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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 1999 COMMISSION FILE NUMBER 0-27038
SCANSOFT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-3156479
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9 CENTENNIAL DRIVE
PEABODY, MASSACHUSETTS 01960
(978) 977-2000
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, $0.001 par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. []
The aggregate market value of voting stock held by non-affiliates of
the Registrant was approximately $23,752,027 as of March 26, 1999, based on
$1.625 per share, the last reported sales price on the Nasdaq National Market
for such date. Shares of Common Stock held by each executive officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
The number of shares of the registrant's Common Stock, $0.001 par
value, outstanding as of March 26, 1999 was 26,355,780.
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SCANSOFT, INC.
TABLE OF CONTENTS
Page
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PART I.........................................................................1
ITEM 1. Business.........................................................1
ITEM 2. Properties......................................................17
ITEM 3. Legal Proceedings...............................................17
ITEM 4. Submission of Matters to a Vote of Security Holders.............17
PART II.......................................................................18
ITEM 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.............................................18
ITEM 6. Selected Financial Data.........................................19
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................20
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.....31
ITEM 8. Financial Statements and Supplementary Data.....................32
ITEM 9. Changes in and Disagreements with Accounts on Accounting
and Financial Disclosure........................................51
PART III......................................................................52
ITEM 10. Directors and Executive Officers of the Registrant.............52
ITEM 11. Executive Compensation.........................................54
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.59
ITEM 13. Certain Relationships and Related Transactions.................60
PART IV.......................................................................63
ITEM 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K....................................................63
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PART I
WHEN USED IN THIS REPORT, THE WORDS "EXPECTS," "INTENDS," "BELIEVES,"
"PROJECTS," "PLANS," "ANTICIPATES," "ESTIMATES," AND SIMILAR WORDS AND
EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS, WHICH INCLUDE STATEMENTS AS TO THE TIMING OF PRODUCT RELEASES, THE
PERFORMANCE AND UTILITY OF THE COMPANY'S PRODUCTS AND EARNINGS AND
PROFITABILITY, ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE RISKS AND UNCERTAINTIES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE RISKS DISCUSSED BELOW AND UNDER ITEM
7--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND OTHER RISKS DETAILED FROM TIME TO TIME IN OUR PERIODIC REPORTS
AND OTHER INFORMATION FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE
FORWARD-LOOKING STATEMENTS SPEAK ONLY AS THE DATE HEREOF. THE COMPANY EXPRESSLY
DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR
REVISION TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT ANY
CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN
EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED.
ITEM 1. BUSINESS
GENERAL
On January 6, 1999, we sold our hardware business to a newly formed
subsidiary of Primax Electronics, Ltd. for approximately $7 million. On March 2,
1999, Visioneer acquired ScanSoft, Inc., an indirect wholly owned subsidiary of
Xerox Corporation, in a cash election merger. The corporate entity "Visioneer"
survived the merger, but changed its name to "ScanSoft, Inc." In addition, we
changed the ticker symbol for our common stock, that trades on the Nasdaq, to
"SSFT." In this Report, the "Company," the "Registrant," "ScanSoft," "We," "Our"
and "Visioneer" refer to the surviving company unless the context otherwise
requires.
Under our agreement with Primax, Primax's subsidiary acquired our
hardware business, including all of our hardware assets, liabilities and related
intellectual property, and the name "Visioneer," and assumed our Fremont,
California lease. In addition, we entered into a multi-year licensing agreement
with Primax's subsidiary (now called Visioneer) to bundle PaperPort software
products with the Visioneer line of hardware imaging products.
Pursuant to the terms of the agreement with Xerox, we acquired ScanSoft
for approximately 6.8 million shares of common stock, a warrant to purchase up
to an additional 1.7 million shares of common stock exercisable upon certain
events, approximately 3.6 million shares of non-voting Series B Preferred Stock
and the assumption of 1.7 million ScanSoft stock options. In connection with the
merger, approximately 5.1 million shares of our outstanding stock, which shares
are now owned by Xerox, were cashed out at $2.06 per share with consideration
from Xerox. Additionally, approximately 330,000 shares were cashed out at $2.06
per share with consideration from the Company. Xerox owns approximately 45% of
the outstanding shares of our common stock and has two designees on the Board,
including Paul A. Ricci, the new Chairman of the Board.
PRODUCTS
Our PaperPort products provide an integrated hardware and software
solution at the desktop through compact sheetfed scanners and larger flatbed
scanners. Our PaperPort sheetfed scanners and PaperPort flatbed scanners and
their associated intellectual property were sold as part of the sale of our
hardware business to Primax in January 1999. After the merger with ScanSoft in
March 1999, we acquired additional software products based on patented optical
character recognition ("OCR") and image processing technologies. The Software
products acquired in the merger with ScanSoft include TextBridge Pro, Pagis Pro,
ProOCR 100 and ScanWorks.
We provide digital imaging software products for retail, OEM and
corporate markets. Our products capture and convert paper documents and photos
into digital documents and images and enhance a user's ability to organize and
share digital documents and images in the office, at home and on the Internet.
Our products are based on patented optical character recognition ("OCR") and
image processing technologies, designed to address the
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needs of a broad group of users ranging from consumers and small office to
medium sized businesses and large corporations.
Our software products include OCR, personal document management and
software suites that offer various combinations of these products and often
third party offerings. We believe that our ability to achieve broad market
acceptance of our products will depend on several factors, including, but not
limited to, ease-of-use, OCR accuracy, speed, and overall functionality. In
addition, the ability of our software to integrate with desktop operating
systems, word processing applications, email software, fax applications, image
editing products and Internet publishing tools will affect our ability to
achieve market acceptance for our products. In that regard, our strategy is to
maintain and enhance our technological position by investing in OCR and image
processing technology and strategic business and technology partnerships with
other leading companies.
We also provide software in two other emerging markets: enterprise
imaging and Internet imaging software. The enterprise imaging software market
includes high-end OCR products and software targeted at the emerging network
scanning market. The network scanning and multifunction market includes devices
from Xerox, Canon, Ricoh, and Hewlett Packard. Several network multifunction
devices offer scanning options that use client software to convert, edit,
organize and distribute digital documents via fax, email and the Internet.
Currently, we bundle client software with Xerox network multifunction devices.
The Internet imaging software market includes products that make it
easier to publish and share paper documents and photos via the Internet.
Currently, our products allow users to capture and convert paper-based documents
to Joint Photographic Experts Group ("JPEG"), Hypertext Mark-up Language
("HTML") and Portable Document Files ("PDF") files and share photos and
documents via email or as part of an Internet site.
During 1998, we provided an integrated hardware and software solution
at the desktop through compact sheetfed scanners and larger flatbed scanners.
PaperPort's high-performance scanners intelligently automated the paper input
process by performing multiple operating functions without user intervention and
provided advantages in scanning speed, image quality and image orientation.
Since we sold our hardware assets, liabilities and intellectual property to
Primax on January 6, 1999, our products have been entirely focused on software
as described above.
PRODUCT DESCRIPTION
The following is a description of our PaperPort Deluxe, PaperPort
Scanner Suite and Visual Explorer software products, as well as the TextBridge
Pro, Pagis Pro, ProOCR 100 and ScanWorks software products which were acquired
in the merger with ScanSoft in March 1999.
PRODUCTS FOR BUSINESSES AND PROFESSIONAL USERS
PAPERPORT DELUXE -- PaperPort Deluxe is paper management software
designed for small office and home office users. It turns a scanner or
multi-function-peripheral into a versatile solution for filing, copying, finding
and sharing paper and photographs. PaperPort Deluxe provides a visual desktop
with thumbnail file representations that allow users to quickly browse and
locate images, Web pages and electronic files. Other key features include
SimpleSearch, which enables users to find scanned images, electronic documents
and Web pages by searching file names, content or keywords, and ScanDirect,
which enables direct scanning into linked applications. PaperPort Deluxe is
compatible with the Windows 95, Windows 98 and Windows NT 4.0 operating systems.
PAPERPORT SCANNER SUITE -- PaperPort Scanner Suite combines all the
features of PaperPort Deluxe and TextBridge Pro to provide a easy way scan,
organize, edit and share paper documents, photos, Web pages and electronic
files. PaperPort Scanner Suite is compatible with the Windows 95, Windows 98 and
Windows NT 4.0 operating systems.
TEXTBRIDGE PRO -- TextBridge Pro is a very accurate and versatile OCR
software that allows users to easily edit paper documents, turn price lists into
spreadsheets, or brochures into Web pages. TextBridge Pro combines
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OCR with page layout comprehension to recreate electronic files that are similar
to the paper originals in terms of page layout, font characteristics and
graphics. For flexibility, TextBridge Pro provides text, table and picture
zoning tools that allow users to choose what sections of a document they want to
recognize. In addition, TextBridge Pro offers built-in post-recognition editing,
which enables users to conveniently proofread converted documents against the
original scanned image. TextBridge Pro is a Windows 95, Windows 98 and Windows
NT compliant application. There are also versions available for Windows 3.x and
Macintosh System 8.x. TextBridge Pro supports recognition for twelve languages
and is localized for European distribution.
PAGIS PRO -- Pagis Pro is a comprehensive scanning suite that combines
the Pagis digital imaging desktop with TextBridge Pro and MGI PhotoSuite to
transform an office personal computer into a paper-to-digital solution for
electronically filing, copying, editing and sharing documents and photos. Pagis
Pro intelligently scans color documents and photos and creates color images that
are easy to view, share, and print. Its folders provide visual image thumbnails
to quickly browse and locate scanned images, and Pagis Pro provides powerful
full-text and keyword indexing to help users retrieve document images, photos
and electronic files. Using the Extended Image File Format ("XIFF"), Pagis Pro
can store and send high-quality color document image files that are a fraction
of the size of images saved in a standard image file format, such as Tagged
Image File Format ("TIFF"). An image viewer provides image editing, selection
and annotation tools. These tools help users enhance an image, select a portion
of the image they want to work with, and add highlights or notes to an image.
TextBridge Pro is integrated into the Pagis desktop, so users can easily convert
paper documents and bring the recognized pages into a word processor or
spreadsheet. For photo editing and photo projects, Pagis Pro integrates a third
party photo editor. Pagis Pro is compatible with Windows 95, Windows 98 and
Windows NT 4.0 operating systems.
PRODUCTS FOR CONSUMERS
VISUAL EXPLORER -- Visual Explorer enables users to visually manage all
their electronic files and Web pages. Visual thumbnails of documents and Web
pages enable users to quickly identify their files. In addition, the software
includes SimpleSearch, which enables users to find documents and Web pages by
searching file names, URLs, content or keywords. A MiniViewer allows users to
easily open and view any email attachments (documents) sent to them. Visual
Explorer is compatible with the Windows 95 and Windows 98 operating systems.
PROOCR 100 -- ProOCR100 is OCR software that is designed for simplicity
and ease-of-use. Users can simply click on the Auto-OCR button to automatically
walk through the text recognition process. Designed to handle real documents,
ProOCR100 can recognize pages with degraded text (like faxes and photocopies)
and complex documents with multiple columns and tables. ProOCR100 is compatible
with the Windows 95, Windows 98 and Windows NT 4.0 operating systems.
SCANWORKS -- ScanWorks combines the Pagis digital imaging desktop with
MGI PhotoSuite to provide an easy to use, consumer oriented scanning software
suite that enables users to edit and share photos, keep track of important
documents and conveniently make color copies at home. ScanWorks intelligently
scans color photos and documents and creates color images that are easy to view,
share, and print. ScanWorks folders provide visual image thumbnails to quickly
browse and locate scanned images, and ScanWorks provides powerful full-text and
keyword indexing to help users retrieve document images, photos and electronic
files. Using the XIFF file format, ScanWorks can store and send high-quality
color document image files that are a fraction of the size of image files saved
in an uncompressed image format. ScanWorks also has a image viewer with image
editing, selection, and annotation tools. For more advanced image editing and
photo projects, ScanWorks integrates a third party photo editor. ScanWorks is
compatible with the Windows 95, Windows 98 and Windows NT 4.0 operating systems.
OEM PRODUCTS
We bundle various versions of Pagis, PaperPort, Visual Explorer and
TextBridge with leading scanner, multifunction device and storage device
manufacturers and leading independent software vendors. OEM customers often
require us to integrate products with other applications or customize existing
products to meet specific requirements. Therefore, we offer OEM customers both
packaged products to bundle and a software developer's toolkit to facilitate the
integration of OCR functionality with other applications.
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PRODUCTS SOLD TO PRIMAX
Our sheetfed and flatbed scanners and their associated intellectual
property were sold to Primax Electronics, Ltd. on January 6, 1999. These
products are described below:
PAPERPORT SHEETFED SCANNERS -- The PaperPort sheetfed scanners are
integrated hardware and software solutions for paper input and digitized
document and image management that are easy to use, fast and cost-effective. The
PaperPort Vx and mx grayscale scanners are small in size (12" x 2.5" x 3.75")
and are designed to operate on the desktop between the keyboard and monitor. The
PaperPort Vx is compatible with Macintosh personal computers, while the
PaperPort mx is compatible with Windows 3.1, Windows 95, Windows 98 and Windows
NT. The PaperPort ix, a scanning keyboard, is a grayscale scanner fully
integrated into a keyboard and is compatible with the aforementioned Windows
releases. The PaperPort Strobe is a color scanner that was smaller (11" x 2.5" x
2") and faster than our grayscale predecessors. It is available in both
Macintosh and Windows versions, Windows 3.1, Windows 95 and Windows 98. The
Windows versions are also available in either a parallel or serial interface,
and the Macintosh version incorporates a SCSI interface. PaperPort sheetfed
scanners are designed to handle multiple sizes, shapes and textures of paper,
including business cards, newspaper articles, business memos, receipts and
photographs, and a broad range of paper types. In 1998, we recognized the end of
life of our grayscale sheetfed scanners and produced only the color PaperPort
Strobe. This scanner features 24-bit, 600 dpi color images, offering high
quality and high-resolution.
PAPERPORT FLATBED SCANNERS -- Our product line included three distinct
groups of flatbed scanners. The first group, the 30-bit line, scans 30-bit color
images in either 300 x 600 dpi optical resolution or 600 x 1200 dpi optical
resolution. In addition, we sold the 3100USB, a scanner with the above
characteristics that utilizes the Universal Serial Bus (USB) port on newer
personal computers that run Windows 98. The second group, the 36-bit line, scans
36-bit color images in 600 x 1200 dpi. The third group, the OneTouch line, scans
36-bit color images in either 300 x 600 dpi optical resolution or 600 x 1200 dpi
optical resolution with the press of a single button. This scanner features
five-button functionality that was automatically linked with the software. All
three groups of scanners are compatible with Windows 95 and Windows 98 and
featured a pass-through parallel port design, as well as USB compatibility for
the 3100USB, that allows them to easily connect to a Windows PC. In addition to
the base version of our document management and image editing software, these
flatbed scanners were bundled with Visioneer's Web Publishing Kit, a collection
of Internet tools and utilities, which simplify the creation of Web sites.
NEW PRODUCTS
We intend to design and develop products to extend the life and
usability of our products for our installed base through the development of
software upgrades and add-on accessory products. We also intend to offer these
upgrades to our OEM partners. We also plan to incorporate new software features
into our software, and to expand our software product lines in 1999 through the
development of alternative form factors comprising enhanced imaging
capabilities, and other features and functionality. We believe that the
development of these and other products and features is essential to our
success. Accordingly, we will continue to make significant investments in the
research and development of new products. Such expenses may fluctuate from
quarter to quarter depending on a wide range of factors, including the status of
various development projects.
ENABLING TECHNOLOGY
We have devoted substantial resources to develop software technologies
to create comprehensive, easy-to-use, and versatile products for users of image
capture devices, such as scanners, multifunction peripherals and digital
cameras.
Our software is developed using OCR and image processing technologies,
Application Programming Interfaces (APIs), object-oriented development tools,
and modern graphical user interface designs. In addition, our products employ
commercial text retrieval database systems, electronic document format
conversion toolkits, and standard scanner device interfaces.
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API -- Our TextBridge and PerfectScan APIs are the foundation for
products in both the TextBridge product-line and Pagis product-line. These APIs
provide an interface to the OCR and image processing technologies and provide
image text conversion, image processing and cleanup, scanner and digital camera
control, image file format read and write with image compression, and image
printing.
For PaperPort and Visual Explorer products, software applications on
the hard drive are recognized, and linking icons to applications supported by
the PaperPort API are placed on the PaperPort or Visual Explorer desktop. In
addition, "AutoLaunch" technology allows users to launch input with digitized
documents directly into third-party software applications and peripherals
already installed on the user's personal computer. The PaperPort software
locates these paper-enabled third-party software applications and peripherals
and builds drag and drop buttons for one-button distribution of these digitized
documents. Using the PaperPort API, developers can create PaperPort links to
expedite the intelligent transfer of documents between the PaperPort software
and their applications. These functions allow developers to automate certain
tasks such as user interface management, file conversion, software
initialization, object control and OCR.
OCR -- Our OCR technology provides image-to-text document conversion.
This technology provides high quality character recognition accuracy with page
layout retention, including the ability to reconstruct headers, footers,
columns, paragraphs, embedded images, captions, inverted text and character font
attributes. Additionally, the OCR engine provides document export directly to
Rich Text Format ("RTF"), PDF, HTML and ASCII text, and many other industry
standard electronic document formats via third-party conversion technology. The
OCR engine employs a number of technologies to improve document recognition
accuracy. These technologies are described below:
CHARACTER/WORD ACCURACY -- Character accuracy refers specifically to
correctly identifying the actual characters in a page image. Traditional OCR
contains basic capabilities for identifying the shapes of the characters through
pattern recognition techniques. The TextBridge OCR engine employs a variety of
different recognition "experts," which work cooperatively in the OCR process.
SEGMENTATION -- Segmentation is the process of differentiating between
the text and picture components of a given page image. The segmentation in
TextBridge performs that function as well as identifies the appropriate
lexicographical ordering of the regions of text on the page, so that the final
output will appear in correct read order.
OUTPUT FORMATTING -- TextBridge's formatting capabilities make it
possible to reconstruct most compound document formats, including multiple
columns, cell tables, pictures, captions, headers and footers, thereby saving
the end-user reformatting time and effort. The most recent additions to
TextBridge's reformatting abilities include reverse video (white-black) text
output and insets.
IMAGE PROCESSING -- Our image processing technology provides capture,
enhancement and compression techniques. The heart of the image processing core
engine is page segmentation capabilities which provide the ability to decompose
a page image into its components, including text, pictures, background tints,
and text color. The image processing core engine also provides efficient page
enhancement technologies such as auto-crop, auto-straighten, automatic picture
enhancement, high-speed rendering, line removal, speck removal, tint removal and
forms field detection.
Our advanced image compression technologies employ wavelet, JPEG,
symbol-based and Huffman compression techniques to facilitate the process of
capturing high-quality compound color documents and store them in the compact
XIFF image format. XIFF images are a fraction of the size of images saved in a
standard image file format, such as TIFF. Moreover, the text is clean and
suitable for OCR, faxing or printing.
MARKETING, SALES AND DISTRIBUTION
The primary market for our products is comprised of computer users who
required access to both paper and electronic information. The SOHO (Small
Office, Home Office) market, which represented a significant majority of our
branded business, has been targeted by us because mobile and home-based
professionals require office-like
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productivity without access to copiers, fax machines and scanners. This market,
within the last 18 months, has been increasingly attracted to scanners offering
color imaging capability. With the advent of color sheetfed and flatbed
scanners, the grayscale sheetfed scanner market continued its decline in 1998.
In 1998 we derived substantially all of our branded revenues from sales
through our independent distributors, retailers and resellers. Although we have
established strategic software OEM partnerships, we expect that sales through
our independent distributors and resellers will continue to account for a
substantial portion of our revenues for the foreseeable future. Our top four
retail customers for 1998 were Sam's Club (owned by "Wal-Mart"), Office Depot,
Inc., Best Buy Company, Inc. and CompUSA, Inc. for distribution of our products
in North America. Sales to these top four independent distributors and resellers
accounted for 46% of our total net revenues in 1998 in the aggregate, or 18%,
12%, 9% and 7%, respectively, as compared to 38% of our total revenues in 1997.
With the transition to a software only business, we expect to derive the
majority of our revenue through our independent distributors, including Ingram
Micro, Tech Data and Merisel. These distributors in turn sell to computer
superstores, such as Comp USA and Fry's Electronics; consumer electronic stores,
such as Best Buy and Circuit City; mail order houses, such as PC Connection and
MicroWarehouse; and office superstores, such as Office Max, Office Depot and
Staples. Our agreements with our distributors and resellers are not exclusive,
and each of our distributors and resellers can cease marketing our products with
limited notice and with little or no penalty. There can be no assurance that our
independent distributors and resellers will continue to offer our products or
that we will be able to recruit additional or replacement distributors. The loss
of one or more of our major distributors or resellers would have a material
adverse effect on our business, operating results and financial condition. Many
of our distributors and resellers offer competitive products. There can be no
assurance that our distributors and resellers will give priority to the
marketing of our products as compared to competitor's products. Any reduction or
delay in sales of our products by our distributors and resellers would have a
material adverse effect on our business, operating results and financial
condition.
We grant our distributors and resellers price protection and certain
rights of return with respect to products purchased by them. In addition, we
offered various end-user rebate programs for our products. We accrue for
expected returns, anticipated price reductions, and anticipated rebate
redemption in amounts that the Company believes are reasonable. However, there
can be no assurance that these accruals will be sufficient or that any future
returns, price protection charges, or rebate redemption will not have a material
adverse effect on our business and operating results, especially in light of the
rapid product obsolescence which often occurs during product transitions. The
short product life cycles of our products and the difficulty in predicting
future sales increase, the risk of new product introductions, price reductions
by our competitors, or other factors affecting the paper input market could
result in significant product returns. In addition, there can be no assurance
that new product introductions by competitors or other market factors will not
require us to reduce prices in a manner or at a time or rate which gives rise to
significant price protection charges and which would have a material adverse
effect on our operating results. Any product returns, price protection charges,
or rebate redemption in excess of recorded allowances would have a material
adverse effect on our business, operating results and financial condition.
Net revenues from resellers and distributors outside North America
represented approximately 7% of net revenues in 1998 as compared to 10% in 1997.
Prior to the acquisition of ScanSoft, we had limited experience in developing
international versions of our products and marketing, distributing, servicing
and supporting such products. However, ScanSoft derived 19% of its revenues in
1998 from international sales and has a subsidiary in the United Kingdom. We
expect our combined revenues from international sales to account for
approximately 13% of revenues in 1999.
Domestically, full-featured software product customers who register
with us currently receive limited hotline technical support and product
information at no cost. Additional technical support services are available on a
"fee for support" basis. We currently offer several technical support options to
customers of packaged products. These include telephone, fax or email support by
a customer support representative or self help by accessing our technical
information bulletins or frequently asked questions on the Internet. Outside of
the U.S., full-featured software product customers receive technical support
from a third party company on both a fee and non-fee basis.
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OEM RELATIONSHIPS
Prior to the merger with ScanSoft, we had software OEM agreements with
several companies including Western Digital Corporation, Brother Industries,
Ltd., Minolta Co. Ltd., Omron Software Company, Ltd., Agfa-Gevaert N.V. and
Epson America, Inc. These OEM agreements remained with us after the merger.
ScanSoft, as an indirect wholly owned subsidiary of Xerox Corporation,
had software OEM agreements with several companies including: Mustek Systems,
Inc., Microtek International, Inc., Seiko-Epson Corporation, Canon Computer
Systems, Inc., IBM, Plustek USA, Inc., Primax Electronics, Inc., Avision Labs,
Inc., Compaq Computer Corporation, Acer Peripherals, Inc. and Symantec
Corporation. Additionally, ScanSoft also entered into multiple non-exclusive
agreements with Xerox Corporation (a significant stockholder) in which ScanSoft
agreed to license Xerox the royalty-bearing right to copy and distribute certain
versions of Pagis and TextBridge software programs with Xerox's multi-function
peripherals.
We are pursuing and may enter into additional OEM agreements to
distribute our software products. However, there are certain risks associated
with such relationships, including whether sufficient priority will be given by
such OEM partners to market our products and whether such OEM partners will
continue to offer our products. Such risks have been experienced by us in
regards to our agreements with Hewlett-Packard and Compaq. The loss of any OEM
partnership or our inability to enter into additional OEM partnerships could
have a material adverse effect on our business, operating results and financial
condition. See "Item 7--Management's Discussion and Analysis of Financial
Condition and Results of Operations--Overview."
RESEARCH AND DEVELOPMENT
Our research and development team, after the merger on March 2, 1999,
is located at our headquarters in Peabody, Massachusetts. As of December 31,
1998, we employed 21 full-time and 4 contract software design and quality
assurance engineers, technicians and support staff in Fremont, California. The
primary activities of these employees during 1998 were the design and
development of the sheetfed and flatbed scanner lines, the development of the
PaperPort flatbed line of products, the development of a new release of
PaperPort Deluxe Software, the development of other new software products
(ProOCR 100, Visual Explorer, Scanner Suite and ScannerWorks), enhancements of
existing products, product testing, and technical documentation development.
In 1998, the research and development team in Fremont, California was
restructured into a smaller group. Our strategy was to concentrate our efforts
on software development, and leverage the hardware and mechanical engineering
capabilities of our manufacturing partners to design and build our future
hardware products. The 30 bit, 36-bit, and One Touch flatbed scanners,
introduced in 1998, were designed in cooperation with our manufacturing
partners, Avision, Inc and Primax Electronic, Ltd. However, all flatbed and
sheetfed scanners and their associated intellectual property were part of the
sale of hardware assets, liabilities and intellectual property sold to Primax
Electronics, Ltd. on January 6, 1999.
Since the completion of the merger, we are consolidating the research
and development organization to the new corporate headquarters. We expect to
complete the transition by the end of June 1999.
Our growth and future financial performance will depend in part upon
our ability to enhance existing applications, and develop and introduce new
applications that keep pace with technological advances, meet changing customer
requirements, respond to competitive products and achieve market acceptance. As
a result, we expect that we will continue to commit substantial resources to
product research and development in the future.
MANUFACTURING
In the past, we contracted nearly all materials procurement,
manufacturing, assembly, testing and quality assurance to third party
manufacturers. Purchase orders were placed on our manufacturing partners for
final assemblies or subassemblies, which in turn were delivered to other
manufacturing partners who perform final assembly, pack-out and shipment to our
customers. This outsourcing strategy allowed us to leverage off of the
manufacturing
7
and engineering expertise and economies of scale of our manufacturing partners,
while allowing our manufacturing and operations team to concentrate on value
added activities, such as vendor management, product price negotiations and cost
reduction efforts. However, all flatbed and sheetfed scanners and their
associated intellectual property were part of the sale of our hardware business
in January 1999.
We had six significant independent manufacturing partners in 1998.
Primax Electronics, Ltd., Orient SemiConductor Ltd, Flextronics International
Marketing (L) Ltd., NMB Technologies, Inc., Avision, Inc. and DisCopyLabs.
Flextronics manufactured our standalone grayscale product lines, the PaperPort
Vx for Macintosh, and the PaperPort mx for Windows. NMB manufactured our
scanning keyboard product, the PaperPort ix, and our color sheetfed scanners,
the PaperPort Strobe. On January 19, 1998, we notified NMB that we wished to
terminate the manufacturing agreement for the PaperPort Strobe, based on NMB's
inability to comply with certain cost reduction stipulations as specified. As of
March 16, 1998, we had qualified two manufacturers for the PaperPort Strobe
products, Orient SemiConductors, Ltd. and Flextronics.
In 1999, following the sale of our hardware business to Primax, we have
reduced our key supplier list to one supplier on the west coast, DCL and one
supplier on the east coast, Omnet Technology Corporation, for our software
products.
Unforeseen factors with our suppliers may result in production delays.
Any performance problems or production delays could have a material adverse
effect on our business, operating results and financial condition. In addition,
there can be no assurance that current or future manufacturing partners will be
able to meet our requirements for manufactured products. Any inability to
increase manufacturing capacity as required could have a material adverse effect
on our business, operating results and financial condition. In addition, the
current purchase order arrangements with our manufacturing partners would allow
them to terminate the arrangements by not accepting our purchase orders. The
unanticipated loss of any of our manufacturing partners could cause delays in
our ability to ship orders while the Company identifies a replacement
manufacturer. Such an event would have a material adverse effect on our
business, operating results and financial condition. In addition, we are
continually exploring alternative manufacturing sources, including potential
sources for new products. However, there can be no assurance that such
alternative sources can be successfully developed.
Our manufacturing policies were designed to reduce our investment in
inventories, yet still respond to rapid changes in customer demand, but may in
certain instances result in excess or insufficient inventory, or inappropriate
mix of component inventory, if orders do not match forecasts. To the extent we
have excess inventories, we may experience inventory write-downs or may have to
lower prices of our products which would result in substantial price protection
charges and a negative impact on gross margins. To the extent we have
insufficient inventory, we may be materially adversely impacted by the loss of
one or more of our distribution and reseller relationships and the inability to
obtain market acceptance of our products.
COMPETITION
The digital imaging market is highly competitive. It is subject to
rapid change along with frequent new product introductions and enhancements, as
well as constant pressure to reduce prices. We believe that the principal
competitive factors in this market include OCR accuracy, ease of understanding
and use, product reliability, tolerance for poor media, product features and
functions, price/performance characteristics, brand recognition, and quality of
product support. Our competition within the digital imaging software market
ranges from large corporations to small independent software vendors. We also
expect to encounter continued competition, both from established companies and
from new companies that are now developing, or may develop, competing products.
The TextBridge family of OCR products face competition in two markets:
the market for packaged OCR application programs and OEM bundled OCR products.
Several companies offer packaged OCR application programs through the channel,
including companies such as Caere Corporation and Adobe Corporation and several
small independent software vendors. We face significant price pressure in the
retail channel. In the OEM market in which companies "bundle" the OCR technology
with related hardware products, such as scanners or multifunction peripherals,
or incorporate OCR technology into third party application software products,
competitors include
8
Caere Corporation and several small independent software vendors. We have
experienced significant price competition in the OEM market and expect this to
continue. In addition, the "bundled" OCR products themselves present competition
to our fully featured shrinkwrap products.
The Pagis and PaperPort family of products compete with various
products in the digital imaging software marketplace. In the personal document
management segment there are several competitors, including DocuMagix, Inc. (a
division of JetFax Corporation), Caere Corporation, Newsoft (a subsidiary of
UMAX Corporation), and Eastman Software (a subsidiary of Kodak Corporation).
With decreasing prices driving affordable scanning solutions into the
mainstream, we expect to face increasing competition in this product category
from a variety of software developers.
In the scanning software suite segment, our products include various
combinations of the products mentioned above and often include photo-editing
capabilities. Competitors include Adobe Corporation. Caere Corporation has also
announced plans to enter this market segment. Microsoft and MGI Software offer
photo-editing products and could offer products in this market segment in the
future.
We expect that some consolidation in the digital imaging software
industry will occur over the next few years through strategic acquisitions or
alliances, and we expect increased competition from new entrants, including the
possibility that Microsoft will add digital imaging components to its Windows
operating system. In addition, according to PC Data, Inc., the average retail
price of scanners dropped by 47% for the nine months ending September 30, 1998,
as compared to the same period in 1997. Based on this historical trend, we
expect that scanner prices will continue to decline in the future. We believe
that the downward price trend of scanners may reduce prices for digital imaging
software products. These changes in the market could result in price erosion,
reduced gross margins or loss of market share, any of which could have a
material adverse effect on our business, operating results and financial
condition.
There can be no assurance that we will be able to compete successfully
against current and future competitors, especially those with greater financial,
marketing, recruiting, technical and other resources, or that competitive
pressures will not materially adversely affect our business, operating results
and financial condition.
PROPRIETARY TECHNOLOGY
We rely on certain technology which we license from third parties,
including software which is integrated with internally developed software and
used in our products to perform key functions and software which is bundled with
our software to provide additional functionality. There can be no assurance that
these third-party technology licenses will continue to be available to us on
commercially reasonable terms or at all. The loss of or inability to maintain
any of these technology licenses could result in delays or reductions in product
shipments until equivalent technology is identified, licensed and integrated or
bundled. Any such delays or reductions in product shipments would materially
adversely affect our business, operating results and financial condition.
We generally enter into confidentiality or license agreements with our
employees, consultants and vendors, and generally control access to and
distribution of our software, documentation and other proprietary information.
Despite these precautions, it may be possible for a third party to copy or
otherwise obtain and use our products or technology without authorization, or to
develop similar technology independently. To license our products, we primarily
rely on "shrink wrap" licenses that are not signed by the end-user customer and,
therefore, may not be enforceable under the laws of certain jurisdictions.
Despite our efforts to protect our proprietary rights, unauthorized parties may
attempt to copy aspects of our products or to obtain and use information that we
regard as proprietary. Policing unauthorized use of our products is difficult.
There can be no assurance that we will be able to protect our technology, or
that our competitors will not independently develop technologies that are
substantially equivalent or superior our technology. In addition, the laws of
some foreign countries do not protect our proprietary rights to the same extent
as do the laws of the United States. Furthermore, litigation may be necessary to
enforce our intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Such litigation could
result in substantial
9
costs and diversion of resources and could have a material adverse effect on our
business, operating results or financial condition.
We currently have two pending U.S. patent applications and one pending
Canadian patent application. As a result of the merger, we have entered into a
license agreement with Xerox that includes limited licenses and the assignment
of certain patents and trademarks. In addition, we have filed counterpart
applications in several European countries, Canada, Japan and Australia. We may
file additional U.S. and foreign patent applications in the future. On January
6, 1999 we sold all assets, liabilities and intellectual property associated
with our hardware business. There can be no assurance that patents will issue
from any application filed by the Company or that, if patents do issue, the
claims allowed will be sufficiently broad to protect our technology. The source
code for our proprietary software is protected both as a trade secret and as a
copyrighted work.
EMPLOYEES
As of December 31, 1998, we had a total of 54 full-time salaried
employees, 21 of which were in research and development, 19 of which were in
sales, marketing, and customer support, 4 of which were in operations and 10 of
which were in administration and finance. Prior to our merger with ScanSoft, we
implemented a restructuring plan to reduce operating expenses. This
restructuring plan included a decrease of approximately 20% of total employee
and consultant headcount.
Following the sale of our hardware business to Primax and upon the
completion of the merger with ScanSoft, we had a total of 138 full time
employees, all of whom are based in the United States and the United Kingdom. Of
the total, 46 are engaged in sales, marketing and support, 67 in research and
development, 20 in administration, MIS and finance and six in operations and
manufacturing. Following the consolidation of research and development on the
east coast, the research and development staff will be reduced to 58 people. Our
future performance depends in significant part on the continued service of our
key technical and senior management personnel. None of our employees are
represented by a labor union. We have not experienced any work stoppages and
consider our relations with our employees to be good.
FACTORS AFFECTING RESULTS
DIFFICULTIES OF INTEGRATING TWO COMPANIES. The anticipated benefits
merging with ScanSoft will depend in part on whether we can integrate our
operations and products in an efficient and effective manner. We cannot
guarantee that this will occur. Successful integration will require integration
of each company's products and coordination of each company's operating
procedures, financial controls, development efforts and sales and marketing
efforts. This integration may be difficult to accomplish smoothly or
successfully, and may take longer than we expect. If serious difficulties are
encountered during integration, management will have to divert its attention
from normal business operations to address these issues, which could have an
adverse effect on the surviving corporation's business. In addition, the merger
may cause potential customers to cancel or delay orders as the result of
uncertainty over the successful integration of the two companies. Furthermore,
there could be an adverse effect on employee morale and on the ability of the
surviving corporation to retain key personnel. Failure to effectively accomplish
the integration of the two companies' operations could have a material adverse
effect on the surviving corporation's business, operating results and financial
condition.
SUBSTANTIAL EXPENSES RESULTING FROM THE MERGER. We expect to incur
certain costs in connection with the integration of Visioneer and ScanSoft's
operations. Such costs cannot now be reasonably estimated, because they depend
on future decisions to be made by our management, but they could be material.
Such costs could relate to the elimination of duplicate facilities and
operations, integration of internal and customer-related activities, and
cancellation and/or overlap of contractual obligations. These costs and expenses
will affect results of operations in the first quarter of 1999, the quarter in
which the merger is consummated.
FAILURE TO ACHIEVE SYNERGIES COULD LEAD TO DECLINE IN STOCK PRICE. The
market price of our common stock may decline significantly if:
10
o the integration of the combined companies is not successful;
o we do not experience business synergies as quickly or to the extent
expected by financial analysts; or
o the effect of the merger on earnings per share and operating
results is not in line with the expectations of financial analysts.
DEPENDENCE ON DEVELOPING MARKET; RAPID TECHNOLOGICAL CHANGE. The market
for digital imaging software and, in particular, for our products, is new and
rapidly evolving. It is dependent on market demand for color sheetfed and
flatbed scanners, as well as for other paper input systems. It is characterized
by transforming technology and frequent new product introductions. Developing
new products and product enhancements is a complex and uncertain process
requiring high levels of innovation, as well as the accurate anticipation of
technological and market trends. Our PaperPort, Pagis and TextBridge software
products account for most of our revenues. We expect that these products will
continue to account for most of our revenues for the foreseeable future. Broad
market acceptance of these products is therefore critical to our future success
and will depend in part on the following:
o Our ability and that of our distributors and other industry
suppliers to convince end users to adopt paper input systems and
digital imaging software for the desktop.
o Our ability to educate end users about the benefits of digital
imaging products generally and the specific benefits of our
products.
o Our ability to adapt to emerging industry standards and respond to
our competitors' product announcements.
o Our ability to develop, introduce, upgrade and support competitive,
new products and product enhancements that meet changing customer
requirements and emerging industry standards.
o Our ability to maintain current market share for our products and
increase brand-name recognition.
If we are not successful in meeting the goals listed above, we may not
be able to gain broad market acceptance for our products. Further, a decline in
demand for digital imaging products generally, or for PaperPort, Pagis or
TextBridge products, in particular, could occur as a result of competitive
technological change or other factors and would have a material adverse effect
on our business, operating results and financial condition.
DIFFICULTIES ASSOCIATED WITH TIMING OF NEW PRODUCT INTRODUCTION. The
digital imaging software market is characterized by rapid technological change,
evolving customer needs, frequent new product introductions and evolving
industry standards. Rapid product advancements could erode the market position
of our products or render those products obsolete. Our success depends on how
well we are able to manage the transition to new products and new versions of
existing products. The life cycles of our products are difficult to estimate.
Further, it is not unusual in personal computer software life cycles for the
sales volume of new products to increase in the first few months after their
introduction because distributors and resellers purchase initial inventory
during that time. As a product reaches the end of its life cycle, however,
demand for that product tends to fall in anticipation of new replacement
products. Consequently, announcements about new products at the end of a product
life cycle may cause our customers to defer purchasing existing products, and we
may be forced to lower the prices of older products in anticipation of new
releases. This may result in distributors claiming price protection credits or
returning older products to us, and as a result, our revenues may decline. We
cannot accurately predict the exact timing in which a new product or version
will be ready to ship. Moreover, in order to maintain competitiveness, we must
make substantial investments in product development and testing. We cannot
guarantee that we will have sufficient resources to make the necessary
investments or that we will be able to develop new products or new product
features quickly enough to meet market demand. Any delay in the scheduled
release of new products or features, or lack of market acceptance for such new
products or features, may have a material adverse impact on our business,
results of operations and financial condition.
11
DISPOSITION OF HARDWARE BUSINESS; NEED FOR REBRANDING OF PRODUCTS; NEED
FOR SERVICES AGREEMENT WITH PRIMAX. In January 1999, we sold our hardware
business to Primax, which was a principal manufacturer of our flatbed and
sheetfed scanners and other hardware products. In this transaction, Primax
purchased substantially all of our hardware business (including the "Visioneer"
brand and company name), and it assumed all known liabilities associated with
the hardware business. We intend to take steps to rebrand all software products
carrying the Visioneer name so that in the future all such products will be
identified with a new software brand name, such as ScanSoft or PaperPort. In the
same way, Primax will rebrand any hardware products that carry the PaperPort
name so that in the future such products will be identified with a different
name. This rebranding may create confusion for our customers, including OEM
distributors and end-users, and there will necessarily be an adjustment period
during which time new brands will need to be established.
DEPENDENCE ON RELATIONSHIPS WITH XEROX, PRIMAX AND OTHER OEMS. ScanSoft
and Visioneer each had OEM relationships with Xerox prior to the merger, which
relationships remain in effect following the merger. In connection with the sale
of the hardware business to Primax, Visioneer entered into a software license
agreement granting Primax certain rights to "bundle" and sell Visioneer's
software products with certain Primax hardware products. Under the license,
Primax must pay us certain minimum annual royalties during the license term.
Primax, however, is not obligated to bundle or sell our software products with
its hardware products. Other risks include whether Primax will give sufficient
priority to marketing our products, whether Primax will continue to offer our
products at all, and whether Primax will elect instead to bundle software
products of our competitors with its hardware products. Any of the foregoing
actions could adversely impact our future business, results of operations and
financial condition since we expect Primax to become an important OEM partner.
We also rely on other OEM partners to bundle, market and sell our
products with their products. However, there are certain risks associated with
such relationships, including whether sufficient priority will be given by such
OEM partners to marketing our products. In addition, our OEM partners may not
continue to offer our products. If we do not maintain and build our OEM
relationships, our business, operating results and financial condition may
suffer.
COMPETITION. The digital imaging market is highly competitive and
subject to rapid change, with frequent new product introductions and
enhancements, and constant pressure to reduce prices. We believe that the
principal competitive factors in the digital imaging software market include:
o OCR accuracy;
o ease of understanding and use,
o product reliability;
o tolerance for poor media;
o product features and functions;
o price/performance characteristics;
o brand recognition; and
o quality of product support.
Our current competitors include developers of digital image processing
software (including photo-editing software), personal document management
software and scanning software suites and manufacturers of scanners and
multi-function peripheral devices. We also face competition in the market for
packaged OCR application programs and bundled OCR products, both in the retail
channel and in the OEM market. We experience significant price competition in
both the retail channel and the OEM market and expect this to continue. In
addition, our "bundled" OCR products themselves compete with our fully featured
shrinkwrap products. In addition to our
12
current competitors, Microsoft Corporation and MGI Software offer photo-editing
products and could offer products in this market segment in the future.
Increased competition may force us to lower our prices, experience decreased
gross margins or lose market acceptance. We face the following challenges from
our competitors:
o Certain of our competitors offer products comparable to ours at
retail prices that are lower than ours.
o Many of our current and potential competitors have longer operating
histories and significantly greater financial, technical, support,
sales, marketing, recruiting and other resources.
o Certain of our competitors have greater name recognition and larger
customer bases than we do.
o Certain of our competitors may be better able to withstand
significant price decreases or devote greater resources to the
development, promotion, sale and support of their products than we
can.
o Certain of our competitors may be able to develop digital image
processing software with superior OCR accuracy, ease of
understanding and use, product reliability, tolerance for poor
media, product features and functions and price/performance
characteristics.
We may not be able to compete successfully against current and future
competitors, especially those with greater financial, technical, support, sales,
marketing, recruiting and other resources. If we are not successful in meeting
the challenges listed above, we may not be able to gain broad market acceptance
for our products and our business, financial condition and operating results may
suffer. Competitive pressures may materially affect our business, operating
results, and financial condition.
Further, we expect that some consolidation in the digital imaging
software industry will occur over the next few years through strategic
acquisitions or alliances. We expect increased competition from new entrants,
including the possibility that Microsoft will add digital imaging components to
the Windows operating system. In addition, according to PC Data, Inc., the
average retail price of scanners dropped by 47% for the nine months ending
September 30, 1998, as compared to the same period in 1997. Based on this
historical trend, we expect that scanner prices will continue to decline in the
future. We believe that the downward price trend of scanners may reduce prices
for digital imaging software products. These changes in the market could result
in price erosion, reduced gross margins or loss of market share, any of which
could have a material adverse effect on our business, operating results and
financial condition.
PRESSURE ON GROSS MARGIN. We may suffer adverse operating results if
our gross margin fluctuates. Retail prices on software products drop quickly. In
addition, our competitors will attempt to offer products which meet or exceed
our products' performance and capabilities. We intend to introduce new software
products, software upgrades and software features in response to anticipated
competitive price pressures and new product introductions. If prices fall faster
than we expect or if we must reduce our prices for any reason, we may experience
pressure on our gross margin. In addition, our gross margin will depend in part
on certain factors listed below:
o Our success in introducing new products to the market and easing
out old ones.
o Our competitors prices, products and market share.
o The amount of royalties we receive under our OEM arrangements.
o General economic conditions.
If we are not successful in meeting these challenges, our business,
operating results and financial condition may suffer.
DEPENDENCE ON DISTRIBUTORS AND RESELLERS. We expect to continue to
receive a substantial portion of our revenues from sales through our independent
distributors and resellers, but we anticipate that our dependence on
13
any one independent distributor or reseller will decrease in the future as we
expand distribution channels. Our agreements with distributors and resellers are
not exclusive; many of our distributors and resellers offer competitive products
and are not required to give our products priority. Each of our distributors and
resellers can cease marketing our products with limited notice and with little
or no penalty. If we lose any one of our independent distributors or resellers,
we may not be able to recruit replacements. If our distributors or resellers
reduce or cease their marketing and sales efforts on our behalf, our business,
operating results and financial condition may suffer.
INTERNATIONAL SALES RISKS. We plan to expand our international sales by
establishing a more extensive network of international distributors and
resellers. We also plan to develop versions of our products suitable to the
market requirements of particular foreign countries, such as different
languages. We have limited experience in developing international versions of
our products and marketing, distributing, servicing and supporting such
products. We may not be able to develop new or additional versions of our
existing products or successfully market, sell, deliver, service or support our
products in international markets. In conducting business outside of the United
States, we are exposed to the risks listed below:
o Unexpected changes in regulatory requirements.
o Import and export duties and restrictions.
o Tariffs and other trade barriers.
o Difficulties in staffing and managing foreign operations.
o Longer payment cycles.
o Uncertainties in connection with collecting accounts receivable.
o Political instability.
o Fluctuations in currency exchange rates.
o Logistical difficulties in managing multinational operations.
o Seasonal reductions in business activity during summer months in
Europe and certain other parts of the world.
o Potentially adverse tax consequences, including our inability to
recover withholding taxes.
If we are not successful in managing the risks listed above, our
business, operating results and financial condition may suffer. One or more of
these factors could have a material adverse effect on our international
operations and, consequently, on our business, operating results and financial
condition.
QUALITY CONTROL RISKS. Our products are complex and may contain certain
software errors or failures which are detected only after we begin to ship a
product, especially when first introduced as new versions or when enhancements
are released. Although we conduct testing during product development, we have at
times been forced to delay commercial release of software until problems were
corrected and, in some cases, have provided enhancements to correct errors in
released software. If we do detect any errors before we ship a product, we might
have to limit product shipment for an extended period of time while we address
the problem. Delay in commercial release, correction of errors or limiting
product shipment could lead to loss of revenues, credibility with customers and
market acceptance of our products. We would also be exposed to additional
warranty and engineering expenses. Despite our testing and testing by current
and potential customers, errors may be found in software or releases after
commencement of commercial shipments, resulting in loss or delay of revenue or
delay in market acceptance, diversion of development resources, damage to our
reputation, or increased service and warranty costs. If we do not successfully
manage our quality control, our business, operating results and financial
condition may suffer.
14
DEPENDENCE ON THIRD-PARTY LICENSES. We rely on certain technology which
we license from third parties, including software which is integrated with our
own software and used in our products to perform key functions and provide
additional functionality. Because our products incorporate software developed
and maintained by third parties, we are, to a certain extent, dependent upon
such third parties' ability to maintain or enhance their current products, to
develop new products on a timely and cost-effective basis, and to respond to
emerging industry standards and other technological changes. Further, these
third-party technology licenses may not always be available to us on
commercially reasonable terms or at all.
In the event that our agreements with third-party vendors should fail
to be renewed or the products licensed from such vendors should fail to address
the requirements of our software products, we would be required to find
alternative software products or technologies of equal performance or
functionality. There can be no assurance that we would be able to replace such
functionality provided by software that we currently license from third parties
in the event that we lose the license to such software, such software becomes
obsolete or incompatible with future versions of our products or is otherwise
not adequately maintained or updated. The absence of or any significant delay in
the replacement of that functionality could have a material adverse effect on
our business, operating results and financial condition. Moreover, if we were to
lose any of these technology licenses we might experience product shipment
delays or reductions until equivalent technology were identified, licensed and
used. If we do experience product shipping delays and reductions due to
licensing problems, our business, operating results and financial condition
would suffer.
RISKS ASSOCIATED WITH PROTECTION OF CONFIDENTIAL INFORMATION AND
PROPRIETARY RIGHTS. We generally enter into confidentiality or license
agreements with our employees, consultants and vendors. We also generally
control access to and distribution of our software, documentation and other
proprietary information. We primarily rely on "shrink wrap" licenses that are
not signed by the end-user customer and, therefore, may not be enforceable under
the laws of certain jurisdictions. Unauthorized parties may attempt to copy
aspects of our products or to obtain and use information that we regard as
proprietary. Policing unauthorized use of our products is difficult and we may
not be able to protect our technology from unauthorized use. Additionally, our
competitors may independently develop technologies that are substantially the
same or superior to ours. In addition, the laws of some foreign countries do not
protect our proprietary rights to the same extent as the laws of the United
States. Although the source code for our proprietary software is protected both
as a trade secret and as a copyrighted work, litigation may be necessary to
enforce our intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Litigation, regardless of
the outcome, can be very expensive and can divert management efforts. These
risks, if not managed successfully, could have a material adverse effect on our
business, operating results or financial condition.
DEPENDENCE ON KEY PERSONNEL; RISKS ASSOCIATED WITH HIRING AND RETENTION
OF EMPLOYEES. We rely to a significant extent upon our senior management team
and other key employees. Competition for such employees is intense. We cannot
guarantee that we will be able to retain our key employees following the merger.
Our operations could be materially and adversely affected if we were unable to
retain such key employees, or attract new ones. From time to time, we will need
to hire additional or replacement employees. We may not be successful in hiring,
integrating or retaining new employees. If we are not successful in attracting
or retaining qualified personnel, our business, financial condition and
operating results could suffer.
HISTORY OF LOSSES; FLUCTUATIONS IN OPERATING RESULTS. ScanSoft had net
losses for 1996, 1997 and 1998. Visioneer also had net losses for its fiscal
1996, 1997 and 1998, although a substantial portion of those losses were
attributable to the hardware business that was sold to Primax. On a pro forma
basis, the combined companies had a net loss for 1997 and 1998. We may never
become profitable or sustain profitability.
Our revenues frequently fluctuate from quarter to quarter due, to a
large extent, on the following:
o volume, timing and filling of customer orders;
o reduction in prices in response to competition;
15
o increased expenditures to pursue new product or market
opportunities;
o fluctuation in sales orders, juxtaposed with a significant portion
of our operating expenses being fixed in advance, based in large
part on forecasts of future sales;
o inability to adjust operating expenses to compensate for shortfalls
in sales orders against forecast;
o price protection charges in excess of recorded allowances;
o demand for products;
o seasonality;
o customer deferrals in anticipation of new versions of products;
o introduction of new products by us or our competitors;
o timing of new product acquisitions; and
o timing of significant marketing and sales promotions.
Further, backlog early in a quarter is generally not large enough to
assure than we will meet our revenue target for any particular quarter. A
shortfall in shipments at the end of any quarter may cause operating results for
that quarter to fall significantly short of anticipated levels.
In addition, if we need to reduce our prices in response to price
competition, we will therefore be at a significant disadvantage with respect to
our competitors that have substantially greater resources. Such competitors may
more readily withstand an extended period of downward pricing pressure. In such
event, we may also incur price protection charges from our distributors and
resellers. Any price protection charges in excess of recorded allowances would
have a material adverse effect on our business, operating results and financial
condition.
Due to the foregoing factors, among others, our revenues are difficult
to forecast. We intend to base our expense levels in significant part on our
expectations of future revenue. As a result, we expect our expense levels to be
relatively fixed in the short term. Our failure to meet revenue expectations
would have a material adverse affect on our business, operating results and
financial condition. Further, an unanticipated decline in revenue for a
particular quarter may disproportionately affect our net income because a
relatively small amount of our expenses are intended to vary with our revenue in
the short term. As a result, we believe that period-to-period comparisons of our
results of operations are not and will not necessarily be meaningful, and you
should not rely upon them as an indication of future performance.
XEROX AS A SIGNIFICANT STOCKHOLDER. Xerox Imaging Systems, Inc., a
wholly owned subsidiary of Xerox, owns approximately 45% of our outstanding
common stock and all of our outstanding Series B Preferred Stock. In addition,
Xerox has the opportunity to acquire additional shares of our common stock
pursuant to a warrant. Xerox is currently our largest stockholder. Although
Xerox does not control us and is restricted for at least two years after the
merger from holding more than 50% of the voting power of our capital stock,
Xerox will have a strong influence over matters requiring approval by our
stockholders. In addition, Xerox has two designees on the board of directors,
including Paul A. Ricci, the new Chairman of the Board.
Xerox has advised us that its current intent is to hold all of its
shares of common stock. However, there can be no assurance concerning the
periods of time during which Xerox will maintain its ownership of our common
stock.
YEAR 2000 RISKS. We have a number of installed computer systems and
software products that are coded to accept only two digit entries in the date
code field. These date code fields will need to distinguish 21st century
16
dates from 20th century dates (the "Year 2000 bug"). The Year 2000 bug could
lead to system failures or miscalculations causing disruptions of operations
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities. We are currently
in the process of establishing procedures for evaluating and managing the risks
and costs associated with this problem. See, "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000." Finally,
many of our customers' and suppliers' operations may be affected by Year 2000
complications. As such, the failure of these customers and suppliers to ensure
that their systems are Year 2000 compliant could have a material adverse effect
on our customers and suppliers, resulting in a material adverse effect on our
business, operating results and financial condition.
ITEM 2. PROPERTIES
On January 6, 1999, Primax assumed the lease on our former headquarters
in Fremont, California. Following the completion of the merger with ScanSoft,
Inc., the combined company relocated its headquarters, administrative, sales,
marketing and support functions to our leased headquarters facility in Peabody,
Massachusetts. We currently occupy 37,636 square feet of space at this facility,
and the lease will expire in July 2001. We also lease warehouse space in
Topsfield, Massachusetts and research and development space at a Xerox facility
in Palo Alto, California. In addition, our subsidiary, ScanSoft Europe Ltd.,
leases a sales and support office in Reading, England.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are parties to various legal proceedings or
claims, either asserted or unasserted, which arise in the ordinary course of
business. In addition, during 1998, we were involved in separate legal matters
with Caere Corporation, Flashpix, Incorporated and Storm Technology, Inc.
(1) We were named as the defendant in a complaint filed by Caere
Corporation on August 10, 1998, in the United States District
Court for the Northern District of California. Caere
Corporation alleged that we engaged in false and misleading
advertising concerning our software product, ProOCR100.
Pursuant to a settlement agreement, we agreed to pay Caere the
sum of $75,000, and the lawsuit was dismissed with prejudice.
(2) We were named as a defendant as part of the Digital Imaging
Group, in a complaint filed by Flashpix, Incorporated on July
16, 1998, in the United States District Court for the Eastern
District of Louisiana. The complaint alleged, among other
things, trademark infringement, unfair competition, unfair
trade practices, and dilution of trademark. Subsequent to
December 31, 1998, we have, along with the Digital Imaging
Group, settled this matter.
(3) We were named as the defendant in a complaint filed by Storm
Technology, Inc. on June 2, 1998, in the United States
District Court for the Northern District of California,
alleging patent infringement of specified scanner technology.
Subsequently, the parties settled the matter and executed an
updated Patent Cross License Agreement. Primax assumed this
matter when it purchased our hardware business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
17
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET FOR COMMON STOCK
Our Common Stock commenced trading on the Nasdaq National Market on
December 11, 1995 under the symbol "VSNR," and traded under that symbol until
March 3, 1999. Our Common Stock is now traded under the symbol "SSFT." The
following table sets forth for the periods indicated the high and low sale
prices for our common stock as reported on the Nasdaq National Market.
High Low
---- ---
Fiscal 1997:
1st quarter........................ $6 $ 3-1/8
2nd quarter........................ 4-3/8 2-1/2
3rd quarter........................ 4-3/4 2-13/16
4th quarter........................ 5-3/4 1-5/8
Fiscal 1998:
1st quarter........................ 3-1/2 1-5/8
2nd quarter........................ 4-1/8 2-1/16
3rd quarter........................ 2-1/4 11/16
4th quarter........................ 2-7/8 11/16
HOLDERS OF RECORD
As of March 26, 1999, there were approximately 244 holders of record of
our common stock.
DIVIDENDS
To date, we have not paid any cash dividends on shares of our common
stock. We presently intend to retain all future earnings for our business and do
not anticipate paying cash dividends on our common stock in the foreseeable
future.
18
ITEM 6. SELECTED FINANCIAL DATA
The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
information contained in Item 7--"Management's Discussion and Analysis of
Financial Condition" and Results of Operations and the Financial Statements and
Notes to Financial Statements contained in Item 8 of this Report.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ----------- ------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENT OF OPERATIONS DATA(1):
Product revenues............................ $74,674 $50,523 $44,233 $34,734 $ 3,903
Royalty and development revenues............ 4,396 7,100 11,848 2,605 --
------------ ----------- ----------- ------------ ------------
Total net revenues........................ 79,070 57,623 56,081 37,339 3,903
------------ ----------- ----------- ------------ ------------
Cost of revenues:
Cost of product revenues.................... 58,486 49,838 42,164 25,664 4,481
Cost of royalty and development revenues.... 884 887 3,303 1,274 --
------------ ----------- ----------- ------------ ------------
Total cost of revenues.................... 59,370 50,725 45,467 26,938 4,481
------------ ----------- ----------- ------------ ------------
Gross profit (loss)............................ 19,700 6,898 10,614 10,401 (578)
------------ ----------- ----------- ------------ ------------
Operating expenses:
Research and development.................... 4,408 8,115 10,938 8,975 4,532
Selling, general and administrative......... 19,150 22,428 26,342 11,805 6,482
Non-recurring items(2)...................... -- 675 -- 1,600 --
------------ ----------- ----------- ------------ ------------
Total operating expenses.................. 23,558 31,218 37,280 22,380 11,014
------------ ----------- ----------- ------------ ------------
Operating loss................................. (3,858) (24,320) (26,666) (11,979) (11,592)
Net interest income............................ 53 940 2,274 426 137
------------ ----------- ----------- ------------ ------------
Net loss....................................... $(3,805) $(23,380) $(24,392) $(11,553) $(11,455)
============ =========== =========== ============ ============
Net loss per share: basic and diluted......... (0.19) (1.20) (1.34) (4.28) (6.76)
============ =========== =========== ============ ============
Weighted average common shares outstanding:
basic and diluted........................... 19,728 19,450 18,255 2,669 1,694
============ =========== =========== ============ ============
19
DECEMBER 31,
-------------------------------------------------------------------
1998 1997 1996 1995 1994
------------ ----------- ----------- ------------ ------------
(IN THOUSANDS)
BALANCE SHEET DATA(1):
Cash, cash equivalents and short-term
investments............................... $ 8,123 $14,452 $31,200 $46,166 $ 4,032
Working capital............................. 6,569 8,389 28,807 46,677 3,376
Total assets................................ 28,445 33,550 51,785 65,793 7,378
Long-term liability......................... 91 125 -- -- --
Capital lease obligations, less current -- -- -- -- 248
portion.....................................
Total stockholders' equity (deficit) ....... 7,582 10,930 33,193 49,860 4,053
- -----------
(1) See Note 1 of Notes to Financial Statements for an explanation of the
Company's fiscal year ends.
(2) See Note 10 of Notes to Financial Statements. Also, the charge in 1995
related to the fair value of securities issued and cash paid in connection
with the settlement of a patent matter.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND THE NOTES THERETO CONTAINED IN ITEM 8 OF THIS REPORT.
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH
AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. OUR ACTUAL
RESULTS MAY DIFFER MATERIALLY AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE
DISCUSSED IN THIS REPORT AND OTHER RISKS DETAILED FROM TIME TO TIME IN OUR
PERIODIC REPORTS.
OVERVIEW
ScanSoft, Inc. was incorporated as Visioneer, Inc. in California in
March 1992, and commenced shipment of our initial product in the first quarter
of 1994. Through September 1995, we financed our operations primarily through
private placements of equity securities, from which we raised an aggregate of
approximately $33 million, net of issuance costs. In December 1995, we
reincorporated in Delaware in conjunction with our initial public offering and
raised $43.5 million, net of issuance costs. In January 1996, the over allotment
option granted to the underwriters in the initial public offering was exercised,
resulting in additional net proceeds of approximately $6.4 million. We have
experienced sequential growth in annual net revenues since the first year of
product shipments. The annual growth rates between 1994 and 1996 were directly
attributable to the growth of the sheetfed scanner and document management
software markets, the development of OEM relationships and new product
introductions. In contrast, the single digit growth rate from 1996 to 1997 was
attributed to several factors. First, the grayscale sheetfed scanner market
declined sharply with the advent of color sheetfed scanners. The transition of
the market from grayscale to color occurred at a much faster rate than we had
anticipated, and as a result, we recorded significant charges relating to
grayscale inventory reserves, purchase order commitments and price protection
charges in the first half of 1997. Second, we were late in introducing a color
scanner product, and as a result, did not capture planned market share. Third,
increased competition caused overall sheetfed scanner average selling prices to
drop significantly. Finally, the growth of the sheetfed scanner market has
leveled off, and, in fact, may be decreasing in size.
A key component of our business strategy in 1997 and 1998 was to
penetrate the much larger and growing flatbed market by leveraging off of our
software. Historically, we have bundled our PaperPort software with our scanner
products, which has provided significant product differentiation. The PaperPort
flatbed scanner line was introduced in September 1997. This line was enhanced
with the introduction of additional 30-bit products as well as the entire 36-bit
and One Touch line of flatbed scanners in 1998. In addition, our focus over time
has shifted from the hardware business to the software business. During 1997 we
implemented a strategy to focus our research and
20
development efforts on software development rather than hardware development and
to leverage the engineering resources of our manufacturing partners to design
future hardware products. In furtherance of this strategy, on December 3, 1998,
we entered into an agreement to sell our hardware business and the Visioneer
brand name to Primax, and to merge with ScanSoft. Following the sale to Primax
and the merger with ScanSoft, our business will focus on software products in
the PaperPort line, and the TextBridge and Pagis line of software products.
Our success in the future will depend on our ability to maintain
software gross margins and increase sales of our software products. This will
depend in part on our ability and the ability of our distributors, resellers and
OEM partners to convince end-users to adopt paper and image input systems for
the desktop and to educate end-users about the benefits of our products. There
can be no assurance that the market for our products will develop or that we
will achieve market acceptance of our products. Despite experiencing several
quarters of minor levels of profitability throughout our history, we have
incurred annual net losses since inception. There can be no assurance that we
will be able to reach quarterly profitability or attain annual profitability in
the near future. As of December 31, 1998, we had an accumulated deficit of $80.4
million.
As a result of the sale of our hardware business in January, our
revenues will decline significantly in the first quarter of 1999. We expect our
revenues to start improving gradually from the quarter ended June 1999, as
revenues from ScanSoft start impacting our operating results.
RESULTS OF OPERATIONS
The following table presents, as a percentage of total net revenues,
certain selected financial data for each of the three years in the period ended
December 31, 1998:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
Revenues:
Product revenues................................ 94.4% 87.7% 78.9%
Royalty and development revenues................ 5.6% 12.3% 21.1%
----------------- ----------------- -----------------
Total net revenues............................ 100.0% 100.0% 100.0%
Cost of revenues:
Cost of product revenues........................ 74.0% 86.5% 75.2%
Cost of royalty and development revenues........ 1.1% 1.5% 5.9%
----------------- ----------------- -----------------
Total cost of revenues........................ 75.1% 88.0% 81.1%
----------------- ----------------- -----------------
Gross profit....................................... 24.9% 12.0% 18.9%
----------------- ----------------- -----------------
Operating expenses:
Research and development........................ 5.6% 14.1% 19.5%
Selling, general and administrative............. 24.2% 38.9% 47.0%
Non-recurring item(1) .......................... 0.0% 1.2% 0.0%
----------------- ----------------- -----------------
Total operating expenses...................... 29.8% 54.2% 66.5%
----------------- ----------------- -----------------
Operating loss..................................... (4.9%) (42.2%) (47.5%)
Interest income.................................... 0.6% 1.7% 4.2%
Interest expense................................... (0.6%) (0.1%) (0.1%)
----------------- ----------------- -----------------
Net loss........................................... (4.8%) (40.6%) (43.5%)
----------------- ----------------- -----------------
- ----------
(1) See Note 10 of Notes to Financial Statements
21
TOTAL NET REVENUES
We derived our revenue primarily from three sources, the sale of
PaperPort hardware products, PaperPort software products, and royalties and
custom software development revenue earned pursuant to arrangements with certain
OEM customers. Through the end of 1998, approximately 86% of our product
revenues have been derived from sales of our PaperPort products to authorized
resellers and independent distributors in North America and, to a lesser extent,
in Europe and the Asia-Pacific regions. Revenues from all sales to distributors
and authorized resellers are subject to agreements allowing price protection and
certain rights of return. Under the price protection rights granted by us, if we
lower our selling price, we are then obligated to issue credit to our
distributors and resellers equal to the difference between the new selling price
and the price paid for all unsold inventory held by the distributor and
reseller. Accordingly, reserves for estimated future returns, exchanges and
price protection are provided upon revenue recognition.
Total net revenues increased 37% to $79.1 million in 1998 from $57.6
million in 1997, despite a 38% reduction in royalty and development revenues
from $7.1 million in 1997 to $4.4 million in 1998. The decline in royalty
revenues in 1998 was due to the termination, in the third quarter of 1996, of
royalties under an OEM agreement with Hewlett-Packard and the termination of
royalties under our OEM agreement with Compaq in the first quarter of 1997. In
regards to another OEM agreement with Hewlett-Packard, which involved the
licensing of our software for Hewlett-Packard scanners, Hewlett-Packard informed
us, in the fourth quarter of 1997, that commencing January 1, 1998, it would no
longer be building new scanner products incorporating our software. We
experienced declining royalties from this agreement in 1998 as Hewlett-Packard
sold existing inventory of products incorporating our software which it held at
December 31, 1997. Net revenues from hardware product sales increased to $66.0
million in 1998 compared to $41.5 million in 1997. As a result of the addition
of the PaperPort 36-bit and OneTouch flatbed color scanner lines in 1998,
overall scanner unit sales in 1998 increased by approximately 248% over 1997,
despite a 79% decrease in grayscale scanner unit sales. Revenues did not
increase at the same rate as unit increases because of the sharp decline in
average retail prices offset the net revenue from the increased hardware unit
sales from 1997 to 1998. Software revenues increased 4.3% to $8.7 million in
1998 from $8.3 million in 1997. The increase was primarily attributable to the
commencement of sales of new PaperPort software products that included ProOCR
100, PaperPort ScannerSuite, Visual Explorer, and PaperPort Deluxe 5.3 released
in the second quarter of 1998.
Total net revenues increased 3% to $57.6 million in 1997 from $56.1
million in 1996, despite a 40% reduction in royalty and development revenues
from $11.8 million in 1996 to $7.1 million in 1997. The decline in royalty
revenue in 1997 was due to the termination of the royalties associated with our
OEM agreement with Hewlett-Packard and our OEM agreement with Compaq Computers.
Our second OEM agreement with Hewlett-Packard, which related to the licensing of
our software for Hewlett-Packard scanners, was terminated in the fourth quarter
of 1997.
Our ability to increase our revenues will depend upon our ability to
attain wider market acceptance for our software products and our ability to
introduce new products with enhanced end-user features on a timely basis. As a
result of the sale of our hardware assets, liabilities and intellectual property
to Primax Electronics, Ltd., our revenues will be substantially reduced in 1999,
even taking into consideration the addition of revenues from the merger with
ScanSoft.
Our four largest resellers for 1998 were Sam's Club, Office Depot,
Inc., Best Buy Company, Inc. and CompUSA, Inc. for distribution of our products
in North America. Sales to these top four independent resellers accounted for
46% of our total net revenues in 1998 in the aggregate, or 18%, 12%, 9% and 7%,
respectively. Our four largest resellers and distributors of our products in
1997 were Ingram, Best Buy, Office Depot and Micro Warehouse. Sales to these
independent distributors and resellers, in the aggregate, accounted for
approximately 38% of total net revenues in 1997. The four largest distributors
and resellers in 1996 were Ingram, Best Buy, Tech Data and Merisel. Sales to
these independent distributors, in the aggregate, accounted for approximately
52% of our total net revenues in 1996. In 1998, all four of our top customers
were resellers compared to 1997, when three out of four of our largest
customers, excluding OEMs, were resellers. In contrast in 1996, three out of
four of our customers were distributors. We have focused on establishing direct
relationships with major resellers, thus
22
bypassing distributors. This strategy, to a limited extent, reduces a layer of
our inventory in the retail channel, thereby reducing inventory risk and
increasing channel inventory visibility.
Total net revenues from independent distributors outside North America,
primarily in Europe and the Asia-Pacific regions, were approximately 7%, 10% and
13% of total net revenues in 1998, 1997 and 1996, respectively. Net revenues
from international sales increased from $5.6 million in 1997 to $5.9 million in
1998, whereas sales decreased from $7.1 million in 1996 to $5.6 million in 1997.
The reduction in international revenues from 1996 to 1997 was primarily due to
the delayed introduction of Japanese localized PaperPort Strobe products, the
first of which were shipped in February 1998, and our decision to restructure
our international sales and marketing operations in May 1997. Although our
international sales are all denominated in U.S. dollars, these sales are subject
to a number of risks inherent in doing business on an international level, such
as unexpected changes in regulatory requirements, import and export duties and
restrictions, fluctuations in currency exchange rates, and the logistical
difficulties of managing multinational operations, any of which could adversely
impact the success of our international operations. The growth of our
international business will depend, in part, on our ability to increase
awareness of our products in international markets. See "Item 1--Business--
Marketing, Sales and Distribution."
The introduction of major new software products and enhancements of
existing products, such as PaperPort Deluxe, as well as potential OEM
agreements, are expected to have a significant impact on our quarterly and
annual revenues. As is characteristic of the initial stages of personal computer
product life cycles, we expect that sales volumes of any new software product
may increase in the first few months following introduction due to the purchase
of initial inventory by our distribution channel. Thereafter, revenues may
stabilize or decline until the end of a product life cycle, at which time
revenues are likely to decline significantly, as a result of unit sales and
price reductions. At the end of a product life cycle we may experience higher
rates of return and/or increased price protection charges as a result of price
reductions. This could have a material adverse impact on our total net revenues
and operating results. Although we have sought to mitigate the effect of such
transition by controlling inventory levels of our distributors and resellers,
channel inventory levels are very difficult to quantify accurately, and we may
experience higher than normal rates of return on our older version products and
may incur significant price protection charges in connection with our planned
release of new PaperPort products and price reductions in 1999. In this regard,
receivable allowances were $4.2 million and $5.3 million at December 31, 1998
and 1997, respectively. A substantial portion of these reserves related to the
hardware business and were eliminated as part of the sale to Primax on January
6, 1999. Due to the inherent uncertainties of product development and new
product introductions, we cannot accurately predict the exact quarter in which a
new product or version will be ready to ship. Any delay in the scheduled release
of major new products would have a material adverse impact on our total net
revenues and operating results.
We have experienced and may continue to experience significant
fluctuations in revenues and operating results from quarter to quarter and from
year to year due to a combination of factors, many of which are outside of our
direct control. After taking into consideration the sale of our hardware
business in January 1999, and the merger with ScanSoft in March 1999, these
factors include the integration of the Visioneer and ScanSoft businesses,
development of the paper input systems market, demand for our products, our
success in developing, introducing and shipping new products and product
enhancements, the market acceptance of such products, our ability to respond to
new product introductions and price reductions by our competitors, the timing,
cancellation or rescheduling of significant orders, the purchasing patterns and
potential product returns from our distribution channels, our relationships with
our OEM partners and distributors, our ability to attract, retain and motivate
qualified personnel, the timing and amount of research and development and
selling, general and administrative expenditures, and general economic
conditions.
Revenues and operating results in any quarter depend, to a large
extent, on the volume, timing and ability to fulfill customer orders, which is
difficult to forecast. A significant portion of our operating expenses are
relatively fixed, based in large part on our forecasts of future sales. If sales
are below expectations in any given period, the adverse effect of a shortfall in
sales on our operating results may be magnified by our inability to adjust
operating expenses to compensate for such shortfall. Accordingly, any
significant shortfall in revenues relative to our expectations would have an
immediate material adverse impact on our business, operating results and
financial condition. We may also be required to reduce prices in response to
competition or to increase our spending to
23
pursue new product or market opportunities. In the event of significant price
competition in the market for our products, which is anticipated, we will be
required to decrease costs at least proportionately and we will be at a
significant disadvantage with respect to our competitors that have substantially
greater resources. Such competitors may more readily withstand an extended
period of downward pricing pressure. In such event, we will also incur price
protection charges from our distributors. Any price protection charges in excess
of recorded allowances would have a material adverse effect on our business,
operating results and financial condition.
Due to all of the foregoing factors, it is likely that at some point in
the future our operating results will be below the expectations of public market
analysts and investors. In such event, the price of our common stock would
likely be materially adversely affected. Accordingly, our prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies participating in new and rapidly evolving markets.
There can be no assurance that we will be successful in addressing such risks.
TOTAL COST OF REVENUES
Total cost of revenues consists primarily of the costs associated with
the purchase of PaperPort products and related costs of freight, inventory
rework, inventory obsolescence and warranty. For 1998, our PaperPort hardware
products were manufactured, assembled and tested by five manufacturing partners,
Avision, Primax, Flextronics, NMB and Orient SemiConductor. Grayscale sheetfed
scanners were manufactured by Flextronics. Our scanning keyboard, PaperPort ix,
and the color sheetfed scanner, the PaperPort Strobe, were manufactured by NMB
and Orient SemiConductor; and the PaperPort flatbed scanners were manufactured
by Primax and Avision. We sold our hardware business to Primax in January 1999.
Our software products are manufactured by DCL, which also package and ships the
majority of our hardware and software products to our customers. See "Item
1--Business--Manufacturing."
Total cost of revenues, as a percentage of total net revenues,
decreased in 1998 to 75% as compared to 88% in 1997. The decrease was primarily
a result of approximately $9.5 million of charges taken in the first quarter of
1997 for write-offs and increased reserves relating to excess and obsolete
grayscale inventory and cancellation charges relating to adverse purchase
commitments for grayscale products. Total cost of revenues as a percentage of
total net revenues was 88% in 1997 as compared to 81% in 1996. The increase was
primarily a result of the charges taken in 1997 as described above.
As a result of the sale of our hardware business, we expect our total
cost of revenues, as a percentage of revenue, to decline significantly from the
historical levels reported in the statement of operations.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist principally of personnel
costs, costs of contractors and outside consultants, supplies and material
expenses, equipment depreciation and overhead costs relating to occupancy. As of
December 31, 1998, we employed 21 full-time and 3 contract software design
engineers, technicians and support staff. Upon the completion of the merger on
March 2, 1999, we employed 67 full-time technicians and support staff.
Research and development expenses were 6%, 14% and 20% of total net
revenues for 1998, 1997 and 1996, respectively. Research and development
expenses decreased 46% in absolute dollars to $4.4 million in 1998 from $8.1
million in 1997. Due to our strategy to concentrate our engineering efforts on
software development, all of our flatbed scanner lines that were introduced in
1997 and 1998 were designed in cooperation with our manufacturing partners,
Primax and Avision.
Research and development expenses decreased 26% in absolute dollars to
$8.19 million in 1997 from $10.6 million in 1996. The decrease was primarily the
result of the restructuring of the engineering group in May 1997.
24
We believe that the development of new products and the enhancement of
existing products are essential to our success. Accordingly, we will continue to
invest in research and development activities. However, such expenses may
fluctuate from quarter to quarter depending on a wide range of factors including
the status of various development projects. To date, we have not capitalized any
development costs and do not anticipate capitalizing any such costs in the
foreseeable future.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include personnel and
related overhead costs for sales, marketing, customer support, finance, human
resources and general management. Such costs also include advertising,
commissions to manufacturers' representative organizations, co-op paid to our
distributors and resellers, trade shows and other marketing and promotional
expenses.
Selling, general and administrative expenses decreased 14% in absolute
dollars to $19.2 million in 1998 from $22.4 million in 1997, and also declined
as a percentage of total net revenues, to 24% in 1998 from 39% in 1997. The
decrease was the direct result of a Company-wide restructuring plan implemented
in May 1997, in which we reduced overall headcount and spending by approximately
40% of first quarter 1997 levels, as well as an additional restructuring in
August 1998 which cut existing headcount by an additional 20%. We believe that
these spending reductions were necessary in order to reduce our cost structure
to allow us to compete more effectively. As noted below, the May 1997
restructuring resulted in a $675,000 one-time charge. The restructuring in
August 1998 did not result in a significant one-time charge.
Selling, general and administrative expenses decreased 15% in absolute
dollars to $22.4 million in 1997 from $26.3 million in 1996. As a percentage of
total net revenues, selling, general and administrative expenses decreased to
39% in 1997 from 47% in 1996. The decrease in spending was primarily attributed
to the restructuring plan implemented in May 1997, described above.
We will continue to attempt to control selling, general and
administrative expenses. However, if net revenues continue to grow, in order to
support our growing operations, selling, general and administrative expenses may
increase in absolute terms. Such expenses may fluctuate from quarter to quarter
depending on a variety of factors, including the timing of the introduction of
any new products, expansion of our distribution channels, general advertising
not related to product introductions and expansion into international markets.
NON-RECURRING ITEM
The non-recurring item in 1997 represents expenses incurred for
severance and other charges related to the termination of approximately 40
employees and 20 contract employees in connection with the Company-wide
restructuring plan implemented in May 1997. The restructuring actions were fully
completed as of December 1997.
OTHER INCOME, NET
Other income, net, consists primarily of interest earned on cash
equivalents and short-term investments. Other income, net, was $53,000,
$940,000, and $2.3 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The decrease in other income, net from 1997 to 1998, and 1996 to
1997 was a result of decreased interest income from significantly lower cash,
cash equivalents and short-term investments, which were used primarily to fund
our operating losses.
TAXATION
At December 31, 1998, we had federal net operating loss carryforwards
of approximately $61 million, of which approximately $900,000 related to tax
deductions from stock compensation. The tax benefit related to the stock
compensation benefit, when realized, will be accounted for as an addition to
additional paid in capital rather than as a reduction of the provision for
income tax. Research and development credit carryforwards as of December 31,
1998 were approximately $2.0 million. The net operating loss and credit
carryforwards will expire at
25
various dates beginning in 2007, if not utilized. Utilization of the net
operating losses and credits may be subject to a substantial annual limitation
due to the ownership change limitations provided by the Internal Revenue Code of
1986 and similar state provisions. The annual limitation may result in the
expiration of net operating losses and credits before utilization. As a result
of the new stock issued in conjunction with the merger with ScanSoft, we are not
certain whether we will be able to utilize our net operating loss and credit
carryforwards without limitations. (See Note 6 of Notes to Financial
Statements).
LIQUIDITY AND CAPITAL RESOURCES
Through September 30, 1995, we financed our operations primarily
through private placements of equity securities, from which it raised an
aggregate of approximately $33 million, net of issuance costs. In December 1995,
we completed our initial public offering, and raised approximately $43.5
million, net of issuance costs. In January 1996, the over allotment option
granted to the underwriters in the initial public offering was exercised,
resulting in proceeds of approximately $6.4 million, net of issuance costs. As
of December 31, 1998, we had cash, cash equivalents and short-term investments
of $7.9 million and working capital of $6.6 million, as compared to $14.5
million in cash, cash equivalents and short-term investments and $8.4 million of
working capital at December 31, 1997.
We used $9.5 million of cash for our operating activities for 1998, as
compared to $20.0 million for 1997 and $18.9 million for 1996. Negative cash
flows from operating activities for these periods were attributed primarily to
net losses incurred of $3.8 million, $23.4 million and $24.4 million for 1998,
1997 and 1996, respectively, offset by non-cash charges and changes in working
capital.
Cash provided by investing activities during 1998 was $2.3 million as
we decreased short-term investments by $2.6 million and made capital
expenditures of $0.3 million. Capital expenditures for 1998 consisted primarily
of purchases of manufacturing tools and molds, computer equipment and software
tools.
Cash provided by financing activities was $3.5 million during 1998. At
December 31, 1998, we had short-term bank borrowings of $3.2 million, and $0.3
million was provided by proceeds from the issuance of Common Stock in connection
with our employee stock purchase plan and the exercises of stock options.
On March 19, 1998, we amended our $7.5 million line of credit,
increasing the line to $12.5 million and extending the expiration date to March
1999. The line bore an interest rate of 0.25% over the Prime Rate, and was
collateralized by a security interest in our assets. As of December 31, 1998, we
had $6.0 million of short-term borrowings and $0.3 million of letters of credit
outstanding under the line of credit, and we were not in compliance with all
financial covenants under the agreement. As a result of the sale of our hardware
business to Primax, we paid all amounts owed on the line, cancelled the line and
obtained a waiver of covenant default for the period ended December 31, 1998.
Our principal sources of liquidity as of December 31, 1998 consisted of
approximately $7.9 million of cash, cash equivalents and short-term investments.
Subsequent to our year end, we sold our hardware business to Primax for $7
million. In addition, the merger with ScanSoft provided additional cash of $0.8
million with no associated long- or short-term debt. Based upon these events and
existing cash balances, we believe that our existing sources of liquidity will
provide adequate cash to fund our operations for at least the next twelve
months. Thereafter, if cash generated by operations is insufficient to satisfy
our liquidity requirements, we may be required to sell additional equity or debt
securities, or increase or obtain additional lines of credit. The sale of
additional equity or convertible debt securities may result in additional
dilution to our stockholders.
PRO FORMA RESULTS AND RELATED MANAGEMENT DISCUSSION AND ANALYSIS
The following two tables present, as dollar amounts and as a percentage
of total net revenues, the condensed unaudited pro forma total net revenues, and
certain selected financial data for each of the two years in the period ended
December 31, 1998, assuming the sale of the hardware business and the merger
with ScanSoft
26
occurred at the beginning of the periods presented and after excluding the
impact of non-recurring charges resulting from the merger, such as in process
research and development:
SCANSOFT, INC.
UNAUDITED PRO FORMA
CONDENSED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
1998 Pro Forma 1997 Pro Forma
Combined Combined
------------------- -----------------
Total net revenues....................... $ 34,791 $ 33,924
Total cost of revenues................... 9,669 8,444
------------------- -----------------
Gross profit............................. 25,122 25,480
------------------- -----------------
Operating expenses:
Research and development............... 9,812 11,256
Selling, general and administrative.... 15,006 15,763
Other operating expenses............... 2,276 2,276
------------------- -----------------
Total operating expenses............ 27,094 29,295
------------------- -----------------
Operating loss........................... (1,972) (3,815)
Other income (expense) .................. 28 198
------------------- -----------------
Net loss................................. $ (1,944) $ (3,617)
=================== =================
Net loss per share: basic and diluted... (0.07) (0.14)
=================== =================
27
1998 Pro Forma 1997 Pro Forma
Combined Combined
------------------- -----------------
Total net revenues....................... 100.0% 100.0%
Total cost of revenues................... 27.8% 24.9%
------------------- -----------------
Gross profit............................. 72.2% 75.1%
------------------- -----------------
Operating expenses:
Research and development............... 28.2% 33.2%
Selling, general and administrative.... 43.1% 46.4%
Other operating expenses............... 6.6% 6.7%
------------------- -----------------
Total operating expenses............ 77.9% 86.3%
------------------- -----------------
Operating loss........................... (5.7%) (11.2%)
Other income (expense) .................. 0.1% 0.5%
------------------- -----------------
Net loss................................. (5.6%) (10.7%)
------------------- -----------------
UNAUDITED PRO FORMA TOTAL NET REVENUES
The pro forma net revenues represent revenues from the combination of
our software business with that of ScanSoft's and comes primarily from two
sources, the sale of PaperPort, TextBridge, and Pagis software products, and
royalties and custom software development revenue earned pursuant to
arrangements with certain OEM customers. To date, a vast majority of our product
revenues have been derived from sales of our software products to authorized
resellers and independent distributors.
Total net revenues increased in 1998 from 1997, due primarily to the
increase in unit shipments of products offset partially by a decline in royalty
revenues.
The decline in royalty revenues in 1998 was due to the termination, in
the third quarter of 1996, of royalties under our OEM agreement with
Hewlett-Packard.
The introduction of major new software products and enhancements of
existing products, as well as potential OEM agreements, are expected to have a
significant impact on our quarterly and annual revenues.
UNAUDITED PRO FORMA TOTAL COST OF REVENUES
The pro forma cost of revenues consists primarily of the costs
associated with the purchase of software products and related costs of freight,
inventory obsolescence and warranty.
The pro forma cost of revenues, as a percentage of total net revenues,
increased in 1998 to 28% as compared to 25% in 1997. The increase was
attributable primarily to the reduction in royalty revenues, which carry minimal
or no cost of revenues.
UNAUDITED PRO FORMA RESEARCH AND DEVELOPMENT EXPENSES
Pro forma research and development expenses consist principally of
personnel costs, costs of contractors and outside consultants, supplies and
material expenses, equipment depreciation and overhead costs relating to
occupancy.
28
Pro forma research and development expenses decreased 13% in absolute
dollars to $9.8 million in 1998 from $11.3 million in 1997. The decrease was
primarily the result of the restructuring of the engineering group in May 1997
and the focus on software development rather than hardware development.
UNAUDITED PRO FORMA SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Pro forma selling, general and administrative expenses include
personnel and related overhead costs for sales, marketing, customer support,
finance, human resources and general management. Such costs also include
advertising, commissions to manufacturers' representative organizations, co-op
paid to our distributors and resellers, trade shows and other marketing and
promotional expenses.
Pro forma selling, general and administrative expenses decreased 5% in
absolute dollars to $15.0 million in 1998 from $15.7 million in 1997, and also
declined as a percentage of total net revenues, to 43% in 1998 from 46% in 1997.
The decrease was the direct result of a Company-wide restructuring plan
implemented in May 1997, in which we reduced overall headcount and spending, as
well as an additional restructuring in August 1998 which cut existing headcount.
We anticipate that selling, general and administrative expenses as a
percentage of net revenues, and absolute dollars will decrease in the future due
to the merger.
UNAUDITED PRO FORMA OTHER OPERATING EXPENSES
Pro forma other operating expense contains the amortization of goodwill
and other identified intangible assets arising from the merger that have
estimated useful lives ranging from three to seven years.
UNAUDITED PRO FORMA OTHER INCOME, NET
Pro forma other income, net, consists primarily of interest earned on
cash equivalents and short-term investments. Other income, net, was $28,000 and
$198,000 for the years ended December 31, 1998 and 1997, respectively. The
decrease from 1997 to 1998 was a result of decreased interest income from
significantly lower cash, cash equivalents and short-term investments, which
were used primarily to fund our operating losses.
YEAR 2000 COMPLIANCE
We are aware of the potential business risks associated with the "Year
2000" millennium issue. Based upon this potential business risk, we have
developed a strategy to examine the potential effect of this issue. The
following strategy outlines the process by which we are trying to minimize the
potential risk associated with the "Year 2000" millennium issue.
We are in the process of assessing the potential effects of the "Year
2000" millennium change on our business systems and processes, including
facilities, software and components used by our employees, as well as our
outsourcing vendors and critical suppliers. Our Year 2000 project is proceeding
on schedule. The project goal is to ensure that our business is not impacted by
the date transitions associated with the Year 2000.
Our Year 2000 project plan is coordinated by a team that reports to
senior management. The project team is evaluating the Year 2000 compliance of
our business systems and processes, including facilities, software and
components used by our employees, as well as our outsourcing vendors and
critical suppliers who provide services relating to our business. Our Year 2000
project is comprised of the following phases:
o Phase 1 - Inventory all business systems and processes, including
facilities, software and components used by our employees, in order
to assign priorities to potentially impacted systems and services.
This phase was completed by January 31, 1999 and a complete
inventory was compiled.
29
o Phase 2 - Assess the Year 2000 compliance of all inventoried
business systems and processes, including facilities, software and
components used by our employees, and determine whether to renovate
or replace any non-Year 2000 compliant systems and services. This
phase was completed by March 31, 1999.
o Phase 3 - Complete remediation, if any is required, of any
non-compliant business systems and processes, including facilities,
software and components used by our employees and outsourcing
vendors. Conduct procurements to replace any other non-Year 2000
compliance business systems and processes, including facilities,
software and components used by our employees and outsourcing
vendors that won't be remediated. We expect to complete all
remediation efforts, if any are required, by June 30, 1999.
o Phase 4 - Test and validate remediated and replacement systems, if
any such remediation or replacement is required, to ensure
inter-system compliance and mission critical system functionality.
We expect to complete testing and validation efforts, if any are
required, by July 31, 1999.
o Phase 5 - Deploy and implement remediated and replacement systems,
if any deployment or implementation is required, after the
completion of successful testing and validation. We expect to
complete the deployment and implementation of the remediated or
replacement systems, if any is required, by September 30, 1999.
o Phase 6 - Design contingency plan and business continuation plans
in the event of the failure of business systems and processes,
facilities, data networking infrastructure, software and components
used by our employees due to the Year 2000 millennium change. We
expect that the initial contingency and business continuation plan
will be in place by November 30, 1999.
Based on our inventory and assessment to date, we believe that our
internal mission critical systems are Year 2000 compliant and that our
facilities can be Year 2000 compliant. In addition, we are seeking assurances
from our facilities' landlords and equipment vendors and data circuit providers
regarding the Year 2000 compliance of their facilities and equipment.
At this time, we believe that our incremental remediation costs, if
any, needed to make our current business systems and processes, including
facilities, software and components used by our employees and outsourcing
vendors, are not material. While we are incurring some incremental costs, our
incurred costs through December 31, 1998 were less than $60,000. Our expected
total costs, including remediation and replacement costs, if any, are estimated
to be between $100,000 and $200,000 over the life of the Year 2000 project.
We are contacting our hardware and software vendors, other significant
suppliers, manufacturers, outsourcing service providers and other contracting
parties to determine the extent to which we are vulnerable to any one of their
failures to achieve Year 2000 compliance for their own systems. At the present
time, we do not expect Year 2000 issues of any such third parties to materially
affect our business.
Should we fail to solve a Year 2000 compliance problem to our critical
business systems and processes, the result could be a failure or interruption to
normal business operations.
Despite the assurances of our third-party suppliers, hardware and
software vendors, and outsourcing service providers regarding Year 2000
compliance of their products and services, the potential exists that a Year 2000
problem relating to such third-party suppliers, vendors and outsourcing service
providers products and services could have a material impact on our business. We
are conducting monthly discussions with our critical outsourcing service
providers to determine the progress of their Year 2000 compliance programs.
Despite extensive preparation and effort to ensure Year 2000
compliance, implementation of our business continuation contingency plan for a
very short time may be required while we remediate the Year 2000 problem.
30
Despite our belief that our mission critical computer software
applications and systems are Year 2000 compliant and our expectation that our
enhancement effort will result in Year 2000 compliant systems, we are currently
developing a business continuation contingency plan. We expect to finalize our
initial contingency plan to complete the testing of all existing systems by
November 30, 1999.
The Foregoing Year 2000 discussion contains "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements, including without limitation, anticipated costs and
the dates by which certain actions are expected to be completed, are based on
management's best current estimates, which were derived utilizing numerous
assumptions about future events, including the continued availability of certain
resources, representations received from third parties and other factors.
However, there can be no guarantee that these estimates will be achieved, and
actual results could differ materially from those anticipated. Specific factors
that might cause such material differences include, but are not limited to, the
ability to identify and remediate all relevant systems, results of Year 2000
testing, adequate resolution of Year 2000 issues by governmental agencies,
businesses and other third parties who are outsourcing service providers
suppliers and vendors, unanticipated system costs, the adequacy of and ability
to implement contingency plans and similar uncertainties. The "forward-looking
statements" made in the foregoing Year 2000 discussion speak only as of the date
on which such statements are made, and management does not undertake any
obligation to update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INVESTMENT RISK
As of December 31, 1998, our investment portfolio consisted of fixed
income securities. These securities, like all fixed income instruments, carry a
degree of interest rate risk. Fixed rate securities may have their fair market
value adversely impacted due to a rise in interest rates, while floating rate
securities may produce less income than expected if interest rates fall.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
----
Financial Statements:
Report of Independent Accountants...................................... 33
Balance Sheets......................................................... 34
Statements of Operations .............................................. 35
Statements of Cash Flows............................................... 36
Statements of Stockholders' Equity..................................... 37
Notes to Financial Statements.......................................... 38
Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedules..... 50
Schedule II -Valuation and Qualifying Accounts and Reserves............ 51
32
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of ScanSoft, Inc.
In our opinion, the accompanying balance sheets and the related
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of ScanSoft, Inc.
(formerly Visioneer, Inc.) at December 31, 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Jose, California
January 27, 1999, except for Note 3, which is as of March 2, 1999
33
SCANSOFT, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
DECEMBER 31,
-----------------------------
1998 1997
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 7,659 $11,361
Short-term investments......................................................... 202 3,029
Restricted cash................................................................ 262 62
Accounts receivable, less allowances of $4,171 and $5,315...................... 13,512 12,295
Inventory...................................................................... 4,777 3,078
Prepaid expenses and other current assets...................................... 929 1,059
-------------- -------------
Total current assets......................................................... 27,341 30,884
Property and equipment, net....................................................... 1,039 2,454
Other assets...................................................................... 65 212
-------------- -------------
Total Assets................................................................. $28,445 $33,550
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank borrowings..................................................... $ 6,000 $2,821
Accounts payable............................................................... 11,053 12,837
Accrued sales and marketing incentives......................................... 1,165 1,460
Accrued payable to sub-contractors............................................. 625 1,500
Other accrued liabilities...................................................... 1,929 3,877
-------------- -------------
Total current liabilities.................................................... 20,772 22,495
-------------- -------------
Long-term liability............................................................... 91 125
Commitments and contingencies (Note 9)............................................ -- --
Stockholders' equity:
Common stock, $0.001 par value; 50,000,000 shares authorized; 19,852,952 and
19,563,854 shares issued and outstanding..................................... 20 20
Additional paid-in capital..................................................... 87,995 87,682
Deferred compensation relating to stock options................................ (50) (150)
Notes receivable from stockholders............................................. -- (44)
Accumulated deficit............................................................ (80,383) (76,578)
-------------- -------------
Total stockholders' equity................................................... 7,582 10,930
-------------- -------------
Total Liabilities and Stockholders' Equity................................... $28,445 $33,550
============== =============
The accompanying notes are an integral part of these financial statements.
34
SCANSOFT, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1998 1997 1996
----------------- ------------------ ------------------
Revenues:
Product revenues.................................. $74,674 $50,523 $44,233
Royalty and development revenues.................. 4,396 7,100 11,848
----------------- ------------------ ------------------
Total net revenues.............................. 79,070 57,623 56,081
----------------- ------------------ ------------------
Cost of revenues:
Cost of product revenues.......................... 58,486 49,838 42,164
Cost of royalty and development revenues.......... 884 887 3,303
----------------- ------------------ ------------------
Total cost of revenues.......................... 59,370 50,725 45,467
----------------- ------------------ ------------------
Gross profit......................................... 19,700 6,898 10,614
----------------- ------------------ ------------------
Operating expenses:
Research and development.......................... 4,408 8,115 10,938
Selling, general and administrative............... 19,150 22,428 26,342
Non-recurring item (Note 10)...................... -- 675 --
----------------- ------------------ ------------------
Total operating expenses........................ 23,558 31,218 37,280
----------------- ------------------ ------------------
Operating loss....................................... (3,858) (24,320) (26,666)
Interest income...................................... 507 984 2,344
Interest expense..................................... (454) (44) (70)
----------------- ------------------ ------------------
Net loss............................................. $(3,805) $(23,380) $(24,392)
================= ================== ==================
Net loss per share: basic and diluted............... (0.19) (1.20) (1.34)
================= ================== ==================
Weighted average common shares outstanding: basic
and diluted (Note 1).............................. 19,728 19,450 18,255
================= ================== ==================
The accompanying notes are an integral part of these financial statements.
35
SCANSOFT, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................... $(3,805) $(23,380) $(24,392)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 1,720 2,052 1,982
Accounts receivable allowances........................... (1,144) 1,384 1,400
Other.................................................... 144 385 493
Changes in assets and liabilities:
Accounts receivable.................................... (73) (2,899) (1,042)
Inventory.............................................. (1,699) 1,430 (744)
Prepaid expenses and other current assets.............. 130 (148) 631
Other assets........................................... 147 16 (99)
Accounts payable....................................... (1,784) 1,388 1,237
Accrued sales and marketing incentives................. (295) (1,014) 321
Accrued payable to sub-contractors..................... (875) 400 775
Other accrued liabilities.............................. (1,982) 433 574
-------------- -------------- --------------
Net cash used in operating activities......................... (9,516) (19,953) (18,864)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net sales (purchases) of short--term investments............ 2,827 5,718 (3,852)
Transfer from (to) restricted cash......................... (200) -- 1,300
Capital expenditures for property and equipment............ (305) (348) (3,086)
-------------- -------------- --------------
Net cash provided by (used in) investing activities........... 2,322 5,370 (5,638)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term bank borrowings, net............................ 3,179 2,821 --
Proceeds from issuance of common stock, net................ 313 732 7,232
Payments on capitalized lease obligations.................. -- -- (248)
-------------- -------------- --------------
Net cash provided by financing activities..................... 3,492 3,553 6,984
-------------- -------------- --------------
Net decrease in cash and cash equivalents..................... (3,702) (11,030) (17,518)
Cash and cash equivalents at beginning of year................ 11,361 22,391 39,909
-------------- -------------- --------------
Cash and cash equivalents at end of year...................... $7,659 $11,361 $22,391
============== ============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.............................................. 444 44 71
The accompanying notes are an integral part of these financial statements.
36
SCANSOFT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except for share amounts)
Notes
Common Stock Additional Receivable
------------------ Paid In Deferred from Accumulated
Shares Amount Capital Compensation Stockholders Deficit Total
---------- ------ --------- ----------- ----------- ----------- ---------
Balance at December 31, 1995............. 18,371,047 $ 18 $ 79,444 $ (350) $ (446) $ (28,806) $ 49,860
Issuance of common stock pursuant
to exercise of the over-allotment
option granted to underwriters......... 600,000 1 6,415 - - - 6,416
Deferred compensation expense
related to stock options............... - - - 100 - - 100
Issuance of common stock pursuant
to stock option exercises.............. 278,066 - 513 - - - 513
Issuance of common stock pursuant
employee stock purchase plan........... 110,996 - 637 - - - 637
Repurchase of restricted stock........... (157,500) - (58) - 117 - 59
Net loss................................. - - - - - (24,392) (24,392)
---------- ------ --------- ---------- ------- ---------- ---------
Balance on December 31, 1996............. 19,202,609 19 86,951 (250) (329) (53,198) 33,193
Deferred compensation expense
related to stock options............... - - - 100 - - 100
Issuance of common stock pursuant
to stock option exercises.............. 402,865 1 196 - - - 197
Issuance of common stock pursuant
employee stock purchase plan........... 188,797 - 627 - - - 627
Repurchase of restricted stock........... (230,417) - (92) - 285 - 193
Net loss................................. - - - - - (23,380) (23,380)
---------- ------ --------- ---------- ------- ---------- ---------
Balance on December 31, 1997............. 19,563,854 20 87,682 (150) (44) (76,578) 10,930
Deferred compensation expense
related to stock options............... - - - 100 - - 100
Issuance of common stock pursuant
to stock option exercises.............. 172,129 - 126 - - - 126
Issuance of common stock pursuant
employee stock purchase plan........... 116,969 - 187 - - - -
Repayment of notes receivable from
stockholder............................ - - - - 44 - 231
Net loss................................. - - - - - (3,805) (3,805)
---------- ------ --------- ---------- ------- ---------- ---------
Balance on December 31, 1998............. 19,852,952 $ 20 $ 87,995 $ (50) $ - $ (80,383) $ 7,582
---------- ------ --------- ---------- ------- ---------- ---------
---------- ------ --------- ---------- ------- ---------- ---------
The accompanying notes are an integral part of these financial statements.
37
SCANSOFT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND PRESENTATION
ScanSoft, Inc. (the "Company") was incorporated as Visioneer, Inc. in
the state of California on March 10, 1992 and was reincorporated in the state of
Delaware on December 5, 1995. The Company develops and markets scanner hardware
and software for sale primarily through retail distributors or directly to
retailers. The Company began primarily as a scanner hardware company and spent
most of its research and development time on the development of scanner products
and related bundled software for this market. In 1997, the Company decided to
leverage off the merits of its software in an attempt to penetrate the flatbed
scanner market and to introduce stand alone software products. The Company's
focus over time has shifted from the hardware business to the software business
and during 1997, the Company implemented a strategy to focus its research and
development efforts on software development rather than hardware development and
to leverage the engineering resources of its manufacturing partners to design
future hardware products. As a follow on to this strategy, the Company
negotiated an agreement with Primax Electronics, Ltd. ("Primax") to sell the
hardware business of the Company which was completed on January 6, 1999. (See
Note 2). As part of the sale to Primax, the name "Visioneer" was also sold and a
majority of the Company's employees, including its president and selected vice
presidents, became employees of Primax.
As a result of the change in business strategy, the Company also
entered into an agreement to purchase the business of ScanSoft, Inc., an
indirect wholly owned subsidiary of Xerox. This transaction was consummated on
March 2, 1999. (See Note 3). In connection with this acquisition, the Company
changed its name to ScanSoft, Inc.
The Company's fiscal year ends on the Sunday closest to December 31.
Accordingly, fiscal 1998 ended January 3, 1999 and contained 53 weeks. Fiscal
years 1997 and 1996 each had 52 weeks. The Company reports quarterly results
generally on thirteen-week quarterly periods, each ending on the Sunday closest
to month-end. For purposes of presentation, the Company has indicated its
accounting year as ending on December 31 or our interim quarterly periods as
ending on the respective calendar month-end.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities on the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue from product sales to customers is generally recognized when
the product is shipped, provided no significant obligations remain and
collectibility is probable. Revenues from sales to distributors and authorized
resellers are subject to agreements allowing price protection and certain rights
of return. Accordingly, reserves for estimated future returns, exchanges and
credits for price protection are provided for upon revenue recognition. The
Company has limited control over the extent to which products sold to
distributors and resellers are sold through to end users. Accordingly, a portion
of the Company's sales may from time to time result in increased inventory at
its distributors and resellers. The Company provides sales returns reserves for
distributor and reseller inventories. These reserves are based on the Company's
estimates of inventory held by its distributors and resellers and the expected
sell through of its products by its distributors and resellers.
Actual results could differ from these estimates.
38
The Company earns royalty and custom software development revenue
pursuant to certain license agreements and records revenue when earned. Payments
received from customers prior to revenue recognition and gross profits on
shipments to customers prior to related revenue recognition are reported as
"deferred revenues" and are included in other accrued liabilities in the balance
sheet.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
Cash equivalents are short-term, highly liquid instruments with
original maturities of 90 days or less. The Company has classified all its
securities as "available for sale." These securities are comprised primarily of
commercial paper with maturities within one year. At December 31, 1998 and 1997
the fair market value of these securities approximated cost.
INVENTORY
Inventory is stated at the lower of cost or market, cost being
determined on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method over
the estimated useful lives of the assets, which is generally one to five years.
Leasehold improvements are amortized over the term of the related lease or the
useful life, if shorter.
SOFTWARE DEVELOPMENT COSTS
Software development costs incurred prior to establishment of
technological feasibility are expensed as incurred. The Company defines
establishment of technological feasibility as the completion of a working model.
Software development costs incurred subsequent to the establishment of
technological feasibility through the period of general market availability of
products will be capitalized, if material. To date, all software development
costs have been expensed.
WARRANTY COSTS
The Company provides for the estimated cost which may be incurred under
its product warranties upon product shipment.
INCOME TAXES
The Company accounts for income taxes utilizing an asset and liability
approach that requires the recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been recognized in
the Company's Financial Statements or income tax returns. In estimating future
tax consequences, the Company generally considers all expected future events
other than enactments of changes in the tax laws or rates.
COMPREHENSIVE INCOME (LOSS)
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income." Comprehensive income is defined as the change in equity of a company
during a period from transactions and other events and circumstances excluding
transactions resulting from investments by owners and distributions to owners.
The Company's comprehensive loss for 1996, 1997 and 1998 is the same as its
reported net loss.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash
equivalents, short-term investments and trade accounts receivable. The Company
invests
39
in a wide variety of financial instruments, such as certificates of deposits,
commercial paper, municipal debt and U.S. government agency debt. The Company,
by policy, limits the amount of credit exposure to any one financial
institution. The Company performs ongoing credit evaluations of its customers'
financial condition and maintains an allowance for uncollectible receivables
based upon expected collectibility of accounts receivable. At December 31, 1998,
1997 and 1996 the Company's top two customers in aggregate accounted for 30%,
42% and 40% respectively, of accounts receivable.
FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The estimated fair value of financial instruments at December 31, 1998
and 1997 was not significantly different than the values presented in the
balance sheets.
NET LOSS PER SHARE
Basic loss per share is based on the weighted average number of common
shares outstanding, and diluted loss per share is based on the weighted average
number of common shares outstanding and dilutive potential common shares
outstanding. However, because the Company has been in a net loss position on an
annual basis since 1995, the effects of potential common shares outstanding have
been excluded as they would be anti-dilutive in the loss per share calculation.
All options outstanding during 1998, 1997 and 1996 were excluded from diluted
loss per share calculations because they were anti-dilutive in view of the
losses incurred by the Company.
EMPLOYEE STOCK PLANS
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock Compensation." SFAS 123 establishes an accounting
method based on the fair value of equity instruments awarded to employees as
compensation. The Company has elected to retain its current application of
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees." The Company has adopted, as required, the disclosure provisions
of SFAS No. 123.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities." SFAS 133 requires that all derivatives be
recognized at fair value in the statement of financial position, and that
corresponding gains or losses be reported either in the statement of operations
or as a component of comprehensive income, depending on the type of hedging
relationship that exists. The Company is currently assessing the disclosure
effects of adopting SFAS 133, which will be effective for the Company's fiscal
2000 financial statements.
NOTE 2. SALE OF HARDWARE BUSINESS:
On December 3, 1998, the Company entered into an agreement to sell its
hardware assets, liabilities and intellectual property to Primax for
approximately $7 million in cash. The terms of the agreement also grant to
Primax a software license agreement that allows them to "bundle," market and
sell the Company's PaperPort software with Primax hardware products. The
agreement requires the payment of certain royalties by Primax to the Company.
On January 6, 1999 the agreement with Primax was consummated.
Accordingly, in the quarter ending March 31, 1999, the Company will report a
non-operating gain related to the sale of the hardware business, less costs and
expenses of disposing of the business. The most significant assets and
liabilities at December 31, 1998 of the hardware business were receivables,
inventories and accounts payable in the approximate amounts of $12.7 million,
$4.4 million and $10.7 million, respectively. In addition, Primax assumed the
lease of the Company's current corporate facilities. The Company entered into an
agreement with Primax to pay Primax rent for their use of this facility until
the move of the corporate offices to Peabody, Massachusetts after the
acquisition of ScanSoft in March 1999.
40
HARDWARE BUSINESS PRO FORMA INFORMATION (UNAUDITED)
As a result of the sale of the hardware business on January 6, 1999,
the revenues and other operating expenses related to the hardware business will
not continue. The following summarizes the unaudited pro forma operating
information for the hardware business and the remaining software business for
the year ended December 31, 1998:
Hardware Software
Business Business Combined
------------- ------------- -------------
Total net revenues......................... $66,015 $13,055 $79,070
Total cost of revenues..................... 55,474 3,896 59,370
------------- ------------- -------------
Gross profit............................... 10,541 9,159 19,700
------------- ------------- -------------
Operating expenses:
Research and development................... 734 3,674 4,408
Selling, general and administrative........ 15,887 3,263 19,150
------------- ------------- -------------
Total operating expenses.............. 16,621 6,937 23,558
------------- ------------- -------------
Operating income (loss) ................... (6,080) 2,222 (3,858)
Other income (expense) .................... 26 27 53
------------- ------------- -------------
Net income (loss) ......................... $(6,054) $2,249 $(3,805)
============= ============= =============
NOTE 3. ACQUISITION OF SCANSOFT:
The Company acquired ScanSoft, a company that develops, markets,
distributes and supports systems and software that capture, communicate and
print documents at the desktop, effective March 2, 1999 for approximately 6.8
million shares of Common Stock of the Company, 3.6 million shares of non-voting
Preferred Stock of the Company and exchange of 1.7 million employee stock
options to purchase Common Stock of the Company in exchange for outstanding
employee stock options of ScanSoft. Additionally, in conjunction with the
acquisition, the Company incurred approximately $1.5 million of acquisition
related costs.
This acquisition is being accounted for under the purchase method of
accounting. Based on a preliminary appraisal, the Company expects to record a
one time write-off of approximately $4 million in the quarter ending March 31,
1999 related to the estimated value of in-process research and development
acquired as part of the purchase. For its year ended December 31, 1998, ScanSoft
had net revenues of $21.7 million (unaudited) and a net loss of $1.9 million
(unaudited). Also at December 31, 1998 ScanSoft had total assets of
approximately $6.8 million (unaudited).
41
NOTE 4. BALANCE SHEET COMPONENTS:
The following table summarizes key balance sheet components:
December 31,
-----------------------
1998 1997
-------- --------
(In Thousands)
Inventory:
Raw materials.............................. $ 429 $ 1,536
Work-in-process............................ 2,261 329
Finished goods............................. 2,087 1,213
-------- --------
$ 4,777 $ 3,078
======== ========
Property and equipment:
Machinery and equipment.................... $ 3,029 $ 3,672
Software................................... 1,522 1,377
Leasehold improvements..................... 308 289
Furniture and fixtures..................... 701 688
-------- --------
5,560 6,026
Accumulated depreciation and amortization.. (4,521) (3,572)
-------- --------
1,039 2,454
======== ========
NOTE 5. BANK LINE OF CREDIT:
At December 31, 1998, the Company had a $12.5 million line of credit
with a bank with an expiration date in March 1999. The line of credit was
collateralized by a security interest in the Company's assets and carried an
interest rate of 8.25%. At December 31, 1998, the Company had bank borrowings of
$6.0 million under this line of credit and the Company was not in compliance
with certain covenants, for which the bank issued a waiver. In connection with
the sale of the hardware business in January 1999 (see Note 2), the outstanding
borrowings were paid and the line of credit was terminated.
42
NOTE 6. INCOME TAXES:
No provision for federal or state income taxes has been recorded as the
Company has incurred net operating losses through December 31, 1998.
Deferred tax assets (liabilities) consist of the following:
1998 1997
---------- ----------
(In Thousands)
Deferred Tax Assets:
Federal and state loss and credit carryforwards......... $ 24,414 $ 21,774
Capitalized start-up and development costs.............. 882 1,255
Other asset valuation reserves.......................... 2,669 3,473
Other................................................... 1,961 1,849
---------- ----------
Gross deferred tax assets............................... 29,926 28,351
Deferred tax liabilities................................ (255) (119)
Valuation allowance..................................... (29,671) (28,232)
---------- ----------
Net deferred tax assets............................ $ - $ -
========== ==========
Management believes that based on a number of factors, the available
objective evidence creates sufficient uncertainty regarding the realizability of
the deferred tax assets such that full valuation allowance has been recorded.
These factors include the lack of significant history of profits, the fact that
the market in which the Company competes is intensely competitive and
characterized by rapidly changing technology, and lack of carryback capacity to
realize these assets.
At December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $61 million, of which approximately $900,000
related to tax deductions from stock compensation. The tax benefit related to
the stock compensation benefit, when realized, will be accounted for as an
addition to additional paid in capital rather than as a reduction of the
provision for income tax. Research and development credit carryforwards as of
December 31, 1998 were approximately $2.0 million. The net operating loss and
credit carryforwards will expire at various dates beginning in 2007, if not
utilized. Utilization of the net operating losses and credits may be subject to
a substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code of 1986 and similar state provisions. The annual
limitation may result in the expiration of net operating losses and credits
before utilization. At December 31, 1998 the federal net operating loss and
credit carryforwards of the Company were not subject to any material
limitations. The federal net operating loss carryforwards differ from the
accumulated deficit principally due to temporary differences in the recognition
of certain expense items for financial statement and federal tax reporting
purposes, consisting primarily of certain reserves and allowances not currently
deductible for tax and start-up and development costs capitalized for tax
purposes.
NOTE 7. STOCKHOLDERS' EQUITY:
RESTRICTED COMMON STOCK
In February 1993, the Company's board of directors adopted the 1993
Restricted Stock Purchase Plan (the "Purchase Plan") which provided for the sale
of Common Stock to employees and consultants. Restricted shares purchased under
the Purchase Plan are subject to a repurchase right by the Company. This
repurchase right generally lapses over a 48-month period. This plan was
terminated on October 16, 1995. As of December 31, 1998, no shares were subject
to repurchase under the Purchase Plan.
43
COMMON STOCK WARRANTS
At December 31, 1994, the Company had 101,500 Series C Convertible
Preferred Stock warrants outstanding which were exercisable at $4 per share. In
conjunction with its initial public offering, 85,000 of these warrants were
exercised on a net issuance basis for 65,000 Common shares. The remaining 16,500
warrants automatically converted into Common Stock warrants upon the completion
of the Company's initial public offering.
These warrants will expire on June 30, 2004.
During the quarter ended December 31, 1995 the Company issued a warrant
to purchase 110,000 shares of its Series C Convertible Preferred Stock in
connection with a technology licensing arrangement. The warrant expires on
November 1, 1999 and is exercisable at $9 per share. The Company assigned a
value of $300,000 to this warrant. The warrant automatically converted into a
Common Stock warrant upon the completion of the Company's initial public
offering.
DEFERRED COMPENSATION RELATING TO STOCK OPTIONS
Based on an independent consultant's valuation report, management
believes that the exercise price for certain options granted during 1995 was
below the estimated fair value of the Company's Common Stock at the dates of the
grants. The Company recorded deferred compensation expense of $400,000 related
to these grants which is being amortized over related vesting periods of the
options. As of December 31, 1998, the Company has recorded an expense of
$350,000 related to this compensation.
NOTES RECEIVABLE FROM STOCKHOLDERS
In exchange for the issuance of Common Stock in fiscal 1995 and 1994
under the 1993 Restricted Stock Purchase Plan, the Company received notes
receivable from certain stockholders that bore interest at rates varying from
4.86% to 7.2% per annum. During 1998, all loan balances were fully settled.
NOTE 8. STOCK COMPENSATION PLANS:
1993 INCENTIVE STOCK OPTION PLAN
In February 1993, the Company's board of directors adopted the 1993
Incentive Stock Option Plan (the "Option Plan"). Under the Option Plan, the
Board of Directors are authorized to issue options for up to 3,870,000 shares of
Common Stock to employees and consultants of the Company at grant prices
determined by the Board of Directors on the date of grant. The Option Plan
allows for incentive stock options to be granted to employees and non-statutory
stock options to be granted to employees and consultants.
Options granted under the Option Plan expire no later than ten years
from the date of grant (no later than five years for 10% shareholders). The
exercise price will be at least 100% and 85% of the fair value of the stock
subject to the option on the date the option is granted as determined by the
Board of Directors for incentive stock options and non-statutory stock options,
respectively (110% of the fair value for 10% shareholders). The options
generally become exercisable in increments over a period of four years from the
date of grant, with the first increment vesting after one year. At the
discretion of the Board of Directors, options may be granted with different
vesting terms.
1995 DIRECTORS' STOCK OPTION PLAN
In October 1995, the Company instituted a directors' stock option plan
and reserved a total of 200,000 shares of the Company's Common Stock for
issuance of stock options thereunder. On October 3, 1997, at the Company's
Annual Meeting of Stockholders, an amendment was approved to increase the
options available in this plan by 120,000 to an aggregate of 320,000. The Plan
allows for granting of stock options to members of the Board of Directors who
are not employees of the Company. The options generally become exercisable in
increments over
44
a period of four years from the date of grant, with the first increment vesting
after one year. The price of the options are equal to the fair market value of
the Company's Stock on the date of the grant.
1997 EMPLOYEE STOCK OPTION PLAN
In February 1997, the Board of Directors adopted the 1997 Employee
Stock Option Plan (the "1997 Option Plan") to provide for the granting of
non-statutory stock options only to eligible employees and consultants who are
not officers or directors of the Company, with the exception of officers who
were not previously employed by the Company and for whom an option grant is an
inducement essential to such officers' entering into an employment relationship
or contract with the Company. The 1997 Option Plan was adopted in response to
the non-availability of options for future grant under the Option Plan. The
Company has reserved a total of 1,300,000 shares under this plan.
Options granted under the 1997 Option Plan expire no later than ten
years from the date of grant (no later than five years for 10% shareholders).
The exercise price will be at least 100% and 85% of the fair value of the stock
subject to the option on the date the option is granted as determined by the
Board of Directors for incentive and non-statutory stock options, respectively
(110% of the fair value for 10% shareholders). The options generally become
exercisable in increments over a period of four years from the date of grant. At
the discretion of the Board of Directors, options may be granted with different
vesting terms.
NON-STATUTORY OPTION GRANT TO A DIRECTOR
On April 9, 1997, the Company's Board of Directors granted
non-statutory stock options for 30,000 shares of Common Stock to Mr. Jeffrey
Heimbuck, in conjunction of him becoming a member of the Company's Board of
Directors. The option grants were made outside of the 1995 Directors' Stock
Option Plan at an exercise price of $3.50 per share. All such options become
exercisable in annual installments of 25% of the total number of shares subject
to each option on each anniversary of the date of grant. On October 15, 1998,
Mr. Heimbuck resigned as a member of the Company's Board of Directors and the
Non-Statutory Option Grant was canceled.
REPRICING OF STOCK OPTIONS
In January 1998, the Company allowed all holders of outstanding options
to exchange higher priced options for new options at $1.75 per share, the fair
market value at the time of the exchange. The repricing terms provided that for
each seven shares of options exchanged, six new options would be granted. The
repriced options maintained the same vesting schedule. Options for 2,656,449
shares were exchanged for new options for 2,276,956 shares and are included in
the summary stock option table in the options cancelled and options granted
categories.
45
The following table summarizes activity under all stock option plans:
Options Outstanding
Shares --------------------------
Available Number Price per
for Grant of Shares Share
--------- --------- ----- -----
Balance at December 31, 1995................. 1,016,329 1,759,017 $0.15 - $7.00
Options granted.............................. (1,825,600) 1,825,600 $0.40 - $10.75
Options exercised............................ - (278,066) $0.15 - $10.75
Options canceled............................. 1,187,841 (1,187,841) $0.15 - $10.75
---------- ----------
Balance at December 31, 1996................. 378,570 2,118,710 $0.15 - $10.75
Additional shares authorized................. 2,450,000 -
Options granted.............................. (2,671,200) 2,671,200 $2.63 - $4.50
Options exercised............................ - (402,865) $0.15 - $3.50
Options canceled............................. 1,244,135 (1,244,135) $0.15 - $10.75
---------- ----------
Balance at December 31, 1997................. 1,401,505 3,142,910 $0.15 - $10.75
Options granted.............................. (3,147,801) 3,147,801 $0.91 - $3.00
Options exercised............................ - (172,129) $0.15 - $1.75
Options canceled............................. 3,536,679 (3,566,679) $0.15 - $7.00
---------- ----------
Balance at December 31, 1998................. 1,790,383 2,551,903 $0.15 - $10.75
========== ==========
1995 EMPLOYEE STOCK PURCHASE PLAN
In October 1995, the Company instituted an employee stock purchase plan
(the "1995 Purchase Plan") and reserved a total of 300,000 shares of the
Company's Common Stock for issuance thereunder. On October 3, 1997, at the
Company's Annual Meeting of Stockholders, an amendment was approved to increase
the shares available in this plan by 400,000 to an aggregate of 700,000. The
1995 Purchase Plan permits employees to acquire shares of the Company's Common
Stock through payroll deductions. During 1996, 1997, and 1998 shares issued
under this plan aggregated 110,996, 188,797, and 116,969 respectively.
PRO FORMA INFORMATION
As of December 31, 1998, the Company had five stock-based compensation
plans as described above. The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no compensation cost
has been recognized for these stock option plans. Had compensation cost for
options granted in 1998, 1997 and 1996 under the Company's option plans been
determined based on fair market value at the grant dates, as prescribed by SFAS
No. 123, the Company's net loss and pro forma net loss (in thousands) and the
Company's net loss and pro forma net loss per share would have been as follows:
46
Year Ended December 31,
-----------------------------------
1998 1997 1996
--------- ---------- ----------
(In Thousands, except for per share amounts)
Net loss -as reported: basic and diluted............ $ (3,805) $ (23,380) $ (24,392)
Net loss per share -pro forma: basic and diluted.... $ (6,483) $ (25,247) $ (26,172)
Met loss per share -as reported: basic and diluted.. $ (0.19) $ (1.20) $ (1.34)
The weighted average fair market value of options granted was $ 1.16
per share, $3.87 per share and $3.80 per share for the years ended December 31,
1998, 1997 and 1996, respectively.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants during the applicable period: expected volatility of
70% for all periods, risk-free interest rate of 5.12% for options granted in
1998, 5.71% for options granted in 1997 and 6.19% for options granted in 1996,
and a weighted average expected option term of 5.0 years for all periods. The
Company has not paid dividends and assumed no dividend yield.
The following table summarizes information about stock options
outstanding under the 1993 Incentive Stock Option Plan, the 1997 Employee Stock
Option Plan, the 1995 Directors' Stock Option Plan and the Non-Statutory Option
Grant to Director at December 31, 1998:
Options Outstanding Options Exercisable
-------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Shares Remaining Average Shares Average
Exercise Price Range Outstanding Life in Years Exercise Price Exercisable Exercise Price
- -------------------- ----------- ------------- -------------- ----------- --------------
$ 0.15 -- $ 1.06 203,414 8.79 $0.85 46,076 $0.38
$ 1.75 -- $ 1.75 1,809,239 8.36 $1.75 929,587 $1.75
$ 2.25 -- $ 2.31 387,250 9.45 $2.30 43,498 $2.31
$ 2.63 -- $ 10.75 152,000 8.15 $6.82 73,133 $8.88
--------- ---- ----- --------- -----
$ 0.15 -- $ 10.75 2.551,903 8.55 $2.06 1,092,294 $2.19
--------- ---- ----- --------- -----
For the Employee Stock Purchase Plan, the fair value of each purchase
right is estimated at the beginning of the offering period using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used in 1998, 1997 and 1996: expected volatility of 70% for all
three years; risk-free interest rate of 5.12%, 5.71% and 5.17% for 1998, 1997
and 1996, respectively; and expected lives of six months for all three years.
The Company has not paid dividends and assumed no dividend yield. The
weighted-average fair value of all purchase rights granted in 1998, 1997 and
1996, were $0.70, $2.14 and $2.89, respectively.
47
NOTE 9. COMMITMENTS AND CONTINGENCIES:
OPERATING AND CAPITAL LEASES
The Company leases its facility in California and certain equipment
under noncancelable operating leases. Total rent expense under these operating
leases for the years ended December 31, 1998, 1997 and 1996 was $339,000,
$657,000, and $546,000, respectively.
In August 1997, the Company entered into an agreement with a third
party to sublease 17,928 square feet within the Company's leased facility in
Fremont, California. The term of the sublease is forty-six months. The income is
used to offset the Company's rent expense. As indicated in Note 2, as part of
the sale of its hardware business, the Company's leases were included in the
sale and therefore the Company's lease and sublease commitments outstanding at
December 31, 1998, were assumed by Primax.
LETTERS OF CREDIT
As of December 31, 1998, the Company had two letters of credit
outstanding totaling $0.3 million. The letters of credit were secured by the
Company's line of credit. The letters of credit are secured by certificates of
deposit which are presented as restricted cash at December 31, 1998. As
indicated in Note 2, as part of the sale of its hardware business all of the
Company's commitments associated with the letters of credit were included in the
sale.
LITIGATION AND OTHER CLAIMS
The Company is a party to litigation and patent infringement matters
and claims which arose in the course of the Company's operations. While the
results of such litigation and claims cannot be predicted with certainty, the
Company believes that the final outcome of such matters will not have a
significant adverse effect on the Company's financial position and results of
operations. However, should the Company not prevail in any such litigation, its
operating results and financial position could be adversely impacted.
NOTE 10. NON-RECURRING ITEM:
The Company implemented a restructuring plan of all its organizations
in May 1997 which included a decrease of approximately 40% of total employee and
consultant headcount. A one-time restructuring charge of $675,000 was recorded
in the three month period ended June 30, 1997, representing severance paid to
terminated employees.
NOTE 11. SEGMENT, GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
In 1998, the Company adopted Statement of Financial Accounting
Standards (FAS) 131, "Disclosures about Segments of an Enterprise and Related
Information." FAS 131 supersedes FAS 14, "Financial Reporting for Segments of a
Business Enterprise," replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. FAS
131 also requires disclosures about products and services, geographic areas and
major customers. The adoption of FAS 131 did not affect results of operations or
financial position or the segment information reported in 1997. Based on its
management structure, the Company has one reporting segment.
48
The following is net sales information by geographic area:
Year Ended December 31,
-----------------------------------
1998 1997 1996
---------- --------- ---------
(In Thousands)
United States............ $ 73,219 $ 52,023 $ 48,981
Foreign.................. 5,851 5,600 7,100
---------- --------- ---------
Total.................... $ 79,070 $ 57,623 $ 56,081
---------- --------- ---------
During 1998, two customers accounted for 18% and 12% of total net
revenues, respectively. One customer accounted for 21% of total net revenues in
1997. In 1996, one customer accounted for 37% of total net revenues.
49
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Stockholders of ScanSoft, Inc.
Our audits of the financial statements referred to in our report dated
January 27, 1999, except for Note 3, which is as of March 2, 1999, appearing on
page 33 in the 1998 Annual Report on Form 10-K also included an audit of the
Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our
opinion, the Financial Statement Schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements.
PricewaterhouseCoopers LLP
San Jose, California
January 27, 1999
50
Schedule II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
ACCOUNTS RECEIVABLE
1998 1997 1996
---------------- ---------------- ----------------
Balance at beginning of period..................... $ 5,315 $ 3,931 $ 2,531
Additions charged to costs and expenses............ 19,480 7,122 4,469
Deductions and write-offs.......................... (20,624) (5,738) (3,069)
---------------- ---------------- ----------------
Balance at end of period........................... $ 4,171 $ 5,315 $ 3,931
================ ================ ================
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable.
51
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding our
executive officers and directors as of March 26, 1999.
Name Age Position
---- --- --------
Michael K. Tivnan 46 President, Chief Executive Officer, and Director
Paul A. Ricci(1)(2) 42 Chairman of the Board of Directors
Wayne S. Crandall 40 Vice President Sales and Channel Marketing
Steven C. Ricketts 36 Vice President Marketing
Stanley E. Swiniarski 41 Vice President Development
J. Larry Smart(1) 51 Director
William J. Harding(1)(2) 51 Director
David F. Marquardt(2) 50 Director
Mark B. Myers 59 Director
- ----------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
Mr. Tivnan has served as the President and Chief Executive Officer of
the Company since March 2, 1999. From February 1998 until March 2, 1999, Mr.
Tivnan served as the President of ScanSoft, Inc., which was then operating as an
indirect wholly owned subsidiary of Xerox. From November 1993 until February
1998, Mr. Tivnan served as General Manager and Vice President of ScanSoft. From
January 1991 until November 1993, Mr. Tivnan served as Chief Financial Officer
of ScanSoft.
Mr. Ricci has served as the Chairman of the Board of Directors since
March 2, 1999. Mr. Ricci joined Xerox in 1992 and is currently the Vice
President, Corporate Business Development, a position he has held since January
1998. Prior to assuming his current position, Mr. Ricci has held several
positions within Xerox, including serving as President, Software Solutions, in
Xerox's Document Services Group, and as President of the Desktop Document
Systems Division. Mr. Ricci has served as Chairman of the Board of Directors of
ScanSoft since June 1997 and has served as the sole director of ScanSoft since
September 1996. From September 1996 until February 1998, Mr. Ricci served as
President of ScanSoft.
Mr. Crandall has served as the Vice President Sales and Channel
Marketing of the Company since March 2, 1999. From December 1989 until March 2,
1999, Mr. Crandall oversaw all domestic and international sales activity of
ScanSoft, Inc., which was then operating as an indirect wholly owned subsidiary
of Xerox. Mr. Crandall originally joined ScanSoft in November 1988 as the
Director of North America Sales.
Mr. Ricketts has served as Vice President Marketing of the Company
since March 2, 1999. Mr. Ricketts joined ScanSoft, Inc., which was then
oeprating as an indirect wholly owned subsidiary of Xerox, in December 1992 as
the Manager of OEM Marketing and held roles that include leadership over the
program management teams and worldwide product marketing function. Mr. Ricketts
served as Director of Marketing of ScanSoft for three years before being
promoted to Vice President in August 1998.
Mr. Swiniarski has served as Vice President Development of the Company
since March 2, 1999. From November 1991 until March 2, 1999, Mr. Swiniarski
served as the Director of Product Development. From 1988 until 1991, Mr.
Swiniarski served as the Director of Technology Development and Marketing for
Siemens Nixdorf Information Systems, Inc. and held a number of engineering
positions with software companies that include Apollo Computer, High Order
Software, Inc. and Systems Architects, Inc.
52
Mr. Smart has served as a director of the Company since March 2, 1999.
From April 1997 until March 2, 1999, Mr. Smart served as President and Chief
Executive Officer of Visioneer. Mr. Smart served as Chairman of the Board of
Directors of Visioneer from February 1997 until April 1997. From April 1996 to
March 1997, Mr. Smart was Chairman, President and Chief Executive Officer of
StreamLogic Corporation, a network storage company. From July 1995 to March
1996, Mr. Smart was President and CEO of Micropolis Corporation, a disk drive
design and manufacturing company. From March 1994 to February 1995, Mr. Smart
was President and Chief Executive Officer of Maxtor Corporation, a disk drive
development and manufacturing company. Mr. Smart currently serves as Chairman of
the Board of Southwall Technologies Inc., a thin film technology company, and is
a director of Savoir Technology Group, Inc., a distributor of electronic
components and systems, and Midisoft Corp., a developer of music and sound
software for personal computers.
Dr. Harding has served as a director of the Company since May 1995.
Since 1994, Dr. Harding has been a general partner of Morgan Stanley Venture
Partners II, L.P., which manages the Morgan Stanley Venture Capital Funds.
During 1994, Dr. Harding was a private investor. From 1985 through 1993, Dr.
Harding was a general partner of J.H. Whitney & Co., a venture capital firm.
Mr. Marquardt has served as a director of the Company since November
1992. Since August 1980, Mr. Marquardt has been a general partner of Technology
Venture Investors, a venture capital firm. Mr. Marquardt currently serves as a
director of Auspex Systems, Inc., a provider of network server hardware and
software.
Dr. Myers has served as a director of the Company since March 2, 1999.
Since February 1992, Dr. Myers has served as Senior Vice President, Xerox
Research and Technology, responsible for worldwide research and technology. Dr.
Myers earned an A.B. degree from Earlham College, Richmond, Indiana in 1960, and
a Ph.D. in material sciences from Pennsylvania State University in 1964.
53
ITEM 11.EXECUTIVE COMPENSATION
The following table provides certain summary information for the fiscal
years 1996, 1997 and 1998 concerning compensation paid to the Company's Chief
Executive Officer and to the Company's four other named executive officers whose
compensation exceeded $100,000 in 1998 (the "Named Executive Officers").
ANNUAL COMPENSATION LONG-TERM COMPENSATION
------------------------------------------------ ------------------------
OTHER ANNUAL SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION OPTIONS(#)
- -------------------------------------- ------ ---------- ----------- -------------- ------------------------
J. Larry Smart(2) ................. 1998 $314,357 $154,500 $ -- 698,574
President and Chief Executive 1997 190,500 98,429 21,500 815,000
Officer 1996 -- -- -- --
Rudolph E. Burger.................. 1998 193,269 25,000 -- 215,128
Senior Vice President of Business 1997 173,077 27,424 -- 205,000
Development 1996 137,307 -- -- 40,006
Geoffrey C. Darby(3) .............. 1998 117,944 10,000 -- 71,430
Vice President of Finance and 1997 159,346 17,498 -- 10,000
Chief Financial Officer 1996 156,000 20,000 -- 30,000
Murray Dennis(4) .................. 1998 193,817 86,550 -- 222,577
Vice President of Sales and 1997 175,000 80,045 -- 75,000
Marketing 1996 87,500 51,023 -- 150,000
Michael T. Burt(5) ................ 1998 136,254 20,000 -- 130,715
Vice President of Operations 1997 83,077 21,522 -- 100,000
1996 -- -- -- --
- ----------
(1) Includes amounts paid in the subsequent year for bonuses earned in the
indicated year.
(2) Mr. Smart joined the Company in April 1997.
(3) Mr. Darby left the Company in August 1998.
(4) Mr. Dennis joined the Company in May 1996.
(5) Mr. Burt joined the Company in April 1997.
54
RECENT OPTION GRANTS
The following table sets forth certain information regarding options
granted during the fiscal year ended January 3, 1999 to the Named Executive
Officers.
Percent of Potential Realizable Value at
Total Options Assumed Annual Rates of Stock
Securities Granted to Exercise Price Appreciation for Option
Underlying Employees in or Base Term ($)(2)
Options Fiscal Price Expiration -----------------------------------
Name Granted(#) Year(%)(1) ($/Share) Date 5% 10%
- -------------------- ------------- ---------------- ------------ ----------- --------------- ------------------
J. Larry Smart 115,715 3.68% $1.75 4/1/07 $114,980 $ 284,938
154,287 4.90 1.75 7/1/07 158,831 396,591
428,572 13.61 1.75 10/1/07 455,772 1,146,159
Rudolph E. Burges 34,286 1.09 1.75 9/27/05 27,389 65,072
156,556 4.97 1.75 5/20/07 158,384 393,998
4,286 0.14 1.75 10/6/07 4,558 11,462
20,000 0.64 2.31 6/23/08 29,055 73,631
Geoffrey C. Darby 17,143 0.54 1.75 12/9/08 21,085 54,860
25,715 0.82 1.75 7/25/06 23,233 56,476
8,572 0.27 1.75 10/6/07 9,116 22,925
20,000 0.64 2.31 6/23/08 29,055 73,631
Murray Dennis 2,111 0.07 1.75 7/24/06 1,906 4,634
126,461 4.02 1.75 7/25/06 114,254 277,735
52,576 1.67 1.75 2/4/07 51,166 126,249
21,429 0.68 1.75 10/6/07 22,789 57,309
20,000 0.64 2.31 6/23/08 29,055 73,631
Michael T. Burt 85,715 2.72 1.75 5/8/07 86,336 214,571
25,000 0.79 3.00 3/30/08 47,167 119,531
20,000 0.64 2.31 6/23/08 29,055 73,631
- ----------
(1) Based on options to purchase an aggregate of 3,147,801 shares of common
stock granted during fiscal 1998.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of five percent (5%) and
ten percent (10%) compounded annually from the date the respective options
were granted to their expiration date and are not presented to forecast
possible future appreciation, if any, in the price of our common stock. The
gains shown are net of the option exercise price, but do not include
deductions for taxes or other expenses associated with the exercise of the
options or the sale of the underlying shares of common stock. The actual
gains, if any, on the stock option exercises will depend on the future
performance of our common stock, the optionee's continued employment
through applicable vesting periods and the date on which the options are
exercised.
55
The following table shows the number of shares of common stock
represented by outstanding stock options held by each of the Named Executive
Officers as of January 3, 1999.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES(1)
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at Fiscal Options at Fiscal Year-End
Name Year-End Exercisable/Unexercisable ($) Exercisable/Unexercisable
- ----------------------------- ----------------------------------------- ---------------------------------------
J. Larry Smart 395,001/303,573 $--/--
Rudolph E. Burges 86,825/138,303 863/6,038
Geoffrey C. Darby --/-- --/--
Murray Dennis 91,136/121,723 --/--
Michael T. Burt 42,901/87,814 --/--
- ----------
(1) Based on a per share price of $1.1875, the closing price of our common
stock as reported by The Nasdaq National Market on December 31, 1998,
the last trading day of the fiscal year.
In January 1998, the Company allowed all holders of outstanding options
to exchange higher priced options for new options at $1.75 per share, the fair
market value at the time of the exchange. The repricing terms provided that for
each seven shares of options exchanged, six new options would be granted. The
repriced options maintained the same vesting schedule. Options for 2,656,449
shares were exchanged for new options for 2,276,956 shares.
TEN-YEAR OPTION/SAR REPRICINGS
(as of March 26, 1999)
LENGTH OF
ORIGINAL
OPTION TERM
NUMBER OF REMAINING
SECURITIES NUMBER OF MARKET PRICE EXERCISE AT DATE OF
UNDERLYING SHARES OF STOCK AT PRICE AT TIME NEW REPRICING
OPTIONS/SARS REISSUED TIME OF OF REPRICING EXERCISE OR
DATE OF REPRICED OR 7:6 RATIO REPRICING OR OR AMENDMENT PRICE AMENDMENT
EXECUTIVE OFFICER REPRICING AMENDED (#) (#) AMENDMENT ($) ($) ($) (YEARS)
- ---------------------- ---------- -------------- ----------- --------------- --------------- -------- -------------
J. Larry Smart...... 1/12/98 135,000 115,715 $1.75 $3.75 $1.75 9.25
President and 1/12/98 180,000 154,287 1.75 3.44 1.75 9.50
Chief Executive 1/12/98 500,000 428,572 1.75 3.88 1.75 9.75
Officer
Jay Hanson.......... 7/25/96 5,000 5,000 6.50 10.75 6.50 9.83
Vice President, 1/12/98 10,000 8,572 1.75 4.25 1.75 7.67
Engineering 1/12/98 5,000 3,750 1.75 4.25 1.75 7.67
1/12/98 5,000 4,286 1.75 6.50 1.75 8.58
1/12/98 5,000 4,286 1.75 6.50 1.75 8.58
1/12/98 10,000 8,572 1.75 3.50 1.75 9.08
1/12/98 8,000 6,858 1.75 2.63 1.75 9.42
1/12/98 3,300 2,829 1.75 3.63 1.75 9.67
1/12/98 30,000 25,715 1.75 3.88 1.75 9.75
Bruce S. Mowery..... 7/25/96 150,000 150,000 6.50 10.75 6.50 9.83
Vice President
Marketing
56
BOARD MEETINGS AND COMMITTEES
The Board of Directors held a total of 15 meetings during the fiscal
year ended January 3, 1999. Each director attended at least 75% of the aggregate
number of meetings of (i) the Board of Directors and (ii) the committees of the
Board of Directors on which he served, except David F. Marquardt, who attended
66.6% of the meetings.
The Board of Directors has an Audit Committee and a Compensation
Committee. It does not have a nominating committee or a committee performing the
functions of a nominating committee.
The Audit Committee of the Board of Directors, which currently consists
of directors Paul A. Ricci, J. Larry Smart and William J. Harding, held one
meeting during 1998. The Audit Committee, which meets periodically with
management and our independent public accountants, recommends engagement of our
independent public accountants and is primarily responsible for approving the
service performed by our independent public accountants and reviewing and
evaluating our accounting principles and the adequacy of our internal auditing
procedures and controls.
The Compensation Committee of the Board of Directors, which currently
consists of directors Paul A. Ricci, William J. Harding and David F. Marquardt,
held three meetings during 1998. The Compensation Committee, in conjunction with
the Board of Directors, establishes salaries, incentives and other forms of
compensation for directors, officers and other employees, administers the
various incentive compensation and benefit plans (including our stock purchase
and stock option plans) and recommends policies relating to such plans.
COMPENSATION OF DIRECTORS
Nonemployee directors of the Company are automatically granted options
to purchase shares of the Company's Common Stock pursuant to the terms of the
Company's 1995 Directors' Stock Option Plan (the "Directors' Option Plan").
Under such plan, each person who was a nonemployee director of the Company on
the date of the Company's initial public offering, which was December 11, 1995,
was granted an option to purchase 20,000 shares of Common Stock on the date of
such offering and each person who thereafter first becomes a nonemployee
director will be granted an option to purchase 20,000 shares of Common Stock on
the date on which he or she first becomes a nonemployee director (the "First
Option"). Thereafter, on January 1 of each year, commencing January 1, 1997,
each nonemployee director shall be automatically granted an additional option to
purchase 5,000 shares of Common Stock (a "Subsequent Option") if, on such date,
he or she shall have served on the Company's Board of Directors for at least six
(6) months. The Directors' Plan provides that the First Option shall become
exercisable in installments as to twenty-five percent (25%) of the total number
of shares subject to the First Option on each anniversary of the date of grant
of the First Option and each Subsequent Option shall become exercisable in full
on the first anniversary of the date of grant of that Subsequent Option. Options
granted under the Directors' Option Plan have an exercise price equal to the
fair market value of the Company's Common Stock on the date of grant, and a term
of ten (10) years. Pursuant to the Directors' Option Plan, on January 1, 1998,
each nonemployee director was granted an option to purchase 5,000 shares of
Common Stock. The terms of such options, including vesting terms, are
substantially similar to the terms of the First Option.
CHANGE IN CONTROL AND EMPLOYMENT AGREEMENTS
AGREEMENTS WITH VISIONEER'S EXECUTIVE OFFICERS
Two executive officers of Visioneer prior to the merger, J. Larry
Smart, President and Chief Executive Officer and a director, and Murray Dennis,
Vice President of Sales and Marketing, executed employment and non-compete
agreements with Primax V Acquisition Corp., a wholly owned subsidiary of Primax
Electronics Ltd. After the sale of the hardware business to Primax in January
1999, Mr. Dennis became employed by Primax, and received a signing bonus paid by
Primax equal to six months of his Visioneer salary as part of his new employment
compensation package. He also released Visioneer from its obligations under his
existing employment agreement with Visioneer. Mr. Smart is entitled to receive
payment of six months additional salary by Visioneer since his termina-
57
tion of employment. Michael T. Burt, Vice President of Operations, received a
payment of four months additional salary upon termination of employment.
Pursuant to an engagement letter dated August 11, 1998 between Visioneer and The
Brenner Group LLC, Richard Brenner serves as the Company's Chief Financial
Officer. Visioneer paid The Brenner Group hourly fees for Mr. Brenner's services
and paid a success fee of 90,000 for completion of the hardware sale and the
merger with ScanSoft. The total amount of payments to Messrs. Smart and Brenner
will be approximately 325,000.
In November 1998, Visioneer's Board of Directors approved the
acceleration of vesting of 50% of unvested options held by Messrs. Dennis and
Burt upon each individual's termination of employment with Visioneer. Visioneer
also accelerated the vesting of certain options held by Mr. Smart in accordance
with the vesting schedules set forth in letter agreements between Visioneer and
Mr. Smart dated April 9, 1997, July 7, 1997 and October 6, 1997. Options to
purchase a total of approximately 151,787 shares held by Mr. Smart have also
been accelerated.
In November 1998, Visioneer's Board of Directors also approved offering
to employees, including executive officers, whose employment was terminated by
Visioneer prior to the effective time of the merger the right to receive 0.20
per share for each option share held by such employee that is or would have
vested as of the effective time of the merger (including options that will be
accelerated prior to such time), provided that the employee agreed to terminate
all additional outstanding unvested options held by such employee. Accordingly,
Mr. Dennis received approximately 30,500 for options exercisable as of the date
of the hardware sale to Primax and options accelerated as a result of their
termination of employment. Similarly, Messrs. Smart and Burt received
approximately 134,000 and 17,400, respectively, for options that would be
exercisable as of the closing of the merger and for options accelerated in
connection with the closing of the merger or their termination of employment.
58
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of March 26, 1999, as to (1) each
person (or group of affiliated persons) who is known by us to own beneficially
more than 5% of our common stock; (2) each of our directors; (3) each of our
executive officers; and (4) all directors and executive offices as a group.
SHARES BENEFICIALLY OWNED(2)
---------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT
- -------------------------------------------------------------------- ------------------ -----------------
Xerox Imaging Systems, Inc.(3).................................... 11,853,602 45.0%
800 Long Ridge Road
Stamford, CT 06904
Technology Venture Investors - IV................................. 917,001 3.5
2480 Sand Hill Road
Menlo Park, CA 94025
Morgan Stanley Venture Capital Fund II, L.P.(4)................... 734,036 2.8
3000 Sand Hill Road
Building 4, Suite 250
Menlo Park, CA 94025
Michael K. Tivnan(5).............................................. 80,938 *
Paul A. Ricci(6).................................................. 130,000 *
Wayne S. Crandall(7).............................................. 46,275 *
Steven C. Ricketts(8)............................................. 21,765 *
Stanley E. Swiniarski(9).......................................... 28,214 *
William J. Harding(10)............................................ 759,036 2.9
David F. Marquardt(11)............................................ 945,451 3.6
Mark B. Myers..................................................... -- --
J. Larry Smart(12)................................................ 8,346 *
All directors and executive officers as a group
(9 persons)(13).............................................. 2,020,026 7.6%
- ----------
* Less than 1%.
(1) Unless otherwise indicated, the address for the following stockholders
is c/o ScanSoft, Inc., 9 Centennial Drive, Peabody, Massachusetts
01960.
(2) Applicable percentage ownership is based on 26,355,780 shares of common
stock outstanding as of March 26, 1999. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission. In computing the number of shares beneficially owned by a
person and the percentage of ownership of that person, shares of common
stock subject to options held by that person that are currently
exercisable or exercisable within 60 days of March 26, 1999 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage of ownership of any other person.
The persons named in the table have sole voting and investment power
with respect to all shares of common stock shown as beneficially owned
by them, subject to the community property laws where applicable and
except as indicated in the other footnotes to this table.
(3) Excludes a warrant to purchase up to 1,738,552 shares of common stock.
(4) Includes 486,544 shares owned by Morgan Stanley Venture Capital Fund
II, L.P., 126,276 shares owned by Morgan Stanley Venture Investors,
L.P., 121,216 shares owned by Morgan Stanley Venture Capital Fund II,
C.V.
59
(5) Includes 70,938 shares subject to options exercisable within 60 days of
March 26, 1999.
(6) Excludes 11,853,602 shares of common stock held by Xerox Imaging
Systems, Inc.
(7) Includes 36,275 shares subject to options exercisable within 60 days of
March 26, 1999.
(8) Includes 21,765 shares subject to options exercisable within 60 days of
March 26, 1999.
(9) Includes 28,214 shares subject to options exercisable within 60 days of
March 26, 1999.
(10) Includes 486,544 shares owned by Morgan Stanley Venture Capital Fund
II, L.P., 126,276 shares owned by Morgan Stanley Venture Investors,
L.P., 121,216 shares owned by Morgan Stanley Venture Capital Fund II,
C.V., and 25,000 shares subject to options exercisable within 60 days
of March 26, 1999 held by William J. Harding, a director of ScanSoft.
Dr. Harding is a general partner of Morgan Stanley Venture Partners II,
L.P., the general partner of Morgan Stanley Venture Capital II, L.P.,
Morgan Stanley Venture Investors, L.P., and Morgan Stanley Venture
Capital Fund II, C.V., and, as such, may be deemed to share voting and
investment power with respect to such shares. Dr. Harding disclaims
beneficial ownership with respect to such shares except to the extent
of his pecuniary interest in such shares.
(11) Includes 917,001 shares owned by Technology Venture Investors IV, L.P.,
and 25,000 shares subject to options exercisable within 60 days of
March 26, 1999, held by David F. Marquardt, a director of ScanSoft. Mr.
Marquardt is a general partner of TVI Management IV, L.P., which is the
sole general partner of Technology Venture Investors IV, L.P., and, as
such, Mr. Marquardt may be deemed to share voting and investment power
with respect to such shares. Mr. Marquardt disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
in such shares. Also includes 3,450 shares held directly by Mr.
Marquardt.
(12) Includes 6,250 shares subject to options exercisable within 60 days of
March 26, 1999.
(13) Includes 213,442 shares subject to options exercisable within 60 days
of March 26, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions with Management and Others
The following is a summary of certain agreements we have entered into
with Xerox, which currently owns approximately 45% of our outstanding common
stock. The following summaries of these agreements are qualified in their
entirety by reference to each of the agreements, copies of which are included as
exhibits to this Report.
VOTING AGREEMENT. Xerox, Xerox Imaging Systems, Inc., Visioneer and
several holders of Visioneer common stock entered into a voting agreement
effective at the close of the merger with ScanSoft, pursuant to which they
agreed to vote to elect certain nominees to the Board of Directors, including up
to two persons designated by Xerox (the "Voting Agreement").
At each annual meeting of stockholders during the term of the Voting
Agreement, or at any special meeting of stockholders at which board members are
to be elected, the parties to the Voting Agreement will vote their shares so as
to elect the following directors:
(i) so long as Xerox owns at least 20% of our outstanding
voting stock: two persons designated by Xerox, two individuals
designated by the four members of the Board of Directors who were not
nominated by Xerox and who are not our Chief Executive Officer or our
then-current Chief Executive Officer, and two independent members with
relevant industry experience who are to be designated by at least four
out of the five directors who are not considered to be independent
directors; or
60
(ii) so long as Xerox owns at least 10% of our outstanding
voting stock: one person designated by Xerox, two individuals
designated by the five members of the board who were not nominated by
Xerox and who are not our Chief Executive Officer or our then-current
Chief Executive Officer, and three independent members with relevant
industry experience who are designated by at least three out of the
four directors who are not considered to be independent directors.
The Voting Agreement will terminate upon the earliest to occur of: (1)
the sale of all or substantially all of our property or business or our merger
into or consolidation with any other corporation or if we effect any other
transaction(s) in which more than 50% of our voting power is disposed of; (2)
such time as Xerox owns less than 10% of our outstanding voting stock; or (3)
such time as the non-reporting person parties to the Voting Agreement own, in
the aggregate, less than 7% of our outstanding voting stock; provided, however,
that if such time occurs prior to March 2, 2001 and Xerox holds at such time
shares of our Series B Preferred Stock, the Voting Agreement will not terminate
until the earlier of (x) March 2, 2001 or (y) the date on which Xerox (together
with its affiliates) no longer holds any shares of our Preferred Stock.
THE SERIES B PREFERRED STOCK. In connection with the merger, Xerox
Imaging Systems, Inc. was issued 3,562,238 shares of our nonvoting Series B
Preferred Stock. The Series B Preferred Stock is convertible into shares of
common stock on a share-for-share basis at the option of Xerox Imaging Systems,
Inc. at any time after March 2, 2001; provided, however, that the Series B
Preferred Stock becomes convertible immediately if Xerox Imaging Systems, Inc.'s
ownership of our outstanding common stock is less than 30%, unless such
conversion would result in Xerox Imaging Systems, Inc. owning more than 50% of
our outstanding common stock. The Series B Preferred Stock is entitled to
noncumulative dividends at the rate of 0.065 per annum only if and to the extent
declared by our Board of Directors. The Series B Preferred Stock has a
liquidation preference of 1.30 per share plus all declared but unpaid dividends.
The Series B Preferred Stock does not have any voting rights, except for such
rights as are provided under Delaware law.
COMMON STOCK WARRANT. At the closing of the merger, we issued to Xerox
Imaging Systems, Inc. a ten-year warrant (the "Warrant") that allows Xerox
Imaging Systems, Inc. to acquire a number of shares of common stock equal to the
number of options to purchase common stock (whether vested or unvested) that
remain unexercised at the termination of any ScanSoft option assumed by us in
the merger. The exercise price for each warrant share is the same as the
exercise price of each assumed ScanSoft option, as adjusted by the exchange
ratio in the merger. If all of the assumed ScanSoft options terminate without
being exercised, Xerox Imaging Systems, Inc. would be entitled to purchase
approximately 1,738,552 additional shares of our common stock. The Warrant is
exercisable at any time that shares are available for acquisition under the
Warrant; provided, however, Xerox Imaging Systems, Inc. may not exercise the
Warrant prior to two years from the date of its initial issuance unless,
immediately after such exercise, Xerox Imaging Systems, Inc. owns directly or
indirectly a number of outstanding shares of our common stock that represents
less than 45% of the total number of shares of our common stock outstanding
immediately after such exercise.
REGISTRATION RIGHTS AGREEMENT. We have entered into a registration
rights agreement (the "Registration Rights Agreement") with Xerox and Xerox
Imaging Systems, Inc. in connection with the merger with ScanSoft. Pursuant to
the Registration Rights Agreement, Xerox may demand registration under the
Securities Act of some or all of the shares of common stock owned by Xerox
(including upon conversion of the Series B Preferred Stock or pursuant to the
exercise of the Warrant). Each such registration will be at our expense. We may
postpone such a demand under certain circumstances. In addition, Xerox may
request that we include shares of common stock held by Xerox in any registration
proposed by us of our common stock.
(b) Certain Business Relationships
Not applicable.
61
(c) Indebtedness of Management
Not applicable.
62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this Report:
(1) Financial Statements - See Index to Financial Statements in
Item 8 of this Report.
(2) Financial Statement Schedule - The following financial
statement schedule for our fiscal years ended December 31,
1998, 1997 and 1996 is contained in Item 8 of this Report:
II - Valuation and Qualifying Accounts and Reserves
Report of PricewaterhouseCoopers LLP, Independent
Accountants. Refer to Item 8 above.
All other schedules have been omitted as the
requested information is inapplicable or the
information is presented in the financial statements
or related notes included as part of this Report.
(3) Exhibits -Refer to Item 14(c) below.
(b) Reports on Form 8-K.
(1) On December 8, 1998, the Registrant filed a current report on
Form 8-K, dated December 3, 1998, to report under Item 5 the
signing of the agreement to acquire ScanSoft and to sell its
hardware business to Primax Electronics, Ltd., and to file,
under Item 7, the press releases associated therewith.
(c) Exhibits.
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
Exhibit No. Description of Exhibits
----------- -----------------------
2.1(1) Agreement and Plan of Merger dated December 2, 1998, between
Visioneer, Inc., a Delaware corporation, and ScanSoft, Inc., a
Delaware corporation.
3.1(2) Bylaws of Registrant.
3.2(3) Amended and Restated Certificate of Incorporation of Registrant.
4.1(3) Specimen Common Stock Certificate.
4.2(4) Preferred Shares Rights Agreement, dated as of October 23, 1996,
between the Registrant and U.S. Stock Transfer Corporation,
including the Certificate of Designation of Rights, Preferences
and Privileges of Series A Participating Preferred Stock, the
form of Rights Certificate and Summary of Rights attached thereto
as Exhibits A, B and C, respectively.
4.3 Voting Agreement dated March 2, 1999 between Xerox, Xerox Imaging
Systems, Inc., Visioneer, Inc. and several holders of Visioneer
common stock.
63
Exhibit No. Description of Exhibits
----------- -----------------------
10.1(2) Form of Indemnification Agreement.
10.2(2)** 1993 Incentive Stock Option Plan and form of Option Agreement.
10.3(2)** 1995 Employee Stock Purchase Plan and form of Subscription
Agreement.
10.4(2)** 1995 Directors' Option Plan and form of Option Agreement.
10.5(5)** 1997 Employee Stock Option Plan.
10.6(5)** Director 1997 Compensation Plan.
10.7(2) LZW Paper Input System Patent License Agreement dated October 20,
1995 between the Registrant and Unisys Corporation.
10.8(2) Patent License agreement dated November 13, 1995 between the
Registrant and Wang Laboratories, Inc.
10.9(2) Building Lease dated May 21, 1996 between the Registrant and John
Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77
(Arrillaga Family Trust) as amended, and Richard T. Peery,
Trustee, or his Successor Trustee, UTA dated 7/20/77 (Richard T.
Peery, Separate Property Trust) as amended.
10.10(2) Software License Agreement dated August 14, 1996 between the
Registrant and Hewlett-Packard Company.
10.11(6) Form of Employment Agreement between the Registrant and each
individual who was an executive officer prior to the merger with
ScanSoft and the sale of the hardware business.
10.12+ Software Distribution Agreement dated April 26, 1995 between
Xerox Imaging Systems, Inc. and Tech Data Corporation.
10.13 Assignment, Assumption, Renewal and Modification Agreement dated
June 18, 1997 between Xerox Imaging Systems, Inc., ScanSoft, Inc.
and Tech Data Product Management, Inc.
10.14+ Distribution Agreement dated September 22, 1993 between Ingram
Micro, Inc. and Xerox Imaging Systems, Inc., as amended.
10.15+ Gold Disk Bundling Agreement: Pagis SE & Pagis Pro, dated June
29, 1998 between Xerox Corporation, through its Channels Group
and ScanSoft, Inc., as amended.
10.16+ Gold Disk Bundling Agreement dated March 25, 1998 between Xerox
Corporation, Office Document Products Group and ScanSoft, Inc.
23.1 Consent of PricewaterhouseCoopers LLP.
24.1 Power of Attorney. (See page 66)
27.1 Financial Data Schedule.
64
- ----------
** Denotes Management compensatory plan or arrangement.
+ Confidential Treatment requested pursuant to a request for confidential
treatment filed with the Commission on April 2, 1999. The portions of
the exhibit for which confidential treatment has been requested have
been omitted from the exhibit. The omitted information has been filed
separately with the Commission as part of the confidential treatment
request.
(1) Incorporated by reference from the Registrant's Registration Statement
on From S-4 (No. 333-70603) filed with the Commission on January 14,
1999.
(2) Incorporated by reference from the Registrant's Registration Statement
on Form S-1 (No. 333-98356) filed with the Commission on October 19,
1995.
(3) Incorporated by reference from the Registrant's Registration Statement
on Form S-8 (No. 333-74343) filed with the Commission on March 12,
1999.
(4) Incorporated by reference from the Registrant's current Report on Form
8-K dated October 30, 1996.
(5) Incorporated by reference from the Registrant's Quarterly Report on
Form 10-Q for the fiscal quarter ended March 31, 1997.
(6) Incorporated by reference from the Registrant's Annual Report on Form
10-K/A-2 for the fiscal year ended December 31, 1996.
65
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the
Registrant has duly caused this Report on Form 10-K to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Peabody, State of
Massachusetts, on March 29th, 1999.
SCANSOFT, INC.
By: /s/ MICHAEL K. TIVNAN
---------------------------------------
Michael K. Tivnan
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael K. Tivnan and Richard M. Brenner,
and each of them, his attorneys-in-fact and agents, each with the power of
substitution, for him in any and all capacities, to sign any and all amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therein, with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed by the following persons in
the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/S/ MICHAEL K. TIVNAN President, Chief Executive Officer and March 29, 1999
- ------------------------------ Director (Principal Executive Officer)
Michael K. Tivnan
/S/ RICHARD M. BRENNER Chief Financial Officer (Principal March 29, 1999
- ------------------------------ Accounting Officer)
Richard M. Brenner
/S/ PAUL RICCI Director March 29, 1999
- ------------------------------
Paul Ricci
/S/ J. LARRY SMART Director March 29, 1999
- ------------------------------
J. Larry Smart
/S/ DAVID F. MARQUARDT Director March 29, 1999
- ------------------------------
David F. Marquardt
/S/ WILLIAM HARDING Director March 29, 1999
- ------------------------------
William Harding
/S/ MARK MYERS Director March 29, 1999
- ------------------------------
Mark Myers
66