--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES SECURITIES EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT #2
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JANUARY 30, 2003.
SCANSOFT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 000-27038 94-3156479
(State or other jurisdiction of (Commission (IRS Employer
incorporation) File Number) Identification No.)
9 CENTENNIAL DRIVE
PEABODY, MASSACHUSETTS 01960
---------------------
Address of principal executive offices
(978) 977-2000
---------------------
Registrant's telephone number, including area code
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On February 14, 2003, ScanSoft, Inc. (the "Registrant") filed a report on
Form 8-K with respect to the January 30, 2003 acquisition of the Speech
Processing Telephony and Voice Control business units (the "Business") from
Royal Philips Electronics N.V., a limited liability company organized under the
laws of the Netherlands ("Philips"). On March 24, 2003, the Registrant filed the
required financial statements and pro forma financial information relating to
the acquired Business, for the periods specified under Regulation S-X, as
Amendment No. 1 to such Form 8-K. Subsequent to the filing of Amendment No. 1 to
such Form 8-K, the Registrant has received additional financial statements for
the period subsequent to September 30, 2002. By this Amendment No. 2 to such
Form 8-K, the Registrant is amending and restating Item 7 thereof to include
such additional financial statements and pro forma financial information.
2
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired.
The following financial statements of the Business are filed with this
report:
PAGE
----
Report of Independent Auditors.............................. 5
Combined Balance Sheets as of December 31, 2001 and December
31, 2002.................................................. 6
Combined Statements of Operations and Comprehensive Loss for
the years ended December 31, 2001 and 2002................ 7
Changes in the Net Investment of the Philips Group for the
years ended December 31, 2001 and 2002.................... 8
Combined Statements of Cash Flows for the years ended
December 31, 2001 and 2002................................ 9
Notes to Combined Financial Statements...................... 10
(b) Pro Forma Financial Information.
The following unaudited pro forma combined financial statements are filed
with this report:
PAGE
----
Introduction to Unaudited Pro Forma Combined Financial
Statements................................................ 28
Unaudited Pro Forma Combined Statement of Operations for the
year ended December 31, 2002.............................. 29
Unaudited Pro Forma Combined Statement of Operations for the
three months ended March 31, 2003......................... 30
Notes to Unaudited Pro Forma Combined Financial
Statements................................................ 31
(c) Exhibits
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1(1) Purchase Agreement, dated as of October 7, 2002, by and
between Koninklijke Philips Electronics N.V., a limited
liability company organized under the laws of The
Netherlands, and ScanSoft, Inc.
2.2(2) Amendment No. 1, dated as of December 20, 2002, to Purchase
Agreement, dated as of October 7, 2002, by and between
Koninklijke Philips Electronics N.V., a limited liability
company organized under the laws of The Netherlands, and
ScanSoft, Inc.
2.3(3) Amendment No. 2, dated as of January 29, 2003, to Purchase
Agreement, dated as of October 7, 2002, by and between
Koninklijke Philips Electronics N.V., a limited liability
company organized under the laws of The Netherlands, and
ScanSoft, Inc.
23.1 Consent of KPMG Accountants N.V.
99.1# Press Release as of January 30, 2003.
---------------
# Previously filed.
(1) Incorporated by reference from Exhibit 2.4 of the Company's Amendment No. 2
to Registration Statement on Form S-1 (No. 333-100647) filed with the
Securities and Exchange Commission on January 6, 2003.
(2) Incorporated by reference from Exhibit 2.5 of the Company's Amendment No. 4
to Registration Statement on Form S-1 (No. 333-100647) filed with the
Securities and Exchange Commission on February 7, 2003.
(3) Incorporated by reference from Exhibit 2.6 of the Company's Amendment No. 4
to Registration Statement on Form S-1 (No. 333-100647) filed with the
Securities and Exchange Commission on February 7, 2003.
3
ITEM 7(a). FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
4
INDEPENDENT AUDITORS' REPORT
The Supervisory Board of Royal Philips Electronics N.V.
We have audited the accompanying combined balance sheets of Philips Speech
Processing Telephony and Voice Control (A division of Royal Philips Electronics
N.V.) as of December 31, 2002, and the related combined statements of operations
and comprehensive loss, changes in the net investment of the Philips Group, and
cash flows for each of the years in the two-year period ended December 31, 2002.
These combined financial statements are the responsibility of Philips Speech
Processing Telephony and Voice Control's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Philips Speech
Processing Telephony and Voice Control (A division of Royal Philips Electronics
N.V.) as of December 31, 2002, and the results of its operations and its cash
flows for the two-year period ended December 31, 2002, in conformity with
generally accepted accounting principles in the United States of America.
/s/ KPMG Accountants N.V. KPMG Accountants N.V.
Eindhoven, The Netherlands
June 10, 2003
5
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
COMBINED BALANCE SHEETS
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
ASSETS
CURRENTS ASSETS:
Cash...................................................... 23 7
Accounts receivable, net (Notes 3 and 16)................. 3,036 3,359
Receivables from related parties (Note 13)................ 512 347
Inventory, net (Note 4)................................... 662 291
Deferred income taxes (Notes 9 and 13).................... 25 0
Other current assets (Note 5)............................. 240 216
------ -----
TOTAL CURRENT ASSETS........................................ 4,498 4,220
------ -----
Property, plant and equipment, net (Notes 6 and 15)......... 521 336
Intangible assets, net (Note 7)............................. 184 117
------ -----
TOTAL ASSETS................................................ 5,203 4,673
====== =====
LIABILITIES AND NET INVESTMENT OF THE PHILIPS GROUP
CURRENT LIABILITIES:
Accounts payable.......................................... 850 483
Deferred income........................................... 1,481 572
Payables to related parties (Note 13)..................... 1,541 672
Deferred income tax liability (Notes 9 and 13)............ 17 16
Other accrued liabilities (Note 8)........................ 2,153 2,896
------ -----
TOTAL CURRENT LIABILITIES................................... 6,042 4,639
------ -----
Long-term provisions (Note 10).............................. 269 245
TOTAL LIABILITIES........................................... 6,311 4,884
------ -----
Commitments and contingencies (Note 14)
NET INVESTMENT OF THE PHILIPS GROUP......................... (1,108) (211)
------ -----
TOTAL LIABILITIES AND NET INVESTMENT OF THE PHILIPS GROUP... 5,203 4,673
====== =====
The accompanying notes are an integral part of these combined financial
statements.
6
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Revenue:
Revenue, third parties.................................... 15,801 16,127
Revenue, related parties.................................. 2,890 582
TOTAL REVENUE (NOTES 13 AND 15)............................. 18,691 16,709
Cost of sales............................................... 3,288 2,519
GROSS PROFIT................................................ 15,403 14,190
------- -------
Operating expenses:
Selling and marketing..................................... 15,066 12,415
Research and development (Note 13)........................ 13,512 10,421
General and administrative (Note 13)...................... 3,877 3,739
Total operating expenses.................................... 32,455 26,575
OPERATING LOSS.............................................. (17,052) (12,385)
------- -------
Interest revenue, net (Note 13)............................. 2 3
LOSS BEFORE INCOME TAXES.................................... (17,050) (12,382)
------- -------
Income tax benefit (Note 9)................................. 1,364 333
NET LOSS.................................................... (15,686) (12,049)
======= =======
Components of other comprehensive income:
Foreign currency translation adjustments.................. 58 (41)
COMPREHENSIVE LOSS.......................................... (15,628) (12,090)
======= =======
The accompanying notes are an integral part of these combined financial
statements.
7
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
CHANGES IN THE NET INVESTMENT OF THE PHILIPS GROUP
NET INVESTMENT OF THE
PHILIPS GROUP
---------------------
(IN THOUSANDS
OF EURO'S)
BALANCE DECEMBER 31, 2000................................... 972
Net cash transfer from Philips.............................. 13,548
Components of comprehensive income:
Net loss.................................................. (15,686)
Foreign currency translation adjustments.................. 58
BALANCE DECEMBER 31, 2001................................... (1,108)
Net cash transfer from Philips.............................. 12,987
Components of comprehensive income:
Net loss.................................................. (12,049)
Foreign currency translation adjustments.................. (41)
BALANCE DECEMBER 31, 2002................................... (211)
The accompanying notes are an integral part of these combined financial
statements
8
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Cash flows from operating activities:
Net loss.................................................... (15,686) (12,049)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities
Deferred taxation......................................... (1,260) 24
Depreciation and amortization............................. 607 438
Change in assets and liabilities:
Accounts receivable, net............................... 1,033 (323)
Related parties, net................................... 2 (704)
Inventory, net......................................... 851 371
Other current assets................................... 207 24
Accounts payable....................................... (69) (367)
Deferred income and other accrued liabilities.......... (30) (166)
Long-term provisions................................... 85 (24)
Effect of exchange rate changes............................. (38) 105
NET CASH USED IN OPERATING ACTIVITIES....................... (14,298) (12,671)
Cash flows from investing activities:
Purchases of property, plant and equipment................ (201) (189)
Effect of exchange rate changes............................. -- 3
NET CASH USED IN INVESTING ACTIVITIES....................... (201) (186)
Cash flows from financing activities:
Net cash transferred from Philips......................... 13,606 12,946
Effect of exchange rate changes............................. 4 (107)
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 13,610 12,839
Effect of exchange rate changes............................. 34 2
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (855) (16)
Cash and cash equivalents, beginning of period.............. 878 23
Cash and cash equivalents, end of period.................... 23 7
Supplementary information:
Cash received from Philips for income taxes............... 9,897 105
Cash received from (paid to) Philips for interest......... (576) 2
The accompanying notes are an integral part of these combined financial
statements
9
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2002
1. DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION
DESCRIPTION OF THE COMPANY
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL (PSP), a division of
Royal Philips Electronics N.V. (Philips and Philips Group) is active in the
field of speech processing technology. Starting from the traditional
tape-recorded dictation Philips in the past two decades has become a global
leader in the field of speech processing, offering a wide portfolio of
state-of-the-art products and technologies. Philips Speech Processing Telephony
is offering speech-enabled services including directory assistance, interactive
voice response and voice portal applications for enterprise customers, telephony
vendors and carriers. Philips Speech Processing Voice Control is operating on
the market for speech-enabled automotive and mobile products. It offers a
product portfolio including small footprint speech recognition engines for
embedded applications like voice controlled climate, navigation and
entertainment features within cars as well as voice dialing within mobile
phones. With presence in Aachen, Germany, Dallas, USA, and Taipei, Taiwan PSP is
able to cover the global market with products supporting more than 40 languages
and that can process a vocabulary of more than one million words.
Royal Philips Electronics N.V., the Netherlands, and ScanSoft, Inc., of
Peabody, MA, USA entered into a purchase agreement in which ScanSoft acquires
the business, employees and intellectual property of Philips Speech Processing
Telephony and Philips Speech Processing Voice Control. The transaction was
consummated on January 30, 2003. See note 17 for additional disclosure of the
transaction.
BASIS OF PRESENTATION
The combined financial statements reflect the financial position, results
of operations, changes in net investment of the Philips Group, and cash flows of
the PSP business unit of Philips as if PSP had been a separate entity for all
periods presented. The combined financial statements have been prepared using
Philips' historical basis for PSP's assets and liabilities and results of
operations, which have been stated in conformity with accounting principles
generally accepted in the United States of America (U.S. GAAP). All significant
intercompany transactions and balances have been eliminated in preparation of
the combined financial statements.
Corporate overheads have been allocated to PSP from Philips at central,
regional and local levels for amounts, including directors remuneration,
marketing, management information systems, accounting and financial reporting,
treasury, human resources, legal, tax and security, based on the net sales of
PSP compared to the consolidated net sales of Philips. Management believes these
allocations are reasonable. However, the costs of these services charged to PSP
are not necessarily indicative of the costs that would have been incurred had
PSP operated as an entity independent of Philips, or as an autonomous public
company, for all periods presented.
PSP purchases components used in the production process, as well as
equipment and supplies under collective purchase agreements and purchase
conditions negotiated by Philips. Management believes that the benefits derived
from such agreements and conditions would unlikely have been obtained had PSP
been a stand-alone company.
The pension and other postretirement benefit costs attributable to PSP have
been based on the charge incurred by individual operations in respect of
specific plans of which employees of PSP are members. For the purposes of
presentation of the combined financial statements, the participation in the
Philips plans has been treated as participation in various multi-employer plans.
The charges included in the combined financial statements reflect the
arrangements of Philips and are therefore not necessarily indicative of the
pension and other postretirement benefit costs had PSP been a stand-alone
company. During the year
10
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ended December 31, 2001, PSP has benefited from contribution holidays with
respect to certain over-funded Philips pension plans. During 2002 no
contribution holidays existed anymore. Upon divestment, PSP will not benefit
from any contribution holidays, as the employees will no longer participate in
Philips' plans.
Because in the past PSP was not a separate legal group of companies or a
separate holding company within the Philips Group of companies, the proportion
of share capital and reserves attributable to PSP has been shown in the combined
balance sheets as part of the "Net investment of the Philips Group". For the
purpose of these combined financial statements, interest charge is calculated
based on the average rate of interest for long-term debt paid by Philips and the
average amount of net investment of the Philips Group invested in PSP during the
reporting periods, taking into account the debt-to-equity ratio reported by
Philips during the reporting periods. In addition, PSP has a number of
short-term balances with other Philips Group businesses. These balances arise
from trading transactions and services or other items and have been aggregated
on the combined balance sheets under the headings "Receivables from related
parties" and "Payables to related parties".
Historically, PSP's operations have been included in the combined income
tax returns filed by Philips in each of the countries where PSP is located
(country fiscal unity). Income tax expense in these combined financial
statements has been calculated on an as if separate tax return basis. The
current tax expense is assumed to be settled within the financial period
following the period in which it arises. Tax effects that may arise from PSP's
divestment from the Philips Group have not been reflected in PSP's combined
financial statements.
Other significant features of the PSP divestment from Philips are described
in Note 17.
The financial information included herein is not necessarily indicative of
the combined results of operations, financial position, changes in the net
investment of the Philips Group and cash flows of PSP in the future or what they
would have been for the periods presented had PSP been a separate stand-alone
entity.
REPORTING CURRENCY
The Euro is used as reporting currency. The financial statements of foreign
operations are translated into euros. Assets and liabilities are translated
using the exchange rates on the respective balance sheet dates. Income and
expense items are translated at average rates during the period.
2. SUMMARY OF ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Historically, Philips manages cash and cash equivalents on a centralized
basis. Cash receipts associated with PSP's business are transferred to Philips
on a daily basis and Philips funds PSP's disbursements. These cash transactions
are reflected in the caption "Net investment of the Philips Group". In certain
countries, however, PSP has dedicated bank accounts, operating under periodic
cash pooling with Philips. Furthermore, PSP entities have small amounts of petty
cash.
11
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTS RECEIVABLE
Accounts receivables are stated at face value, net of allowances for
doubtful accounts.
INVENTORY
Finished goods inventories are valued at the lower of cost, as determined
by the first-in, first-out (FIFO) method, or net realizable value. Provision is
made for obsolescence. Work in process comprises deferred costs on uncompleted
contracts.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, less accumulated
depreciation. Depreciation is calculated using the straight-line method over the
expected economic life of the asset. Costs related to maintenance activities are
expensed in the period in which they are incurred. Following are the expected
useful lives of the assets:
Machines and installations.................................. from 5 to 10 years
Other fixed assets.......................................... from 3 to 5 years
INTANGIBLE ASSETS
Intangible assets consists of acquired intellectual property rights
consisting of computer software for resale, which is being amortized on the
straight-line method over 5 years.
IMPAIRMENT OF LONG-LIVED ASSETS
Through December 31, 2001, PSP evaluated the recoverability of its
long-lived assets in accordance with Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed of". Whenever adverse events or changes in
business climate result in the expected undiscounted future cash flows from the
related asset being less than the carrying value of the asset, an impairment
loss would be recognized for the excess of the carrying value of the assets over
the expected discounted future cash flows.
On January 1, 2002, PSP adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 144 amends existing
guidance on asset impairment and provides a single accounting model for
long-lived assets to be disposed of SFAS No. 144 also changes the criteria for
classifying an asset as held-for-sale; and broadens the scope of businesses to
be disposed of that qualify for reporting as discontinued operations, and
changes the timing of recognizing losses on such operations. The adoption of
SFAS No. 144 on January 1, 2002 did not have an impact on the Company's combined
financial statements.
INCOME TAXES
Historically, PSP's operations have been included in the combined income
tax returns filed by Philips in each of the countries where PSP is located
(country fiscal unity). Income tax expense in these combined financial
statements has been calculated on an as if separate tax return basis.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to
12
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. Deferred tax assets, including assets arising from
loss carry forwards, are recognized if it is more likely than not that the asset
will be realized.
REVENUE RECOGNITION
PSP recognizes revenue in accordance with Statement of Position 97-2,
Software Revenue Recognition, as amended by Statement of Position 98-9, and the
Securities and Exchange Commission's Staff Accounting Bulletin No. 101 Revenue
Recognition in Financial Statements. Revenue from the sale of hardware and
software to end users is recognized upon delivery, provided that no significant
obligations remain, evidence of the arrangement exists, the fees are fixed or
determinable, and collectibility of the related receivable is reasonably
assured.
Revenue from royalties on sales of PSP's products by original equipment
manufacturers to third parties is recognized upon delivery to the third party
when such information is available, or when notified by the reseller that such
royalties are due as a result of a sale, provided that collectibility of the
related receivable is reasonably assured. Revenue from maintenance contracts is
recognized ratably over the contract term.
Revenue from development of custom software is recognized on a completed
contract basis. The Company has applied the completed contract method for
recognizing revenues on contracts involving software and services which
represent significant customization or modification of the software because they
do not have the ability to make reasonably dependable estimates of the extent of
progress to completion. Accordingly, all project costs and progress payments are
deferred until the project is complete. Any anticipated losses are recognized
immediately.
RESEARCH AND DEVELOPMENT AND CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Under SFAS No. 86 "Accounting for the Costs of Computer Software to be
Sold, Leased or Otherwise Marketed ", costs incurred in the research and
development of software products are expensed as incurred until technological
feasibility has been established. Once established, these costs would be
capitalized. The establishment of technological feasibility and the ongoing
assessment of the recoverability of these costs requires considerable judgment
by management with respect to certain external factors, including, but not
limited to, anticipated future gross product revenues, estimated economic life
and changes in software and hardware technologies. In the year ended December
31, 2001 and the nine-month period ended September 29, 2002, costs eligible for
capitalization were not material.
PENSION AND OTHER POSTRETIREMENT BENEFITS
PSP accounts for the cost of pension plans and postretirement benefits
other than pensions in accordance with SFAS No. 87, "Employers Accounting for
Pensions" and SFAS No. 106, "Employers Accounting for Postretirement Benefits
Other Than Pensions", respectively. These plans are generally part of pension
and postretirement benefit plans within Philips, and are accounted for by PSP as
multi-employer plans.
STOCK-BASED COMPENSATION
PSP applies SFAS No. 123, "Accounting for Stock-Based Compensation", which
allows companies which have stock-based compensation arrangements with employees
to continue to apply the existing accounting required by Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock
13
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Issued to Employees", and to provide pro forma disclosure of the accounting
results of applying the fair value method of SFAS No. 123. PSP accounts for
stock-based compensation arrangements (related to Philips stock options granted
to PSP employees) under the intrinsic value method of APB Opinion No. 25. The
following table illustrates the effect on net income if the fair value based
method had been applied to all outstanding and unvested awards in each period.
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Net loss, as reported....................................... (15,686) (12,049)
Deduct: Total share-based employee compensation expense
determined under fair value based method for all awards,
net of related tax effects................................ (116) (148)
Pro forma net loss.......................................... (15,802) (12,197)
======= =======
USE OF ESTIMATES
The preparation of financial statements in conformity with US GAAP requires
management to make estimates and assumptions that affect reported amounts in the
financial statements and the accompanying notes. While management bases its
assumptions and estimates on the facts and circumstances known at the balance
sheet date, actual results could materially differ from those estimates.
ACCOUNTING STANDARDS NOT YET ADOPTED
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations" (SFAS No. 143). SFAS No.
143 requires PSP to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of tangible long-lived assets that result from the acquisition,
construction, development and/or normal use of the assets. PSP would also record
a corresponding asset, which is depreciated over the life of the asset.
Subsequent to the initial measurement of the asset retirement obligation, the
obligation will be adjusted at the end of each period to reflect the passage of
time and changes in the estimated future cash flows underlying the obligation.
PSP is required to adopt SFAS No. 143 on January 1, 2003. PSP believes that the
adoption of SFAS No. 143 will not have a material impact on its financial
statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections"
(SFAS No. 145). SFAS No. 145 provides for the rescission of several previously
issued accounting standards, new accounting guidance for the accounting for
certain lease modifications and various technical corrections to existing
pronouncements that are not substantive in nature. SFAS No. 145 will be adopted
on January 1, 2003, except for the provisions relating to the amendment of SFAS
No. 13, "Accounting for Leases", which was adopted as required for transactions
occurring subsequent to May 15, 2002. PSP believes that the adoption of SFAS No.
145 will not have a material impact on its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" (SFAS No. 146). SFAS No. 146 addresses significant issues
regarding the recognition, measurement and reporting of costs that are
associated with exit and disposal activities, including restructuring activities
that are currently accounted for pursuant to the guidance that the Emerging
Issues Task Force (EITF) has set forth in EITF Issue No. 94-3, " Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". The scope of
SFAS No. 146 also includes (1) costs related to terminating a contract that is
not a capital lease, and
14
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(2) termination benefits that employees who are involuntarily terminated receive
under the terms of a one-time benefit arrangement that is not an ongoing benefit
arrangement or an individual deferred compensation contract. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. PSP believes that the adoption of SFAS No. 146 will not have a
material impact on its financial statements.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock Based
Compensation -- Transition and Disclosure -- an amendment of FASB statement No.
123" ("SFAS 148"). SFAS 148 permits two additional transition methods for
entities that adopt the fair value based method of accounting for stock-based
employee compensation. The Statement also requires new disclosures about the
ramp-up effect of stock-based employee compensation on reported results. The
Statement also requires that those effects be disclosed more prominently by
specifying the form, content, and location of those disclosures. The transition
guidance and annual disclosure provisions of SFAS 148 are effective for fiscal
years ending after December 15, 2002, with earlier application permitted in
certain circumstances. The interim disclosure provisions are effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002. PSP has adopted the disclosure requirements as from
2002.
PSP has decided to adopt the fair value recognition of SFAS 123 accounting
"Stock Based Compensation" as from January 1, 2003 prospectively to all employee
awards granted, modified or settled after January 1, 2003.
In November 2002, the Emerging Task-Force issued its consensus on EITF
00-21, "Revenue Arrangements with Multiple Deliverables" ("EITF 00-21") on an
approach to determine whether an entity should divide an arrangement with
multiple deliverables into separate units of accounting. According to the EITF
in an arrangement with multiple deliverables, the delivered item(s) should be
considered a separate unit of accounting if all of the following criteria are
met: (1) The delivered item(s) has value to the customer on a standalone basis,
(2) There is objective and reliable evidence of the fair value of the
undelivered item(s), (3) If the arrangement includes a general right of return,
delivery or performance of the undelivered item(s) is considered probable and
substantially in the control of the vendor. If all the conditions above are met
and there is objective and reliable evidence of fair value for all units of
accounting in an arrangement, the arrangement consideration should be allocated
to the separate units of accounting based on their relative fair values.
However, there may be cases in which there is objective and reliable evidence of
the fair value(s) of the undelivered item(s) in an arrangement, but no such
evidence for one or more of the delivered items. In those cases, the residual
method should be used to allocate the arrangement consideration. The guidance in
this Issue is effective for revenue arrangements entered into in fiscal
beginning after June 15, 2003. Alternatively, entities may elect to report the
change in accounting as a cumulative-effect adjustment in accordance with
Opinion 20. If so elected, disclosure should be made in periods subsequent to
the date of initial application of this consensus of the amount of recognized
revenue that was previously included in the cumulative effect adjustment. PSP
believes that the adoption of EITF 00-21 will not have a significant impact on
the combined financial statements.
15
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Trade accounts receivable................................... 4,503 5,055
Allowance for doubtful accounts............................. (1,467) (1,696)
------ ------
Total accounts receivable, net.............................. 3,036 3,359
====== ======
4. INVENTORY
Inventory consisted of the following:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Work in process............................................. 606 69
Finished goods.............................................. 225 257
Allowance for obsolescence.................................. (169) (35)
---- ---
Total inventory, net........................................ 662 291
==== ===
5. OTHER CURRENT ASSETS
Other current assets consisted of the following:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Royalties receivable........................................ 22 0
Prepaid expenses and sundry receivables..................... 218 216
--- ---
Total Other current assets.................................. 240 216
=== ===
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Machines and installations.................................. 1,374 1,155
Other fixed assets.......................................... 3,730 3,389
Accumulated depreciation.................................... (4,583) (4,208)
------ ------
Total property, plant and equipment, net.................... 521 336
====== ======
16
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. INTANGIBLE ASSETS
Intangible assets consisted of the following:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Computer software for resale, gross......................... 230 194
Accumulated amortisation.................................... (46) (77)
--- ---
Intangible asset, net....................................... 184 117
=== ===
Amortization of computer software costs was E 46 thousand and E 31 thousand
for the year ended December 31, 2001 and the year ended December 31, 2002,
respectively. The estimated amortisation expense for the next three years is
E 39 thousand per year.
8. OTHER ACCRUED LIABILITIES
Other accrued liabilities consisted of the following:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Salaries and wages, holiday allowance, year-end payment..... 1,245 1,113
Accrued holiday rights...................................... 335 242
Obligation towards former stock holders..................... 196 165
Accrued sales tax........................................... 56 139
Accrued commercial costs.................................... 83 348
Accrued R&D costs........................................... 0 156
Customer deposit............................................ 0 330
Others...................................................... 238 403
----- -----
Total other accrued liabilities............................. 2,153 2,896
===== =====
9. INCOME TAXES
Historically, PSP's operations have been included in the combined income
tax returns filed by Philips in each of the countries where PSP is located
(country fiscal unity). The income tax expense reported and the determination of
deferred tax assets to be realized in PSP's combined financial statements is
based on an as if separate tax return basis.
17
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents the principal reasons for the difference
between the effective income tax rate and statutory income tax rate in the
Netherlands:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN PERCENTAGES)
Statutory income tax rate in the Netherlands................ 35% 35%
Foreign rate differentials.................................. 4% 4%
Change in valuation allowance............................... -31% -35%
Others...................................................... 0% -1%
Effective income tax rate................................... 8% 3%
The income tax expense is as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Income (loss) before income taxes:
The Netherlands........................................... 0 0
Foreign................................................... (17,050) (12,382)
Income tax benefit (expense):
Current taxes
The Netherlands........................................... 0 0
Foreign................................................... 105 357
Deferred taxes
The Netherlands........................................... 0 0
Foreign................................................... 1,259 (24)
Income tax benefit.......................................... 1,364 333
18
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The sources of differences between the financial accounting and tax basis
of PSP's assets and liabilities that give rise to the net deferred tax assets
are as follows:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Deferred tax assets:
Doubtful accounts......................................... 84 66
Accrued compensation...................................... 131 288
Taxes other than income taxes............................. 84 10
Jubilee provision......................................... 19 25
Others.................................................... 174 168
Property, plant and equipment............................. 110 78
Net operating losses...................................... 29,436 32,941
------- -------
TOTAL GROSS DEFERRED TAX ASSETS............................. 30,038 33,576
------- -------
Valuation allowance......................................... (29,978) (33,546)
NET DEFERRED TAX ASSETS..................................... 60 30
Deferred tax liabilities:
Fixed assets.............................................. 27 21
Accruals.................................................. 17 18
Others.................................................... 8 7
------- -------
TOTAL GROSS DEFERRED LIABILITIES............................ 52 46
======= =======
NET DEFERRED TAX ASSETS (LIABILITIES)....................... 8 (16)
Based upon an as if separate tax return basis, as at December 31, 2002 PSP
has incurred E 22.8 million of operating loss carry forwards expiring at various
dates through 2022 and E 59.3 million of operating loss carry forwards with no
expiration date.
The valuation allowance for deferred tax assets as of December 31, 2001 and
December 31, 2002 was E 30.0 million and E 33.5 million, respectively. The net
change in total valuation allowance for the year ended December 31, 2001 and the
year ended December 31, 2002 was an increase of E 4.1 million and E 3.5 million,
respectively. In assessing the realizability of deferred tax assets, PSP
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. PSP considers
the scheduled reversal of deferred tax liabilities, projected future taxable
income and tax planning strategies in making this assessment. Based upon the
level of historical taxable income and projections for future taxable income
over the periods in which the deferred tax assets are deductible, management
believes it is more likely than not that PSP will realize the benefits of those
deductible differences for which a valuation allowance has not been recorded.
19
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. LONG-TERM PROVISIONS
Long-term provisions consisted of the following:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(IN THOUSANDS OF EURO'S)
Provision for pensions...................................... 199 162
Provision for jubilee benefit obligations................... 70 83
--- ---
Total long-term provisions.................................. 269 245
=== ===
11. PENSION AND OTHER POST RETIREMENT COSTS
Employees of PSP participate in various defined benefit and defined
contribution pension plans of the Philips Group. For the purposes of the
preparation of these combined financial statements, PSP's participation in the
Philips plans has been treated as participation in various multi-employer plans.
Accordingly, the charges included in the combined financial statements may not
be indicative of the pension and other post retirement costs had PSP been a
stand alone entity.
Pension premium charged for the year ended December 31, 2001 and the year
ended December 31, 2002 were E 86 thousand and E 114 thousand, respectively.
In addition to receiving pension benefits, PSP employees in certain
countries participate in other postretirement benefit plans of the Philips
Group. These other postretirement benefits under SFAS No. 106 are recorded at
the country central level and charged out to the various local entities as part
of human resource overhead (surcharge on salaries paid). The charge to PSP is
approximately E 13 thousand and E 48 thousand for the year ended December 31,
2001 and the year ended December 31, 2002, respectively.
12. EQUITY INCENTIVE PLANS
EXISTING PHILIPS INCENTIVE PLANS
Philips has granted stock options on its ordinary shares to members of
PSP's management and certain key employees under either a Euro (EUR) denominated
plan or a United States Dollar (USD) denominated plan. Under Philips' plans,
options are granted with an exercise price equal to the fair market value of the
underlying ordinary shares on the date of grant. Options are subject to vesting
periods typically of three years and expirations of five or ten years. A limited
number of options have also been granted under variable plans, subject to
achievement of certain financial objectives during multi-year performance
cycles. Exercise of all options is restricted by Philips' rules on insider
trading.
STOCK-BASED COMPENSATION
Pro forma net income information, as required by SFAS No. 123, has been
determined as if PSP had accounted for employee share options granted to PSP's
employees by Philips under SFAS No. 123's fair value method. The pro forma
amounts below are not necessarily representative of the effects of share-based
awards on future net income because the plans eventually adopted by PSP after
divestment from Philips may differ from Philips share options plans. Accordingly
future grants of employee stock options to PSP's employees may not be comparable
to awards made to employees while PSP was a part of Philips.
20
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions:
DECEMBER 31, DECEMBER 31,
2001 2002
------------ ------------
(EUR -- DENOMINATED)
Risk-free interest rate..................................... 4.66% 4.70%
Expected dividend yield..................................... 1.2% 1.2%
Expected option life........................................ 5 yrs. 5 yrs.
Expected stock price volatility 49% 53%
(USD -- DENOMINATED)
Risk-free interest rate..................................... 4.77% 4.65%
Expected dividend yield..................................... 1.2% 1.2%
Expected option life........................................ 5 yrs. 5 yrs.
Expected stock price volatility 49% 49%
The assumptions were used for these calculations only and do not
necessarily represent an indication of management's expectations of future
development.
The following table summarizes information about the number of Philips
share options granted to PSP's employees, those outstanding at December 31, 2001
and December 31, 2002 and changes during the period:
Fixed option plans:
DECEMBER 31, 2001 DECEMBER 31, 2002
-------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE EXERCISE AVERAGE EXERCISE
SHARES PRICE SHARES PRICE
------- ---------------- ------ ----------------
(IN EUR) (IN EUR)
Options outstanding, beginning of period..... 3,200 43.18 9,325 33.77
Options granted.............................. 6,125 28.85 6,336 34.78
Options exercised............................
Options forfeited............................ (3,107) 32.74
Options outstanding, end of period........... 9,325 33.77 12,554 34.53
Weighted average fair value of options
granted during the year in EUR............. 14.75 14.90
(IN USD) (IN USD)
Options outstanding, beginning of period..... 24,500 40.61 16,700 29.57
Options granted.............................. 11,950 25.68 8,892 30.70
Options exercised............................
Options forfeited............................ (19,750) 40.90 (4,750) 39.08
Options outstanding, end of period........... 16,700 29.57 20,842 27.90
Weighted average fair value of options
granted during the year in USD............. 11.90 13.01
21
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Variable option plans:
DECEMBER 31, 2001 DECEMBER 31, 2002
-------------------------- -------------------------
WEIGHTED WEIGHTED
AVERAGE EXERCISE AVERAGE EXERCISE
SHARES PRICE SHARES PRICE
------- ---------------- ------ ----------------
(IN EUR) (IN EUR)
Options outstanding, beginning of period..... 3,200 43.18 9,325 33.77
Options granted.............................. 6,125 28.85
Options exercised............................
Options forfeited............................ (2,675) 32.41
Options outstanding, end of period........... 9,325 33.77 6,650 34.31
Weighted average fair value of options
granted during the year in EUR............. 14.75
(IN USD) (IN USD)
Options outstanding, beginning of period..... 22,500 42.00 14,700 30.20
Options granted.............................. 11,950 25.68
Options exercised............................
Options forfeited............................ (19,750) 40.90 (1,750) 43.04
Options outstanding, end of period........... 14,700 30.20 12,950 28.48
Weighted average fair value of options
granted during the year in USD............. 11.90
The following table summarizes information about stock options outstanding
at December 31, 2002:
Fixed option plans:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -----------------------------------
NUMBER WEIGHTED AVERAGE
OUTSTANDING AT REMAINING NUMBER EXERCISABLE
DECEMBER 31, EXERCISE PRICE CONTRACTUAL LIFE AT DECEMBER 31, WEIGHTED PRICE
YEAR OF GRANT 2002 PER SHARE (YEARS) 2002 PER SHARE
------------- -------------- -------------- ---------------- ------------------ --------------
(price in EUR) (price in EUR)
2000................. 2,500 42.90 7.79 -- --
2001................. 4,150 29.14 8.29 -- --
2002................. 5,904 34.78 9.29 -- --
(price in USD) (price in USD)
1999................. 2,000 24.96 6.5 2,000 24.96
2000................. 3,000 36.65-43.05 7.46 -- --
2001................. 9,950 25.68 8.29 -- --
2002................. 5,892 30.70 9.29 -- --
TOTAL................ 33,396 2,000
22
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Variable option plans:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -----------------------------------
NUMBER WEIGHTED AVERAGE
OUTSTANDING AT REMAINING NUMBER EXERCISABLE
DECEMBER 31, EXERCISE PRICE CONTRACTUAL LIFE AT DECEMBER 31, WEIGHTED PRICE
2002 PER SHARE (YEARS) 2002 PER SHARE
-------------- -------------- ---------------- ------------------ --------------
(price in EUR) (price in EUR)
2000................. 2,500 42.90 7.79 -- --
2001................. 4,150 29.14 8.29 -- --
(price in USD) (price in USD)
2000................. 3,000 36.65 - 43.05 7.46 -- --
2001................. 9,950 25.68 8.29 -- --
TOTAL................ 19,600
13. TRANSACTIONS WITH RELATED PARTIES
PSP sells products to and purchases certain products and services from
Philips in the normal course of business. Transactions between PSP and Philips
are effected at prices that are intended to reflect the market value of the
products and services involved. The following table summarizes transactions
between PSP and Philips:
DECEMBER 31, DECEMBER 31,
IN THOUSANDS OF EURO'S 2001 2002
---------------------- ------------ ------------
STATEMENT OF OPERATIONS:
Sales to Philips group...................................... 2,890 582
Interest revenue............................................ 2 3
Corporate overhead allocation............................... 308 212
Corporate Research.......................................... 3,058 1,958
DECEMBER 31, DECEMBER 31,
IN THOUSANDS OF EURO'S 2001 2002
---------------------- ------------ ------------
BALANCE SHEET:
Income taxes receivable (included in Receivables from
related parties).......................................... 105 259
Trade accounts receivable from Philips Group................ 512 347
Trade accounts payable to Philips Group..................... 1,541 672
Deferred income taxes....................................... 8 (16)
Interest revenue in these combined financial statements is calculated based
on the average rate of interest for long-term debt paid by Philips and the
average amount of net investment of the Philips Group invested in PSP during the
reporting periods, taking into account the debt-to-equity ratio reported by
Philips during the reporting periods.
Income tax expense has been calculated on an as if separate tax return
basis. Tax effects that may arise from PSP's divestment from the Philips Group
have not been reflected in PSP's combined financial statements.
Corporate overheads have been allocated to PSP from Philips at central,
regional and local levels for amounts including, but not limited to, directors
remuneration, marketing, management information systems, accounting and
financial reporting, treasury, human resources, legal, tax and security, based
on
23
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
the net sales of PSP compared to the consolidated net sales of Philips.
Management believes these allocations are reasonable. However, the costs of
these services charged to PSP are not necessarily indicative of the costs that
would have been incurred had PSP operated as an entity independent of Philips.
Philips Corporate Research is contracted by PSP to perform certain research
and development projects; the projects are determined on a yearly basis. The fee
charged is reported under Research & Development expenses.
14. COMMITMENTS AND CONTINGENCIES
PSP is potentially subject to lawsuits, claims and proceedings, which arise
in the ordinary course of business. There are no such matters pending that PSP
expects to be material in relation to its business, financial condition or
results of operations.
RENT AGREEMENTS
PSP has entered into certain short-term contracts to rent office and
warehouse facilities. The rent charged to income amounted to E 1,112 thousand
and E 1,013 thousand for the year ended December 31, 2001 and the year ended
December 31, 2002 respectively, of which E 181 thousand and E 284 thousand
respectively relates to charges from Philips based on square meters occupied.
The table below presents the amounts of rent payable under the present
contracts for the upcoming periods.
RENT
IN THOUSANDS OF EURO'S AMOUNT
---------------------- -----------
Year 2003................................................... 779
Year 2004................................................... 531
Year 2005................................................... 531
Year 2006................................................... 133
Year 2007 and later......................................... 0
15. GEOGRAPHICAL INFORMATION
PSP operates and derives its revenue from all major regions in the world.
The geographical location of property, plant and equipment and the geographical
origin of revenues are as follows:
AMERICAS EUROPE ASIA PACIFIC TOTAL
-------- ------ ------------ ------
December 31, 2001
Net sales..................................... 7,883 9,446 1,362 18,691
Property, plant and equipment, net............ 129 378 14 521
December 31, 2002
Net sales..................................... 8,424 7,907 378 16,709
Property, plant and equipment, net............ 48 284 4 336
24
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
16. CONCENTRATION OF RISKS AND FINANCIAL INSTRUMENTS
CONCENTRATION OF CREDIT RISK
Credit risk represents the risk that a loss would be recognized at the
reporting date if counter parties failed completely to perform as contracted.
Financial instruments which potentially subject PSP to a concentration of credit
risk consist principally of accounts receivable. Management believes it has
adequately provided for the collection risk in PSP's trade accounts receivable
by recording an allowance for doubtful accounts which reduces such amounts to
their net realizable value.
Due to the project nature of the speech processing business, PSP derives a
substantial portion of its revenues from a limited number of customers. In the
year 2001 and the year 2002, two and three customers, respectively accounted for
more than 10% of revenues each, and in the aggregate for 28% and 45% of
revenues, respectively.
FINANCIAL INSTRUMENTS
PSP's earnings, cash flows, and financial position are exposed to foreign
currency risk from foreign currency denominated receivables, payables,
forecasted transactions, as well as net investments in certain foreign
operations. These items are denominated in various foreign currencies, including
mainly the U.S. Dollar.
PSP periodically assesses its foreign currency exchange risk exposure. As
USA customers are invoiced from Dallas, USA, in US Dollars and European
customers are invoiced from Aachen, Germany, in Euro the currency risk exposure
is very limited. Accordingly, PSP does not enter into any hedging activities or
purchase derivative instruments.
During 2001, PSP recorded a net foreign currency transaction profit of E 23
thousand and during the year 2002, a loss was recorded of E 16 thousand, which
is included in cost of sales.
FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES
The carrying values of accounts receivable and accounts payable approximate
fair value because of the short maturity of these instruments.
17. PSP DIVESTMENT
On October 7, 2002, Royal Philips Electronics N.V. and ScanSoft, Inc.
signed a purchase agreement for the transfer of PSP's business, employees,
assets and liabilities to ScanSoft. The transaction was consummated on January
30, 2003.
To provide for an orderly transfer and transition of PSP from Philips to
ScanSoft, various ancillary agreements were executed that cover a wide range of
matters, including but not limited to:
- the transfer by Philips to ScanSoft of the business, employees, assets
and liabilities associated with PSP's business (Purchase Agreement, Local
Asset Transfer Agreements);
- the transfer or license by Philips to ScanSoft of certain intellectual
property rights (Technology Transfer and License Agreement, Trademark
Transfer and License Agreement);
- the provision by Philips of certain corporate and local human resource
management, finance and accounting, housing, information technology and
other services to ScanSoft (Transition Services Agreement).
25
PHILIPS SPEECH PROCESSING TELEPHONY AND VOICE CONTROL
(A division of Royal Philips Electronics N.V.)
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK INCENTIVE PLANS
The Philips stock options granted to the PSP employees were not converted
into options for shares of ScanSoft. Upon closing, PSP employees with
outstanding exercisable options had a limited period of time to exercise these
options and all unvested options were cancelled. In addition, ScanSoft has
assumed no obligation towards the beneficiaries or towards Philips with respect
to these outstanding Philips' stock options.
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
In most countries PSP's employees have pension entitlements as part of
their benefit packages, and as it is common practice that in offering
transferring employees equivalent benefit packages, this equivalence also
extends to pension rights. In fact there exists a compulsory European Directive
obliging member states to implement legislation in each EC country to the effect
that in case of transfer of a business, all pension entitlements transfer with
the transferred employees. In the Netherlands, this law has become effective on
July 1, 2002.
In some countries, the pension entitlements are part of a state scheme; in
many countries, however, the entitlements are specifically related to Philips,
and require a per country approach on how to deal with pension rights going
forward and the treatment of accrued rights in the past. There are legal
requirements which dictate a transfer of pension liabilities, but also if there
is not a strict legal requirement, in many cases taking into account the
justified interest of employees will be a precondition for a smooth transition
process in terms of consultation with works council and unions.
Pension entitlement for PSP's employees may be funded by way of a separate
pension fund, with an insurance company or by way of a book reserve system.
In case a book reserve system was used by Philips in a country, the pension
liabilities transferred to ScanSoft and Philips included a provision in the
local balance sheet which was equal to the actuarial present value of pension
rights accrued up to the effective date as calculated under the relevant local
book reserve system concerned.
In case of a dedicated Philips pension fund, transferred employees either
received a premium free policy or a collective transfer of liabilities and
assets under the terms and rules set by the pertaining pension fund took place.
26
ITEM 7(b). PRO FORMA FINANCIAL INFORMATION
SCANSOFT, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
27
SCANSOFT, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
On October 7, 2002, ScanSoft, Inc. ("ScanSoft") entered into a definitive
agreement with Royal Philips Electronics ("Philips") to acquire the Philips
Speech Processing Telephony and Voice Control business units ("PSP") and related
intellectual property. On January 30, 2003, we completed the acquisition of the
Speech Processing Telephony and Voice Control business units of Royal Philips
Electronics, and related intellectual property on the terms set forth in the
purchase agreement dated October 7, 2002, as amended. As consideration for these
business units and intellectual property, we paid 3.1 million euros ($3.4
million) in cash paid at closing, subject to adjustment in accordance with the
provisions of the purchase agreement, as amended, and a deferred payment of 1.0
million euros in cash due no later than December 31, 2003, a 5.0 million euro
note due December 31, 2003 and bearing 5.0% interest per annum and issued a
$27.5 million three-year, zero-interest subordinated debenture, convertible at
any time at Philips' option into shares of our common stock at $6.00 per share.
The unaudited pro forma statements of operations for the year ended
December 31, 2002 and the three months ended March 31, 2003 give effect to the
acquisition of PSP as if ScanSoft and PSP had been combined at the beginning of
the earliest period presented. An unaudited pro forma balance sheet is not
required as this acquisition is already reflected in the consolidated ScanSoft
balance sheet as of March 31, 2003.
The unaudited pro forma adjustments related to the acquisition of PSP are
based on a preliminary purchase price allocation. The purchase price of PSP is
preliminary, pending resolution of the determination of the fair value of
allocation of certain contractual liabilities assumed by ScanSoft that are still
being determined based on the contractual nature of assignability of these
contracts. Additionally, the purchase price is subject to adjustment based on a
calculation set forth in the purchase agreement, as amended, which must be
agreed upon by the parties and which may result in an adjustment either to
increase or decrease the total purchase consideration. Upon final determination
of the fair value of the liabilities referred to above and the purchase price
adjustment, a corresponding adjustment will be recorded to goodwill. No
significant transactions occurred between ScanSoft and PSP during the year ended
December 31, 2002 and the three months ended March 31, 2003, respectively.
The historical PSP financial information has been derived from the audited
financial statements of PSP included in this Form 8-K/A and have been translated
from euros to US dollars using average exchange rates for the respective
periods.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results that would have occurred
if the transactions had been consummated as of January 1, 2002, nor is it
necessarily indicative of future operating results or financial position. The
unaudited pro forma combined financial information should be read in conjunction
with the historical financial statements and related notes thereto of PSP,
included herein, and ScanSoft, as filed in the Company's 2002 Form 10-K.
28
SCANSOFT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
PRO FORMA PRO FORMA
SCANSOFT PSP ADJUSTMENTS COMBINED
-------- -------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue, third parties................. $101,524 $ 15,253 $ -- $116,777
Revenue, related party................. 5,095 550 -- 5,645
-------- -------- ------- --------
Total revenue.......................... 106,619 15,803 -- 122,422
-------- -------- ------- --------
Costs and expenses:
Cost of revenue...................... 16,419 2,382 (29)(3) 18,772
Cost of revenue from amortization of
intangible assets................. 9,470 -- 484(1) 9,954
Research and development............. 27,633 9,856 -- 37,489
Selling general and administrative... 43,771 15,279 -- 59,050
Amortization of other intangible
assets............................ 1,682 -- 749(2) 2,431
Restructuring and other charges...... 1,041 -- -- 1,041
-------- -------- ------- --------
Total costs and expenses............... 100,016 27,517 1,204 128,737
-------- -------- ------- --------
Income (loss) from operations.......... 6,603 (11,714) (1,204) (6,315)
Other income (expense), net............ (16) 3 (286)(4)(5)(6) (299)
-------- -------- ------- --------
Income (loss) before income taxes...... 6,587 (11,711) (1,490) (6,614)
Provision for (benefit from) income
taxes................................ 254 (315) 315(7) 254
-------- -------- ------- --------
Net income (loss)...................... $ 6,333 $(11,396) $(1,805) (6,868)
======== ======== ======= ========
Net income (loss) per common share:
Basic................................ $ 0.09 $ (0.11)
Diluted.............................. $ 0.09 $ (0.11)
Weighted average common shares:
Basic................................ 67,010 (3,562)(8) 63,448
Diluted.............................. 72,796 (9,348)(8) 63,448
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
29
SCANSOFT, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
PRO FORMA PRO FORMA
SCANSOFT PSP ADJUSTMENTS COMBINED
------------ ---------- ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenue, third parties................. $26,516 $1,116 $ -- $27,632
Revenue, related party................. 1,320 -- -- 1,320
------- ------ -------- -------
Total revenue.......................... 27,836 1,116 -- 28,952
------- ------ -------- -------
Costs and expenses:
Cost of revenue...................... 4,302 11 (2)(3) 4,311
Cost of revenue from amortization of
intangible assets................. 2,057 -- 40 (1) 2,097
Research and development............. 7,177 837 -- 8,014
Selling general and administrative... 13,261 874 -- 14,135
Amortization of other intangible
assets............................ 361 -- 63 (2) 424
Restructuring and other charges...... 529 -- -- 529
------- ------ -------- -------
Total costs and expenses............... 27,687 1,722 101 29,510
------- ------ -------- -------
Income (loss) from operations.......... 149 (606) (101) (558)
Other income (expense), net............ 22 (10) (14)(4)(5)(6) (2)
------- ------ -------- -------
Income (loss) before income taxes...... 171 (616) (115) (560)
Provision for (benefit from) income
taxes................................ 95 -- -- 95
------- ------ -------- -------
Net income (loss)...................... $ 76 $ (616) $ (115) (655)
======= ====== ======== =======
Net income (loss) per common share:
Basic................................ $ 0.00 $ (0.01)
Diluted.............................. $ 0.00 $ (0.01)
Weighted average common shares:
Basic................................ 67,689 (3,562)(8) 64,127
Diluted.............................. 77,220 (13,093)(8) 64,127
---------------
See accompanying Notes to Unaudited Pro Forma Combined Financial Statements.
30
SCANSOFT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS
1. ACQUISITIONS
On October 7, 2002, ScanSoft, Inc. ("ScanSoft") entered into a definitive
agreement with Royal Philips Electronics ("Philips") to acquire the Philips
Speech Processing Telephony and Voice Control business units ("PSP") and related
intellectual property. On January 30, 2003, we completed the acquisition of the
Speech Processing Telephony and Voice Control business units of Royal Philips
Electronics, and related intellectual property on the terms set forth in the
purchase agreement dated October 7, 2002, as amended. As consideration for these
business units and intellectual property, we paid 3.1 million euros ($3.4
million) in cash paid at closing, subject to adjustment in accordance with the
provisions of the purchase agreement, as amended, and a deferred payment of 1.0
million euros in cash due no later than December 31, 2003, a 5.0 million euro
note due December 31, 2003 and bearing 5.0% interest per annum and issued a
$27.5 million three-year, zero-interest subordinated debenture, convertible at
any time at Philips' option into shares of our common stock at $6.00 per share.
2. PRO FORMA ADJUSTMENTS
Pro forma adjustments reflect only those adjustments which are factually
determinable. The purchase price is subject to adjustment based on a calculation
set forth in the purchase agreement, as amended, which must be agreed upon by
the parties and which may result in an adjustment either to increase or decrease
the total purchase consideration. Upon final determination of the purchase price
adjustment, a corresponding adjustment will be recorded to goodwill.
Under the terms of the purchase agreement, as amended, Philips agreed to
reimburse the Company for the costs, up to 5.0 million euros, associated with
certain restructuring actions taken through December 31, 2003, primarily
headcount and facilities related charges associated with operations based in
Germany. As of March 31, 2003, the Company entered into severance agreements
with a total of 70 employees of Philips resulting in severance costs totaling
$1.3 million. Of these amounts, 34 employees and related severance costs of $1.0
million were subject to reimbursement by Philips pursuant to the purchase
agreement and as such a related receivable was recorded and remains outstanding
at March 31, 2003. The remainder was recorded as part of the purchase price
allocation in accordance with EITF 95-3, "Recognition of Liabilities in
Connection with a Purchase Business Combination." To the extent that the total
reimbursable costs exceed 5.0 million euros as of or at any time prior to
December 31, 2003, Philips will reimburse the Company for one-third of the
excess and the Company will be responsible for the remaining two-thirds of any
excess. To the extent that the total reimbursable costs are less than 5.0
million euros at December 31, 2003, Philips will pay to the Company an amount
equal to two-thirds of such difference. Any adjustment will either increase or
decrease the total purchase consideration and a corresponding adjustment will be
recorded to goodwill.
ScanSoft believes these restructuring actions are an integral component of
the acquisition plan to enable the benefits of the combined companies to be
optimized and the benefits of the acquisition to be realized.
Pro forma adjustments include the following:
(1) Adjustment to record amortization expense related to patents, core and
completed technology of $484,000 and $40,000 for the year ended December 31,
2002 and the three months ended March 31, 2003, respectively.
(2) Adjustment to record amortization expense related to customer
relationships, tradenames and trademarks of $749,000 and $63,000 for the year
ended December 31, 2002 and the three months ended March 31, 2003, respectively.
31
SCANSOFT, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED
FINANCIAL STATEMENTS -- (CONTINUED)
(3) Adjustment to eliminate amortization expense related to intangible
assets of PSP existing prior to the acquisition which were not acquired by
ScanSoft. Amortization expense of $29,000 and $2,000 was eliminated for the year
ended December 31, 2002 and the three months ended March 31, 2003, respectively.
(4) Adjustment to record interest expense on the 5.0 million euro
promissory note issued as partial purchase consideration for the acquisition,
bearing interest at five percent per year, as if the consideration was issued on
January 1, 2002. Interest expense for the year ended December 31, 2002 and the
three months ended March 31, 2003 would have been $236,000 and $20,000,
respectively.
(5) Adjustment to eliminate interest income (expense) of $3,000 and
($10,000) for the year ended December 31, 2002 and the three months ended March
31, 2003, respectively, recorded on intercompany balances between PSP and
Philips, as if the acquisition had occurred on January 1, 2002.
(6) Adjustment to record imputed interest expense of $47,000 and $4,000 for
the year ended December 31, 2002 and the three months ended March 31, 2003,
respectively, on the non-interest bearing deferred payment of 1.0 million euro
to be paid on December 31, 2003 as partial consideration for the PSP
acquisition, as if the acquisition had occurred on January 1, 2002.
(7) Adjustment to eliminate income tax benefits of $315,000 recorded by PSP
in its historical statements of operations which would not have been realized by
ScanSoft had the acquisition occurred on January 1, 2002.
(8) Adjustment to exclude the assumed conversion of Series B participating
preferred stock of 3,562,000 for the year ended December 31, 2002 and the three
months ended March 31, 2003, respectively, and to exclude common stock
equivalents totaling 9,348,000 and 13,093,000 for the year ended December 31,
2002 and the three months ended March 31, 2003, respectively, because their
impact would be antidilutive. The pro forma net loss per share and the shares
used in pro forma net loss per share do not include the effects of the assumed
conversion to common stock of the convertible debenture issued to Philips as
partial purchase consideration for the PSP acquisition because the impact would
be antidilutive. The total shares of common stock to be issued upon conversion
of the debenture would be 4,583,333.
32
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 hereunto duly authorized.
SCANSOFT, INC.
/s/ GERALD C. KENT, JR
--------------------------------------
Gerald C. Kent, Jr.
Vice President, Controller &
Chief Accounting Officer
(Principal Accounting Officer)
Date: June 19, 2003
33
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1(1) Purchase Agreement, dated as of October 7, 2002, by and
between Koninklijke Philips Electronics N.V., a limited
liability company organized under the laws of The
Netherlands, and ScanSoft, Inc.
2.2(2) Amendment No. 1, dated as of December 20, 2002, to Purchase
Agreement, dated as of October 7, 2002, by and between
Koninklijke Philips Electronics N.V., a limited liability
company organized under the laws of The Netherlands, and
ScanSoft, Inc.
2.3(3) Amendment No. 2, dated as of January 29, 2003, to Purchase
Agreement, dated as of October 7, 2002, by and between
Koninklijke Philips Electronics N.V., a limited liability
company organized under the laws of The Netherlands, and
ScanSoft, Inc.
23.1 Consent of KPMG Accountants N.V.
99.1# Press Release as of January 30, 2003.
---------------
# Previously Filed.
(1) Incorporated by reference from Exhibit 2.4 of the Company's Amendment No. 2
to Registration Statement on Form S-1 (No. 333-100647) filed with the
Securities and Exchange Commission on January 6, 2003.
(2) Incorporated by reference from Exhibit 2.5 of the Company's Amendment No. 4
to Registration Statement on Form S-1 (No. 333-100647) filed with the
Securities and Exchange Commission on February 7, 2003.
(3) Incorporated by reference from Exhibit 2.6 of the Company's Amendment No. 4
to Registration Statement on Form S-1 (No. 333-100647) filed with the
Securities and Exchange Commission on February 7, 2003.