988
------------
Liabilities assumed.............................. (1,083)
$ 25,724
============
(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.
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.
-12-
(5) CONTINGENCIES
Class Action Lawsuits
The Company is a named party in several class action 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):
Revenues by Destination
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1998 1999 1998 1999
--------- -------- --------- ---------
United States............. $19,982 $21,518 $ 54,153 $ 60,363
Europe, other............. 33,160 20,039 76,563 86,541
Singapore................. -- 27,967 -- 63,833
Korea..................... -- 15,354 245 16,575
Far East, other........... 1,718 2,595 3,955 6,884
------- ------- -------- --------
$54,860 $87,473 $134,916 $234,196
======= ======= ======== ========
-13-
Long-lived Assets
September 30,
-------------------------------
1998 1999
-------- --------
United States.......... $117,682 $132,899
Belgium................ 57,008 134,707
Europe, other.......... 98,227 95,167
Singapore.............. -- 5,177
Korea.................. -- 26,853
Far East, other........ 5,070 4,904
-------- --------
$277,987 $399,707
======== ========
The following tables summarize financial information by business unit
(in thousands):
Three months ended September 30, 1998
Technologies Consulting
& &
Solutions Applications Services Total
------------ ------------ ---------- ---------
Revenues......................... $ 20,471 $ 16,295 $18,094 $ 54,860
Depreciation and amortization (977) (2,659) (648) (4,284)
Write off of in-process research
and development................. -- (44,613) -- (44,613)
Segment profit (loss)............ 15,740 (35,056) 7,349 (11,967)
Nine months ended September 30, 1998
Technologies Consulting
& &
Solutions Applications Services Total
------------ ------------ ---------- ---------
Revenues......................... $ 56,053 $ 35,559 $43,304 $134,916
Depreciation and amortization (8,066) (6,484) (2,248) (16,798)
Write off of in-process research
and development................. (12,910) (66,113) -- (79,023)
Segment profit (loss)............ 26,160 (48,282) 16,169 (5,953)
-14-
Three months ended September 30, 1999
Technologies Consulting
& &
Solutions Applications Services Total
------------ ------------ ---------- ---------
Revenues.............................. $ 31,033 $ 32,107 $24,333 $ 87,473
Depreciation and amortization......... (4,502) (6,304) (1,295) (12,101)
Segment profit........................ 21,409 21,094 8,899 51,402
Nine months ended September 30, 1999
Technologies Consulting
& &
Solutions Applications Services Total
------------ ------------ ---------- ---------
Revenues.............................. $ 82,244 $ 83,659 $68,293 $234,196
Depreciation and amortization......... (10,689) (16,771) (4,374) (31,834)
Segment profit........................ 61,091 53,638 23,626 138,355
Total assets and capital expenditures
Technologies Consulting
& &
Solutions Applications Services Total
------------ ------------ ---------- ---------
As per September 30,1998
- ------------------------
Segment assets........................ $ 73,611 $144,284 $103,482 $321,377
Capital expenditures.................. 2,125 2,249 601 4,975
As per September 30,1999
- ------------------------
Segment assets........................ $226,688 $172,024 $110,328 $509,040
Capital expenditures.................. 4,779 1,610 1,865 8,254
Reconciliation of Segment Information
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- ---------------------------
1998 1999 1998 1999
-------- -------- -------- --------
Profit (loss) for reportable segments.... $(11,967) $ 51,402 $ (5,953) $138,355
Unallocated amounts:
Other operating expense ............... (1,821) - (1,821) -
General and administrative.............. (14,416) (22,102) (33,511) (61,971)
Research and development................ (6,436) (12,473) (16,293) (33,088)
Other income (expense).................. (2,456) 1,885 624 10,222
Profit (loss) before income taxes and
minority interest........................ $(37,096) $ 18,712 $(56,954) $ 53,518
-15-
September 30,
--------------------------
1998 1999
-------- --------
Total assets for reportable segments.............. $321,377 $509,040
Unallocated amounts:
Cash.......................................... 204,572 90,196
Marketable securities......................... 756 489
Other current assets.......................... 12,204 22,563
Investments................................... 17,123 13,538
Deferred tax assets........................... 4,066 4,507
-------- --------
Total assets...................................... $560,098 $640,333
======== ========
(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):
Three Months Ended Nine Months Ended
September 30 September 30
------------------------ --------------------------
1998 1999 1998 1999
----------- --------- ---------- -----------
Net income (loss) as reported............. $(39,749) $10,447 $(61,193) $ 31,096
Change in the cumulative translation
adjustment............................... 10,668 4,823 9,990 (10,812)
-------- ------- -------- --------
Comprehensive income (loss)............... $(29,081) $15,270 $(51,203) $ 20,284
======== ======= ======== ========
(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 December 15, 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.
-16-
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 as of
January 1, 1999, 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.
(9) SUBSEQUENT EVENTS
Stock split
In April 2000, the Company declared a two-for-one split of its common
shares which was effective in May 2000. All data related to shares and per
share amounts for all periods presented have been adjusted to reflect the
effect of the stock split.
Acquisition
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.
-17-
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 AND RECENT DEVELOPMENTS
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
-18-
translation, and the globalization of telecommunication. To address these large
potential markets, beginning in the second half of 1998, we have implemented a
strategy to expand the breadth of our speech and language technologies to
include 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 take the financial
risk and share in the rewards for speech and language applications for these
additional languages. Through September 30, 1999 we had entered into strategic
alliances for the development of Bahassa, Czech, Farsi, Greek, Hungarian,
Polish, other Slavic languages, and Scandinavian languages. In the third
quarter, we further expanded our strategic alliance program by licensing our
software development kits and tools to strategic partners to develop machine
translation language pairs.
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. During the third quarter of 1999, we acquired Bumil
Information and Communications, Ltd., a Korean based company which is a leading
developer of telephony applications in the Asian market. This acquisition
provides us with increased resources to apply our core technologies to develop
applications and solutions.
In connection with our expansion of our business into speech and language
applications, we have successfully entered the dictation, machine translation
and education markets. Our award winning Voice Xpress products have facilitated
our entry into the retail computer application market. We have also expanded
our reach into the medical dictation market. We intend to leverage our position
in this market where we believe the estimated $6 billion transcription market,
as well as the medical record market, represent a large potential area of growth
for us. During the third quarter of 1999, we acquired the Articulate Systems
division of Fonix Corporation. This acquisition provides us with additional
resources to create enterprise dictation and transcription solutions for the
healthcare 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.
-19-
CREATION OF SEPARATE ENTITIES
We have recently announced that we plan to create separate entities for two
of our key business areas: Globalization and Internet Translation and Healthcare
Solutions. Longer term, we also plan to form an additional entity for Enterprise
and Telephony Solutions. These entities are intended to focus our technology and
resources to the targeted market, to further expand on our position as a
technology leader in those markets, as well as in speech and language technology
overall. We also believe that the creation of these entities will help create
more transparent and easily understood business units.
Healthcare Solutions. During the past year, we have been developing and
acquiring resources with a goal of creating a technology-enhanced enterprise
dictation and transcription solution for the healthcare industry. In
furtherance of this strategy, since September 30, 1999 we entered into
agreements to acquire OmniMed Transcription, Inc. and Linguistic Technologies,
Inc., and acquired the southern-Florida based medical transcription business of
Rodeer Systems, Inc. OmniMed is a medical transcription company based in
Madison, Wisconsin, with a customer base of over 300 healthcare organizations.
Linguistic Technologies is a speech recognition technology company focused on
the medical transcription market. Linguistic Technologies has developed
advanced software designed to help make the traditional medical transcription
process more efficient. The southern Florida medical transcription offices of
Rodeer will add a southeast component to our planned enterprise dictation and
transcription solution. The three acquisitions, if completed, will cost a total
of approximately $40 million. In addition, we have agreed to pay up to a total
of $9 million in earnouts, should the acquired businesses meet agreed to
performance criteria.
We expect that the resources from the completion of these acquisitions,
combined with our existing speech products and technologies, will create a
solution to improve the overall medical dictation and transcription process and
position us to take a leadership position in the healthcare market. We plan to
integrate these businesses with our core speech and language technologies that
include our PowerScribe(R) integrated dictation solution and our natural
language technology. It is our goal to be in a position to offer an advanced,
technology-enhanced solution for the medical market that will help healthcare
organizations reduce turn-around time for medical reports, improve clinical data
capture, enhance overall quality of patient care and reduce transcription costs,
while improving transcriptionist productivity.
The completion of the acquisitions contemplated by the agreements with
OmniMed and Linguistic Technologies are subject to the satisfaction of closing
conditions. There is a possibility that one of more of these conditions will not
be satisfied and that we will not complete either of these acquisitions.
Moreover, even if these acquisitions are completed, we cannot assure that we
will be able to achieve the anticipated benefits.
Globalization/Internet Translation. In December 1999, we signed an
agreement with Microsoft under which our Internet translation services will be
made available through Microsoft's popular Office Update web site,
officeupdate.com. The implementation of this agreement should provide users of
web site with quick and easy access to both our machine and human translation
and globalization services. We also recently announced our intention to provide
our own on-line translation services. We have entered into agreements with some
Internet Service providers to offer our translation services through their
sites.
-20-
We also plan to offer this service through our own web site and with other
Internet service providers. Proposed services include:
. Limited free Internet machine, or gist, translations for documents up to
one page in length;
. Internet machine translation for large documents;
. Internet machine translation with terminology management, which improves
the quality of the translation, for large documents;
. Internet translation with tailored memory modules management for large
customers;
. Complete Internet translation, including machine translation and human
post-editing, for highly accurate translation; and
. Web site globalization, which adapts a web site's content and its
messages to the local culture, language and market.
We expect to make additional investments, including the acquisition of
complementary businesses, in an effort to capture a leadership position for
translation and globalization services over the Internet. We cannot assure that
we will be able to introduce any of our proposed Internet translation or
globalization services successfully.
Telephony and Enterprise Solutions. We have significantly enhanced our
telecommunications offerings and services and augmented our telephony business
group resources to meet the increasing demand for speech technology in the
telecommunications market. We recently opened one of the industry's most
comprehensive customer support and service centers designed to support
application development for telephony and the enterprise. We have a wide range
of industry leading telephony solutions with our family of text-to-speech (TTS)
technologies -- including our recently announced L&H RealSpeak natural sounding
TTS - as well as large and small vocabulary recognizer engines and dialogue
systems. These solutions are available for a variety of platforms, languages
and environments. They are targeted toward telephony developers and vendors to
voice-enable next generation call centers, interactive voice response
applications and other telephone-based services for the banking, financial
services and travel industries, among others. We believe that our wide range of
telephony and enterprise solutions and technologies puts us in a position to
become a leader in the voice enabled telephony and enterprise market. However,
we have only recently introduced many of our telephony and enterprise solutions,
and the market for these products is in the early stage of development. As a
result, we cannot assure that we will be successful.
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
-21-
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 and language pairs for 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 may become 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 and language pairs for our applications products. We
anticipate that revenue from sales of speech and language applications to the
general personal computer market may become seasonal, with higher revenue in the
third and fourth quarters. These revenues may also fluctuate significantly
depending upon the timing and acceptance of new product releases.
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 may be somewhat
seasonal, with lower revenues in the first and second quarters.
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 37.58 Belgian francs per U.S. dollar in the first nine months of 1999,
compared to 36.96 Belgian francs per U.S. dollar in the first nine months of
1998.
-22-
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated as a percentage of total revenues:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1998 1999 1998 1999
-------------- ------------- -------------- -------------
Revenues:
Technologies & solutions.................................. 37% 35% 42% 35%
Applications.............................................. 30 37 26 36
Consulting & services..................................... 33 28 32 29
---- ---- ---- ----
Total revenues......................................... 100 100 100 100
Cost of revenues:
Technologies & solutions.................................. 7 6 7 4
Applications.............................................. 8 5 8 6
Consulting & services..................................... 18 16 18 17
---- ---- ---- ----
Total cost of revenues................................. 33 27 33 27
Operating expenses:
General & administrative.................................. 11 11 12 12
Marketing & sales......................................... 16 18 16 19
Research & development.................................... 12 14 12 14
Amortization and write-off of goodwill.................... 7 10 10 10
Write-off of in-process research and development.......... 81 -- 59 --
Other operating expense................................... 3 -- 1 --
---- ---- ---- ----
Total operating expenses............................... 163 81 143 82
---- ---- ---- ----
Operating income (loss)..................................... (63) 19 (43) 18
---- ---- ---- ----
Other (income) expense...................................... 4 (2) (1) (4)
---- ---- ---- ----
Minority interest........................................... 3 1 2 1
---- ---- ---- ----
Provision for income taxes.................................. 2% 8% 1% 8%
---- ---- ---- ----
Revenues. Total revenues increased 59% to approximately $87.5 million in
the third quarter of 1999 from approximately $54.9 million in the third quarter
of 1998. In the first nine months of 1999, total revenues increased 74% to
approximately $234.2 million from approximately $134.9 million in the first nine
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 52% to
approximately $31 million in the third quarter of 1999 from approximately
$20.5 million in the third quarter of 1998. In the first nine months of 1999,
this revenue increased by 46.7% to approximately $82.2 million from
approximately $56.1 million in the first nine 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.
-23-
In the third quarter and first nine months of 1999, our technologies and
solutions revenue included approximately $14.0 million and $28.8 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 and language pairs for our core speech and language
technologies, compared to $4.5 million of such revenue in the third quarter and
first nine months of 1998. These increases were partially offset by the
elimination of engineering revenue associated with the Brussels Translation
Group project. In the third quarter and first nine months of 1998, we had
approximately $2.5 million and $7.0 million, respectively, of engineering
revenue from the Brussels Translation Group included in our speech and language
technologies and solutions revenue, compared to only $1.0 million of such
revenue in the first quarter of 1999.
Speech and language applications revenue increased by 97% to approximately
$32.1 million in the third quarter of 1999 from approximately $16.3 million in
the third quarter of 1998. In the first nine months of 1999, this revenue
increased by 135% to approximately $83.7 million from approximately
$35.6 million in the first nine 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 third quarter and first nine months of
1999, our applications revenue included approximately $13.0 million and
$27.8 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 and language pairs for our applications
products, compared to $4.5 million of such revenue in the third quarter and
first nine months of 1998. 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 third
quarter and first nine months of 1998, we had approximately $2.5 million and
$7.0 million, respectively, of engineering revenue from the Brussels Translation
Group included in speech and language applications revenue, compared to only
$1.0 million of such revenue in the first quarter of 1999.
Speech and language consulting and services revenue increased by 34% to
approximately $24.3 million in the third quarter of 1999 from approximately
$18.1 million in the third quarter of 1998. In the first nine months of 1999,
this revenue increased by 58% to approximately $68.3 million from approximately
$43.3 million in the first nine months of 1998. These increases were primarily
attributable to our acquisition of additional translation services businesses as
well as internal growth. In the third quarter and first nine months 1999,
revenues from Microsoft and its affiliates constituted 9.0% and 9.6%,
respectively, of our translation services revenue. The increased revenues were
primarily attributable to major translation and localization contracts that we
entered into in the beginning of the quarter and acquisitions of translation
companies.
Cost of Revenues. Total cost of revenues as a percentage of revenues
decreased to 27% in the third quarter of 1999 from 33% in the third quarter of
1998, and to 27% in the first nine months of 1999 from 33% in the first nine
months of 1998. These decreases were primarily attributable to an improvement
in margins of both our technologies and solutions, and applications divisions,
and an increase in the percentage of our revenues derived from those divisions.
Costs of speech and language technologies and solutions revenue as a
percentage of such revenue decreased to 17% in the third quarter of 1999 and 13%
in the first nine months of 1999 from 18% in the third quarter of 1998 and 16%
in the first nine months of 1998.
-24-
Our improvement in margins was primarily attributable to a more favorable mix of
sales of products and technologies, including increased tool licensing revenue
which have a relatively lower cost of sales.
Costs of speech and language applications revenue as a percentage of such
revenue decreased to 15% in the third quarter of 1999 from 25% in the third
quarter of 1998 and to 16% in the first nine months of 1999 compared to 32% in
the first nine 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 tool licensing revenue which has a relatively lower cost
of sales.
Costs of consulting and services revenue as a percentage of such revenues
increased to 58% in the third quarter of 1999 from 56% in the third quarter of
1998 and to 59% in the first nine months of 1999 from 57% in the first nine
months of 1998.
General and Administrative Expense. General and administrative expense
increased 70% to approximately $9.9 million, or 11% of total revenues, in the
third quarter of 1999 from approximately $5.8 million, or 11% of total revenues,
in the third quarter of 1998. In the first nine months of 1999, general and
administrative expense increased 72% to approximately $27.2 million, or 12% of
total revenues, from approximately $15.8 million, or 12% of total revenues, in
the first nine months of 1998. The increase in general and administrative
expense was primarily attributable to the inclusion of general and
administrative expenses of our acquired businesses for the periods after their
acquisition, to increased personnel and related costs to support our revenue
growth and to increased legal and accounting expenses incurred in connection
with the U.S. Securities Exchange Commission review of our registration
statements and associated filings that was completed in April 1999.
Marketing and Sales Expense. Marketing and sales expense increased 76% to
approximately $15.6 million, or 18% of total revenues, in the third quarter of
1999 compared to approximately $8.9 million, or 16% of total revenues, in the
third quarter of 1998. In the first nine months of 1999, marketing and sales
expense increased 104% to approximately $43.5 million, or 19% of total revenues,
from approximately $21.3 million, or 16% of total revenue, in the first nine
months of 1998. The 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 94% to approximately $12.5 million, or 14% of total revenues, in the
third quarter of 1999 from approximately $6.4 million, or 12% of total revenues,
in the third quarter of 1998. In the first nine months of 1999, research and
development expense increased 103% to approximately $33.1 million, or 14% of
total revenues, from approximately $16.3 million, or 12% of total revenues, in
the first nine months of 1998. This increase was primarily attributable to the
inclusion of research and development expenses of our acquired businesses for
the periods after their acquisition, increased staffing and reallocation of
personnel to research and development.
-25-
Amortization and Write-off of Goodwill. Our amortization of goodwill
increased 119% to approximately $8.7 million, or 10% of total revenues, in the
third quarter of 1999, from approximately $3.9 million, or 7% of total revenues,
in the third quarter of 1998. In the first nine months of 1999, our amortization
of goodwill, exclusive of write-offs, increased 146% to approximately $23.1
million, or 10% of total revenues, from approximately $9.4 million, or 7% of
total revenues, in the first nine 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.
In the third quarter of 1999, we allocated approximately $51.3 million of
goodwill in connection with our acquisitions, including the acquisitions of the
Articulate Systems Division of Fonix Corporation and Bumil Information and
Communications, Co., Ltd.
Write-off of In-process Research and Development. In the third quarter of
1999 and the first nine months of 1999, we recorded no charges for the write-off
of in-process research and development. This compares to approximately
$44.6 million of such write-offs in the third quarter of 1998 and $79.0 million
of such write-offs in the first nine months of 1998. These charges were incurred
in connection with our acquisitions of Applications Technology, Inc., the
Linguistic components division of Inso Corporation, Dictation Consortium N.V.,
Ailogic Corporation and NeocorTech, Kurzweil Educational Systems, Inc.,
Globalink, Inc. and Tiksoft, LLC.
Other Operating Expense. We did not recognize any other operating expense
in the third quarter of 1999 or the first nine months of 1999, compared to other
operating expense of approximately $1.8 million in each of the comparable
periods in 1998. The other operating expense in 1998 consisted primarily of
transition expenses incurred in connection with our acquisitions and the
consolidation of our operations.
Other (Income)/Expense. Our other (income)/expense includes interest
income and expense, bank charges, realized and unrealized foreign exchange gains
and losses, our share in the losses of unconsolidated affiliates and debt
conversion expense. We recognized other income of approximately $1.9 million and
$10.2 million in the third quarter of 1999 and the first nine months of 1999,
respectively, compared to other expense of approximately $2.5 million in the
third quarter of 1998 and other income of $624,000 in the first nine months of
1998. This other income recognized in the 1999 periods was primarily a result of
net interest income attributable to our cash and investment balances and foreign
exchange gains. Our foreign exchange gains and losses have been primarily
attributable to unrealized exchange gains resulting from the increase and
decrease in the value of the U.S. dollar in relation to the Belgian franc and
other functional currencies of our non-U.S. subsidiaries, principally the Euro,
as well as the increase and decrease in our dollar denominated assets.
A significant portion of our cash and short-term investments are denominated in
U.S. dollars. Because our functional currency for our non-U.S. operations is
their local currency, we are required to recognize unrealized foreign exchange
gains with respect to our U.S. dollar denominated assets of these operations
when the value of the U.S. dollar increases in relation to their functional
currency and unrealized foreign exchange losses when the relative value of the
U.S. dollar decreases. Our unrealized foreign exchange gains were $0.7 million
in the third quarter of 1999 and $5.2 million in the first nine months of 1999.
-26-
Minority Interest. Our minority interest expense, net of taxes, relates to
our share of the distribution obligations under the $156.0 million of preferred
income equity redeemable trust securities we issued in May 1998. Our minority
interest expense decreased to $1.1 million in the third quarter of 1999 compared
to $1.7 million in the third quarter of 1998 and increased to $3.4 million in
the first nine months of 1999 compared to $2.3 million in the first nine months
of 1998.
Provision for Income Taxes. In the third quarter of 1999 and the first
nine months of 1999, we recognized income tax expense of approximately
$7.2 million and $19.1 million, respectively, compared to approximately
$1.0 million and $1.9 million in the comparable periods of 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 Belgium.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, we had working capital of approximately
$153.3 million, including approximately $90.7 million in cash and marketable
securities.
In the first nine months of 1999, our operating activities provided
approximately $20.8 million of cash. Our net income of approximately
$31.1 million included non-cash expenses of approximately $23.1 million of
amortization of goodwill, $3.4 million of amortization of software development
costs, and $5.3 million of depreciation. An increase in accrued expenses net of
accounts payable also provided $4.2 million of cash. Our uses of cash included
an increase in accounts receivable of approximately $46.3 million. The increase
in accounts receivable was primarily attributable to our increased revenues and
to several large contracts entered into at the end of the quarter.
In the first nine months of 1999, our investing activities used
approximately $130.4 million of cash, including approximately $100 million for
acquisitions, approximately $17.5 million for the acquisition of licenses and
capitalized software development costs, approximately $8.3 million in additions
to property and equipment, and approximately $5.8 million of investments in
associated companies. On September 1, 1999, we completed the acquisition of
substantially all the assets of the Articulate Systems Division of Fonix
Corporation for a total of $24.0 million in cash (subject to adjustment) with an
additional earn-out of up to $4.0 million if financial performance targets are
reached during a two year period following the acquisition. On September 10,
1999, we acquired Bumil Information and Communications, Co. Ltd., for a total of
$25.0 million in cash with an additional earn-out of up to $25.0 million to be
paid in January 2001 if financial targets are reached. 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.
In the first nine months of 1999, our financing activities provided us
approximately $23.6 million of cash, primarily attributable to approximately
$54.4 million from the sale of common stock, including approximately
$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 $28.6 million in repayment of our long term debt and
capital lease obligations.
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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 periods 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 intend to
seek additional sources of cash during the year to increase our financial
flexibility or to fund acquisitions. The sufficiency of our resources to fund
working capital needs is subject to known and unknown risks, uncertainties and
other factors which may materially harm our business, including without
limitation the risk factors set forth in the introduction to this Item 2.
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.
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.
-28-
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.
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:
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. 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 September 1999, the Company has
approximately $24.7 million in fixed rate debt.
FOREIGN EXCHANGE
Operating in international markets involves exposure to movements in currency
exchange rates. Currency exchange rate movements typically affect economic
growth, inflation, interest rates, governmental actions and other factors.
Changes in currency exchange rates that would have the largest impact on
translating our non-U.S. dollar operating profit include the Belgian franc, the
British pound, the German mark and the Korean Won. The currency exchange rates
to the U.S. dollar at December 31,1998 and September 30,1999, respectively, are
as follows:
-30-
Foreign currency Exchange rate to the U.S. Dollar
- ---------------------------------------------------------------------------
December 31,1998 September 30,1999
- ---------------------------------------------------------------------------
BEF 34.57 37.83
- ---------------------------------------------------------------------------
GBP 0.61 0.61
- ---------------------------------------------------------------------------
DEM 1.68 1.83
- ---------------------------------------------------------------------------
KRW --- 1,218.71
- ---------------------------------------------------------------------------
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.)
On May 27th and June 4th 1998, L&H Capital Trust I (the "Trust") a
wholly-owned subsidiary of the Company, issued in a registered offering an
aggregate of $156 million in principal amount of trust preferred income equity
redeemable securities (the "PIERS"). The PIERS are convertible into shares of
the Company's common stock at a conversion price of $28.425 per share (subject
to certain adjustments in certain transactions). On September 16, 1999, certain
holders of the PIERS converted their PIERS into 1,582 shares of the Company's
common stock.
On July 12, 1999, the Company issued 11,646 shares of common stock to two
former shareholders of Emti Portugal at a price of $18.05 per share. The
shareholders acquired the shares for an aggregate purchase price of $210,210.
These shares were issued as additional consideration for the Company's
acquisition of Emti Portugal in August 1997 which became payable upon the
satisfaction of certain performance targets being met for the year ended 1998.
On July 12, 1999, the Company issued 20,578 shares of common stock to two
former shareholders of Emti Brazil at a price of $18.05 per share. The
shareholders acquired the shares for an aggregate purchase price of $371,432.
These shares were issued as additional consideration for the Company's
acquisition of Emti Brazil in August 1997 which became payable upon the
satisfaction of certain performance targets being met for the year ended 1998.
On August 3, 1999, the Company issued 112,460 shares of common stock to ten
former shareholders of Trantex OY at a price of $19.55 per share. The
shareholders acquired the shares for an aggregate purchase price of $2,198,593.
These shares were issued as additional consideration for the Company's
acquisition of Trantex OY in October 1997 which became payable upon the
satisfaction of certain performance targets being met for the year ended 1998.
-31-
On August 3, 1999, the Company issued 34,168 shares of common stock to ten
former shareholders of Wordwork AB at a price of $19.55 per share. The
shareholders acquired the shares for an aggregate purchase price of $667,984.
These shares were issued as additional consideration for the Company's
acquisition of Wordwork AB in December 1997 which became payable upon the
satisfaction of certain performance targets being met for the year ended 1998.
On August 3, 1999, the Company issued 18,502 shares of common stock to
Foster Holding SA, a former shareholder of Kermit Srl, at a price of $19.55 per
share. Foster Holding SA acquired the shares for an aggregate purchase price of
$361,714. These shares were issued as additional consideration for the Company's
acquisition of Kermit Srl in December 1997 which became payable upon the
satisfaction of certain performance targets being met for the year ended 1998.
On September 14, 1999, the Company issued 62,248 shares of common stock to
Mendez pursuant to a bond refundable in shares ("BRS") issued in connection with
its acquisition of Mendez and pursuant to the asset purchase agreement executed
in September of 1996.
With regard to all of the transactions mentioned above, the Company relied
upon Regulation S promulgated under the Securities Act of 1933, as amended (the
"Act"), and Section 4(2) of the Act as exemptions from the registration
requirements of the Act. No commissions were paid to any underwriter in
connection with the securities issued in any of the foregoing transactions.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND INTERIM REPORTS
----------------------------
EXHIBIT INDEX
-------------
(A) EXHIBIT DESCRIPTION
-------------------
(B) REPORTS ON FORM 6-K
-------------------
During the fiscal quarter ended September 30, 1999, we were a foreign
private issuer, and therefore, were not required to report on Form 8-K.
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Instead, we were required to report on Form 6-K. We filed the following reports
on Form 6-K during the fiscal quarter ended September 30, 1999:
1. On August 6, 1999, we filed a Form 6-K concerning our 1999 Second
Quarter results.
2. On September 7, 1999, we filed a Form 6-K concerning certain
unaudited pro forma financial information for the 1999 Second
Quarter.
3. On September 9, 1999, we filed a Form 6-K/A concerning certain
unaudited pro forma financial information for the 1999 Second
Quarter.
4. On September 20, 1999, we filed a Form 6-K concerning our
acquisitions of the Articulate Division of Fonix Corporation and
Bumil Information and Communications Co., Ltd.
-33-
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)
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