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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 0-27038
SCANSOFT, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 94-3156479
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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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 /X/ 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. /X/
The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $195,205,983.81 as of March 23, 2000, based on
$5.8125 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 23, 2000 was 45,754,414.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive proxy statement filed with the Securities and Exchange
Commission relating to the Company's 2000 Annual Meeting of Stockholders to be
held May 4, 2000 (Part III of Form 10-K)
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SCANSOFT, INC.
TABLE OF CONTENTS
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PART I
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
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 18
Item 6. SELECTED FINANCIAL DATA..................................... 18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 20
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. 28
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE........................................ 53
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 53
Item 11. EXECUTIVE COMPENSATION...................................... 54
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 54
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 54
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 54
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FORWARD LOOKING STATEMENTS
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 UNDER THE HEADING
"RISK FACTORS" 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.
PART I
ITEM 1. BUSINESS
ScanSoft, Inc. was incorporated as Visioneer, Inc. in March 1992 and
through December 1998, developed and sold scanner hardware and software
products.
In 1993, Xerox Imaging Systems, Inc. ("XIS") a wholly owned subsidiary of
Xerox Corporation, established a software business unit called "ScanSoft". On
September 16, 1996, XIS formed a wholly owned subsidiary, ScanSoft, Inc., in
order to focus on the software business.
On January 6, 1999, Visioneer sold the hardware business and the Visioneer
brand name to Primax Electronics, Ltd., and on March 2, 1999, Visioneer acquired
ScanSoft, in a cash election merger, from Xerox Corporation. The corporate
entity "Visioneer" survived the merger, but changed its name to "ScanSoft, Inc."
In addition, Visioneer changed the ticker symbol for its common stock that
trades on the Nasdaq, to "SSFT."
On January 15, 2000, ScanSoft, Inc. signed a definitive agreement to
acquire Caere Corporation ("Caere") in a forward triangular merger to be
accounted for as a purchase transaction. The merger was completed on March 13,
2000. Caere designs, develops, manufactures and markets a range of OCR software
tools.
ScanSoft, Inc. ( hereinafter "ScanSoft" or the "Company") is a leading
provider of digital imaging software products for retail, OEM and corporate
markets. ScanSoft's 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.
Generally, ScanSoft's products are based on proprietary or patented optical
character recognition ("OCR") and/or image processing technologies designed to
address the needs of a broad group of users ranging from consumers and small
office to medium-sized businesses and large corporations.
The Company maintains executive offices and principal facilities at 9
Centennial Drive, Peabody, MA 01960. Its telephone number is (978) 977-2000. The
Company maintains a World Wide Web site at www.scansoft.com.
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SCANSOFT'S BUSINESS MODEL
Growth in the digital imaging software market is driven by the increasing
need to create and use digital images. For example, on-line communication, such
as e-mail and Internet publishing, is driving the need for scanners and digital
cameras to convert existing printed or photographic information into digital
text and images. The desire to store paper by using the personal computer as a
digital filing cabinet is also driving demand for imaging devices. Individuals
can capture images of paper documents, store them in electronic folders, and
index the information so they can be quickly found. In addition, the
proliferation of high quality, low cost color printers is benefiting the digital
imaging industry. Because many personal computer users can now print color
documents and photos, they are able to make color copies at the office and make
high quality prints of captured photos conveniently at home. Other industry
trends that are having a positive effect on the digital imaging market are
increasing computer speeds and lower prices for computer memory (RAM).
ScanSoft's strategy is to target the growing imaging device market through
its core business of consumer and small office/home office ("SOHO") imaging
software. According to research firm International Data Corporation (IDC),
worldwide shipments of scanners will grow from 18.9 million in 1999 to 39.4
million in 2003. The firm projects digital camera shipments to grow at a
compound annual growth rate of 48% through the same period, with shipments
increasing from 4.7 million in 1999 to 22 million units in 2003. IDC also
expects that worldwide multifunction peripheral units will grow from 3.7 million
to 6.5 million, representing a compound annual growth rate of 20%.
ScanSoft's software products include OCR, personal document management,
photo imaging and editing and software suites that offer various combinations of
these products and often third party offerings. ScanSoft believes that its
ability to achieve broad market acceptance of its 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 ScanSoft's
software to integrate with desktop operating systems, word processing
applications, e-mail software, fax applications, image editing products and
Internet publishing tools will affect ScanSoft's ability to achieve market
acceptance for its products. In that regard, ScanSoft's strategy is to maintain
and enhance its technological position by investing in OCR and image processing
technology and strategic business and technology partnerships with other leading
companies.
ScanSoft also provides 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, e-mail and the Internet.
Currently, ScanSoft bundles client software with Xerox network multifunction
devices. ScanSoft plans to offer client/server software products in the future.
The Internet imaging software market includes products that make it easier
to publish and share paper documents and photos via the Internet. Currently,
ScanSoft's products allow users to capture and convert paper-based documents to
Joint Photographic Experts Group ("JPEG"), Hypertext Mark-up Language ("HTML")
and Portable Document Format ("PDF") files and share photos and documents via
e-mail or as part of an Internet site. Based on the growth of the Internet, and
the increasing number of ways people and organizations are leveraging the
Internet for communication, ScanSoft expects revenue from, and increased
competition in, this market segment.
PRODUCTS
The Company offers a product line designed to accommodate the diversity of
information and data entry requirements. ScanSoft's products can be used with a
range of computer systems, such as IBM, IBM-compatible, and Apple Macintosh
personal computers, as well as most desktop operating systems, such as Windows,
Windows 95/98, Windows NT, and System 7. Each product is designed to accomplish
the same overall goal: to improve the speed, accuracy, and simplicity of desktop
information management.
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PRODUCTS FOR BUSINESSES AND PROFESSIONAL USERS
Paperport(R) 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.
Textbridge Pro(R)
TextBridge Pro is 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 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(R)
Pagis Pro is a comprehensive scanning suite that combines the Pagis digital
imaging desktop with TextBridge Pro and Kai's PhotoSoap 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
Paper Converter(TM)
Paper Converter software converts scanned paper documents and images
- -including formatted text, tables and photos -- into editable Hypertext Mark-up
Language ("HTML"). Paper Converter is the first scan-to-Web product designed to
integrate directly into Microsoft's FrontPage 2000, a Web site creation and
management tool. Paper Converter allows Web professionals and office workers in
small businesses and larger corporate environments to convert and organize
paper-based information and make it accessible via the Web and on corporate
intranets.
PhotoFactory(TM)
PhotoFactory combines three photo-editing software packages users can use
to edit, liquefy, twist, and stretch photos. With PhotoFactory users can create
presentations complete with sound, animation and other
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special effects. PhotoFactory runs on Macintosh 8.1 or greater and Microsoft
Windows 9.x, NT operating system platforms.
Kai's PhotoSoap 2(TM)
PhotoSoap2 provides professional photo retouching tools. Users can restore
old or damaged photographs, add special effects, print to popular formats and
papers, and export pages to the Web.
Kai's SuperGoo(TM)
By using SuperGoo users can mix images of family and friends with the
hundreds of facial components, such as eyes, noses, hairstyles, and more,
included in the software. Stretch, warp, or smear images using a library of
customizable Liquid Image distortion tools. Images can be converted into
Quicktime or AVI animation or posted on the Web.
Kai's Power SHOW(TM)
Power SHOW allows users to easily create and play home photo shows or
enhance business presentations. SHOW works with digital photos, PC PowerPoint
slides, pictures, and video clips. Presentations can also be sent to others via
the Web.
OEM PRODUCTS
We bundle various versions of Pagis, PaperPort, 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.
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 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 2000 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.
CAERE PRODUCT DESCRIPTIONS
On March 13, 2000 ScanSoft acquired Caere and, as a result, acquired the
following software product lines: OmniPage(R) Pro, OmniPage Pro 10 Scan Suite
Plus(TM), OmniPage Web(TM), OmniPage Limited Edition(R), Recognita Plus(R),
Developers Kit 2000(TM), PageKeeper Pro(R), OmniForm(TM), OmniForm Internet
Publisher(TM), and the exclusive right to distribute ImageAXS(TM).
OmniPage Pro(R) is a fully featured page recognition solution for power
users. OmniPage Pro is an OCR product that allows the user to recognize, edit,
and save complex documents containing text and images in their original,
full-page formats and provide users the ability to recognize tables and
spreadsheets. OmniPage Limited Edition is a limited feature version of OmniPage
that allows a user to perform OCR on a scanned document and save the document to
a file. OmniPage Limited Edition is bundled with most scanners offered by
Caere's scanner partners.
OmniPage Pro 10 Scan Suite Plus offers six software products in one box. It
contains OmniPage Pro 10.0, MGI PhotoSuite III SE, OmniPage Web PE, NetObjects
Fusion 4.0, Post-It(R) Software Notes from 3-M, and PageKeeper Pro.
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OmniPage Web is a fast, easy way to convert paper documents into
intelligent, structured Web sites. Using the award-winning OmniPage Pro OCR
engine and new Logical Structure Recognition(TM) (LSR(TM)) technology, OmniPage
Web outlines a scanned document and creates a complete, dynamic Web site with
separate Web pages for each page, chapter or section; and hot-links between
referenced sections.
Recognita Plus is a leading, full-featured, multilingual, and
font-independent OCR software product, targeted at the Eastern European market,
that integrates with most popular word processing, desktop publishing, and
spreadsheet applications available for Windows.
The Developers Kit 2000 is a new way to develop applications that integrate
multiple recognition technologies. Whether users require OCR, ICR, OMR, or bar
code, the Developers Kit 2000 offers the flexibility customers demand, in a
single set of developer tools.
PageKeeper Pro is document management software designed to help users
organize, use, and retrieve virtually all computer documents, including scanned
paper, electronic files, and Web pages.
OmniForm converts paper forms to electronic forms with the click of a
button. OmniForm creates an electronic version of scanned or faxed documents by
using OCR technologies and color Logical Forms Recognition(TM). OmniForm users
also can design their own forms, complete with fonts, graphics, and logos, using
the custom toolset and Form Assistant(TM). OmniForm Filler(TM) allows users to
efficiently fill out forms by accepting input, performing calculations,
validating entries and creating databases which can be searched, sorted,
imported, and exported to popular database applications. OmniForm Internet
Publisher converts existing paper forms to electronic versions and allows users
to save the forms to a variety of Web-ready formats incorporating such form
intelligence as field validation and calculations, so that companies can collect
and distribute data-associated business transactions such as invoices, purchase
orders, expense reports, or questionnaires.
ImageAXS organizes locates digital images and multimedia files, including
photos, scanned images, downloaded images, movies, and sounds. ImageAXS is a
visual database for professional users -- photographers, Web designers, graphic
artists, stock photo collectors, and others -- who have lots of images to
catalog and want to be able to find them quickly and easily.
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.
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 products, software applications on the hard drive are
recognized, and linking icons to applications supported by the PaperPort API are
placed on the PaperPort 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.
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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
require 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 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.
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In 1999 we derived a significant portion of our revenue 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 two
customers for 1999 were Ingram Micro and Tech Data, both independent
distributors. Sales to these top two independent distributors accounted for 39%
of our total revenue in 1999 in the aggregate, or 24% and 15%, respectively, as
compared to the top two independent distributors and resellers in 1998
accounting for 30% of our total revenue in 1998. 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 that 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.
Revenue from resellers and distributors outside North America represented
approximately 13% of revenue in 1999 as compared to 7% in 1998. We expect our
revenue from international sales to account for approximately 25% of revenues in
2000.
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.
OEM RELATIONSHIPS
The Company has software OEM agreements with several manufacturers who
bundle digital imaging software with the scanning, capture, and multifunction
devices or software they sell including: Apple, Brother, Canon, Compaq, Epson,
Hewlett-Packard, IBM, Mattel, Microtek, Mustek, Olivetti-Lexikon, Primax, Smith
Micro, and Visioneer. Additionally, The Company also entered into multiple
non-exclusive agreements with
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Xerox Corporation (a significant stockholder) in which ScanSoft agreed to
license Xerox the royalty-bearing right to copy and distribute certain versions
of Pagis, PaperPort and TextBridge software programs with Xerox's multifunction
peripherals. The Company also has key technology partnerships with several
companies, including a recent alliance with Microsoft.
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 is located at both our headquarters in
Peabody, Massachusetts. As of December 31, 1999, we employed 62 full-time and 6
contract software design and quality assurance engineers, technicians and
support staff.
Our growth and future financial performance will depend in part upon our
ability to enhance existing applications and to 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
The Company outsources a majority of the duplication and production of its
software products to third parties. These vendors procure all required
components, including compact disks, floppy disks, product manuals, boxes, and
other product literature, and manufacture completed software products for
delivery to the Company. Such manufacturing services are available from multiple
vendors. However, an interruption or failure by an existing manufacturing
supplier could result in a delay in shipment of ScanSoft products.
Most of the components used in the manufacture of the Company's products
are available from multiple sources of supply. Certain components used in the
manufacture of the Company's OCR products are currently available only from a
single source. Although the Company generally maintains a several-month
inventory level of these components, failure of a single-source supplier to
deliver required quantities of such materials could materially and adversely
affect the Company's operating results. The Company believes that, if necessary,
it could develop alternative sources of supply for these components and parts,
or re-engineer the products. However, any delays in developing such alternative
sources of supply or in the re-engineering of the products could have a material
adverse effect on the Company's results of operations.
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
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programs through the retail channel, including companies such as Adobe
Corporation ("Adobe"), ABBYY Software House ("ABBYY"), NewSoft America, Inc.
("NewSoft"), I.R.I.S. 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 Adobe, ABBYY, NewSoft,
I.R.I.S. 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), NewSoft, 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. Microsoft Corporation and MGI Software
Corp. 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.
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
The Company relies upon proprietary technology, trade secrets, know-how,
continuing technological innovations and licensing opportunities to maintain its
competitive position. The Company attempts to protect its technology and trade
secrets with patents, copyrights, trade secret laws, technical measures and non-
disclosure agreements. The Company's policy is to file patent applications to
protect technology, inventions and improvements that are important to the
development of its business. The Company has been issued a series of patents
that directly relate to its products. These patents expire on various dates
between 2005 and 2016. Assurance cannot be given that any patents issued to the
Company will not be challenged, invalidated or circumvented or that the rights
granted by the patents will provide competitive advantages to the Company.
In order to protect its ownership rights in its software products, the
Company licenses such products to OEMs and resellers on a non-exclusive basis
with contractual restrictions on reproduction, distribution and transferability.
In addition, the Company generally licenses it software in object code form
only. The Company licenses its software products to end users by use of a
"shrink-wrap" customer license that restricts the end user to personal use of
the product. Despite these contractual restrictions, it may be possible for
competitors or users to illegally copy the software or obtain information that
the Company regards as proprietary.
The Company also relies on trade secrets and proprietary know-how. The
Company has been, and will continue to be, required to disclose its trade
secrets and proprietary know-how to employees and consultants. Although the
Company seeks to protect its trade secrets and proprietary know-how by entering
into confidentiality agreements with such persons, there can be no assurance
that these agreements will not be breached, that the Company would have an
adequate remedy for any breach, or that the Company's trade secrets will not
otherwise become known or be independently discovered by competitors.
Because of technological developments in the industry in which the Company
markets its products, it is possible that certain of the Company's products may
infringe third party proprietary rights. From time to time
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the Company has received, and in the future may receive, notices of claims of
infringement. In response to these claims, the Company may have to obtain
licenses for an allegedly infringing product or stop selling such product and be
liable for damages. However, there can be no assurances that any required
licenses or rights could be obtained on commercially reasonable terms.
In addition, ScanSoft has developed products in the past that incorporate
technology based on licenses received from third parties. The Company's ability
to continue to develop and commercialize its products will be affected by its
ability to renew existing technology licenses and to obtain technology licenses
from third parties in the future. There can be no assurance that the Company
will be able to renew its current licenses or obtain any necessary licenses in
the future. The failure to renew existing licenses or to obtain any licenses
that may be required in the future could have a material adverse effect on the
Company.
Policing unauthorized use of technology is difficult, especially in the
software industry. Software piracy can be expected to be a persistent problem
for the software industry for the foreseeable future. Such piracy can be
particularly egregious in international markets in which the Company distributes
its products. The Company believes that, due to the rapid pace of technological
change in the industry, factors such as knowledge, ability, frequent product
enhancements, timeliness and quality of product support and the experience of
the Company's employees are more significant as a means to protect the Company's
competitiveness than patent, copyright and trade secret protection.
EMPLOYEES
As of December 31, 1999, ScanSoft employed 125 people. None of the
Company's employees is represented by a labor union. Our future performance
depends in significant part on the continued service of our key technical and
senior management personnel. The Company has experienced no work stoppages and
believes that its employee relations are good. The Company has utilized the
services of consultants, third-party developers, and other vendors extensively
in its sales, development, and manufacturing activities.
Competition in the recruiting of personnel in the computer and data
recognition industry is intense. The Company believes that its future success
will depend in part on its continued ability to hire and retain qualified
management, marketing, technical employees, and independent contractors. There
can be no assurance that the Company will be able to attract and retain enough
qualified employees. The Company does not carry any key person life insurance
with respect to any of its personnel.
RISK FACTORS
ALTHOUGH SCANSOFT AND CAERE EXPECT THAT THEIR RECENT MERGER WILL RESULT IN
BENEFITS, THOSE BENEFITS MAY NOT OCCUR. The acquisition of Caere by ScanSoft
involves risks related to, among other things, the integration and management of
acquired technology, sales and marketing efforts, operations and personnel. The
integration of ScanSoft and Caere will be a complex, time consuming and
expensive process and may result in disruption of the business of the combined
company. Following the merger, the combined company must operate as a combined
organization utilizing common information and communication systems, operating
procedures, financial controls and human resources practices. There may be
substantial difficulties, costs and delays involved in integrating ScanSoft and
Caere, including:
- Potential incompatibility of business cultures;
- Product development delays caused by disruptions from the merger;
- Perceived adverse changes in business focus;
- Potential lapses in internal and financial controls;
- Potential conflicts in sponsoring, advertising or content relationships;
- The loss of key employees and diversion of the attention of management
from other ongoing business concerns;
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- Negative reaction from and/or deterioration of our relationship with our
OEM customers, distributors and resellers, or end-user customers; and
- Caere may not be successfully integrated, managed and operated by
ScanSoft.
WE WILL INCUR SUBSTANTIAL EXPENSES FROM OUR ACQUISITION OF CAERE. We
estimate that we will incur aggregate pre-tax costs of approximately $4 million
associated with the merger, as well as approximately $3-6 million in
restructuring costs, which includes costs relating to employee severance. In
addition, we expect to incur certain costs in connection with the integration of
the two companies. These costs cannot now be reasonably estimated, because they
depend on future decisions to be made by management of the surviving
corporation, but they could be material. These 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
primarily in subsequent periods following the merger.
The merger will be accounted for as a purchase and, accordingly, the
acquired assets and liabilities of Caere will be recorded at estimated fair
values. Under the purchase method of accounting, intangibles in the amount of
approximately $92 million will be capitalized and special charges of
approximately $28 million relating to in-process research and development will
be recorded in the quarter the merger is consummated. These amounts are
estimates that reflect the most recently available information but will be
affected by the completion of a valuation study that will begin shortly. The
completion of the valuation study may result in significant differences from the
preliminary allocation. The amortization of other intangibles after the merger
will have an adverse effect on the results of operations of the surviving
corporation.
OUR ACQUISITION OF CAERE MAY FAIL TO QUALIFY AS A "REORGANIZATION" WITHIN
THE MEANING OF SECTION 368(a) OF THE INTERNAL REVENUE CODE. In order to qualify
as a reorganization within the meaning of Section 368(a) of the Internal Revenue
Code, the merger must satisfy certain requirements, including the requirement
that following the merger the surviving corporation hold "substantially all" of
the properties of Caere. For purposes of issuing private letter rulings, the
Internal Revenue Service has stated that 70% of the fair market value of the
gross assets and 90% of the fair market value of the net assets of the target
will be considered "substantially all" of the target's properties. The merger
was structured such that the cash portion of the consideration paid to the Caere
stockholders may be deemed to be paid by Caere rather than ScanSoft. In that
case, the portion of Caere's properties represented by the cash would not be
held by the surviving corporation following the merger, and the merger likely
would not satisfy the ruling guidelines of the IRS. However, these ruling
guidelines only represent the circumstances under which the IRS will exercise
its administrative discretion to issue private letter rulings. Significantly
lower thresholds than those articulated by the IRS have been upheld by the
courts, including in cases where the target corporation did not transfer cash,
accounts receivable and other financial assets to the acquiror, provided that
all of the target's operating assets and sufficient working capital were
transferred. If the merger fails to qualify as a reorganization within the
meaning of Section 368(a) of the Code, Caere, now a wholly owned subsidiary of
ScanSoft, would recognize corporate level gain upon the deemed transfer of its
assets to Scorpion Acquisitions Corporation in a taxable transaction.
WE DEPEND ON THE CONTINUED DEVELOPMENT OF THE DIGITAL IMAGING SOFTWARE
MARKET FOR OUR GROWTH. The market for digital imaging software and, in
particular, for our products is:
- Constantly evolving and is subject to rapid technological changes;
- Dependent on the introduction, growth, adoption and pricing of digital
imaging devices such as scanners, multi-function peripherals and digital
cameras;
- Subject to the technical knowledge and ability of users to understand and
use such devices and software; and
- 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. We expect to participate in and
benefit from the expected growth caused by the technological and market trends
in the
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digital imaging markets. Broad market acceptance of our products and our future
success will, however, depend in part on the following:
- Our ability to educate users about the benefits of digital imaging
products generally and the specific benefits of our products;
- Our ability to adapt to emerging industry standards and respond to our
competitors' product announcements;
- Our ability to develop, introduce, upgrade and support competitive, new
products and product enhancements that meet changing customer
requirements and emerging industry standards; and
- Our ability to increase brand-name recognition.
If we are not successful in meeting the goals listed above, we may not be
able to maintain or gain broad market acceptance for our products. Further, a
decline in demand for digital imaging products generally, or for ScanSoft's
PaperPort, Pagis or TextBridge products or Caere's OmniPage and OmniForm
products, in particular, could occur as a result of competitive technological
change or other factors.
OUR REVENUE HAS BEEN DEPENDENT ON DEMAND FOR A FEW PRODUCTS. We have
historically had a substantial portion of our revenue generated from a few
products. ScanSoft's TextBridge product family represented approximately 42% of
revenue, Pagis represented approximately 21% of revenue and PaperPort
represented approximately 20% of revenue for the year ended December 31, 1999.
Caere's OmniPage product family represented approximately 58% of its revenue for
the same time period. The likelihood these products will continue to contribute
significant revenue to the combined company is subject to certain risks,
including:
- Our ability to develop and introduce competitive new product enhancements
that meet changing customer requirements; and
- Our ability to develop and introduce product enhancements that meet
emerging industry standards.
The reduction in revenue contribution from any of these products could have
a material adverse impact upon our business, results of operations and financial
condition. In addition, a reduction in revenue may make it more difficult for us
to compete in the digital imaging market.
THE TIMING OF NEW PRODUCT INTRODUCTIONS IS CRITICAL TO OUR SUCCESS. The
digital imaging software market is characterized by rapid technological change,
evolving customer needs, frequent new product introductions and evolving
industry standards. 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 and
new versions of existing products to increase in the first few months after
their introduction because of initial demand. 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.
WE DEPEND ON CONTINUED DEMAND FOR OUR PRODUCTS FROM ORIGINAL EQUIPMENT
MANUFACTURERS. ScanSoft and Caere have OEM relationships with a number of
companies that provide digital imaging hardware. Agreements with our OEM
customers provide for our software products to be bundled with the OEMs'
hardware products when sold. The cost, if any, of integrating, including
providing the reproduction of our software, is assumed by the OEM. These
agreements also provide for a license fee to be paid to ScanSoft or Caere. The
license fee may be a royalty based upon unit sales, a flat fee or a fee for a
certain time period. We
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cannot assure you that OEM customers will accurately report license fees or have
the ability to pay them. Our agreements with OEMs do not obligate them to bundle
our software.
Other risks include whether the OEMs will:
- Give sufficient priority to marketing our products;
- Continue to offer our products at all; and
- Elect instead to bundle software products of our competitors.
OEM revenue has historically represented approximately 15-25% of our revenue. In
the past several years, we have seen a significant reduction in revenue from
certain OEM customers and may not be able to replace the revenue generated from
those relationships.
THE DIGITAL IMAGING SOFTWARE MARKET IS HIGHLY COMPETITIVE. 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:
- Accuracy of scanned images;
- Ease of understanding and use;
- Product reliability;
- Product features and functions;
- Price/performance characteristics;
- Brand recognition; and
- Quality of product support.
Our current competitors include developers of digital imaging software,
document management software, and scanning software suites, and manufacturers of
scanners, multi-function peripheral devices, and digital cameras. We experience
significant price competition and pressure in both the retail channel and the
OEM market and expect this to continue. In addition, our "bundled" products
themselves compete with our fully featured shrinkwrap products. Our current
competitors include Microsoft Corporation, Adobe Systems Incorporated, Corel
Corporation, ABBYY Software House, NewSoft America, Inc., I.R.I.S., JetForm, MGI
Software Corp., and many others.
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:
- Certain of our competitors offer products comparable to ours at retail
prices that are lower than ours;
- Many of our current and potential competitors have longer operating
histories and significantly greater financial, technical, support, sales,
marketing, recruiting and other resources;
- Certain of our competitors have greater name recognition and larger
customer bases than we do;
- 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; and
- Certain of our competitors may be able to develop digital image
processing software with superior accuracy, ease of understanding and
use, product reliability, product features and functions and
price/performance characteristics than we develop.
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 maintain or gain broad market
acceptance for
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our products. Competitive pressures may materially affect our business,
operating results, and financial condition.
WE NEED TO CONTINUE TO MAINTAIN AND BUILD OUR RELATIONSHIPS WITH
DISTRIBUTORS AND OTHER RESELLERS. We expect to continue to receive a
substantial portion of our revenue from sales through our independent
distributors and resellers, but we anticipate that our dependence on 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.
We may not be able to develop an effective method of distributing our
software products using newly emerging software distribution channels, such as
the Internet. Even if successful, the presence of new distribution channels
could adversely affect our existing distribution channels and the prices of our
products.
OUR TRADITIONAL DISTRIBUTORS ARE SUBJECT TO ECONOMIC AND COMPETITIVE
RISK. Our traditional distributors in the retail channel are experiencing
extreme competition both among themselves and from the shift to electronic
commerce. Some of these distributors are experiencing disappointing financial
results and in some cases have announced employee layoffs. A failure by any one
of our distributors could result in:
- Material bad debts;
- Loss of inventories and associated sales values;
- Disruption of revenue from the retail channel; and
- Significant costs incurred to reestablish product distribution.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY IN INTERNATIONAL MARKETS. As a
result of our acquisition of Caere, international sales will represent more than
25% of total sales, and more than 20% of our employees will be in foreign
locations. We plan to continue expansion of our international operations by
establishing a more extensive network of international distributors and
resellers. We also develop versions of our products suitable to the market
requirements of particular foreign countries, such as different languages. We
have limited resources to develop international versions of our products and to
market, distribute, service and support 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.
CONDUCTING BUSINESS OUTSIDE OF THE UNITED STATES WILL EXPOSE US TO
ADDITIONAL RISKS. In conducting business outside of the United States, we are
exposed to the following risks:
- Unexpected changes in regulatory requirements;
- Import and export duties and restrictions;
- Tariffs and other trade barriers;
- Difficulties in staffing and managing foreign operations;
- Longer payment cycles;
- Uncertainties in connection with collecting accounts receivable;
- Political instability;
- Fluctuations in currency exchange rates;
- Logistical difficulties in managing multinational operations;
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- Seasonal reductions in business activity during summer months in Europe
and certain other parts of the world; and
- Potentially adverse tax consequences, including our inability to recover
withholding taxes.
PRODUCT DEFECTS MAY HARM OUR BUSINESS. 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. Delay in commercial release
or correction of errors could lead to loss of revenue, credibility with
customers and market acceptance of our products. Despite our testing, and
testing by current and potential customers, errors may be found in software
after commencement of commercial shipments, resulting in loss or delay of
revenue or market acceptance, diversion of development resources, damage to our
reputation, or increased support costs.
WE DEPEND ON THIRD-PARTY LICENSES FOR OUR PRODUCTS. We rely on certain
software technology which we license from third parties and use 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.
If our agreements with third-party vendors are not renewed or the
third-party software fails to address the needs of our software products, we
would be required to find alternative software products or technologies of equal
performance or functionality. We cannot assure that we would be able to replace
the functionality provided by third-party software if we lose the license to
this software, if it becomes obsolete or incompatible with future versions of
our products or if it is not otherwise adequately maintained or updated.
THE PROTECTION OF OUR PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY IS
KEY TO OUR SUCCESS. ScanSoft and Caere both rely heavily on their proprietary
software technology, trade secrets and other intellectual property. We use a
variety of methods to protect our respective intellectual property including
patents, copyrights, trademarks and trade secrets. In addition, 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" or "click wrap" licenses that are not signed by the 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.
WE DEPEND ON KEY PERSONNEL AND FACE RISKS ASSOCIATED WITH HIRING AND
RETAINING 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. 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.
OUR PAST EXPERIENCE OF FLUCTUATING REVENUE AND OPERATING RESULTS MAY
CONTINUE. ScanSoft and Caere's revenue and operating results have fluctuated in
the past, and future revenue and operating results are likely to
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do so in the future, particularly on a quarterly basis. Our revenue frequently
fluctuates from quarter to quarter due, to a large extent, on the following:
- Volume, timing and filling of customer orders;
- Reduction in prices in response to competition or market conditions;
- Increased expenditures to pursue new product or market opportunities;
- Inability to adjust operating expenses to compensate for shortfalls in
revenue against forecast;
- Returns and allowance charges in excess of recorded amounts;
- Demand for products;
- Seasonality;
- General economic trends impacting retail sales;
- Customer deferrals in anticipation of new versions of products including
new operating systems;
- Introduction of new products by us or our competitors;
- Timing of new product acquisitions; and
- Timing of significant marketing and sales promotions.
In addition, if we need to reduce our prices in response to pricing pressure, we
will be at a significant disadvantage with respect to those of our competitors
that have substantially greater resources. These competitors may more readily
withstand an extended period of downward pricing pressure. In such event, we may
be required to grant credits for price reductions to our distributors and
resellers.
Due to the foregoing factors, among others, our revenue and operating
results are difficult to forecast. We intend to base our expense levels in
significant part on our expectations of future revenue. 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. ScanSoft had net losses for 1997, 1998 and 1999. The combined
company may never become profitable or sustain profitability.
WE MAY NOT BE ABLE TO REALIZE COST SAVINGS FROM THE ACQUISITION OF
CAERE. We expect to reduce annual operating costs by approximately $10 million
following consummation of the Caere merger. Our ability to realize such cost
savings is subject to risks such as those described above relating to the Caere
merger. In addition, realization of the expected cost savings may not occur when
anticipated or may be less than expected due, in part, to the following:
- Our ability to effectively manage diverse and geographically dispersed
operations;
- Difficulties with integrating product development plans, schedules and
resources;
- Difficulties in implementing the planned cost reductions;
- Potential that the information and estimates used to predict the cost
savings was not accurate; and
- Sales and marketing synergies may not be possible without negatively
impacting revenue.
If we are not successful in managing the risks listed above, our business,
operating results and financial condition may suffer.
XEROX'S STOCKHOLDINGS MAY ENABLE IT TO INFLUENCE MATTERS REQUIRING
STOCKHOLDER APPROVAL. Xerox currently owns approximately 26% of ScanSoft's
outstanding Common Stock and all of ScanSoft's outstanding nonvoting Series B
Preferred Stock. In addition, Xerox has the opportunity to acquire additional
shares of
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ScanSoft Common Stock pursuant to a warrant. Xerox is currently ScanSoft's
largest stockholder. Although Xerox does not control ScanSoft and is restricted
until March, 2001 from holding more than 50% of the voting power of ScanSoft's
capital stock, Xerox will have a strong influence over matters requiring
approval by ScanSoft's stockholders. In addition, Xerox has two designees on the
board of directors, including Paul A. Ricci, the Chairman of the Board.
OUR BUSINESS AND OPERATIONS MAY STILL SUFFER FROM PROBLEMS RELATED TO THE
YEAR 2000. Neither ScanSoft nor Caere have experienced disruptions in our
business or operations as a result of the onset of the year 2000. However, there
may still be systems and software products yet to display any year 2000
problems.
OUR STOCK PRICE MAY CONTINUE TO BE VOLATILE. Our Common Stock prices have
fluctuated widely in the past. We believe that these fluctuations have been
caused by announcements of new products, quarterly fluctuations in the results
of operations, and other factors, including, but not limited to, changes in
conditions of the personal computer industry in general. Stock markets have
experienced extreme price volatility in recent years. This volatility has had a
substantial effect on the market price of our Common Stock and other high
technology companies, often for reasons unrelated to the operating performance
of the specific companies. We anticipate that prices for our Common Stock may
continue to be volatile. Future stock price volatility may provoke the
initiation of securities litigation, which may divert management resources.
OUR CHARTER DOCUMENTS CONTAIN ANTI-TAKEOVER PROVISIONS. We are organized
under Delaware law. Certain provisions of Delaware law may have the effect of
delaying, deferring or preventing changes in control of our management, which
could prevent an escalation of stock prices as a result of takeover speculation.
ITEM 2. PROPERTIES
ScanSoft's principal administrative, sales, marketing and support functions
are located at its leased headquarters facility in Peabody, Massachusetts.
ScanSoft currently occupies 37,636 square feet of space at this facility, and
the lease will expire in July 2001. In addition, ScanSoft Europe leases a sales
and support office in Reading, England.
The Company believes that its existing facilities are adequate for its
needs for at least the next twelve months.
ITEM 3. LEGAL PROCEEDINGS
From time to time, ScanSoft is party to various legal proceedings or
claims, either asserted or unasserted, which arise in the ordinary course of
business. Management has reviewed pending legal matters and believes that the
resolution of such matters will not have a significant adverse effect on
ScanSoft's financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE> 20
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.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
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
FISCAL 1999:
1st quarter............................................... 2 3/4 1 1/32
2nd quarter............................................... 3 1/16 1 1/4
3rd quarter............................................... 4 1/8 2
4th quarter............................................... 15 3/8 1 17/32
</TABLE>
HOLDERS OF RECORD
As of March 23, 2000, there were approximately 591 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.
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.
18
<PAGE> 21
SCANSOFT, INC.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.............................. $31,629 $79,070 $ 57,623 $ 56,081 $ 37,339
------- ------- -------- -------- --------
Costs and Expenses:
Cost of revenues.................... 7,602 59,370 50,725 45,467 26,938
Research and development............ 6,920 4,408 8,115 10,938 8,975
Selling, general and
administrative................... 14,509 19,150 22,428 26,342 11,805
Amortization of intangible assets... 1,921 -- -- -- --
Non-recurring items................. 4,290 -- 675 -- 1,600
------- ------- -------- -------- --------
Total operating expenses......... 35,242 82,928 81,943 82,747 49,318
------- ------- -------- -------- --------
Operating loss........................ (3,613) (3,858) (24,320) (26,666) (11,979)
Other income, net..................... 1,015 53 940 2,274 426
------- ------- -------- -------- --------
Loss before income taxes.............. (2,598) (3,805) (23,380) (24,392) (11,553)
Provision for income taxes............ 150 -- -- -- --
------- ------- -------- -------- --------
Net loss.............................. $(2,748) $(3,805) $(23,380) $(24,392) $(11,553)
======= ======= ======== ======== ========
Net loss per share: basic and
diluted............................. $ (0.11) $ (0.19) $ (1.20) $ (1.34) $ (4.33)
======= ======= ======== ======== ========
Weighted average common shares
outstanding: basic and diluted...... 25,630 19,728 19,450 18,255 2,669
======= ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
short-term investments.......... $ 5,224 $ 8,123 $14,452 $31,200 $46,166
Working capital.................... 7,031 6,569 8,389 28,807 46,677
Total assets....................... 29,982 28,445 33,550 51,785 65,793
Long-term liability................ -- 91 125 -- --
Total stockholders' equity
(deficit)....................... 21,924 7,582 10,930 33,193 49,860
</TABLE>
19
<PAGE> 22
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 through December 1998, developed and sold scanner hardware and
software products. 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 development efforts primarily 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 January 6, 1999, we sold our hardware business and the
Visioneer brand name to Primax Electronics, Ltd., and on March 2, 1999, we
acquired from Xerox Corporation its wholly-owned subsidiary, ScanSoft, Inc. and
changed our name to "ScanSoft". Following the sale to Primax and the merger with
ScanSoft, our business is now focused on software products only.
On June 30, 1999, we broadened our product offering by acquiring photo
imaging products and technology from MetaCreations Corporation. The purchase
added Kai's SuperGOO, Kai's PhotoSoap 2 and Kai's Power SHOW software products
to the ScanSoft product line. Since the acquisition of the photo imaging
products, the existing ScanSoft staff have supported development and sales of
these products.
On January 15, 2000, we entered into an agreement to acquire Caere
Corporation, a California-based digital imaging software company. The
acquisition was completed on March 13, 2000, and Caere was merged into a
wholly-owned subsidiary of ScanSoft, with the subsidiary continuing as the
corporate entity under the name Caere Corporation.
Our success in the future will depend on our ability to maintain and
improve software gross margins and to 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, 1999, we had an accumulated
deficit of $83.1 million.
As a result of the sale of our hardware business in January 1999, our
revenue declined significantly in the first quarter of 1999 and for the year
ended December 31, 1999.
20
<PAGE> 23
RESULTS OF OPERATIONS
The following table presents, as a percentage of total revenue, certain
selected financial data for each of the three years in the period ended December
31, 1999:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Revenue:
Hardware.................................................. 0.0% 83.5% 72.0%
Software.................................................. 100.0% 16.5% 28.0%
------ ------ ------
Total Revenue.......................................... 100.0% 100.0% 100.0%
Cost of hardware revenue.................................... 0.0% 70.2% 81.0%
Cost of software revenue.................................... 24.0% 4.9% 7.0%
Research and development.................................... 21.9% 5.6% 14.1%
Selling, general and admin.................................. 45.9% 24.2% 38.9%
Amortization of intangible assets........................... 6.1% 0.0% 0.0%
Non-recurring items(1)...................................... 13.5% 0.0% 1.2%
------ ------ ------
Operating loss.............................................. (11.4)% (4.9)% (42.2)%
Other income................................................ 3.2% 0.1% 1.6%
------ ------ ------
Loss before income taxes.................................... (8.2)% (4.8)% (40.6)%
Provision for income taxes.................................. 0.5% 0.0% 0.0%
------ ------ ------
Net loss.................................................... (8.7)% (4.8)% (40.6)%
------ ------ ------
</TABLE>
- ---------------
(1) See Notes 3 & 5 of Notes to Consolidated Financial Statements
REVENUE
Our revenue is derived from the sale of software products and from license
royalties generated by arrangements with various OEM customers. This represents
a shift from prior years when the sale of hardware products made up the majority
of revenue. On January 6, 1999, we sold the hardware business as part of our
long-term strategy to focus on the software business. During 1999 approximately
49% of our revenue came from the sale of products to authorized resellers and
independent distributors. Sales to all distributors and authorized resellers are
subject to agreements allowing price protection and certain rights of return.
Accordingly, reserves are established for estimated future returns and price
protection upon revenue recognition.
Total revenue of $31.6 million for 1999 decreased 60% compared to 1998 of
$79.1 million. The decrease is due to the sale of the hardware business on
January 6, 1999 that contributed $66.0 million, or 83% of total revenue in 1998.
Excluding the hardware revenue in 1998, revenue increased 141% or $18.5 million.
The increase in absolute dollars is primarily a result of the acquisition of
ScanSoft on March 2, 1999. During 1999 product sales through direct channels,
including the web sites of some of our OEM customers, online stores and our own
web store accounted for $5.5 million, or 17% of our revenue.
Total revenue increased 37% to $79.1 million in 1998 from $57.6 million in
1997, primarily as a result of the introduction of flatbed scanners. Revenue
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. Revenue did not increase at the same rate as unit increases
because of the sharp decline in average retail prices offset the revenue from
the increased hardware unit sales from 1997 to 1998. Software revenue decreased
from $16.1 million in 1997 to $13.1 million in 1998 due primarily to the
termination of royalties from certain OEM agreements.
21
<PAGE> 24
During 1999 three customers each represented at least 10% of our revenue.
Ingram Micro, a retail distributor, accounted for 24%; Tech Data, a retail
distributor, accounted for 15%; and Xerox, an OEM customer, accounted for 14% of
our 1999 revenue. In 1998 Sam's Club, a warehouse club, and Office Depot, an
office superstore, represented 18% and 12%, respectively, of total revenue.
Ingram Micro accounted for 21% of our total revenue in 1997.
Revenue derived outside of North America, primarily in Europe, was
approximately 13%, 7% and 10% of total revenue in 1999, 1998 and 1997,
respectively. International revenue in 1999 of $4.2 million decreased $1.7
million from 1998 due primarily to the sale of the hardware business in January
1999. Revenues from international sales increased marginally from $5.6 million
in 1997 to $5.9 million in 1998. International sales for 1999 were denominated
primarily in local currencies and 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. Prior to 1999, our international sales
were denominated primarily in U.S. dollars. 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, as well as potential OEM agreements, are expected to have a
significant impact on our quarterly and annual revenue. 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. Thereafter, revenue may stabilize or decline until the
end of a product life cycle, at which time revenue is likely to decline
significantly, as a result of unit sales and price reductions. In this regard,
receivable allowances were $3.7 million and $4.2 million at December 31, 1999
and 1998, respectively. 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.
COST OF REVENUE
Cost of software revenue consists primarily of the cost of materials, third
party royalties, fulfillment, and salaries for product support personnel. Cost
of hardware revenue consists primarily of the costs associated with the purchase
of scanner products and related costs of freight, inventory rework, inventory
obsolescence and warranty. We sold our hardware business to Primax in January
1999. Currently our software products are manufactured by Biz2Net and DCL, which
also package and ship the majority of our products to our customers. See "Item
1 -- Business -- Manufacturing."
Cost of revenue decreased to $7.6 million or 24% of revenue in 1999
compared to $59.4 million or 75% of revenue in 1998. The variance in absolute
dollars and percentage of revenue is primarily attributable to the sale of the
hardware business, which incurred $55.5 million in cost of revenue in 1998.
Excluding the hardware business from 1998 revenue and cost of revenue, cost of
revenue for 1998 was $3.9 million or 30% of revenue. The improvement in cost of
revenue from 1998 to 1999, as a percentage of revenue was due to the change in
revenue mix away from the retail distribution channel to direct distribution. In
addition, the increase in OEM revenue, which carries little or no cost,
contributed to the improved cost of revenue.
Total cost of revenue, as a percentage of total net revenue, 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.
22
<PAGE> 25
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salary and benefit
costs of engineers. Research and development costs were $6.9 million or 22% of
revenue in 1999, an increase of $2.5 million from the $4.4 million or 6% of
revenue reported in 1998. The increase in research and development spending is
due to the added software engineering headcount from the acquisition of ScanSoft
on March 2, 1999 being higher than hardware related headcount that transferred
to Primax upon the hardware sale.
Research and development expenses were 6% and 14% of total net revenue for
1998 and 1997, 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.
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 as the cost incurred after technological feasibility but
before release of product is not significant.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling expenses include salaries, commissions, advertising, direct mail,
public relations, trade shows, travel and other related sales and marketing
expenses. General and administrative expenses include personnel costs for
administration, finance, human resources, information systems, and general
management in addition to legal and accounting expenses and other professional
services.
Selling, general and administrative expenses in 1999 were $14.5 million or
46% of revenue, a decrease of $4.7 million from the $19.2 million or 24% of
revenue reported in 1998. The decrease in absolute dollars for selling, general,
and administrative expenses from 1998 to 1999, is due primarily from lower
administrative expenses from the transition of the hardware and software
business to a "software only" business and include lower compensation costs,
depreciation and other operational expenses. This transition occurred when the
hardware business was sold on January 6, 1999, and ScanSoft was acquired on
March 2, 1999.
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%. 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.
We will continue to attempt to control selling, general and administrative
expenses. However, if revenue continues 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.
OTHER COSTS AND EXPENSES
Amortization of intangible assets of $1.9 million for 1999 reflects the
amortization of identified intangible assets from the ScanSoft acquisition and
the acquisition of assets from MetaCreations. The useful lives of the intangible
assets used for amortization range from three to seven years.
Non-recurring items consist of restructuring charges and acquisition
related in-process research and development costs. Restructuring charges of
$346,000 for 1999 relate to the acquisition of ScanSoft and the
23
<PAGE> 26
subsequent consolidation of research and development operations and the move of
the Company's headquarters to Massachusetts. The restructuring charge 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 in-process research and development charge of $3,944,000 for 1999,
reflects that portion of the purchase price of ScanSoft representing acquired
in-process technology that had not yet reached technological feasibility and had
no alternative future use. Accordingly, this amount was immediately charged to
expense in the consolidated statements of income upon consummation of the
acquisition. The value assigned to acquired in-process technology was determined
by identifying research projects in areas for which technological feasibility
has not been established. These include projects (primarily major version
upgrades) in each of ScanSoft's major products, including ScanWorks, Pagis,
TextBridge and API. The value was determined by estimating the revenue
contribution of each of these products and the amount of the revenue
attributable to the core/developed technology, the in-process -- completed, the
in-process -- to be completed and the future yet-to-be-defined elements. The net
cash flows for the in-process -- completed were then discounted utilizing a
weighted average cost of capital of 25%. This discount rate takes into
consideration the inherent uncertainties surrounding the successful development
of the in-process research and development, the profitability levels of such
technology and the uncertainty of technological advances, which could
potentially impact the estimates described above. The split between the
in-process -- completed and the in-process -- to be completed amounts were
estimated based on the time and related costs incurred in development before the
close of the acquisition and estimated to be incurred after the close of the
acquisition. The average percentage of completion of the projects ranged from
73% to 95% at the date of the acquisition.
OTHER INCOME (EXPENSE)
Interest income consists primarily of interest earned on cash equivalents
and short-term investments. Interest income was $189,000, $507,000, and $984,000
for 1999, 1998 and 1997, respectively. The decrease in interest income from 1998
to 1999, and 1997 to 1998, was a result of significantly lower cash, cash
equivalents and short-term investments, which were used primarily to fund our
operating losses. Interest expense consists of interest incurred for borrowings
under credit facilities and short-term notes. Interest expense was $56,000,
$454,000, and $44,000 for 1999, 1998, and 1997, respectively. The decrease in
interest expense from 1998 to 1999 resulted from the payoff of bank borrowings
in connection with the sale of the hardware business in January 1999. The
increase in interest expense from 1997 to 1998 was the result of increased
borrowings under a bank credit facility.
On January 6, 1999, the Company sold its hardware business to Primax
Electronics, Ltd., for approximately $6.8 million and reported a non-operating
gain of $882,000 in 1999.
TAXATION
At December 31, 1999 and 1998, we had federal net operating loss
carryforwards of approximately $60 million and $61 million, respectively, of
which approximately $1,300,000 and $900,000, respectively, 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,
1999 and 1998 were approximately $2.2 million and $2.0 million, respectively.
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. 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 9 of Notes to Financial Statements).
24
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had cash, cash equivalents and short-term
investments of $5.2 million and working capital of $7.0 million, as compared to
$7.9 million in cash, cash equivalents and short-term investments and $6.6
million of working capital at December 31, 1998.
We used $2.5 million of cash for our operating activities for 1999, as
compared to $9.5 million for 1998 and $20.0 million for 1997. Negative cash
flows from operating activities for these periods were attributed primarily to
net losses incurred of $2.7 million, $3.8 million and $23.4 million for 1999,
1998 and 1997, respectively, increased or decreased by non-cash charges and
changes in working capital.
Cash provided from investing activities during 1999 of $6.4 million
resulted primarily from proceeds of $6.8 million generated from the sale of the
hardware business in January and $1.2 million received from the ScanSoft
acquisition. This was partially offset by approximately $1 million in cash used
to purchase the digital imaging assets of MetaCreations. Capital expenditures of
$840,000 in 1999 consisted primarily of computers, business software and
computer network equipment.
Cash provided from financing activities during 1998 was $2.3 million as we
liquidated short-term investments by $2.8 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.
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, 1999 consisted of
approximately $5.2 million of cash and cash equivalents. Subsequent to our
year-end, we acquired Caere Corporation for approximately $156 million. The
acquisition consideration consisted of $49 million in cash and approximately
$107 million in ScanSoft common stock. The cash consideration was paid out of
Caere's cash balance of approximately $50 million. In addition, during March
2000, we entered into a secured credit facility for $10 million to provide
funding for transactions costs and restructuring actions associated with the
Caere transaction. Based upon these events and existing cash balances, we
believe that our existing sources of liquidity will provide adequate cash to
fund our operations for at least the next twelve months. 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.
25
<PAGE> 28
PRO FORMA RESULTS AND RELATED MANAGEMENT DISCUSSION AND ANALYSIS
The following two tables present, as dollar amounts and as a percentage of
revenue, the condensed unaudited pro forma revenue, and certain selected
financial data for each of the two years in the period ended December 31, 1999,
assuming the sale of the hardware business and the merger with ScanSoft 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)
<TABLE>
<CAPTION>
1999 PRO FORMA 1998 PRO FORMA
COMBINED COMBINED
-------------- --------------
<S> <C> <C>
Revenue..................................................... $34,506 $34,791
OPERATING EXPENSES:
Cost of revenue........................................... 8,343 9,668
Research and development.................................. 7,868 9,812
Selling, general and administrative....................... 16,606 15,006
Other operating expenses.................................. 2,590 2,148
------- -------
Total operating expenses............................... 35,407 36,634
------- -------
Operating loss.............................................. (901) (1,843)
Other income (expense)...................................... 109 27
Provision for income taxes.................................. 150
------- -------
Net loss.................................................... $ (942) $(1,816)
======= =======
NET LOSS PER SHARE:
basic and diluted......................................... $ (0.04) $ (0.07)
======= =======
Revenue..................................................... 100.0% 100.0%
OPERATING EXPENSES:
Cost of revenue........................................... 24.2% 27.8%
Research and development.................................. 22.8% 28.2%
Selling, general and administrative....................... 48.1% 43.1%
Other operating expenses.................................. 7.5% 6.2%
------- -------
Total operating expenses............................... 102.6% 105.3%
------- -------
Operating loss.............................................. (2.6)% (5.3)%
Other income (expense)...................................... 0.3% 0.1%
Provision for income taxes.................................. 0.4% 0.0%
------- -------
Net loss............................................... (2.7)% (5.2)%
------- -------
</TABLE>
UNAUDITED PRO FORMA REVENUE
Pro forma revenue represents revenue 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 earned
pursuant to arrangements with certain OEM customers.
Revenue remained relatively flat from 1998 to 1999 due to an increase in
product sales through direct distribution and increased royalties from OEM
agreements. These increases were offset by a decrease in revenue earned through
traditional retail distribution channels.
26
<PAGE> 29
UNAUDITED PRO FORMA COST OF REVENUE
The pro forma cost of revenue consists primarily of material costs, third
party royalties, fulfillment, and salaries for product support personnel. Pro
forma cost of revenue, as a percentage of revenue, decreased in 1999 to 24% as
compared to 28% in 1998. The decrease was attributable to the shift in revenue
away from the higher cost retail distribution channel to the lower cost direct
distribution of products, as well as the increase in royalty revenue, which
carries minimal or no cost of revenue.
UNAUDITED PRO FORMA RESEARCH AND DEVELOPMENT EXPENSES
Pro forma research and development expenses consist principally of
personnel costs, costs of contractors and outside consultants. Pro forma
research and development expenses decreased 20% in absolute dollars to $7.8
million in 1999 from $9.8 million in 1998. The decrease was primarily the result
of consolidating the engineering group from California into the new corporate
headquarters in Peabody, MA.
UNAUDITED PRO FORMA SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Pro forma selling, general and administrative expenses include salaries,
commissions, advertising, direct mail, public relations, trade shows, travel and
other related sales and marketing expenses, in addition to personnel costs for
administration, finance, human resources, information systems, and general
management in addition to legal and accounting expenses and other professional
services.
Pro forma selling, general and administrative expenses increased 14% in
absolute dollars to $17.0 million in 1999 from $15.0 million in 1998, and also
increased as a percentage of revenue, to 48% in 1999 from 43% in 1998. The
increase is due primarily to increased spending for marketing programs
associated with product launches, including the introduction of our photo
products late in 1999 for which there was little associated revenue.
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 with ScanSoft and the
acquisition of assets from MetaCreations that have estimated useful lives
ranging from three to seven years. Also included in this component is the
restructuring expense we incurred to consolidate our research and development
resources.
YEAR 2000 COMPLIANCE
In prior years, the Company discussed the nature and progress of its plans
to become Year 2000 ready. In late 1999, the Company completed its remediation
and testing of systems. As a result of those planning and implementation
efforts, the Company experienced no significant disruptions in mission critical
information technology and non-information technology systems and believes those
systems successfully responded to the Year 2000 date change. The Company
expensed approximately $50,000 during 1999 in connection with remediation of its
systems. The Company is not aware of any material problems resulting from Year
2000 issues, either with its products, its internal systems, or the products and
services of third parties. The Company will continue to monitor its mission
critical computer applications and those of its suppliers and vendors throughout
the year 2000 to ensure that any latent Year 2000 matters that may arise are
addressed promptly.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FIXED INCOME INVESTMENTS
As of December 31, 1999, 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.
27
<PAGE> 30
The Company does not use derivative financial instruments in its investment
portfolio to manage interest rate risk. The Company does, however, limit its
exposure to interest rate and credit risk by establishing and strictly
monitoring clear policies and guidelines for its fixed income portfolios. The
guidelines limit the maximum duration of portfolios, establish credit quality
standards, limits on exposure to one issue, issuer, as well as the type of
instrument. Due to the limited duration and credit risk criteria established in
the Company's guidelines, the exposure to market and credit risk is not expected
to be material.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
28
<PAGE> 31
SCANSOFT, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
29
<PAGE> 32
SCANSOFT, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants........................... 31
Consolidated Financial Statements
Consolidated Balance Sheets............................... 32
Consolidated Statements of Operations..................... 33
Consolidated Statements of Stockholders' Equity........... 34-35
Consolidated Statements of Cash Flows..................... 36
Notes to Consolidated Financial Statements................ 37-54
Financial Statement Schedule:
Report of Independent Accountants on Financial Statement
Schedule............................................... 52
Schedule II -- Valuation and Qualifying Accounts and
Reserves............................................... 53
</TABLE>
30
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of ScanSoft, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
ScanSoft, Inc. and its subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These consolidated financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We conducted our audits of these consolidated statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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
February 4, 2000, except for Note 15,
which is as of March 13, 2000
31
<PAGE> 34
SCANSOFT, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................. $ 5,162 $ 7,659
Short-term investments.................................... 62 202
Restricted cash........................................... -- 262
Accounts receivable, less allowances of $3,690 and
$4,171................................................. 7,713 13,512
Inventory................................................. 780 4,777
Prepaid expenses and other current assets................. 1,372 929
-------- --------
Total current assets................................... 15,089 27,341
-------- --------
Intangible assets, net...................................... 12,987 --
Property and equipment, net................................. 1,546 1,039
Other assets................................................ 360 65
-------- --------
Total assets........................................... $ 29,982 $ 28,445
======== ========
Current liabilities
Short-term bank borrowings................................ $ -- $ 6,000
Note payable.............................................. 1,600 --
Accounts payable.......................................... 2,226 11,678
Accrued sales and marketing incentives.................... 1,425 1,165
Deferred revenue.......................................... 964 843
Other accrued liabilities................................. 1,843 1,086
-------- --------
Total current liabilities.............................. 8,058 20,772
-------- --------
Long-term liabilities....................................... -- 91
Commitments and contingencies (Note 12)
Stockholders' equity
Preferred stock, $0.001 par value; 20,000,000 shares
authorized; 3,562,238 issued and outstanding
Series B convertible preferred stock; 15,000,000 shares
authorized; 3,562,238 shares issued and outstanding;
liquidation value of $4,631............................ 4,631 --
Common stock, $0.001 par value; 70,000,000 shares
authorized; 26,690,027 and 19,852,952 shares issued and
outstanding, respectively.............................. 27 20
Additional paid-in capital................................ 100,397 87,995
Deferred compensation relating to stock options........... -- (50)
Accumulated deficit....................................... (83,131) (80,383)
-------- --------
Total stockholders' equity............................. 21,924 7,582
-------- --------
Total liabilities and stockholders' equity............. $ 29,982 $ 28,445
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
32
<PAGE> 35
SCANSOFT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
REVENUE
Hardware.................................................. $ -- $66,015 $ 41,489
Software.................................................. 31,629 13,055 16,134
------- ------- --------
Total net revenue...................................... 31,629 79,070 57,623
------- ------- --------
COSTS AND EXPENSES
Cost of hardware revenue.................................. -- 55,474 46,711
Cost of software revenue.................................. 7,602 3,896 4,014
Research and development.................................. 6,920 4,408 8,115
Selling, general and administrative....................... 14,509 19,150 22,428
Amortization of intangible assets......................... 1,921 -- --
Restructuring charges..................................... 346 -- 675
In-process research and development....................... 3,944 -- --
------- ------- --------
Total costs and expenses............................... 35,242 82,928 81,943
------- ------- --------
Loss from operations................................... (3,613) (3,858) (24,320)
Other income (expense)
Interest income........................................... 189 507 984
Interest expense.......................................... (56) (454) (44)
Gain on sale of hardware business......................... 882 -- --
------- ------- --------
Loss before income taxes............................... (2,598) (3,805) (23,380)
Provision for income taxes.................................. 150 -- --
------- ------- --------
Net loss............................................... $(2,748) $(3,805) $(23,380)
======= ======= ========
Net loss per share: basic and diluted.................. $ (0.11) $ (0.19) $ (1.20)
======= ======= ========
Weighted average common shares outstanding: basic and
diluted (Note 1).......................................... 25,630 19,728 19,450
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE> 36
SCANSOFT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
---------------- -------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
------ ------ ---------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance on December 31, 1996................ -- $-- 19,202,609 $19 $86,951 $(250)
Deferred compensation expense related to
stock options............................. -- -- -- -- -- 100
Issuance of common stock under employee
stock compensation plans.................. -- -- 591,662 1 823 --
Repurchase of restricted stock.............. -- -- (230,417) -- (92) --
Net loss.................................... -- -- -- -- -- --
-- -- ---------- --- ------- -----
Balance on December 31, 1997................ -- -- 19,563,854 20 87,682 (150)
Deferred compensation expense related to
stock options............................. -- -- -- -- -- 100
Issuance of common stock under employee
stock compensation plans.................. -- -- 289,098 -- 126 --
Repayment of notes receivable from
stockholder............................... -- -- -- -- 187 --
Net loss.................................... -- -- -- -- -- --
-- -- ---------- --- ------- -----
Balance on December 31, 1998................ -- -- 19,852,952 20 87,995 (50)
-- -- ---------- --- ------- -----
<CAPTION>
NOTES
RECEIVABLE
FROM ACCUMULATED
STOCKHOLDERS DEFICIT TOTAL
------------ ----------- -------
<S> <C> <C> <C>
Balance on December 31, 1996................ $(329) $(53,198) $33,193
Deferred compensation expense related to
stock options............................. -- -- 100
Issuance of common stock under employee
stock compensation plans.................. -- -- 824
Repurchase of restricted stock.............. 285 -- 193
Net loss.................................... -- (23,380) (23,380)
----- -------- -------
Balance on December 31, 1997................ (44) (76,578) 10,930
Deferred compensation expense related to
stock options............................. -- -- 100
Issuance of common stock under employee
stock compensation plans.................. -- -- 126
Repayment of notes receivable from
stockholder............................... 44 -- 231
Net loss.................................... -- (3,805) (3,805)
----- -------- -------
Balance on December 31, 1998................ -- (80,383) 7,582
----- -------- -------
</TABLE>
34
<PAGE> 37
SCANSOFT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------ ------------------- PAID-IN DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
--------- ------ ---------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance on December 31, 1998...................... -- $ -- 19,852,952 $20 $ 87,995 $(50)
Issuance of common stock under employee stock
compensation plans.............................. -- -- 412,823 -- 276 --
Deferred compensation expense related to stock
options......................................... -- -- -- -- -- 50
Issuance of common and preferred stock pursuant to
merger.......................................... 3,562,238 4,631 6,755,992 7 10,411 --
Common stock repurchased.......................... -- -- (331,740) -- (684) --
Exchange of employee stock options upon merger.... -- -- -- -- 2,399 --
Net loss.......................................... -- -- -- -- -- --
--------- ------ ---------- --- -------- ----
Balance at December 31, 1999...................... 3,562,238 $4,631 26,690,027 $27 $100,397 $ --
========= ====== ========== === ======== ====
<CAPTION>
NOTES
RECEIVABLE
FROM ACCUMULATED
STOCKHOLDERS DEFICIT TOTAL
------------ ----------- -------
<S> <C> <C> <C>
Balance on December 31, 1998...................... $-- $(80,383) $ 7,582
Issuance of common stock under employee stock
compensation plans.............................. -- -- 276
Deferred compensation expense related to stock
options......................................... -- -- 50
Issuance of common and preferred stock pursuant to
merger.......................................... -- -- 15,049
Common stock repurchased.......................... -- -- (684)
Exchange of employee stock options upon merger.... -- -- 2,399
Net loss.......................................... -- (2,748) (2,748)
-- -------- -------
Balance at December 31, 1999...................... $-- $(83,131) $21,924
== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE> 38
SCANSOFT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT FOR SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $(2,748) $(3,805) $(23,380)
------- ------- --------
Adjustments to reconcile net loss to net cash used in
operating activities
Depreciation and amortization.......................... 240 1,720 2,052
Accounts receivable allowances......................... 2,100 (1,144) 1,384
In-process research and development.................... 3,944 -- --
Amortization of intangibles............................ 1,921 -- --
Gain on sale of hardware business...................... (882) -- --
Other.................................................. 52 144 385
Changes in assets and liabilities, net of effects from
acquisitions and sale of hardware business
Accounts receivable.................................. (7,291) (73) (2,899)
Inventory............................................ (248) (1,699) 1,430
Prepaid expenses and other current assets............ (540) 130 (148)
Other assets......................................... (122) 147 16
Accounts payable..................................... 1,463 (1,784) 1,388
Accrued sales and marketing incentives............... 260 (295) (1,014)
Other accrued liabilities............................ (647) (2,857) 833
------- ------- --------
Total adjustments................................. 250 (5,711) 3,427
------- ------- --------
Net cash used in operating activities............. (2,498) (9,516) (19,953)
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of hardware business................... 6,788 -- --
Cash received in ScanSoft acquisition, net of transaction
costs.................................................. 1,211 -- --
Cash used in MetaCreations assets acquisition............. (1,000) -- --
Net sales of short-term investments....................... 140 2,827 5,718
Transfer from (to) restricted cash........................ 262 (200) --
Capital expenditures for property and equipment........... (840) (305) (348)
Other investment.......................................... (150) -- --
------- ------- --------
Net cash provided by investing activities......... 6,411 2,322 5,370
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term bank borrowings, net........................... (6,000) 3,179 2,821
Repurchase of common stock................................ (684) -- --
Proceeds from issuance of common stock, net............... 274 313 732
------- ------- --------
Net cash (used in) provided by financing
activities...................................... (6,410) 3,492 3,553
------- ------- --------
Net decrease in cash and cash equivalents................... (2,497) (3,702) (11,030)
Cash and cash equivalents at beginning of year.............. 7,659 11,361 22,391
------- ------- --------
Cash and cash equivalents at end of year.................... $ 5,162 $ 7,659 $ 11,361
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for Interest.................... $ -- $ 444 $ 44
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE> 39
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 software for
scanning, editing and communicating paper documents and photos for sale
primarily through retail distributors or directly to retailers. Up until 1999,
the Company was also a scanner hardware company and derived a majority of its
revenues from the sale of scanners.
In December 1998, 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 the Company's employees associated with
the hardware business became employees of Primax. The Company also entered into
an agreement to purchase the business of ScanSoft, Inc., an indirect
wholly-owned subsidiary of Xerox Corporation. This transaction was consummated
on March 2, 1999. (See Note 3). In connection with this acquisition, the Company
changed its name to ScanSoft, Inc.
Effective beginning in fiscal 1999, the Company changed its year-end to
December 31. Prior to 1999, the Company's fiscal year ended on the Sunday
closest to December 31. Accordingly, fiscal 1998 ended January 3, 1999 and
contained 53 weeks. Fiscal year 1997 had 52 weeks. The Company's quarterly
periods also now end on the last day of the calendar quarter. Prior to 1999, the
Company reported 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 the
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
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Intercompany transactions and balances have been
eliminated.
Revenue Recognition
Revenue from hardware product sales to customers (primarily occurring prior
to 1999) is generally recognized when the product is shipped, provided no
significant obligations remain and collectibility is probable. Revenue from
software product sales to customers is generally recognized when the product is
delivered, the fee is fixed or determinable 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.
37
<PAGE> 40
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company earns royalty and custom software development revenue pursuant
to certain license agreements and records revenue when earned. Development
revenues are recognized using percentage of completion method. Percentage of
completion is computed using the input method of costs incurred. Payments
received from customers prior to revenue recognition are reported as deferred
revenues.
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, 1999 and 1998, 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. The costs of sold or retired assets are removed from
the related asset and accumulated depreciation accounts and any gain or loss is
included in operations.
Intangible Assets
Intangible assets resulting from business acquisitions, comprising cost in
excess of net assets acquired, core technology, trademarks, OEM relationships,
workforce and registered users base, are being amortized on a straight-line
basis over the estimated useful lives of the assets, which is generally three to
seven years.
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.
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. No U.S. Federal and
State income taxes are provided on earnings of non-US subsidiaries, to the
extent such earnings are deemed to be indefinitely invested.
Comprehensive Income (Loss)
Comprehensive income is defined as the changes in equity other than
transactions resulting from investments by owners and distributions to owners.
The Company's comprehensive loss for 1999, 1998 and 1997 is the same as its
reported net loss.
38
<PAGE> 41
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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, 1999
and 1998, the Company's top two customers in aggregate accounted for 75% and
30%, respectively, of accounts receivable.
Fair Value Disclosures of Financial Instruments
The estimated fair value of financial instruments at December 31, 1999 and
1998 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 1999, 1998 and 1997 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 Statement
of Financial Accounting Standards No. 123 ("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 November 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 100, Restructuring and Impairment Charges ("SAB
100"). In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
Revenue Recognition in Financial Statements ("SAB 101"). SAB No. 100 expresses
the views of the SEC staff regarding the accounting for and disclosure of
certain expenses commonly reported in connection with exit activities and
business combinations. The Company does not expect the provisions of SAB No. 100
to have a material impact on its financial statements. SAB No. 101 expresses the
views of the SEC staff in applying generally accepted accounting principles to
certain revenue recognition issues. The Company does not expect the provisions
of SAB No. 101 to have a material impact on its financial statements.
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 standard will be
39
<PAGE> 42
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
effective for the Company in fiscal 2000. The Company does not currently use
derivative instruments and, therefore, does not expect that adoption of SFAS 133
will have any impact on their financial position or results of operations.
Reclassifications
Certain prior year balances have been reclassified to conform with the 1999
presentation.
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 $6.8 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. The Company
reported a non-operating gain of $882,000 related to the sale of the hardware
business, net of the 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. Pursuant to the
agreement, the Company agreed to purchase the vested option shares of employees
that were terminated and transferred to Primax. The total cost to the Company
was $273,000 and was recorded against the gain on sale. In addition, Primax
assumed the lease of the Company's then 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.
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 (in thousands):
<TABLE>
<CAPTION>
HARDWARE SOFTWARE
BUSINESS BUSINESS COMBINED
-------- -------- --------
<S> <C> <C> <C>
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.......................................... 26 27 53
------- ------- -------
Net income (loss)..................................... $(6,054) $ 2,249 $(3,805)
======= ======= =======
</TABLE>
40
<PAGE> 43
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITION OF SCANSOFT
Effective March 2, 1999, the Company acquired Xerox Corporation's ScanSoft
subsidiary for approximately 6.8 million shares of Common Stock, 3.6 million
shares of non-voting Preferred Stock and the exchange of 1.7 million employee
stock options to purchase Common Stock of the Company in exchange for
outstanding employee stock options of ScanSoft. In conjunction with the
acquisition, the Company incurred approximately $1.1 million of acquisition
related costs. The purchase price of ScanSoft, including acquisition costs, was
$18.6 million which has been determined as follows (in thousands):
<TABLE>
<S> <C>
Fair value of shares of common stock........................ $10,418
Fair value of shares of preferred stock..................... 4,631
Visioneer options/warrants.................................. 2,399
Acquisition costs........................................... 1,148
-------
$18,596
=======
</TABLE>
The purchase price was allocated to the assets acquired and liabilities
assumed based on the fair value of ScanSoft's current assets, property and
equipment, and liabilities. The excess of the purchase price over the fair value
of tangible assets acquired has been allocated to intangible assets (acquired
in-process research and development, core technology, trade mark and trade name,
and assembled workforce) acquired based on an independent appraisal. The
allocation of purchase price is estimated as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment...................................... $ 909
Current and other assets.................................... 4,813
Liabilities assumed......................................... (2,166)
Identified intangible assets................................ 11,096
Acquired in-process research and development................ 3,944
-------
$18,596
=======
</TABLE>
This acquisition has been accounted for under the purchase method of
accounting and the results of operations of ScanSoft have been included in the
consolidated statements of operations of the Company from the date of
acquisition.
The Company recorded a one time write-off of approximately $3.9 million in
the quarter ended March 31, 1999 relating to the value of in-process research
and development acquired as part of the purchase that had not yet reached
technological feasibility and had no alternative future use. Accordingly, this
amount was immediately charged to expense in the consolidated statements of
operations upon consummation of the acquisition. The value assigned to acquired
in-process technology was determined by identifying research projects in areas
for which technological feasibility has not been established. These include
projects (primarily major version upgrades) in each of ScanSoft's major
products, including ScanWorks, Pagis, TextBridge and API. The value was
determined by estimating the revenue contribution of each of these products and
the amount of the revenues attributable to the core/developed technology, the
in-process -- completed, the in-process -- to be completed and the future
yet-to-be-defined elements. The net cash flows for the in-process -- completed
were then discounted utilizing a weighted average cost of capital of 25%. This
discount rate takes into consideration the inherent uncertainties surrounding
the successful development of the in-process research and development, the
profitability levels of such technology and the uncertainty of technological
advances which could potentially impact the estimates described above. The
allocation between the in-process -- completed and the in-process -- to be
completed amounts were estimated based on the time and related costs incurred in
development before the close of the acquisition and estimated to be incurred
after the close of the acquisition. The average percentage of completion of the
projects ranged from 73% to 95% at the date of the acquisition. All of these
projects were successfully completed in 1999, however, at the time of
41
<PAGE> 44
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition there was risk that if these projects were not successfully
developed, future revenue and profitability of ScanSoft may have been adversely
affected.
4. PRO FORMA RESULTS (UNAUDITED)
The following table reflects unaudited pro forma results of operations of
the Company assuming that the sale of hardware business (Note 2) and the
acquisition of ScanSoft (Note 3) had each occurred concurrently at the beginning
of the fiscal year for each period presented (in thousands, except per share
data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Revenues.................................................... $34,506 $34,791
Net loss.................................................... $ (942) $(1,816)
Net loss per diluted share.................................. $ (0.04) $ (0.07)
</TABLE>
These unaudited pro forma results of operations do not include the gain on
sale of hardware business or the one time write-off of the in-process research
and development as these amounts were non-recurring in nature. The unaudited pro
forma results of operations are not indicative of the actual results that would
have occurred had the transactions actually taken place at the beginning of
these periods.
5. RESTRUCTURING
Pursuant to the disposal of the hardware business and acquisition of the
software business, the Company initiated restructuring actions in the first
quarter of 1999 and recorded a charge of $346,000 for such actions. Included in
the charge was $188,000 related to a workforce reduction. The workforce
reduction costs primarily include severance costs related to the involuntary
termination of employment for approximately 10 employees from research and
development in California. The terminations were necessary in order to
consolidate the Company's research and development efforts to the new corporate
headquarters in Massachusetts. Also included was approximately $46,000 in fixed
assets and $82,000 in non-refundable commitments associated with the California
operation which were no longer required once the headquarters were moved to
Massachusetts, and $30,000 in other exit costs. Severance costs and other exit
costs were determined in accordance with EITF No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity".
All planned restructuring actions were completed and all related liabilities
were paid in 1999, and there are no remaining accruals at December 31, 1999.
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.
6. ACQUISITION OF METACREATIONS PRODUCT LINES
On June 30, 1999, the Company completed a definitive asset purchase
agreement (the "Purchase Agreement") and license agreement (the "License") to
acquire and license certain assets and intellectual property relating to the
photo imaging software products business of MetaCreations Corporation
("MetaCreations") which include Kai's Photo Soap 1.0, Kai's Photo Soap 2.0,
Kai's SuperGoo 1.0, Kai's PowerGoo 1.0 and Kai's Power Show 1.1 (the "Products")
from MetaCreations.
Pursuant to the Purchase Agreement, the Company purchased all of the
inventory, intangibles, marketing materials and MetaCreations' website content
relating to the Products. Under the License Agreement, MetaCreations granted the
Company a non-exclusive, royalty free license to use, reproduce, license, sell
and distribute the intellectual property relating to the Products and other
related software technology. The
42
<PAGE> 45
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company paid MetaCreations an aggregate of $1,000,000 in cash and issued a 7%
promissory note in the principal amount of $1,600,000, due in full on June 30,
2000. Additionally the Company assumed the obligations to fulfill sales orders
relating to the Products, all liabilities under all original equipment
manufacturer and other agreements pertaining to the Products, and up to $950,000
of product returns relating to Products sold prior to the date of the Purchase
Agreement. The Purchase Agreement includes contingent financial performance
incentive payments under which the Company could pay MetaCreations up to an
additional $1,000,000, depending on the revenue levels achieved on the Products
and certain other technology licensed in the License Agreement.
The purchase price was allocated to the assets acquired and liabilities
assumed based on the fair value of MetaCreations's assets and liabilities. The
excess of the purchase price over the fair value of tangible assets acquired has
been allocated to intangible assets (core technology, OEM relationships,
trademarks, and registered users base) acquired based on an independent
appraisal. The allocation of purchase price is estimated as follows (in
thousands):
<TABLE>
<S> <C>
Liabilities assumed...................................... $(1,200)
Identified intangible assets............................. 3,800
-------
$ 2,600
=======
</TABLE>
7. BALANCE SHEET COMPONENTS
The following table summarizes key balance sheet components (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Inventory
Raw materials............................................. $ 524 $ 429
Work-in-process........................................... -- 2,261
Finished goods............................................ 256 2,087
------- -------
$ 780 $ 4,777
======= =======
Property and equipment
Machinery and equipment................................... $ 2,897 $ 4,551
Leasehold improvements.................................... 299 308
Furniture and fixtures.................................... 127 701
Construction in process................................... 295 --
------- -------
3,618 5,560
Accumulated depreciation and amortization................. (2,072) (4,521)
------- -------
$ 1,546 $ 1,039
======= =======
</TABLE>
43
<PAGE> 46
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Intangible assets
Core technology........................................... $10,647 $ --
Trademarks................................................ 2,401 --
OEM relationships......................................... 1,100 --
Assembled workforce....................................... 549 --
Other..................................................... 211 --
------- -------
14,908 --
Accumulated amortization.................................. (1,921) --
------- -------
$12,987 $ --
======= =======
Other accrued liabilities
Accrued compensation...................................... $ 721 $ 216
Accrued royalties......................................... 200 457
Accrued taxes............................................. 351 158
Other..................................................... 571 255
------- -------
$ 1,843 $ 1,086
======= =======
</TABLE>
8. 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.
9. INCOME TAXES
The components of the income tax provision are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Deferred tax assets
Federal and state loss and credit carryforwards........... $ 25,028 $ 24,414
Capitalized start-up and development costs................ 589 882
Asset valuation reserves.................................. 1,274 2,669
Other..................................................... 1,484 1,961
-------- --------
Gross deferred tax assets................................. 28,375 29,926
Deferred tax liabilities
Acquired intangibles...................................... (3,810) --
Other..................................................... (248) (255)
Valuation allowance......................................... (24,317) (29,671)
-------- --------
Net deferred tax assets................................ $ -- $ --
======== ========
</TABLE>
44
<PAGE> 47
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets (liabilities) consist of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Current Federal............................................. $ 70 $-- $--
Foreign................................................... 60 -- --
State..................................................... 20 -- --
---- -- --
Provision for income taxes........................ $150 $-- $--
==== == ==
</TABLE>
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.
Differences between the U.S. statutory federal income tax rate and the
Company's effective income tax rate are analyzed below:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
------------
<S> <C>
Federal statutory tax rate.................................. (34.0)%
Nondeductible in-process research and development........... 51.6%
Foreign tax................................................. 2.3%
State tax, net of federal................................... 0.5%
Change in valuation allowance............................... (14.6)%
-----
5.8%
=====
</TABLE>
At December 31, 1999, the Company had federal and state net operating loss
carryforwards of approximately $60 million and $26 million, respectively, of
which approximately $1,306,000 and $653,000 related to tax deductions from stock
compensation, respectively. 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, 1999 were approximately
$2.2 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.
10. STOCKHOLDERS' EQUITY
Preferred Stock
The Company is authorized to issue up to 20,000,000 shares of preferred
stock, par value $0.001 per share. In connection with the acquisition of
ScanSoft (Note 3), the Company issued 3,562,238 shares of Series B Preferred
Stock to Xerox. The Series B Preferred Stock is convertible into shares of
common stock on a share for share basis at any time after March 2, 2001.
However, the Series B is convertible immediately if the holder's ownership of
outstanding common stock falls below 30%, unless such conversion results in the
holder owning more than 50% of the outstanding Company common stock. The Series
B Preferred Stock has a liquidation preference over the common shareholders
equal to $1.30 per share plus all declared but unpaid dividends.
45
<PAGE> 48
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Series B Preferred Stock is entitled to dividends at the rate of $0.065
per annum per share, payable when, as and if declared by the Board of Directors.
Dividends are non-cumulative. Holders of Series B Preferred Stock have no voting
rights, except those rights provided under Delaware law.
Common Stock Warrants
In connection with the ScanSoft acquisition (Note 3), the Company issued
Xerox a ten-year warrant that allows Xerox to acquire a number of shares of
common stock equal to the number of options (whether vested or unvested) that
remains unexercised at the termination of any ScanSoft option assumed by the
Company in the merger. The exercise price for each warrant share is $0.61. If
all of the assumed ScanSoft options terminate without being exercised, Xerox
would be entitled to purchase approximately 1,736,630 shares of common stock.
The warrant is exercisable at any time; however, Xerox may not exercise the
warrant prior to two years from the date of its initial issuance, unless,
immediately after such exercise, Xerox owns directly or indirectly a number of
outstanding shares of common stock that represents less than 45% of the total
number of shares common stock outstanding immediately after such exercise. From
the date of acquisition through December 31, 1999, approximately 252,075
ScanSoft options have been forfeited and are available for exercise by Xerox.
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.
Deferred Compensation Relating to Stock Options
Based on an independent consultant's valuation report, management concluded
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 has been amortized over related vesting periods of the options. The
Company recorded $50,000, $100,000 and $100,000 in compensation expense for the
years ended December 31, 1999, 1998 and 1997, respectively. As of December 31,
1999, the deferred compensation has been fully amortized.
11. 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.
46
<PAGE> 49
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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.
1998 Stock Option Plan
In conjunction with the acquisition of ScanSoft (Note 3), the Company
assumed the ScanSoft 1998 Stock Option Plan (the "1998 Option Plan"), which
provides for the granting of incentive stock options to officers and employees
of the Company. Non-statutory stock options may also be granted to directors,
officers, employees and consultants of the Company. A total of 4,000,000 shares
of Common Stock has been reserved under this plan.
Options granted under the 1998 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 five years from the date of grant. At
the discretion of the Board of Directors, options may be granted with different
vesting terms.
47
<PAGE> 50
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes activity under all stock option plans and
for options granted outside the plans:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
SHARES ----------------------------
AVAILABLE NUMBER PRICE PER
FOR GRANT OF SHARES SHARE
---------- ---------- --------------
<S> <C> <C> <C>
Balance at December 31, 1996................ 378,570 2,118,710 $0.15 - $12.00
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 - $10.70
---------- ----------
Balance at December 31, 1997................ 1,401,505 3,142,910 $0.15 - $12.00
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 - $12.00
Options granted............................. (3,344,392) 3,345,392 $1.19 - $5.38
Options granted in exchange for ScanSoft
options................................... -- 1,736,630 $0.61
Options exercised........................... -- (371,230) $0.15 - $1.75
Options canceled............................ 3,082,858 (3,082,858) $0.40 - $12.00
---------- ----------
Balance at December 31, 1999................ 1,528,849 4,179,837 $0.61 - $12.00
========== ==========
</TABLE>
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, an amendment
was approved to increase the shares available in this plan by 400,000 to an
aggregate of 700,000. On June 29, 1999, at the Company's Annual Meeting of
Stockholders, an amendment was approved to further increase the shares available
in this plan by 300,000 to an aggregate of 1,000,000. Shares available for
purchase at December 31, 1999 is 541,645. The 1995 Purchase Plan permits
employees to acquire shares of the Company's Common Stock at a 15% discount
through payroll deductions. During 1997, 1998 and 1999 shares issued under this
plan aggregated 188,797, 116,969 and 60,786, 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 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 and the Company's net loss and pro forma net
loss per share would have been as follows (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1999 1998 1997
------- ------- --------
<S> <C> <C> <C>
Net loss -- as reported.............................. $(2,748) $(3,805) $(23,380)
Net loss -- pro forma................................ $(5,004) $(6,483) $(25,247)
Net loss per share -- as reported: basic and
diluted............................................ $ (0.11) $ (0.19) $ (1.20)
Net loss per share -- pro forma: basic and diluted... $ (0.20) $ (0.33) $ (1.30)
</TABLE>
48
<PAGE> 51
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The weighted average fair market value of options granted was $1.79 per
share, $1.16 per share and $3.87 per share for the years ended December 31,
1999, 1998 and 1997, 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
100% to 130% for 1999, 70% for 1998 and 1997, risk-free interest rate of 5.36%
to 6.07% for options granted in 1999, 5.12% for options granted in 1998, and
5.71% for options granted in 1997, 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 1998 Stock Option Plan, the 1995 Directors' Stock Option Plan and the
Non-Statutory Option Grants to Directors at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
EXERCISE SHARES REMAINING AVERAGE SHARES AVERAGE
PRICE RANGE OUTSTANDING LIFE IN YEARS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
----------- ----------- ------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.61 - $0.61 1,175,945 8.39 $0.61 361,634 $0.61
$1.25 - $1.56 482,000 9.34 1.52 -- --
$1.63 - $1.63 1,666,026 9.11 1.63 45,833 1.63
$1.66 - $2.59 680,866 9.67 1.98 -- --
$2.88 - $5.38 160,000 9.60 3.85 5,000 4.50
$12.00 - $12.00 15,000 5.95 12.00 15,000 12.00
--------- ---- ----- ------- -----
$0.61 - $12.00 4,179,837 9.03 $1.51 427,467 $1.16
========= ==== ===== ======= =====
</TABLE>
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
1999, 1998 and 1997: expected volatility of 100% to 130% for 1999, 70% for 1998
and 1997; risk-free interest rate of 5.03%, 5.12% and 5.71% for 1999, 1998 and
1997, 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 1999, 1998 and
1997, were $0.66, $0.70 and $2.14, respectively.
12. COMMITMENTS AND CONTINGENCIES
Operating Leases
In March 1999, the Company entered into an agreement with Xerox Corporation
to sublease 37,636 square feet within Xerox Corporation's leased facility in
Peabody, Massachusetts. The term of the non-cancelable sublease is twenty-nine
months. Future minimum rental payments under the sublease rent agreement totals
$387,000, of which $244,000 is due in 2000 and $143,000 is due in 2001.
The Company also leases sales office space in Naperville, Illinois. The
Company is currently committed through January 2001 under the terms of this
Agreement. Future minimum rental payments under this agreement total $7,100, of
which $6,600 is due in 2000 and $500 is due in 2001. Total rent expense under
operating leases for the years ended December 31, 1999, 1998 and 1997 was
$288,000, $339,000 and $657,000, respectively.
49
<PAGE> 52
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Litigation and Other Claims
From time to time, the Company becomes party to litigation and patent
infringement matters and claims which arise 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.
13. RELATED PARTIES
At December 31, 1999, Xerox owned approximately 44% of the Company's
outstanding common stock and all of the Company's outstanding Series B Preferred
Stock. In addition, Xerox has the opportunity to acquire additional shares of
common stock pursuant to a warrant (Note 10). In addition, Xerox has two
designees on the Board of Directors, including the Chairman of the Board (see
Note 15). In 1999, Xerox accounted for 14% of total net revenues.
In 1999, the Company acquired preferred stock of an internet web content
management company for $150,000. The Company's investment represents less than a
20% ownership and, accordingly, is recorded at cost in the accompanying balance
sheet. The founder and CEO of the investee is also a member of the Company's
Board of Directors.
14. SEGMENT, GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information". SFAS 131 supersedes SFAS 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. SFAS
131 also requires disclosures about products and services, geographic areas and
major customers. Prior to the acquisition of ScanSoft, the Company operated and
managed one reporting segment.
Since the acquisition of ScanSoft, the Company operates, manages and
assesses performance in two segments, United States operations and European
operations. The Company evaluates the performance of each segment based on
operating profit, exclusive of interest and taxes. Each segment follows the
Company's significant accounting policies. Following is a table of selected
financial data on the Company's reportable segments (in thousands).
The following is net sales information by geographic area based on location
of customer (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------
UNITED STATES EUROPE TOTAL
------------- ------ -------
<S> <C> <C> <C>
Revenues............................................ $27,478 $4,151 $31,629
Operating income (loss)............................. (4,824) 1,211 (3,613)
Segment assets...................................... 26,874 3,108 29,982
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
United States......................................... $24,732 $73,219 $52,023
Foreign............................................... 6,897 5,851 5,600
------- ------- -------
Total....................................... $31,629 $79,070 $57,623
======= ======= =======
</TABLE>
50
<PAGE> 53
SCANSOFT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1999, three customers accounted for 24%, 15% and 14% of total net
revenues, respectively. 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.
15. SUBSEQUENT EVENTS
On January 15, 2000, ScanSoft signed a definitive agreement to acquire
Caere Corporation ("Caere") in a purchase transaction. The merger was completed
on March 13, 2000. Caere designs, develops, manufactures and markets a range of
optical character recognition software tools and for the year ended December 31,
1999, reported revenues of approximately $58 million. Under the merger
agreement, ScanSoft will issue approximately 18.6 million shares of its common
stock, $48.3 million in cash and options to purchase 4.7 million shares of its
common stock in exchange for all the outstanding shares and options of Caere.
The purchase price of the Caere acquisition is estimated to be approximately
$179.8 million, which has been determined as follows:
<TABLE>
<S> <C>
Fair value of shares of common stock........................ $107,845
Fair value of options....................................... 16,055
Cash........................................................ 48,344
Estimated transaction costs................................. 3,925
Estimated restructuring costs............................... 3,600
--------
Total............................................. $179,769
========
</TABLE>
Common stock has been valued using an average price of ScanSoft common
stock for a few days before and after the consummation of the Caere merger. The
estimated transaction costs represent estimated fees for the financial advisors,
accountants, attorneys and expenses expected to be incurred in conjunction with
the Caere merger. ScanSoft management plans to terminate redundant employees
primarily associated with duplicate corporate, sales, marketing and other
administrative functions soon after consummation of the merger. The associated
restructuring costs of termination have been included in the purchase
accounting. These costs have been based on preliminary estimates of management
and are subject to further revision upon finalization of ScanSoft management's
plans with respect to Caere's operations.
Effective March 13, 2000, the Company elected three additional directors to
the Board of Directors comprising of two Caere directors and an additional Xerox
designee.
51
<PAGE> 54
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders
of ScanSoft, Inc.
Our audits of the consolidated financial statements referred to in our
report dated February 4, 2000, except for Note 15, which is as of March 13,
2000, appearing on page 31 in the Annual Report on Form 10-K also included an
audit of the financial statement schedule listed in Item 14(a)(2) 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 consolidated financial statements.
PricewaterhouseCoopers LLP
San Jose, California
February 4, 2000
52
<PAGE> 55
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(IN THOUSANDS)
ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Balance at beginning of period.............................. $ 4,171 $ 5,315 $ 3,931
Additions charged to costs and expenses..................... 9,305 19,480 7,122
Additions charged to other.................................. 987 -- --
Deductions and write-off.................................... (10,773) (20,624) (5,738)
-------- -------- -------
Balance at end of period.................................... $ 3,690 $ 4,171 $ 5,315
======== ======== =======
</TABLE>
53
<PAGE> 56
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding our executive
officers as of March 23, 2000.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Michael K. Tivnan......................... 47 President, Chief Executive Officer
Senior Vice President and Chief Financial
John J. Rogers, Jr........................ 42 Officer
Senior Vice President Sales and Channel
Wayne S. Crandall......................... 41 Marketing
Valorie Cook Carpenter.................... 46 Senior Vice President Marketing
Stanley E. Swiniarski..................... 42 Senior Vice President Development
</TABLE>
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. Rogers has served as Senior Vice President and Chief Financial Officer
of the company since June 10, 1999. Mr. Rogers was executive vice president, CFO
and treasurer of PADS Software, Inc. from December 1998 to June 1999. From 1991
through 1998, Mr. Rogers served as executive vice president, CFO and treasurer
of Cognex Corp.
Mr. Crandall has served as the Senior Vice President Sales and Channel
Marketing of the Company since March 2000 and Vice President Sales and Channel
Marketing 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.
Ms. Carpenter has served as Senior Vice President Marketing of the Company
since March 13, 2000. From April 1999 to March 2000, Ms. Carpenter was Senior
Vice President Marketing for Caere Corporation. From 1997 to 1998, Ms. Carpenter
was the Vice President of Marketing for Claris Corporation (later FileMaker,
Inc.), a wholly-owned subsidiary of Apple Computer, Inc. Prior to that, from
1994 to 1997, Ms. Carpenter was a Principal at Market Savvy Consulting.
Mr. Swiniarski has served as Senior Vice President Development of the
Company since March 2000 and Vice President Development 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.
Biographical information for directors contained under the heading
"Election of Directors" in the definitive Proxy Statement for the Company's 2000
Annual Meeting of Stockholders is incorporated herein by reference.
The information contained under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" in the definitive Proxy Statement for the
Company's 2000 Annual Meeting of Stockholders is incorporated herein by
reference.
54
<PAGE> 57
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the heading "Executive Compensation" and
under the captions "Compensation for Directors," "Change in Control and
Employment Agreements," and "Recent Option Grants" in the definitive Proxy
Statement for the Company's 2000 Annual Meeting of Stockholders is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the definitive Proxy Statement for the
Company's 2000 Annual Meeting of Stockholders is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the caption "Related Party Transactions" in
the definitive Proxy Statement for the Company's 2000 Annual Meeting of
Stockholders is incorporated herein by reference.
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, 1999, 1998 and 1997 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.
NONE.
55
<PAGE> 58
(c) Exhibits.
Exhibits (numbered in accordance with Item 601 of Regulation S-K)
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
<S> <C>
2.1(1) Agreement and Plan of Merger dated December 2, 1998, between
Visioneer, Inc., a Delaware corporation, and ScanSoft, Inc.,
a Delaware corporation.
3.1(2) Bylaws of Registrant.
3.2(3) Amended and Restated Certificate of Incorporation of
Registrant.
4.1(3) Specimen Common Stock Certificate.
4.2(4) Preferred Shares Rights Agreement, dated as of October 23,
1996, between the Registrant and U.S. Stock Transfer
Corporation, including the Certificate of Designation of
Rights, Preferences and Privileges of Series A Participating
Preferred Stock, the form of Rights Certificate and Summary
of Rights attached thereto as Exhibits A, B and C,
respectively.
4.3(7) Voting Agreement dated March 2, 1999 between Xerox, Xerox
Imaging Systems, Inc., Visioneer, Inc. and several holders
of Visioneer common stock.
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(7) Software Distribution Agreement dated April 26, 1995 between
Xerox Imaging Systems, Inc. and Tech Data Corporation.
10.13(7) 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(7) Distribution Agreement dated September 22, 1993 between
Ingram Micro, Inc. and Xerox Imaging Systems, Inc., as
amended.
10.15(7) 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(7) Gold Disk Bundling Agreement dated March 25, 1998 between
Xerox Corporation, Office Document Products Group and
ScanSoft, Inc.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
</TABLE>
56
<PAGE> 59
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
<S> <C>
24.1 Power of Attorney. (See signature page)
27.1 Financial Data Schedule.
</TABLE>
- ---------------
** Denotes Management compensatory plan or arrangement.
(1) Incorporated by reference from the Registrant's Registration Statement on
Form 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.
(7) Incorporated by reference from the Registrant's Annual Report on Form 10-K
for the fiscal year ended January 3, 1999.
57
<PAGE> 60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange 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 30, 2000.
SCANSOFT, INC.
By: /s/ MICHAEL K. TIVNAN
------------------------------------
Michael K. Tivnan
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Michael K. Tivnan and John J. Rogers, Jr.
jointly and severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any amendments to this
Annual Report on Form 10-K and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and conforming all that each 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 Exchange Act of 1934, this
Report on Form 10-K has been signed by the following persons in the capacities
and on the date indicated.
<TABLE>
<S> <C>
Date: March 30, 2000 /s/ PAUL A. RICCI
--------------------------------------------------------
Paul A. Ricci, Chairman of the Board
Date: March 30, 2000 /s/ MICHAEL K. TIVNAN
--------------------------------------------------------
Michael K. Tivnan, President, Chief Executive Officer
and Director (Principal Executive Officer)
Date: March 30, 2000 /s/ JOHN J. ROGERS, JR.
--------------------------------------------------------
John J. Rogers, Jr., Chief Financial Officer, (Principal
Financial Officer & Principal Accounting Officer)
Date: March 30, 2000 /s/ J. LARRY SMART
--------------------------------------------------------
J. Larry Smart, Director
Date: March 30, 2000 /s/ MARK MYERS
--------------------------------------------------------
Mark Myers, Director
Date: March 30, 2000 /s/ KATHARINE A. MARTIN
--------------------------------------------------------
Katharine A. Martin, Director
Date: March 30, 2000 /s/ ROBERT G. TERESI
--------------------------------------------------------
Robert G. Teresi, Director
</TABLE>
58
<PAGE> 61
<TABLE>
<S> <C>
Date: March 30, 2000 /s/ ROBERT J. FRANKENBERG
--------------------------------------------------------
Robert J. Frankenberg, Director
Date: March 30, 2000 /s/ ANNE M. MULCAHY
--------------------------------------------------------
Anne M. Mulcahy, Director
</TABLE>
59
<PAGE> 1
EXHIBIT 21.1
SCANSOFT, INC.
SUBSIDIARIES OF THE REGISTRANT
DECEMBER 31, 1999
<TABLE>
<CAPTION>
SUBSIDIARY LEGAL NAME JURISDICTION
- --------------------- ---------------
<S> <C>
Formmatt, Ltd. United Kingdom
Xerox Imaging Systems U.K., Ltd. United Kingdom
Scorpion Acquisitions Corporation Delaware
</TABLE>
Pursuant to the Company's acquisition of Caere Corporation on March 13,
2000, the Company formed a wholly owned subsidiary called Scorpion Acquisitions
Corporation. Scorpion Acquisitions acquired Caere Corporation, which has the
following subsidiaries:
<TABLE>
<S> <C>
Caere GmbH Germany
Caere BV The Netherlands
Caere SARL France
Caere -- Recognita Rt Hungary
Caere Kft Hungary
Caere FSC Guam
</TABLE>
60
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 333-33464, 333-30518, 333-74343 and 333-45425) of
ScanSoft, Inc., of our report dated February 4, 2000, except for Note 15, which
is as of March 13, 2000, relating to the financial statements, which appears on
page 31 of the 1999 Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report dated February 4, 2000 relating to the
financial statement schedule, which appears on page 52 of this Annual Report on
Form 10-K.
PricewaterhouseCoopers LLP
San Jose, California
March 30, 2000
61
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET, STATEMENT OF INCOME AND STATEMENT OF CASH FLOWS INCLUDED IN THE COMPANY'S
FORM 10-K FOR THE YEAR DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND THE NOTES THERETO.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 5,224
<SECURITIES> 0
<RECEIVABLES> 11,403
<ALLOWANCES> 3,690
<INVENTORY> 780
<CURRENT-ASSETS> 15,089
<PP&E> 3,618
<DEPRECIATION> (2,072)
<TOTAL-ASSETS> 29,982
<CURRENT-LIABILITIES> 8,058
<BONDS> 0
27
0
<COMMON> 4,631
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 29,982
<SALES> 31,629
<TOTAL-REVENUES> 31,629
<CGS> 7,602
<TOTAL-COSTS> 7,602
<OTHER-EXPENSES> 27,640
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (56)
<INCOME-PRETAX> (2,598)
<INCOME-TAX> 150
<INCOME-CONTINUING> (2,748)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,748)
<EPS-BASIC> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
