<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 1, 1997
REGISTRATION NO. 333-34531
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
KOFAX IMAGE PRODUCTS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3577 33-0114967
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
3 JENNER STREET, IRVINE, CALIFORNIA 92618
(714) 727-1733
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
DAVID S. SILVER, CHAIRMAN OF THE BOARD AND PRESIDENT
KOFAX IMAGE PRODUCTS, INC.
3 JENNER STREET
IRVINE, CALIFORNIA 92618
(714) 727-1733
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
K.C. SCHAAF, ESQ. LIOR O. NUCHI, ESQ.
CHRISTOPHER D. IVEY, ESQ. WILLIAM J. NEWELL, ESQ.
WILLIAM E. GARRETT, ESQ. DAWN L. JUDD, ESQ.
MARC G. ALCSER, ESQ. WENDY M. PIZARRO, ESQ.
STRADLING, YOCCA, CARLSON & RAUTH, MCCUTCHEN, DOYLE, BROWN & ENERSEN LLP
A PROFESSIONAL CORPORATION ONE EMBARCADERO CENTER, SUITE 200
660 NEWPORT CENTER DRIVE, SUITE 1600 2100 GENG ROAD
NEWPORT BEACH, CALIFORNIA 92660 PALO ALTO, CALIFORNIA 94303
(714) 725-4000 (415) 846-4000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 19, 1997
PROSPECTUS
2,000,000 Shares
[KOFAX LOGO]
Common Stock
------------------------
Of the 2,000,000 shares of common stock (the "Common Stock"), offered
hereby, 1,300,000 shares are being sold by Kofax Image Products, Inc. ("Kofax"
or the "Company") and 700,000 shares are being sold by certain stockholders of
the Company (the "Selling Stockholders"). See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders. Prior to this offering, there has been no
public market for the Common Stock of the Company. It is currently estimated
that the initial public offering price of the Common Stock will be between
$11.00 and $13.00 per share. See "Underwriting" for the factors to be considered
in determining the initial public offering price. Application has been made for
quotation of the Common Stock on the Nasdaq National Market under the symbol
"KOFX."
------------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
========================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- --------------------------------------------------------------------------------------------------------
Per Share....................... $ $ $ $
- --------------------------------------------------------------------------------------------------------
Total(3)........................ $ $ $ $
========================================================================================================
</TABLE>
(1) The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting offering expenses payable by the Company, estimated at
$800,000.
(3) Certain stockholders of the Company have granted to the Underwriters a
30-day option to purchase up to an additional 300,000 shares of Common Stock
solely to cover over-allotments, if any. If the Underwriters exercise this
option in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Stockholders will
be $ , $ , $ and $ , respectively. See
"Underwriting."
------------------------
The shares of Common Stock offered by this Prospectus are offered by the
several Underwriters, subject to prior sale, when, as and if delivered to and
accepted by them, and subject to the right of the Underwriters to reject orders
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made at the offices of Needham & Company, Inc., New York, New York, on
or about , 1997.
------------------------
NEEDHAM & COMPANY, INC. UNTERBERG HARRIS
The date of this Prospectus is , 1997
<PAGE> 3
[PICTURES]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF
THE COMPANY, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and Consolidated Financial Statements and
Notes thereto, appearing elsewhere in this prospectus.
THE COMPANY
Kofax develops and markets hardware and software products for the imaging
and document management market. The Company has increased its revenues every
year since its founding in 1985 and believes that it is the leader in the image
processing accelerator market it has historically served. The Company also
believes that new products it has recently introduced, as well as products it
plans to introduce in the next year, will significantly expand the size of the
Company's addressable market.
Document imaging systems improve efficiencies in paper intensive industries
by converting paper documents into electronic images (a process called
"capture") and managing the routing and storage of the document images. Examples
of the beneficial use of document imaging include expediting loan application
and insurance claim processing and speeding the processing of new drug
applications to the FDA. According to International Data Corporation, software
revenue for the imaging, workflow and document management industry was
approximately $2.3 billion in 1996 and is projected to grow approximately 30%
annually over the next four years.
Kofax currently has two product lines -- component application software and
scanner enhancement products, the latter of which consists primarily of image
processing accelerators. The Company believes that both product lines are well
positioned to take advantage of several major trends in the imaging and document
management market.
- - APPLICATION SOFTWARE. The imaging and document management market is
transitioning from "closed" monolithic systems supplied by turnkey vendors to
a market where VARs and system integrators integrate a set of software
components from different vendors into complete solutions. Anticipating this
trend, Kofax began developing its Ascent family of component software in
early 1993. The first Ascent product, Ascent Capture, was designed to reduce
the cost of scanning and indexing by using automated recognition techniques.
In 1996, the Company introduced Ascent Storage, an application for managing
image repositories on optical jukeboxes. These applications can be combined
with software components from other vendors, such as document management
software from Documentum, Inc., to form complete solutions. Revenue from
Ascent products was $0.2 million in fiscal 1995, $2.1 million in fiscal 1996,
and $5.2 million in fiscal 1997. The Company expects Ascent software to
continue to grow as a share of revenue.
- - IMAGE PROCESSING ACCELERATORS. As the speed and sophistication of imaging
systems have increased, so too have the demands on image processing. To meet
this demand, Kofax continues to advance its market-leading family of hardware
accelerators and software development tools that enable PCs to control
high-speed scanners and perform complex image enhancement and recognition
functions. Kofax expects that image processing accelerators will continue to
account for a majority of its revenue over the next several years.
Kofax's primary growth strategy is to expand its addressable markets by
developing new products that leverage its core image processing technologies. To
further this strategy, Kofax has recently introduced, and plans to introduce
over the next 12 months, new products in each of its product lines. In late
1996, in response to the growth of the Internet and emerging collaborative
applications, Kofax introduced a network scan server called NetScan that
connects popular office scanners directly to a network and allows them to be
shared among multiple users. Products currently in development include a new
version of Ascent Capture that will allow the Company to address the substantial
market for forms processing; a new version of Ascent Storage that requires no
programming to implement and can be used with any standard Windows application;
a SCSI version of the Company's accelerator boards that will address the growing
SCSI scanner market; and the Company's first scanner-resident accelerator
product, which will provide scanner manufacturers with a low-cost image
processing board that provides enhanced functionality.
Kofax sells its products through a network of over 50 technically skilled,
independent distributors specializing in sales of document imaging products.
This channel is supported by a 56 person sales, marketing, and technical support
organization that targets VARs, system integrators, OEMs, and large end users to
supplement the selling efforts of the Company's distributors.
3
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................. 1,300,000 shares
Common Stock offered by the Selling Stockholders.... 700,000 shares
Common Stock outstanding after the offering......... 5,294,258 shares(1)
Use of proceeds..................................... For general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq National Market symbol.............. KOFX
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... $15,773 $18,076 $21,085 $24,964 $29,266
Gross profit................................ 10,361 11,682 13,867 17,038 21,546
Income (loss) from operations............... 1,657 2,027 2,643 (1,433)* 3,392
Net income (loss)........................... 1,298 1,492 1,811 (733) 2,135
Pro forma net income per share.............. $ 0.50
Pro forma weighted average common shares.... 4,282
</TABLE>
- ---------------
* In fiscal 1996, the Company took a one-time charge of $4,176,800 for acquired
research and development costs.
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------------
PRO FORMA(2) AS ADJUSTED(3)
------------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments............................. $ 5,404 $ 18,291
Working capital.................................................... 8,676 21,956
Total assets....................................................... 16,327 29,214
Long-term notes payable............................................ 427 --
Total stockholders' equity(2)...................................... 12,254 25,962
</TABLE>
- ---------------
(1) Based on the number of shares of Common Stock outstanding as of June 30,
1997. Excludes 421,638 shares of Common Stock issuable upon exercise of
stock options outstanding as of August 22, 1997 at a weighted average
exercise price of $3.39 per share.
(2) Reflects on a pro forma basis the conversion of all outstanding shares of
the Company's Redeemable Convertible Preferred Stock into Common Stock upon
the closing of this offering on a one-for-one basis, which results in an
increase to actual stockholders' equity of $7,146,200.
(3) Adjusted to reflect the sale of the 1,300,000 shares of Common Stock offered
by the Company hereby at an assumed initial public offering price of $12.00
per share and the application of the net proceeds therefrom. See
"Capitalization."
---------------
Except as otherwise noted, all information in this prospectus (i) reflects
the automatic conversion of all outstanding shares of the Company's Redeemable
Convertible Preferred Stock into an aggregate of 2,667,002 shares of Common
Stock upon the closing of this offering, (ii) assumes outstanding options to
purchase shares of Common Stock have not been exercised and (iii) assumes the
Underwriters' over-allotment option is not exercised. See "Description of
Capital Stock" and "Underwriting."
The Company was incorporated in California in August 1985 and
reincorporated in Delaware in February 1996. As used in this prospectus,
references to the "Company" and "Kofax" refer to the Company, its predecessor
entity and its subsidiary. The principal executive offices of the Company are
located at 3 Jenner Street, Irvine, California 92618, and the Company's
telephone number is (714) 727-1733. Kofax(R), KIPP(R), ImageControls(R),
Ascent(R), Ascent Capture(R) and NetScan(R) are registered trademarks of the
Company. StorageControls(TM), Adrenaline(TM) and Ascent Storage(TM) are
trademarks of the Company and are the subject of pending trademark registration
applications. Alliance(SM) and The Component Imaging Company(SM) are
servicemarks of the Company and are the subject of pending servicemark
registration applications. This prospectus also includes trademarks of companies
other than the Company, whose mention herein is with due recognition of, and
without intent to, misappropriate their marks.
4
<PAGE> 6
RISK FACTORS
This prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed in "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this prospectus. In addition
to the other information in this prospectus, the following risk factors should
be considered carefully in evaluating the Company and its business before
purchasing shares of Common Stock.
PROBABLE FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's operating results have been, and its future operating results
are expected to be, subject to fluctuations due to a number of factors,
including the timing of orders from, and shipments to, major customers; the
timing of new product introductions by the Company or its competitors;
variations in the mix of products sold by the Company; changes in pricing
policies by the Company, its competitors or its suppliers, including possible
decreases in average selling prices of the Company's products in response to
competitive pressures; product returns or price protection charges from
customers; market acceptance of new and enhanced versions of the Company's
products; the availability and cost of key components; the availability of
manufacturing capacity; delays in the introduction of new products or product
enhancements by the Company, the Company's competitors or other providers of
hardware, software and components for the document imaging market; dependence
upon capital spending budgets; fluctuations in general economic conditions; and
the unpredictability of all of the foregoing. In addition, the Company has at
times experienced quarter-to-quarter declines in net sales. The Company believes
that these fluctuations in net sales result primarily from the budgeting and
purchasing cycles of its customers and, during the summer months, from European
holiday closures. As a result, the Company believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as indications of future performance. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations."
The Company's expense levels are relatively fixed in the short term and are
based on the Company's sales forecasts; however, because substantially all of
the Company's net sales in each quarter result from orders received and shipped
in that quarter, net sales are difficult for the Company to forecast accurately.
The Company operates with little product backlog because its products are
typically shipped shortly after orders are received. In addition, a significant
portion of the Company's sales are made through indirect channels and are
difficult to predict. Any significant reduction in customer demand in a
particular quarter would therefore have an almost immediate adverse effect on
the Company's operating results. If significant shortfalls were to occur between
forecasted and actual orders, as has occurred in the past and as may occur in
the future, the Company might not be able to reduce its expenses proportionately
and in a timely manner. This could compound the resulting adverse effect on
operating results. In addition, in order to promptly fill orders, the Company
maintains inventories of finished goods and components with long lead times,
which could result in writedowns of inventory in the future and could contribute
to quarterly fluctuations in operating results. The Company's gross profit
margins may be adversely affected by the introduction of new products and
changes in product mix. Accordingly, there can be no assurance that the Company
will be able to sustain its current gross profit margins. The Company also may
reduce prices or increase spending in response to competition or to pursue new
market opportunities, which may adversely affect the Company's operating
results. Due to the foregoing factors, the Company's operating results may be
below the expectations of public market analysts and investors in some future
quarters, which would likely result in a decline in the trading price of the
Common Stock. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Overview" and "-- Quarterly Results of Operations."
DEPENDENCE ON A LIMITED NUMBER OF PRODUCTS FOR CURRENT AND FUTURE OPERATING
RESULTS
The Company focuses exclusively on document imaging hardware and software.
Historically, the Company has derived substantially all of its net sales from
its family of accelerator boards, software development tools and accessories.
This family of products is expected to continue to account for a majority of
5
<PAGE> 7
the Company's net sales for the foreseeable future. The Company expects that as
the family of accelerator boards and related products continues to mature, sales
of these products will not continue to grow at historical rates, and there can
be no assurance that the Company will be able to sustain the current level of
growth of such sales. Any reduction in the demand for the Company's family of
accelerator boards and related products due to introductions by the Company's
competitors of products based on new technologies or new industry standards, a
decline in the demand for computer systems or document imaging products, product
obsolescence or any other reason would have a material adverse effect on the
Company's business, operating results, cash flows and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Products."
In January 1995, the Company introduced its Ascent line of document image
processing application software for Microsoft Windows and in October 1996, the
Company began shipping its NetScan product. The Company is directing a
significant amount of its research and development expenditures to the
development of its Ascent products and plans to devote significant marketing
efforts to promotion of its Ascent and NetScan products. The Company believes
that its Ascent and NetScan products, together with other products under
development, will contribute an increasing share of the Company's net sales in
the future as the market for accelerator boards and related products continues
to mature. Accordingly, the Company believes that its operating results will in
the future become substantially dependent on the Company's ability to increase
sales of its Ascent and NetScan products, achieve market acceptance of new
products under development and develop future products. There can be no
assurance that the Company will be successful in increasing sales of its Ascent
and NetScan products, achieving market acceptance of its new products under
development or developing additional products. Failure to increase sales of the
Company's Ascent and NetScan products, achieve market acceptance of products
under development or develop additional products would have a material adverse
effect on the Company's business, operating results, cash flows and financial
condition. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business -- Products."
DEPENDENCE ON DOCUMENT IMAGE PROCESSING MARKET AND COMPONENT SOFTWARE STRATEGY
Substantially all of the Company's net sales have been attributable to
sales of document imaging products, and these products are currently expected to
account for substantially all of the Company's future net sales. The document
imaging market is a rapidly evolving market. If the document imaging market
fails to grow or grows more slowly than the Company currently anticipates, the
Company's business, operating results and financial condition would be
materially adversely affected. In addition, the Company has focused its product
development efforts on a component software strategy rather than seeking to
develop a complete turnkey imaging solution. If the component software approach
does not continue to achieve significant market acceptance, or develops more
slowly than the Company expects, the Company's business, operating results, cash
flows and financial condition could be materially adversely affected. See
"Business -- Industry Background."
RAPID TECHNOLOGICAL CHANGE
The market for the Company's document image processing products is
characterized by rapid technological advances, changes in end user requirements,
frequent new product introductions and enhancements and evolving industry
standards. The introduction of products embodying new technologies and the
emergence of new industry standards could render the Company's existing products
and products under development obsolete and unmarketable. For example,
increasing speeds of future generation Pentium-class microprocessors in standard
PCs could reduce demand for the Company's hardware accelerator products, which
could have a material adverse effect upon the Company's business, operating
results, cash flows and financial condition. The Company's future success will
depend upon its ability to address the increasingly sophisticated needs of its
customers by enhancing its current products and by developing and introducing on
a timely basis new products that lead or keep pace with technological
developments and emerging industry standards, respond to evolving end user
requirements and achieve market acceptance. Any failure by the Company to
anticipate or adequately respond to technological developments or end user
requirements, or any significant
6
<PAGE> 8
delays in product development or introduction could result in a loss of
competitiveness or net sales. In the past, the Company has experienced delays in
the introduction of new products and product enhancements. There can be no
assurance that the Company will be successful in developing and marketing
product enhancements or new products on a timely basis or at all, that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and sale of these products, or that any of
its new products or product enhancements will adequately meet the requirements
of the marketplace and achieve market acceptance. If the Company is unable, for
technological or any other reasons, to develop, introduce and sell its products
in a timely manner, the Company's business, operating results, cash flows and
financial condition would be materially adversely affected. From time to time,
the Company or its present or future competitors may announce new products,
capabilities or technologies that have the potential to replace or shorten the
life cycles of the Company's existing products. There can be no assurance that
announcements of currently planned or other new products will not cause
customers to delay or alter their purchasing decisions in anticipation of such
products, which could have a material adverse effect on the Company's business,
operating results, cash flows and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business -- Products," "-- Competition" and "-- Technology/Research and
Development."
IMPACT OF COMPETITION
The market for document image processing hardware and software components
is highly competitive and is characterized by rapid changes in technology and
frequent introductions of new platforms and features. The Company expects
competition to increase as other companies introduce additional and more
competitive products in the developing document image processing market. In its
accelerator board and developer toolkit business, the Company competes primarily
with a number of small private companies. In its Ascent business, to which the
Company is a relative newcomer, Kofax competes indirectly against large
suppliers of turnkey systems, as well as directly with other component software
vendors, more of whom are expected to enter the market over the next few years.
Some of the Company's existing and potential competitors in the application
software segment of the document imaging market have larger technical staffs,
greater brand name recognition and market presence, more established and larger
marketing and sales organizations and substantially greater financial resources
than the Company. There can be no assurance that the Company will be able to
compete successfully against current or future competitors or that competitive
pressures faced by the Company will not have a material adverse effect on the
Company's business, operating results, cash flows and financial condition.
The Company believes that the competitive factors affecting the market for
the Company's products include product performance, price and quality; product
functionality and features; the availability of products for existing and future
platforms; the ease of integration of the products with other hardware and
software components of document imaging systems; and the quality of support
services, product documentation and training. The relative importance of each of
these factors depends upon the specific customer involved. There can be no
assurance that the Company will be able to compete effectively with respect to
any of these factors.
The Company's present or future competitors may be able to develop products
comparable or superior to those offered by the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements. In order
to remain competitive in the document imaging market, the Company must respond
to technological change, customer requirements, and competitors' current
products, product enhancements and innovations. The Company introduced its
Ascent line of application software products in January 1995, has recently
developed its new generation of accelerator boards and is currently developing
additional product enhancements to these products in an effort to address
customer requirements and respond to technological changes. However, there can
be no assurance that the Company will successfully complete the development or
introduction of these products on a timely basis or that these products will
achieve market acceptance. Accordingly, there can be no assurance that the
Company will be able to continue to compete effectively in the document imaging
market, that competition will not intensify or that future competition will not
have a material adverse effect on the Company's business, operating results,
cash flows and financial condition. See "Business -- Competition."
7
<PAGE> 9
DEPENDENCE UPON DISTRIBUTION CHANNELS
The Company relies heavily on its distributors and resellers for the
marketing and distribution of its products. In fiscal 1997, three of the
Company's distributors, Tech Data Corporation, Law-Cypress Distributing Co. and
Cranel Inc. accounted for 14%, 14%, and 10%, respectively, of the Company's
total net sales. The concentration of sales to a limited number of distributors
increases the credit risk of sales to such distributors. If one or more of the
Company's principal distributors became insolvent or otherwise terminated its
relationship with the Company, the Company's business, operating results, cash
flows and financial condition could be materially adversely affected. The
Company's products are hardware and software components of complete document
imaging systems. As such, sales of the Company's products depend, in significant
part, upon purchases of document imaging systems, which include products
supplied by vendors other than the Company. As a result, sales of the Company's
products are subject to a variety of factors outside of the Company's control,
including the ability of its resellers to successfully sell their complete
solutions to end users. The Company's agreements with resellers and distributors
do not require minimum purchases, are generally not exclusive and in many cases
may be terminated by either party without cause. There can be no assurance that
these resellers and distributors will continue to carry the Company's products
or that they will give a high priority to the marketing of the Company's
products. In addition, there can be no assurance that the Company will retain
any of its current resellers or distributors or that, if the Company were to
lose any reseller or distributor, the Company would be successful in recruiting
replacement organizations to represent it. Any changes in the Company's
distribution channels could materially adversely affect the Company's business,
operating results, cash flows and financial condition. See "Business -- Sales
and Distribution."
DEPENDENCE ON INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company currently holds no patents and relies on a combination of
copyright, trademark and trade secret laws, employee and third-party
nondisclosure agreements, licensing arrangements and other security measures
(which afford only limited protection) to establish and protect its software,
proprietary algorithms and other proprietary technology. There can be no
assurance that the Company will be successful in protecting its proprietary
technology, or that the Company's competitors will not independently develop
products or technologies that are substantially equivalent or superior to the
Company's products and technologies. It is possible that third parties will copy
or reverse engineer portions of the Company's products or otherwise obtain and
use information which the Company regards as proprietary. In addition, the laws
of some foreign countries do not protect the Company's proprietary rights to the
same extent as the laws of the United States. The failure or inability of the
Company to protect its intellectual property rights could have a material
adverse effect on its business, operating results, cash flows and financial
condition.
The PC hardware and software industry is characterized by vigorous
protection of intellectual property rights, which has resulted in significant
and often protracted and expensive litigation. Litigation may be necessary to
protect the Company's intellectual property rights and trade secrets, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. There can be no assurance
that infringement, invalidity, right to use or ownership claims by third parties
will not be asserted against the Company in the future. The Company expects that
it will increasingly be subject to such claims as the number of products and
competitors in the document image processing market grows and the functionality
of such products overlaps with other industry segments. If any claims or actions
are asserted against the Company, the Company may seek to obtain a license under
a third party's intellectual property rights. There can be no assurance,
however, that a license will be available upon reasonable terms if at all. In
addition, should the Company decide to litigate such claims, such litigation
could be expensive, protracted and time consuming, could divert management's
attention from other matters, could cause product shipment delays and could
materially adversely affect the Company's business, operating results, cash
flows and financial condition, regardless of the outcome of the litigation. See
"Business -- Intellectual Property."
8
<PAGE> 10
DEPENDENCE ON SUPPLIERS AND SUBCONTRACTORS
The Company purchases circuit boards, integrated circuits and other
components from third parties. The Company's dependence on third-party suppliers
involves several risks, including limited control over pricing, availability,
quality and delivery schedules. The Company is dependent on sole-source
suppliers for ASICs and certain other components used in its products. The
Company generally purchases sole-sourced components pursuant to purchase orders
placed in the ordinary course of business and has no guaranteed supply
arrangements with any of its sole-source suppliers. There can be no assurance
that the Company will not experience quality control problems or supply
shortages with respect to these components in the future. Any quality control
problems or interruptions in supply with respect to one or more components could
have a material adverse effect on the Company's business, operating results,
cash flows and financial condition. Because of the Company's reliance on these
suppliers, the Company may also be subject to increases in component costs,
which could materially adversely affect its business, operating results, cash
flows and financial condition. See "Business -- Manufacturing and Suppliers."
The Company relies on third-party subcontractors for the manufacture of
certain of its products and components, such as cable assemblies and circuit
boards. Reliance on third-party subcontractors involves several risks, including
the potential inadequacy of capacity, the unavailability of or interruptions in
access to certain process technologies and reduced control over product quality,
delivery schedules, manufacturing yields and costs. Shortages of raw materials
or production capacity constraints at the Company's subcontractors could
negatively affect the Company's ability to meet its production obligations and
result in increased prices for, or unavailability of, affected parts. Any such
reduction, constraint or unavailability could result in delays in shipments of
the Company's products or increases in the prices of components, either of which
could have a material adverse effect on the Company's business, operating
results, cash flows and financial condition. See "Business -- Manufacturing and
Suppliers."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends on the continued service of key management
personnel, including David S. Silver, Chief Executive Officer and Dean A. Hough,
Vice President, Engineering. None of the Company's personnel is subject to an
employment agreement with the Company. In addition, the competition to attract,
retain and motivate qualified technical, sales and operations personnel is
intense. The Company has at times experienced, and continues to experience,
difficulty in recruiting qualified personnel, particularly in software
development and customer support. There can be no assurance that the Company can
retain its key personnel or attract other qualified personnel in the future. The
failure to attract or retain such persons could have a material adverse effect
on the Company's business, operating results, cash flows and financial
condition. See "Business -- Employees" and "Management."
DEPENDENCE ON CAPITAL SPENDING
Substantially all of the Company's net sales are derived from the sale of
hardware and software components for use in document imaging systems purchased
by end users such as large corporations and domestic and foreign governmental
agencies. The decision to purchase a document imaging system generally involves
a significant commitment of capital, with the attendant delays associated with
significant capital expenditures. The Company's future success is directly
dependent upon the capital expenditure budgets of its customers and the
continued demand by such customers for document imaging systems. Certain
industries that utilize document imaging systems, such as the financial services
industry, are highly cyclical, and companies in such industries may experience
economic downturns, which could lead to significant reductions in capital
expenditures. In addition, many domestic and foreign governmental agencies have
experienced budget deficits that have also led to significant reductions in
capital expenditures. The Company's operations may in the future be subject to
substantial period-to-period fluctuations as a consequence of such industry
patterns and such factors affecting capital spending. There can be no assurance
that any such decrease in capital spending will not have a material adverse
effect on the Company's business, operating results, cash flows and financial
condition.
9
<PAGE> 11
RISKS ASSOCIATED WITH INTERNATIONAL SALES
In fiscal 1995, 1996 and 1997, international sales represented
approximately 36%, 36% and 34%, respectively, of the Company's net sales, and
the Company believes that its future growth is dependent in part upon its
ability to increase sales in international markets. The Company intends to
attempt to continue to expand its operations outside of the United States and
enter additional international markets, which will require significant
management attention and financial resources. There can be no assurance,
however, that the Company will be able to successfully maintain or expand its
international sales. International sales are subject to inherent risks,
including changes in regulatory requirements, tariffs and other barriers,
fluctuating exchange rates, difficulties in staffing and managing foreign sales
and support operations and the possibility of greater difficulty in accounts
receivable collection. To date, the Company has avoided the risk of fluctuating
exchange rates associated with international sales by selling its products in
United States currency, however, there can be no assurance that the Company will
be able to continue to do so. There can be no assurance that any of these
factors will not have a material adverse effect on the Company's future
international sales and, consequently, on the Company's business, operating
results, cash flows and financial condition. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operations -- Overview" and
"-- Results of Operations -- Net Sales."
RISK OF DEFECTS
The Company has occasionally discovered errors or defects in its products
after their commercial shipment. Although to date such defects and errors have
not been significant, there can be no assurance that significant defects and
errors will not be discovered in new products, existing products or in new
versions or enhancements of existing products, and if discovered, will be
successfully and timely corrected. Discovery of errors or defects in the
Company's products after commercial shipment could result in adverse customer
reaction, negative publicity regarding the Company or its products, a delay in
or failure to achieve market acceptance or a diversion of management and product
development resources, any of which could have a material adverse effect on the
Company's business, operating results, cash flows and financial condition.
CONTROL BY MANAGEMENT AND EXISTING STOCKHOLDERS
Upon consummation of this offering, the directors, executive officers and
principal stockholders of the Company and their affiliates will, in the
aggregate, own beneficially approximately 52% of the outstanding Common Stock
(47% if the Underwriters' over-allotment option is exercised in full). These
stockholders, acting together, will have the ability to control the election of
the Company's directors and most other stockholders' actions and, as a result,
direct the Company's affairs and business. Such concentration may have the
effect of delaying or preventing a change of control of the Company. See
"Principal and Selling Stockholders."
NO PRIOR PUBLIC MARKET; PROBABLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock of the Company, and there can be no assurance that an active market will
develop or be sustained after this offering or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price will be determined through negotiations among the
Company, the Selling Stockholders and the representatives of the Underwriters
and may not be indicative of future market prices. See "Underwriting." The
market price of the Common Stock could be subject to wide fluctuations in
response to quarter-to-quarter variations in operating results, changes in
earnings estimates by analysts, announcements of technological innovations or
new products by the Company or its competitors, general conditions in the
software and computer industries or the document image processing market and
other events or factors. In addition, the securities of many technology
companies have experienced extreme price and volume fluctuations, which have
often been unrelated to the operating performance of such companies. These
conditions may adversely affect the market price of the Common Stock.
10
<PAGE> 12
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of Common Stock in the public market following
the offering made hereby could have an adverse effect on the market price of the
Common Stock. Upon completion of this offering, the Company will have 5,294,258
shares of Common Stock outstanding, assuming no exercise of options after June
30, 1997. Of these shares, the 2,000,000 shares offered hereby (2,300,000 shares
if the Underwriters' over-allotment option is exercised in full) will be freely
tradeable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of
the Company as that term is defined in Rule 144 under the Securities Act. The
remaining 3,294,258 shares of Common Stock outstanding upon completion of this
offering are "restricted securities" as that term is defined in Rule 144. These
restricted securities may be sold in the public market only if registered or
pursuant to an exemption from registration, such as Rule 144 under the
Securities Act. Of the 3,294,258 shares held by existing stockholders, 3,116,494
shares of Common Stock are subject to certain lock-up agreements pursuant to
which such stockholders have agreed with the Underwriters not to sell any Common
Stock owned by them for a period of 180 days after the effective date of the
offering. Upon the expiration of such lock-up agreements, approximately 31,412
shares will be eligible for sale under Rule 701 (plus shares issuable upon
exercise of then vested outstanding options), 315,619 shares will be eligible
for sale under Rule 144(k) and 2,721,963 shares held by "affiliates" of the
Company, as that term is defined in Rule 144, will be eligible for sale under
Rule 144 subject to the volume and other restrictions of Rule 144. Pursuant to
Rule 701, 8,075 shares will be eligible for sale 90 days following this
offering. An additional 23,750 shares will be eligible for sale 30 days
following this offering, and an additional 23,750 shares will be eligible for
sale 60 days following this offering. Immediately following this offering
approximately 179,189 shares will be eligible for sale under Rule 144. As of
August 22, 1997, 421,638 shares were subject to outstanding options to purchase
Common Stock, of which 416,763 shares are subject to the lock-up agreements
described above. Upon completion of this offering, the holders of 1,967,002
outstanding shares of Common Stock are entitled to certain demand and piggyback
registration rights with respect to such shares, the exercise of which may have
an adverse effect on the market price for the Common Stock or the Company's
ability to raise needed capital. See "Description of Capital
Stock -- Registration Rights," "Shares Eligible for Future Sale" and
"Underwriting."
DILUTION TO NEW INVESTORS
The initial public offering price will be substantially higher than the
book value per share of the Common Stock. Accordingly, investors purchasing
shares of Common Stock in this offering will incur immediate and substantial net
tangible book value dilution of $7.20 per share, assuming an initial public
offering price of $12.00 per share. In addition, investors purchasing shares in
this offering will incur additional dilution to the extent outstanding options
are exercised. See "Dilution."
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company's Board of Directors has the authority to issue up to 5,000,000
shares of Preferred Stock and to determine the price, rights, preferences,
qualifications, limitations and restrictions, including voting rights, of those
shares without any further vote or action by the stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any Preferred Stock that may be issued in the
future. The issuance of Preferred Stock could have the effect of delaying or
preventing a change of control. Further, Section 203 of the General Corporation
Law of Delaware prohibits the Company from engaging in certain business
combinations with interested stockholders. These provisions may have the effect
of delaying or preventing a change in control of the Company without action by
the stockholders, and could therefore adversely affect the price of the Common
Stock. See "Description of Capital Stock."
BENEFITS OF OFFERING TO CURRENT STOCKHOLDERS
All of the Company's stockholders, including those selling in the offering,
will benefit from the creation of a public market for the Company's Common Stock
as a result of the offering. In particular, the aggregate
11
<PAGE> 13
consideration received by the Company for all outstanding shares of its Common
Stock was approximately $4.3 million, which shares will have an aggregate value
of $47.9 million, at an assumed per share value of $12.00, after the offering.
The Selling Stockholders are selling an aggregate of 700,000 shares of Common
Stock which, at an assumed initial offering price of $12.00 per share, less
underwriting discounts and commissions, results in aggregate net proceeds to the
Selling Stockholders of approximately $7.8 million. In addition, the Selling
Stockholders benefit from the Underwriters' marketing efforts in connection with
the offering and their firm commitment to purchase the shares offered hereby.
Further, the Selling Stockholders, to the extent of their sales, will not be
subject to the risk of a decline in the price of the Company's Common Stock in
the public market. See "-- No Prior Public Market; Probable Volatility of Stock
Price." The Company will not receive any proceeds from the sale of Common Stock
by the Selling Stockholders. See "Principal and Selling Stockholders."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,300,000 shares of
Common Stock offered by the Company hereby at an assumed initial public offering
price of $12.00 per share, after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company, are
estimated to be approximately $13,708,000. The Company will not receive any
proceeds from the sale of shares of Common Stock offered by the Selling
Stockholders.
The Company will repay the outstanding amount under the Company's term loan
credit facility, which was $821,400 as of June 30, 1997. The outstanding balance
of the term loan bears interest at the bank's prime rate plus 1.0%, matures on
July 5, 1999, and was incurred for working capital purposes. The Company expects
to use substantially all of the remaining net proceeds of this offering for
working capital, to augment the Company's sales, marketing and technical support
organization, and to increase the Company's funds available for general
corporate purposes. A portion of the net proceeds may also be used for strategic
acquisitions of businesses, products or technologies complementary to those of
the Company. The Company is not currently a party to any commitments or
agreements, and is not currently involved in any negotiations, with respect to
any such acquisitions. The Company has not determined the amounts it plans to
expend with respect to each of the listed uses or the timing of such
expenditures. The amounts actually expended for each use may vary significantly
depending on a number of factors, including future revenue growth, if any, the
amount of cash generated or used by the Company's operations, the progress of
the Company's product development efforts, technological advances, the status of
competitive products and acquisition opportunities presented to the Company.
Pending such uses, the net proceeds of this offering will be invested in short
to medium-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on shares of its
Common Stock. The Company currently anticipates that it will retain all
available funds for use in the operation of its business, and does not intend to
pay any cash dividends in the foreseeable future. Future cash dividends, if any,
will be determined by the Board of Directors. The payment of cash dividends by
the Company is restricted by the Company's current bank credit facilities, which
contain restrictions prohibiting the Company from paying any cash dividends
without the bank's prior approval, and future borrowings may contain similar
restrictions.
12
<PAGE> 14
CAPITALIZATION
The following table sets forth (i) the actual capitalization of the Company
as of June 30, 1997, (ii) the pro forma capitalization of the Company, giving
effect to the conversion of all outstanding shares of Redeemable Convertible
Preferred Stock into shares of Common Stock and (iii) the as adjusted
capitalization of the Company after giving effect to the sale of 1,300,000
shares of Common Stock offered by the Company hereby at an assumed initial
public offering price of $12.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses payable by the
Company.
<TABLE>
<CAPTION>
JUNE 30, 1997
------------------------------------
ACTUAL PRO FORMA(1) AS ADJUSTED
------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term notes payable...................................... $ 427 $ 427 $ --
Redeemable Convertible Preferred Stock, $.001 par value;
2,667,002 actual shares outstanding, no pro forma or as
adjusted shares outstanding................................ 7,146 -- --
Stockholders' equity:
Preferred Stock, $.001 par value, 5,000,000 shares
authorized; no shares issued or outstanding............. -- -- --
Common Stock, $.001 par value; 40,000,000 shares
authorized; 1,327,256 actual shares outstanding and
3,994,258 pro forma shares outstanding; 5,294,258 shares
outstanding, as adjusted(2)............................. 172 4,261 17,969
Retained earnings.......................................... 4,936 7,993 7,993
------- ------- -------
Total stockholders' equity................................. 5,108 12,254 25,962
------- ------- -------
Total capitalization.................................... $12,681 $ 12,681 $25,962
======= ======= =======
</TABLE>
- ---------------
(1) Reflects the conversion of all outstanding shares of the Company's
Redeemable Convertible Preferred Stock into Common Stock on a one-for-one
basis and an increase of approximately $3,057,000 in retained earnings and a
decrease in the value of the Redeemable Convertible Preferred Stock for the
cumulative accretion to the liquidation value of such Preferred Stock upon
the closing of this offering.
(2) Excludes 421,638 shares of Common Stock issuable upon exercise of
outstanding stock options as of August 22, 1997 at a weighted average
exercise price of $3.39 per share. Also excludes a total of 641,650
additional shares of Common Stock reserved for future issuance under the
Company's incentive stock plans. See "Management -- Stock Benefit Plans."
13
<PAGE> 15
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
June 30, 1997 was $11,724,100, or $2.94 per share. Pro forma net tangible book
value per share represents the amount of the Company's total tangible assets
(total assets less $530,200 of intangible assets as of June 30, 1997) less total
liabilities divided by the pro forma number of shares of Common Stock
outstanding. Assuming the sale of the 1,300,000 shares offered by the Company
hereby at an assumed initial public offering price of $12.00 per share and the
application of the net proceeds therefrom, after deducting estimated offering
expenses and underwriting discounts and commissions, the pro forma, as adjusted,
net tangible book value of the Company as of June 30, 1997 would have been
approximately $25,432,100, or $4.80 per share. This represents an immediate
increase in the net tangible book value of $1.86 per share to existing
stockholders and an immediate dilution in net tangible book value of $7.20 per
share to purchasers of shares of Common Stock offered hereby. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $12.00
Pro forma net tangible book value per share as of June 30, 1997........ $2.94
Increase in net tangible book value per share attributable to new
investors............................................................. 1.86
-----
Pro forma, as adjusted, net tangible book value per share after the
offering.................................................................. 4.80
------
Dilution per share to new investors......................................... $ 7.20
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1997,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by existing stockholders
and by purchasers of the shares of Common Stock offered hereby at an assumed
initial public offering price of $12.00 per share:
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED(1)(2) CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders............... 3,994,258 75% $ 4,261,600 21% $ 1.07
New Investors....................... 1,300,000 25 15,600,000 79 12.00
--------- --- ----------- ---
Total..................... 5,294,258 100% $19,861,600 100%
========= === =========== ===
</TABLE>
- ---------------
(1) Sales by the Selling Stockholders in this offering will reduce the number of
shares held by existing stockholders to 3,294,258 shares, or 62% of the
total number of shares to be outstanding after this offering, and will
increase the number of shares held by new investors to 2,000,000 shares, or
38% of the total shares of Common Stock outstanding after this offering. See
"Principal and Selling Stockholders."
(2) The number of shares assumes (i) the conversion of all outstanding shares of
Redeemable Convertible Preferred Stock into shares of Common Stock upon the
closing of this offering, and (ii) no exercise of outstanding options. At
August 22, 1997, 421,638 shares of Common Stock were subject to outstanding
options at a weighted average exercise price of $3.39 per share. To the
extent options are exercised, there will be further dilution to new
investors. See "Management -- Executive Compensation" and Note 8 of Notes to
Consolidated Financial Statements.
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below as of and for each
of the five years in the period ended June 30, 1997 have been derived from the
audited consolidated financial statements and notes thereto audited by Deloitte
& Touche LLP, independent auditors, of which the consolidated financial
statements and notes thereto as of June 30, 1996 and 1997 and for each of the
three years in the period ended June 30, 1997 are included elsewhere in this
prospectus. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
-------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $15,773 $18,076 $21,085 $24,964 $29,266
Cost of sales............................ 5,412 6,394 7,218 7,926 7,720
------- ------- ------- ------- -------
Gross profit............................. 10,361 11,682 13,867 17,038 21,546
Operating expenses:
Sales and marketing................. 4,095 4,817 5,977 7,456 9,565
Research and development............ 3,365 3,455 3,693 5,090 6,653
General and administrative.......... 1,244 1,383 1,554 1,748 1,936
Acquired in-process research and
development costs................. -- -- -- 4,177 --
------- ------- ------- ------- -------
Total operating expenses....... 8,704 9,655 11,224 18,471 18,154
------- ------- ------- ------- -------
Income (loss) from operations............ 1,657 2,027 2,643 (1,433) 3,392
Other income, net........................ 69 51 264 200 69
------- ------- ------- ------- -------
Income (loss) before provision (benefit)
for income taxes....................... 1,726 2,078 2,907 (1,233) 3,461
Provision (benefit) for income taxes..... 428 586 1,096 (500) 1,326
------- ------- ------- ------- -------
Net income (loss)........................ $ 1,298 $ 1,492 $ 1,811 $ (733) $ 2,135
======= ======= ======= ======= =======
Pro forma net income per share........... $ 0.50
=======
Pro forma weighted average common
shares................................. 4,282
</TABLE>
<TABLE>
<CAPTION>
JUNE 30,
-------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and investments... $ 4,135 $ 5,119 $ 6,759 $ 3,514 $ 5,404
Working capital.......................... 6,562 7,774 9,382 6,949 8,676
Total assets............................. 9,096 10,631 13,018 14,141 16,327
Long-term notes payable.................. 70 -- -- 799 427
Total stockholders' equity(1)............ 7,507 9,008 10,832 10,106 12,254
</TABLE>
- ---------------
(1) Includes amounts attributable to the outstanding shares of the Company's
Redeemable Convertible Preferred Stock.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
prospectus. The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto included elsewhere herein.
OVERVIEW
Kofax was founded in 1985 to develop image processing boards that could be
added to personal computers to facilitate high-speed scanning, manipulation and
printing of documents. The Company's first generation of PC-based scanner
acceleration products, the KF-8200 series, was introduced in April 1987. The
Company next developed a set of software development tools that allowed system
integrators and independent software vendors to develop document capture and
printing applications without the need for significant image processing
expertise. The new software development tools, called KIPP Developers Toolkits,
were targeted at Microsoft Windows developers and were introduced in 1990,
together with a second generation of accelerator boards, the KF-9200 series. The
current generation of toolkits, called ImageControls, is a set of 32-bit ActiveX
controls for the Windows NT and Windows 95 environment. The fourth generation of
hardware accelerators, the Adrenaline family, is expected to be released in the
first quarter of fiscal 1998.
In January 1995, the Company introduced its first application software
product, Ascent Capture. Ascent Storage was introduced in January 1996. Ascent
Capture and Ascent Storage are sold through the Company's existing reseller and
system integrator channels. In October 1996, the Company introduced NetScan, a
network scan server for workgroup scanning.
The KIPP and Adrenaline families of products are expected to continue to
account for a majority of the Company's net sales for the next several years.
The Company also expects that its Ascent and NetScan products, together with
other products under development, will contribute an increasing share of the
Company's net sales in the future.
Net sales represent gross sales less discounts, returns and adjustments.
The Company's net sales have grown from $287,000 in fiscal 1987 to $29.3 million
in fiscal 1997. The Company's revenue growth has resulted from the expansion of
the document image processing market, as well as from the growing market
acceptance of the Company's products. The Company typically ships its products
within a short period after acceptance of purchase orders from distributors and
other customers. Accordingly, the Company typically does not have a material
backlog of unfilled orders at the end of any quarter. Net sales of scanner
enhancement products (KIPP, Adrenaline, and NetScan collectively) amounted to
82.3% of fiscal 1997 revenue, of which NetScan contributed less than 1% of net
sales. Net sales of Ascent component software products amounted to 17.7% of
fiscal 1997 revenue compared to 8.5% in fiscal 1996 and 1.0% in fiscal 1995.
International sales (primarily to western European countries) accounted for
approximately 36%, 36% and 34% of net sales during fiscal 1995, 1996 and 1997,
respectively. The Company sells its products primarily through a channel of
distributors and resellers. Net sales through distribution amounted to 77% of
fiscal 1997 revenue. The Company has five domestic and two European sales
offices to support its distributors and resellers. Revenue from hardware and
software sales are recognized at the time of shipment in accordance with AICPA
Statement of Position 91-1, Software Revenue Recognition. Distributors have
certain rights of return and exchange privileges. The Company's distributors
generally do not stock significant amounts of inventory of the Company's
products, as these products are typically incorporated by resellers into
complete imaging and document management systems which are configured shortly
before scheduled delivery to end-user customers. The Company records estimates
for such rights of return and exchange privileges based on historical
experience. The Company provides a warranty for its products against defects in
materials and workmanship. A provision for estimated warranty costs is recorded
at the time of sale.
16
<PAGE> 18
The Company has been profitable for the last 24 quarters, with the
exception of the quarter ending December 1995, when $4,158,500 was charged to
acquired in-process research and development expenses in connection with the
acquisition of certain net assets of LaserData, Inc. ("LaserData"). See Note 3
of Notes to Consolidated Financial Statements.
Cost of sales primarily consist of the costs of components and
subassemblies, labor and manufacturing overhead and, with respect to the
Company's software products, software duplication and royalty expenses. The
Company believes that its gross margins reflect the relatively high software
content of the Company's product mix. Sales and marketing expenses consist
primarily of salaries and commissions, customer support, trade shows,
advertising and other promotional expenses. General and administrative expenses
consist of personnel costs for administration, finance, information systems,
human resources and general management, as well as professional services.
Research and development expenses consist primarily of personnel costs and
overhead costs relating to occupancy. The Company's research and development
personnel costs increased substantially in January 1996 because of the LaserData
acquisition. Despite the fact that the Company's net sales have increased,
research and development expenses as a percentage of net sales are relatively
high because of the high software content of the Company's KIPP and Adrenaline
family of products and the development of its Ascent application software
products. The Company expects that research and development expenses will
continue to increase in absolute amounts and will fluctuate as a percentage of
net sales, depending upon the timing of material research and product
development projects. As of June 30, 1997, the Company did not have any
capitalized software development expenses. See Note 2 of Notes to Consolidated
Financial Statements.
The Company expects the effective tax rate in future periods to approximate
the statutory rate.
RESULTS OF OPERATIONS
The following table sets forth certain income and expense items as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE
30,
-------------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0%
Cost of sales............................................... 34.2 31.8 26.4
----- ----- -----
Gross profit................................................ 65.8 68.2 73.6
Operating expenses:
Sales and marketing....................................... 28.3 29.9 32.7
Research and development.................................. 17.5 20.4 22.7
General and administrative................................ 7.4 7.0 6.6
Acquired in-process research and development costs........ 16.7
----- ----- -----
Total operating expenses.......................... 53.2 74.0 62.0
----- ----- -----
Income (loss) from operations............................... 12.6 (5.8) 11.6
Other income, net........................................... 1.2 0.9 0.2
----- ----- -----
Income (loss) before provision (benefit) for income taxes... 13.8 (4.9) 11.8
Provision (benefit) for income taxes........................ 5.2 (2.0) 4.5
----- ----- -----
Net income (loss)........................................... 8.6% (2.9)% 7.3%
===== ===== =====
</TABLE>
Net Sales. Net sales increased by 18.4% from $21.1 million in fiscal 1995
to $25.0 million in fiscal 1996. In fiscal 1997, net sales increased by 17.2%,
to $29.3 million, from the prior fiscal year. The increase in fiscal 1996 net
sales was primarily attributable to a $2.0 million increase in sales of the
Company's KF-9275 high-end accelerator board, and $1.9 million from sales of
Ascent products. The increase in fiscal 1997 net sales was primarily
attributable to a $3.0 million increase in the sales of the Company's Ascent
products.
17
<PAGE> 19
Gross Profit. As a percentage of net sales, gross profit represented 65.8%,
68.2% and 73.6% in fiscal 1995, 1996 and 1997, respectively. Increases in gross
profit percentages over the past two years were primarily attributable to the
increasing sales of the Company's Ascent software products, changes in
accelerator board product mix and declining costs of DRAM components used in the
Company's accelerator boards.
Sales and Marketing. Sales and marketing expenses were $6.0 million, $7.5
million and $9.6 million in fiscal 1995, 1996 and 1997, respectively. As a
percentage of net sales, sales and marketing expenses represented 28.3%, 29.9%
and 32.7% in fiscal 1995, 1996 and 1997, respectively. The increase in fiscal
1996 was primarily attributable to additional costs for sales and sales support
personnel approximately $1.0 million necessary to support the Ascent component
software products and Ascent reseller channel, and approximately $0.2 million
for the establishment of sales and support offices in the United States and the
United Kingdom. The increase in fiscal 1997 was primarily attributable to
approximately $0.7 million for increased personnel and marketing related
expenses to launch NetScan, and approximately $1.2 million for the continued
growth of personnel and advertising expenses for the Ascent component software
products. The Company expects that sales and marketing expenses will continue to
increase in absolute dollar amounts and will fluctuate as a percentage of net
sales.
Research and Development. Research and development expenses were $3.7
million, $5.1 million and $6.7 million in fiscal 1995, 1996 and 1997,
respectively. As a percentage of net sales, research and development expenses
represented 17.5%, 20.4% and 22.7% in fiscal 1995, 1996 and 1997, respectively.
The increase in research and development expenditures was primarily due to
personnel costs of approximately $0.5 million in 1996 and approximately $0.8
million in 1997 related to the acquisition of the Ascent Storage engineering
group from LaserData effective January 1996 as well as increased engineering
staffing and other costs for ImageControls, Adrenaline and NetScan product
development of approximately $0.8 million in 1996 and $0.7 million in 1997. The
Company expects that research and development expenses will continue to increase
in absolute dollar amounts and will fluctuate as a percentage of net sales
depending upon the timing of material research and development projects.
General and Administrative. General and administrative expenses were $1.6
million, $1.7 million and $1.9 million in fiscal 1995, 1996 and 1997,
respectively. As a percentage of net sales, general and administrative expenses
were 7.4%, 7.0% and 6.6% in fiscal 1995, 1996 and 1997, respectively. The
percentage decreases were attributable to this overhead being absorbed by a
higher revenue base. The Company anticipates that it will incur increased
general and administrative costs in the future related to the additional
insurance and administrative requirements of a public company.
Acquired In-Process Research and Development Costs. Acquired in-process
research and development costs of $4.2 million in fiscal 1996 represented an
allocation of a portion of the purchase price of the acquisition of certain net
assets of LaserData to in-process research and development costs, which had no
future alternative use, based on an independent appraisal.
18
<PAGE> 20
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly consolidated
financial information for the fiscal years ended June 30, 1996 and 1997. In the
opinion of management, this information has been presented on the same basis as
the audited Consolidated Financial Statements appearing elsewhere in this
Prospectus, and includes all adjustments, consisting only of normal recurring
adjustments and accruals, that the Company considers necessary for a fair
presentation. The operating results for any quarter are not necessarily
indicative of the results to be expected for any future period. The unaudited
quarterly information should be read in conjunction with the audited
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
FISCAL 1996 FISCAL 1997
------------------------------------------ ------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30,
1995 1995 1996 1996 1996 1996 1997 1997
--------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... $ 5,624 $ 6,171 $6,445 $6,724 $ 6,581 $7,429 $7,648 $7,608
Cost of sales........................... 1,807 2,004 2,142 1,973 1,858 2,058 1,935 1,869
------ ------- ------ ------ ------ ------ ------ ------
Gross profit............................ 3,817 4,167 4,303 4,751 4,723 5,371 5,713 5,739
Operating expenses:
Sales and marketing................... 1,636 1,761 2,043 2,016 2,092 2,400 2,466 2,607
Research and development.............. 1,130 1,101 1,406 1,453 1,600 1,558 1,764 1,731
General and administrative............ 460 440 460 388 420 489 529 498
Acquired in-process research and
development costs................... -- 4,159 -- 18 -- -- -- --
------ ------- ------ ------ ------ ------ ------ ------
Total operating expenses.......... 3,226 7,461 3,909 3,875 4,112 4,447 4,759 4,836
------ ------- ------ ------ ------ ------ ------ ------
Income (loss) from operations........... 591 (3,294) 394 876 611 924 954 903
Other income, net....................... 85 88 4 23 13 4 28 24
------ ------- ------ ------ ------ ------ ------ ------
Income (loss) before provision (benefit)
for income taxes...................... 676 (3,206) 398 899 624 928 982 927
Provision (benefit) for income taxes.... 274 (1,299) 161 364 240 357 378 351
------ ------- ------ ------ ------ ------ ------ ------
Net income (loss)....................... $ 402 $(1,907) $ 237 $ 535 $ 384 $ 571 $ 604 $ 576
====== ======= ====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth certain income and expense items as a
percentage of net sales for each quarter in fiscal 1996 and fiscal 1997.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
FISCAL 1996 FISCAL 1997
------------------------------------------ ------------------------------------------
SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30,
1995 1995 1996 1996 1996 1996 1997 1997
--------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........................... 32.1 32.5 33.2 29.3 28.2 27.7 25.3 24.6
----- ----- ----- ----- ----- ----- ----- -----
Gross profit............................ 67.9 67.5 66.8 70.7 71.8 72.3 74.7 75.4
Operating expenses:
Sales and marketing................... 29.1 28.5 31.7 30.0 31.8 32.3 32.2 34.3
Research and development.............. 20.1 17.9 21.8 21.6 24.3 21.0 23.1 22.7
General and administrative............ 8.2 7.1 7.2 5.8 6.4 6.6 6.9 6.5
Acquired in-process research and
development costs................... -- 67.4 -- 0.3 -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Total operating expenses.......... 57.4 120.9 60.7 57.7 62.5 59.9 62.2 63.5
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) from operations........... 10.5 (53.4) 6.1 13.0 9.3 12.4 12.5 11.9
Other income, net....................... 1.5 1.4 0.1 0.4 0.2 0.1 0.4 0.3
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before provision (benefit)
for income taxes...................... 12.0 (52.0) 6.2 13.4 9.5 12.5 12.9 12.2
Provision (benefit) for income taxes.... 4.9 (21.1) 2.5 5.4 3.7 4.8 5.0 4.6
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)....................... 7.1% (30.9)% 3.7% 8.0% 5.8% 7.7% 7.9% 7.6%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
19
<PAGE> 21
The Company's net sales sometimes experience sequential declines in the
June and September quarters. In the quarter ended June 30, 1997, net sales and
net income declined from the levels experienced in the quarter ended March 31,
1997, primarily due to weakness in demand for the Company's products in
international markets.
In the second half of each of fiscal 1996 and 1997, operating expenses
increased significantly, both in absolute amounts and as a percentage of net
sales, primarily due to increased product development expenses and increased
sales and marketing expenses for the advertising and promotion of Ascent
Capture, Ascent Storage, and NetScan.
The Company's past operating results have been, and its future operating
results will be, subject to fluctuations due to a number of factors, including
the timing of orders from, and shipments to, major customers; the timing of new
product introductions by the Company or its competitors; variations in the mix
of products sold by the Company; changes in pricing policies by the Company, its
competitors or suppliers, including possible decreases in average selling prices
of the Company's products in response to competitive pressures; product returns
or price protection charges from customers; market acceptance of new and
enhanced versions of the Company's products; the availability and cost of key
components; the availability of manufacturing capacity; delays in the
introduction of new products or product enhancements by the Company, the
Company's competitors or other providers of hardware, software and components
for the document imaging market; dependence upon capital spending budgets; and
fluctuations in general economic conditions.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed its operations and capital requirements from 1986
through 1989 from the sale of approximately $4.0 million of preferred stock and,
thereafter, through cash flow from operations. The Company's primary sources of
funds at June 30, 1997 consisted of $5.4 million of cash, cash equivalents and
short-term investments. In December 1995, $4.6 million of cash was used in
connection with the acquisition of LaserData.
The Company generated cash from operations of $3.7 million during fiscal
1997, primarily due to net income of $2.1 million and depreciation and
amortization. During fiscal 1997, the Company used cash in investing activities
of $3.3 million for capital expenditures and additions to short-term
investments. The Company currently has no significant capital expenditure
commitments.
The Company has an unsecured $2.0 million revolving credit line with
Silicon Valley Bank (the "Bank") and as of June 30, 1997 had no outstanding
balance under the revolving line of credit. The revolving line of credit expires
in October 1997, and the Company intends to enter into negotiations with the
Bank for the renewal of the line of credit. The line of credit agreement
requires the Company to maintain its primary banking relationship with the Bank
while any obligations to the Bank remain outstanding, prohibits the incurrence
of additional debt from sources other than the Bank, except for purchases or
leases of equipment up to $700,000, requires the Company to maintain certain
tangible net worth levels, current ratio percentages and profitability levels
and restricts the payment of dividends without the Bank's prior approval. In
January 1996, the Company entered into a three-year, $1,150,000 term loan. The
proceeds from this offering will be used to prepay the term loan, the balance of
which was $821,400 at June 30, 1997. See "Use of Proceeds."
The Company believes that the net proceeds from the sale of Common Stock
offered by the Company hereby, together with cash flow from operations, if any,
existing cash balances and credit available under the Company's existing credit
facility, will be sufficient to meet its cash requirements for at least the next
12 months.
20
<PAGE> 22
BUSINESS
Kofax is a leading supplier of both document imaging application software
and scanner enhancement products for the imaging and document management market.
The Company specializes in the document capture segment of the market, which
involves converting paper documents to digital electronic images, enhancing and
indexing the images, and then compressing them for routing and storage. The
Company's products are used in conjunction with industry standard personal
computers and personal computer operating systems. The Company sells its
products to a wide variety of document imaging solution providers including
value-added resellers, system integrators, independent software vendors and
computer companies.
INDUSTRY BACKGROUND
Despite the proliferation of computers, the Association for Information and
Image Management estimates that more than 90% of all business information
continues to be stored on paper in file cabinets. In fact, data processing and
word processing have created more paper rather than less.
Document imaging systems are designed to increase operating efficiencies in
paper intensive industries by converting paper documents into electronic images
and then managing the routing and storage of these images. Some of the many uses
of document imaging systems include expediting the processing of loan
applications by financial institutions, processing of insurance claims, speeding
the processing of new drug applications with the FDA for pharmaceutical
companies, and archiving images for local government agencies such as land deed
offices and tax assessors. According to International Data Corporation, software
revenue for the imaging, workflow and document management industry was
approximately $2.3 billion in 1996 and is projected to grow approximately 30%
annually over the next four years.
The benefits of imaging systems include saving companies money by providing
less expensive storage of documents; improving customer service by allowing
workers faster access to files; allowing multiple users to access files
simultaneously; and providing remote access to documents via commercial
telephone lines or the Internet.
To allow documents to be electronically stored, retrieved and routed, most
imaging systems perform the following five functions:
- DOCUMENT CAPTURE performs the initial scanning and indexing of paper
documents.
- OPTICAL STORAGE is used for permanent storage of the scanned digital
images.
- RETRIEVAL AND DISPLAY software allows users to query the system and
display stored images.
- DOCUMENT MANAGEMENT provides centralized management and administration of
large volumes of documents.
- WORKFLOW allows for the automation of routine work processes by routing
documents electronically throughout an organization.
Document capture and optical storage are critical components of all
document imaging systems. Document capture subsystems perform the initial
scanning and conversion of paper documents into digital images as well as the
indexing of the documents for later retrieval by the imaging system. Indexing is
frequently assisted by optical character recognition (OCR), which recognizes
typewritten characters and converts them into computer-readable text, and by
image cleanup, which improves the accuracy of OCR and makes images more
readable.
Optical storage is the most commonly used method of permanently storing
scanned images because of its low cost and high reliability. Optical disks and
optical "jukeboxes" (robotic devices that manage large libraries of optical
disks) are managed by specialized software that allows users to retrieve optical
disks, read and write files from them, and perform automatic backups.
21
<PAGE> 23
THE KOFAX SOLUTION
Kofax develops, markets and supports document capture and image storage
application software, image processing accelerators, and has recently introduced
a workgroup scanning product. The Company believes that its product lines are
well positioned to take advantage of major trends in the imaging and document
management market.
Component Software
Until the mid-1990s, most imaging and document management solutions were
closed monolithic systems supplied by turnkey vendors. Beginning in 1995,
however, specialized vendors began competing with these turnkey imaging systems
by selling individual software components through networks of VARs and system
integrators who would then integrate components from different vendors into a
complete solution for end users. The diagram below shows the breaking down of
monolithic integrated imaging systems into discrete component software
applications.
EVOLUTION OF DOCUMENT IMAGING SOLUTIONS
[MONOLITHIC
Although turnkey systems have the advantage of being supported by a single
vendor, best of breed component applications systems have gained
popularity due to their lower cost, greater flexibility, easier
upgradability, and greater depth of features.
Component systems have the advantage of being more flexible, less costly,
and easier to upgrade than comparable turnkey systems. In an effort to
capitalize on the component imaging trend, Kofax began shipping its Ascent
family of component software applications in January 1995. The first Ascent
application, Ascent Capture, was designed to reduce the cost of the scanning and
indexing process, which is usually extremely labor intensive and therefore an
expensive ongoing function of most imaging and document management systems.
Ascent Capture reduces manual labor by using automated recognition techniques
such as optical character recognition (OCR) and bar code recognition and by
automating the flow of images through the entire capture process. In addition,
sophisticated validation techniques ensure the accuracy of the indexing process
without requiring costly human intervention. In 1996, the Company introduced
Ascent Storage, an application for managing image repositories on optical
jukeboxes. In component based systems, applications such as Ascent Capture and
Ascent Storage are combined by resellers and system integrators with other
software components, such as document management software from Documentum, Inc.,
to form complete imaging and document management solutions.
22
<PAGE> 24
Image Processing Accelerators
Kofax's first products, image processing accelerators, were designed to
give PCs sufficient processing power to operate high-speed scanners and then
compress and store the resulting images. The acceptance of PCs as replacements
for proprietary imaging workstations grew as Microsoft Windows became the most
popular client software environment for document imaging applications and as
PC-based LANs gained acceptance for large scale business applications.
More recently, as the speed and sophistication of imaging systems has
increased, so too have the requirements for image processing. To meet this
demand, Kofax continues to provide a family of hardware accelerators and
development tools that allow Pentium-class PCs to perform high-speed scanning,
image cleanup, and recognition functions, including operations such as
deskewing, despeckling, line removal, bar code recognition, and forms
recognition. These functions, which have grown increasingly CPU intensive, make
document images more readable, allow OCR to operate more accurately and decrease
the storage requirements for compressed images. The following diagram
illustrates the evolution of Kofax image processing accelerator technology.
EVOLUTION OF KOFAX ACCELERATOR TECHNOLOGY
LOGO
As the demand for image processing functions in document capture
applications has increased, Kofax has introduced successive generations of
accelerators, each with the ability to perform additional functions
without slowing down the scanner.
In order to allow these image processing functions to operate at the rated
speed of modern scanners (40 to 150 pages per minute), Kofax develops core
algorithms that can be executed on the most cost-effective platform available in
any particular system. This involves producing algorithms that execute variously
on host PCs, on RISC processors embedded in hardware accelerators, on DSPs, or
on proprietary ASICs. By balancing the execution of algorithms across these
platforms, Kofax systems can simultaneously perform multiple image processing
functions at speeds as high as 250 images per minute.
Workgroup Scanning
The growth of the Internet and the World Wide Web has spawned an increasing
use of low-end color desktop scanners in departments as well as in smaller
workgroups. Kofax has recently introduced a network scan server called NetScan
that allows these scanners to be shared among multiple users.
23
<PAGE> 25
NetScan connects a flatbed scanner directly to a network and allows any
individual in a workgroup to scan an image and have it routed directly back to
his or her desktop or anywhere else on the network. These images can then be
distributed to others at lower cost than express mail and higher quality than a
fax or, can be inserted directly into any Windows application, such as a Web
publishing tool or a word processor.
STRATEGY
Kofax's primary growth strategy is to expand its addressable markets by
developing new products that leverage its core image processing technologies.
Execution of the Company's strategy involves the following key elements:
Expand Addressable Market for Component Software
Kofax is expanding into two new markets related to document capture and
optical storage in which it does not presently compete:
- Forms processing involves capturing data from printed forms and storing
the information in a database. Today, this data entry market is primarily
manual, with workers reading paper documents and keying information into
a mainframe database. Kofax plans to compete in this substantial market
with a forth-coming version of Ascent Capture that performs image
assisted data entry, in which paper forms are scanned, zoned, OCRed, and
the data stored with little or no human participation. This software will
make use of sophisticated forms recognition technology to automatically
recognize different form types, zonal image cleanup algorithms to
optimize different parts of the forms for the highest possible accuracy
in automated recognition, handprint recognition techniques in addition to
OCR (machine print) techniques, and automated validation procedures to
ensure the accuracy of the index data.
- Transparent storage is a method of managing optical devices that makes
the device work like just another drive letter on a network. The current
version of Ascent Storage can be used only with applications that have
been written using a Kofax toolkit and is therefore limited to VARs and
system integrators with programming skills and specialized requirements.
In 1998 Kofax expects to introduce a transparent version of Ascent
Storage for Windows NT networks that requires no programming and can be
used with any standard Windows application. This will broaden the market
for Ascent Storage to include Kofax's entire current distribution channel
of VARs and distributors.
Expand Addressable Market for Scanner Enhancement Products
Currently, Kofax accelerator boards are PC-based controllers that are
compatible only with scanners that use a proprietary interface known as a
"video" interface. Kofax is applying its accelerator technology to two new
markets, SCSI scanners and OEM scanner resident controllers:
- SCSI scanners use the standard SCSI interface technology that is also
used by hard disks and other common PC peripherals. This interface has
grown more popular in the past three years, and in August 1997 Kofax
introduced a new family of hardware accelerators that are compatible with
both video and SCSI scanners. SCSI scanners make up about half the total
market for high-speed document imaging scanners, and the Company believes
that the introduction of these new accelerator boards will allow Kofax to
aggressively compete in this market segment.
- In addition to image processing functions performed by Kofax accelerators
in host PCs, scanner manufacturers use specialized scanner resident image
processing boards to perform certain types of basic image manipulation
that are best executed on raw image data before it is passed to the PC.
Kofax has developed advanced technologies that the Company believes will
allow it to compete aggressively in this market on an OEM basis,
providing scanner manufacturers with a low-cost image processing board
that provides enhanced functionality.
24
<PAGE> 26
Pursue Workgroup Scanning
Kofax intends to be a leader in the emerging product category of workgroup
scanning, and plans to continue investing in NetScan and in certain follow-on
products related to workgroup network scanning. Kofax believes that the growth
of the Internet will continue to drive growth in the market for color desktop
scanners, and that Kofax is well positioned to take advantage of this trend.
Maintain and Expand Distribution Channels and Technical Support
Kofax has pursued a two-tier distribution strategy for eight years and
believes it has developed considerable expertise in selling to and supporting
this channel. Kofax plans to continue investing heavily in products that can be
effectively sold through VARs and distributors, and also plans to continue
investing heavily in technical support, an area that it believes differentiates
Kofax from its competitors.
PRODUCTS
Kofax offers products in two basic areas, both aimed at the imaging and
document management market:
- Component Application Software. The Ascent family of component software
applications today consists of Ascent Capture, a scanning and indexing
application, and Ascent Storage, an optical storage manager for Windows
NT and Novell NetWare networks.
- Scanner Enhancement Products. This area includes the KIPP and Adrenaline
families of PC-based hardware accelerators for scanning and image
processing; developers' toolkits for scanning, image processing and
optical storage; NetScan, a box level product designed to connect a
low-end scanner directly to a local area network; and OEM hardware
designed to improve image quality inside a scanner.
Component Application Software
The Ascent family is a set of standalone software components designed to be
used in conjunction with components from other vendors to form a complete
imaging and document management system. Ascent applications are independent of
both database and network operating system selection, allowing them to work in a
high percentage of existing corporate IT environments. The first Ascent product
commenced shipment in January 1995, and sales of Ascent products currently
account for approximately 20% of the Company's overall net sales. The Company
expects that its Ascent products will contribute an increasing share of the
Company's net sales in the future. See "Risk Factors -- Dependence Upon Certain
Products for Current and Future Operating Results."
Ascent Capture is a batch-oriented document capture software application
designed to process up to 100,000 documents per day at high throughput and low
cost. The goal of Ascent Capture is to reduce the long-term operating cost of
production document capture by incorporating key technologies that are normally
found only in expensive turnkey imaging systems.
25
<PAGE> 27
Document capture is a sequential process that involves several steps, each
of which typically executes on a workstation on a network. The table below
explains each of the steps that make up a complete document capture subsystem.
<TABLE>
<S> <C> <C>
- --------------------------------------------------------------------------------
OPERATION DESCRIPTION ASCENT BENEFITS
Scanning Converts paper documents into Ascent Capture implements a batch scanning
compressed images. system to increase throughput and reduce
the number of scanners and scanner
operators required.
- -------------------------------------------------------------------------------------------
OCR and Image Cleans up image, reads and Image processing cleans up the scanned
Processing retrieves index keywords. image and makes OCR more accurate.
Preprinted forms can be zoned and
automatically indexed by optical character
recognition of the zones.
- -------------------------------------------------------------------------------------------
Indexing and Assigns index keywords to all Bar codes can automate indexing and reduce
Quality documents so that they can be hand keying. For manual indexing, input
Assurance retrieved later. screens are designed for efficient "heads
up" indexing. To ensure accuracy, custom
validation rules can be enforced for each
index field.
- -------------------------------------------------------------------------------------------
Rescanning Sends poorly scanned Ascent Capture keeps track of rejected
documents back to be pages and allows rescanning of single pages
rescanned. within a batch. Rescanned pages are
automatically inserted back into batches in
the proper order.
- -------------------------------------------------------------------------------------------
Release Exports images to long-term Ascent Capture supports release of
storage and indexes to a documents to standard optical systems and
permanent database. common SQL databases. Database schema
conversion is built into the Ascent Capture
system.
- -------------------------------------------------------------------------------------------
</TABLE>
In Ascent Capture, each of these operations is integrated via internal
queues that provide scalability and flexibility. This allows Ascent Capture to
be used in many different environments, from mid-range systems with only a few
stations to enterprise installations with multiple scanners feeding multiple
OCR, index, rescan and release stations. Ascent's internal routing system
maximizes efficiency for every station and operator.
A typical mid-range capture system consists of one or two scan/rescan
stations and two to four stations performing image processing, OCR, indexing and
release. Ascent Capture has a recommended end user list price of $7,995 for each
high-end scan station, $3,495 for each mid-range scan station, and $2,495 for
all other stations, such as OCR, indexing or release. An update service,
available at a price equal to 15% of the software's list price, provides
customers with software upgrades for a period of 12 months.
26
<PAGE> 28
ASCENT CAPTURE PROCESS
[THE ASCENT CAPTURE PROCESS]
Ascent Storage is an optical storage manager for Windows NT and Novell
NetWare networks. It works with applications written with the StorageControls
toolkit and allows these applications to efficiently read and write files to an
optical storage device on the network. Ascent Storage supports WORM
(nonerasable) optical drives, MO (rewritable) drives, and optical jukeboxes that
use mechanical robotics to swap libraries of optical disks into a single drive
on an as-needed basis.
The goal of Ascent Storage is to allow imaging applications to access
optical storage, which is inherently slower than magnetic storage, in the most
efficient possible way. Applications compatible with Ascent Storage can
communicate directly with optical jukeboxes on the network and can intelligently
pre-fetch archived files from optical to magnetic storage, providing users with
the fastest possible file access. In addition, Ascent Storage allows system
managers to manage off-line volumes (off-line disks that have been removed from
the jukebox and stored on a shelf), make real time backups, and check the status
and performance of all optical devices on their network.
Ascent Storage is priced on a device basis. Each optical device on the
network requires a separate Ascent Storage license, ranging in price from $995
for a standalone optical drive to $19,995 for a large optical jukebox. An update
service, available at a price equal to 15% of the software's list price,
provides customers with software upgrades for a period of 12 months.
27
<PAGE> 29
Scanner Enhancement Products
Kofax manufactures a wide variety of hardware and toolkits designed to
accelerate scanning and image processing functions on PCs.
Kofax accelerator boards are used to connect high-speed scanners to PCs and
perform critical image processing operations on the images after they are
scanned. Kofax's recently announced fourth generation of accelerators, to be
sold under the brand name Adrenaline, will contain memory, an on-board RISC
processor, one or two DSP devices, and proprietary ASICs that will accelerate
functions that are too processor intensive to execute efficiently on the PC's
processor.
Because standard processors commonly used in PCs are optimized to work on
bytes rather than bits, even fast PCs driven by Pentium-class processors are
poorly suited to perform image processing and are typically unable to perform
complex image processing in real time. Kofax accelerators are designed primarily
to optimize these image processing operations.
Typical image processing functions performed by Kofax hardware accelerators
include image deskewing, despeckling, deshading, line removal, edge enhancement,
bar code recognition, forms recognition, and others, all of which execute in
real time at scanner speeds of 40 to 150 pages per minute. The following diagram
illustrates Kofax's scanner enhancement technologies.
ADRENALINE ACCELERATOR TECHNOLOGY
[IMAGE PROCESSING SYSTEM]
The image processing engine used on the Adrenaline family of
accelerator boards performs a variety of image processing functions that
make images more readable, increase the accuracy of OCR, and reduce the
compressed file size.
The Adrenaline family will include four models with list prices of $3,500
and $1,500 for the two hardware models and prices of $1,100 and $400 for the two
software engines. The hardware accelerators are generally used to connect
scanners that run at approximately 40 pages per minute and above while the
software engines are entry level products that support only SCSI scanners and
support speeds of up to approximately 30 pages per minute.
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Special versions of the hardware accelerators are available for IBM
ImagePlus systems. These versions account for about 10% of total accelerator
revenue. These IBM-specific products have list prices ranging from $4,000 to
$9,000.
An internal development project, expected to result in shipments in
calendar 1998, is currently underway to produce a scanner resident image
processing board that will be sold on an OEM basis to scanner vendors and
shipped as an integral part of the scanner. This product will perform extremely
high-speed functions designed to improve image quality inside the scanner before
the image is delivered to the PC, by performing tasks such as grayscale
thresholding, certain types of image manipulation and cleanup, and automatic
page segmentation. Other functions will be added on a custom basis depending on
the requirements of the particular OEM.
Software toolkit products are designed for system developers creating
customized imaging and workflow solutions. The software toolkits provide a
powerful and easy environment for developing custom document capture and
document storage applications that take advantage of the features of Kofax
hardware accelerators and optical storage management software.
ImageControls is a set of 16-bit and 32-bit ActiveX controls designed for
use with Visual Basic and Visual C++. Using ImageControls, developers can build
applications that run on either Windows NT or Windows 95 workstations and
perform high-speed scanning, printing, image display, image cleanup (deskew,
despeckle, line removal, etc.), bar code recognition, and automatic forms
recognition. Three versions of the toolkit are available, ranging in price from
$1,000 to $5,000.
StorageControls is a set of 32-bit ActiveX controls that allows developers
to add to their applications the ability to read and write files directly to
optical jukeboxes on Windows NT and Novell NetWare networks. StorageControls
works in either a Visual Basic or Visual C++ environment and allows access both
to standalone optical drives as well as high-volume optical jukeboxes.
StorageControls is included in the high-end versions of ImageControls, and can
also be purchased separately at a list price of $1,000.
Developer toolkits do not contribute significant revenue to the Company but
are an important part of its overall marketing strategy. When a Kofax toolkit is
used to build an application, support is automatically built in for Kofax
hardware accelerators (with ImageControls) or Kofax storage engines (with
StorageControls). Sales of these products therefore depend heavily on gaining
widespread use of Kofax toolkits among application developers in the imaging
market.
NetScan is a small, box-level hardware device with communications software
that connects any Hewlett Packard ScanJet scanner to a local area network.
NetScan allows an entire workgroup to share a flatbed scanner, and its simple
keypad interface makes it as easy to use as a fax machine. To use NetScan, users
enter a personal ID code into the keypad, scan their document, and press the
"Send" key. The scanned image is routed to their desktop via standard e-mail
packages such as Microsoft Exchange or Lotus cc:Mail, at lower cost than express
mail and higher quality than a fax.
NetScan supports both color and black and white scanning and is commonly
used either for electronic document distribution by scanning documents and
routing them over the Internet, or for casual workgroup scanning of images for
use in presentations, Web pages, advertising, and similar applications.
NetScan began shipping in October 1996 and does not yet contribute
substantial revenue to the Company. It is available through national
distributors and mail order catalogs and has a suggested list price of $895.
TECHNOLOGY/RESEARCH AND DEVELOPMENT
As of July 31, 1997, the Company's research and development group consisted
of 59 employees, of which 49 people manage, develop or test the Company's
software products. During the fiscal years ended June 30, 1995, 1996 and 1997,
research and development expenses were $3.7 million, $5.1 million and $6.7
million, respectively. The Company anticipates that it will continue to commit
substantial resources to product development in the future. See "Risk
Factors -- Rapid Technological Change."
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As is common in the imaging and document management industry, the Company
licenses various software from third parties and includes or uses such software
in certain of the Company's application software products. To date, royalties
payable under such license arrangements are less than 10% of the selling price
of the software products.
Algorithm Development
An important aspect of the Company's research and development effort
involves developing proprietary, state-of-the-art image processing algorithms.
These algorithms are highly specialized and depend on a detailed knowledge of
advanced mathematics and computational processes. These algorithms are
encapsulated in proprietary ASICs, digital signal processor code and traditional
C and assembly language code.
The Company's library of algorithms covers two basic areas:
Recognition. This includes algorithms such as bar code recognition, patch
code detection and automatic forms recognition. These algorithms are widely used
to automate the indexing of scanned documents, thus lowering the ongoing labor
cost of the imaging operation.
Image enhancement. These algorithms are used to clean up scanned images so
that recognition operations run with greater accuracy. Image enhancement is used
to improve both the Company's recognition functions and recognition functions
performed by third party products, such as OCR and handprint recognition. This
is a key area of development, as very small increases in OCR accuracy can save
substantial amounts in annual operating costs for an imaging installation.
A key part of this development is tuning the Company's algorithms for
maximum speed. Customers typically prefer to perform image processing during
scanning, which can only be done if all required algorithms execute in less time
than it takes to scan a page (usually one second or less). The Company believes
that its ability to perform image processing in real-time is one of its key
competitive advantages.
The software development group includes engineers with significant design
experience in applied and theoretical image processing, real-time operating
systems, DOS and Windows operating systems, user interfaces, and embedded
systems and firmware. The software development group was an early adopter of
object oriented software development tools and now maintains an expanding base
of reusable code. The hardware design group includes engineers with significant
design experience in high-speed digital electronics, ASICs, field programmable
gate arrays, computer buses, complex computer systems and design for
manufacturability.
SALES AND DISTRIBUTION
Kofax pursues a two-tier distribution strategy. During fiscal 1997, Kofax
had over 50 stocking distributors in 32 countries who accounted for 76.6% of net
sales. Most of the Company's distributors specialize in document image
processing as either their sole business or as a major component of their
business. In fiscal 1997, three of these distributors, Tech Data Corporation,
Law-Cypress Distributing Co. and Cranel Inc. accounted for 14%, 14%, and 10%,
respectively, of the Company's total net sales. See "Risk Factors -- Dependence
Upon Distribution Channels."
In addition, the Company has a direct sales force that works closely with
its distribution channel. Kofax maintains five sales offices in the U.S. staffed
by technical sales managers and application engineers. The Company's European
headquarters in London covers Western Europe, Eastern Europe, Africa and the
Middle East. Two full-time sales people based in the Irvine, California office
cover Asia and South America. In fiscal 1997, approximately 66% of net sales
were generated in the United States, 25% in Europe and 9% in Asia, South America
and the rest of the world.
Kofax products generally reach the end user through the Company's two
distribution channels. Each of these sales channels plays a different role in
the Company's overall distribution strategy:
Distributors. Most Kofax products flow initially through one of the
Company's distributors. Distributors service a large base of VARs and resellers
and are responsible for handling credit issues and stocking product
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to provide quick shipping turnaround. The Company's distributors generally do
not stock significant amounts of inventory of the Company's products, as these
products are typically incorporated by resellers into complete imaging and
document management systems which are configured shortly before scheduled
delivery to end-user customers.
VARs/Resellers. VARs and resellers typically integrate Kofax products into
a specific solution that they then sell to an existing base of customers in such
markets as healthcare and banking. The Company has selected and trained over 300
Ascent Certified Resellers (ACRs) who incorporate the Company's application
software components into complete imaging and document management systems. The
ACRs are the primary focus of the Company's component software sales strategy
and, accordingly, the Company is investing significantly in training and support
of these resellers.
Because NetScan is aimed at a broader audience than the Company's other
products, it uses a different distribution model. NetScan is sold primarily
through national distributors, rather than specialist imaging distributors, and
is also available through several mail order catalog houses. In addition,
NetScan is marketed by a direct inside sales telemarketing operation.
END USERS
Although Kofax generally does not sell products directly to end users, the
Company has an extensive and diverse list of end-user customers who are serviced
and supported by its distributors and resellers. The list below, which was
derived from the Company's database of warranty registration cards received over
the past year, is illustrative of the wide range of industries and organizations
using the Company's products. There can be no assurance that any of the listed
organizations have purchased a material amount of the Company's products or that
they will purchase the Company's products in the future.
<TABLE>
<S> <C> <C>
- ------------------------------ ------------------------------ ------------------------------
MANUFACTURING FINANCIAL/BANKING SYSTEM INTEGRATORS
Kaiser Aluminum Corp. Franklin Templeton EDS Corp.
Rubbermaid Incorporated Home Federal Savings Lucent Technologies Inc.
Siemens AG Association of Nampa Unisys Corporation
Sallie Mae
- ------------------------------ ------------------------------ ------------------------------
NATIONAL GOVERNMENT OIL AND CHEMICALS STATE AND LOCAL GOVERNMENT
Royal Canadian Mounted Police The British Petroleum Co. City of Minneapolis
P.L.C.
U.S. Marshal Service Chevron Corporation Idaho Dept. of Health
U.S. Navy The Dow Chemical Co. Kern County Auditor
- ------------------------------ ------------------------------ ------------------------------
ELECTRONICS SERVICES/DISTRIBUTION EDUCATION
Digital Equipment Corp. Automobile Club of So. Calif. Calif. State University
Hayward
General Electric Co. Avis, Inc. University of Oklahoma
Hewlett-Packard Co. Sysco Corp. University of Wisconsin
- ------------------------------ ------------------------------ ------------------------------
HEALTHCARE INSURANCE UTILITIES
Baxter Healthcare Corp. Life Insurance Company of Kentucky Utilities Co.
Blue Cross and Blue Shield Virginia St. Johns River Water
Association Midland Risk Insurance Management District
Bristol-Myers Squibb Company Company Southern California Edison Co.
New York Life Insurance Co.
</TABLE>
MARKETING
The bulk of the Company's marketing efforts are aimed at generating
short-term leads for itself and its distribution partners. Promotional efforts
are closely tracked and follow-up surveys help determine the effectiveness of
various marketing programs. This process is automated and is designed to ensure
that leads are fulfilled promptly and by the appropriate channel partner.
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Longer term marketing efforts include education of end users via periodic
roadshows, trend and opinion articles placed in key publications, and meetings
with industry analysts. The Company actively uses its marketing efforts to
position itself as both a technological leader and an active supporter of
industry trade associations and standards committees. Currently, the Company's
Chief Executive Officer is Vice-Chair of the Board of Directors of the
industry's largest trade association, the Association for Information and Image
Management.
The Company has several specialized marketing programs designed to reach
specific audiences. The first three of these programs are used to promote the
Ascent product family and are considered important to the long-term success of
Ascent:
The Ascent Reseller Program is designed to attract qualified resellers for
the Company's Ascent family of products. Resellers are accepted into the program
if they meet a set of predefined criteria that includes a minimum level of
technical expertise, experience in the imaging channel and payment of a $3,000
fee. Benefits of the program include demonstration software, free training,
collateral materials, lead support and cooperative marketing funds.
The Component Application Partner Program is aimed at other vendors in the
imaging market who make products complementary to Ascent Capture and Ascent
Storage. Companies are accepted into the program if they support the engineering
work required to write an interface between Ascent and their products. Benefits
include extensive technical support, cooperative marketing opportunities and
reference sales.
Training is provided for the Ascent product family to all qualified
resellers and, for a fee, to interested end users. The basic training class is
three days long and costs $1,495.
The ImageControls ISV Program is targeted at independent software vendors
and provides incentives for these vendors to use Kofax toolkits and support
Kofax accelerators. Benefits of this program include reduced price software and
hardware, lead support, cooperative advertising and inclusion in the Company's
annual ISV catalog.
CUSTOMER SUPPORT
The Company believes its ability to provide comprehensive service, support
and training to its distributors, resellers and customers is an important factor
in its business. A high level of continuing service and support is fundamental
to helping developers, distributors and resellers be successful in selling and
supporting the Company's products. The Company's customer support and training
departments currently provide the following services:
Technical Support. A support staff of 11 engineers provides telephone, fax
and electronic mail support to the entire customer base. Additionally,
authorized resellers and subscribers to the support service program have
extended access to the Internet support site, which contains technical articles,
programming tips and source code samples.
Ascent Certified Resellers are entitled to full support under their
reseller program while Ascent end users may purchase an annual support contract
for $995. For software developers who purchase toolkit products, the Company
provides four months of free technical support, after which annual support costs
are between $795 and $995. End users of the Company's software and hardware
engines may contact this group at no charge for routine product installation and
configuration questions.
Software Upgrades. Customers of the Company's developer software toolkit
products receive free software upgrades as part of their subscription to the
Company's technical support program. Customers of the Ascent application
software products may purchase an update service for 15% of the product's list
price, which provides the customer with software upgrades for a period of 12
months.
Customer Education. The Company provides comprehensive product training to
authorized resellers of the Company's Ascent family of application software
products.
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Hardware Repair or Replacement. The Company provides a warranty on all of
its hardware products for up to two years after installation. Customers with
hardware problems during the warranty period may return their hardware directly
to the Company, or in some cases to their local authorized distributor, for free
repair or replacement. Customers with hardware problems not covered under
warranty may purchase hardware repair service for a flat fee plus shipping
costs.
The Company maintains sales and support offices in the United States and
Europe. The Company believes that existing field sales and support facilities
are adequate to meet its current requirements. The Company plans to continue to
expand its field sales and support facilities worldwide where appropriate to
further penetrate existing and new market opportunities.
COMPETITION
In the imaging and document management industry, the market for scanner
enhancement hardware and software application components is highly competitive
and is characterized by rapid changes in technology and frequent introductions
of new platforms and features. The Company expects competition to increase as
other companies introduce additional and more competitive products in the
emerging imaging and document management market. In its accelerator board and
developer toolkit business, the Company competes primarily with a number of
small private companies. In its Ascent business, Kofax competes indirectly
against suppliers of turnkey systems as well as directly with other component
software vendors, more of whom are expected to enter the market over the next
few years. Some of the Company's existing competitors, as well as a number of
potential competitors, in the document imaging application software segment of
the market have larger technical staffs, greater brand name recognition and
market presence, more established and larger marketing and sales organizations
and substantially greater financial resources than the Company. There can be no
assurance that the Company will be able to compete successfully against current
and future competitors or that competitive pressures faced by the Company will
not have a material adverse effect on the Company's business, operating results,
cash flows and financial condition.
The Company believes that the competitive factors affecting the market for
the Company's products include product performance, price and quality; product
functionality and features; the availability of products for existing and future
platforms; the ease of integration of the products with other hardware and
software components of document imaging systems; and the quality of customer
support services, documentation and training. The relative importance of each of
these factors depends upon the specific end user involved. There can be no
assurance that the Company will be able to compete effectively with respect to
any of these factors.
The Company's present or future competitors may be able to develop products
comparable or superior to those offered by the Company or adapt more quickly
than the Company to new technologies or evolving customer requirements. In order
to remain successful in the imaging and document management market, the Company
must respond to technological change, customer requirements and competitors'
current products, product enhancements and innovations. In particular, the
Company recently introduced its NetScan networked scan server product and is
currently developing additional products and product enhancements in an effort
to address customer requirements in response to technological changes. However,
there can be no assurance that the Company will successfully complete the
development or introduction of these products on a timely basis or that these
products will achieve market acceptance. Accordingly, there can be no assurance
that the Company will be able to continue to compete effectively in its market,
that competition will not intensify or that future competition will not have a
material adverse effect on the Company's business, operating results, cash flows
and financial condition.
INTELLECTUAL PROPERTY
The Company believes that its success is strongly related to its reputation
for technology, product innovation, technical competence, technical customer
support and the response of management to customers' needs. The Company
currently holds no patents and relies on a combination of copyright, trademark
and trade secret laws, employee and third-party nondisclosure agreements,
licensing arrangements and other security measures (which afford only limited
protection) to establish and protect its software, proprietary algorithms
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and other proprietary technology. Despite these precautions, there can be no
assurance that the Company will be successful in protecting its proprietary
technology, or that the Company's competitors will not independently develop
products or technologies that are substantially equivalent or superior to the
Company's products and technologies. It is possible that unauthorized third
parties will copy or reverse engineer portions of the Company's products or
otherwise obtain and use information which the Company regards as proprietary.
In addition, the laws of some foreign countries do not protect the Company's
proprietary rights to the same extent as the laws of the United States. The
failure or inability of the Company to protect its intellectual property rights
could have a material adverse effect on its business, operating results, cash
flows and financial condition.
The PC hardware and software industry is characterized by vigorous
protection of intellectual property rights, which has resulted in significant
and often protracted and expensive litigation. Litigation may be necessary to
protect the Company's intellectual property rights and trade secrets, to
determine the validity and scope of the proprietary rights of others or to
defend against claims of infringement or invalidity. There can be no assurance
that infringement, invalidity, right to use or ownership claims by third parties
will not be asserted against the Company in the future. The Company expects that
it will increasingly be subject to such claims as the number of products and
competitors in the imaging and document management market grows and the
functionality of such products overlaps with other industry segments. If any
claims or actions are asserted against the Company, the Company may seek to
obtain a license under a third party's intellectual property rights. There can
be no assurance, however, that a license will be available upon reasonable
terms, if at all. In addition, should the Company decide to litigate such
claims, such litigation could be expensive, protracted and time consuming, could
divert management's attention from other matters, could cause product shipment
delays and could materially adversely affect the Company's business, operating
results, cash flows and financial condition, regardless of the outcome of the
litigation.
MANUFACTURING AND SUPPLIERS
The Company manufactures its products at its headquarters facility in
Irvine, California. The Company's manufacturing strategy focuses on producing
high quality products while controlling costs and maintaining the flexibility
necessary to introduce new products quickly and react to changing customer
demand. The Company's manufacturing operations consist primarily of materials
and procurement management, functional testing and final assembly of products,
burn-in, quality assurance and shipping. The Company employs one local
independent subcontractor to perform printed circuit board level assembly. The
Company purchases all components and raw materials and consigns them to its
assembly subcontractor. Cable assemblies are purchased complete from a company
that specializes in cable assembly manufacture. The Company has in-house
software duplication capability, but also uses subcontractors for software
duplication. Each of the Company's products undergoes thorough testing and
quality inspection at the final assembly stages of production.
The Company purchases circuit boards, integrated circuits and other
components from third parties. The Company's dependence on third-party suppliers
involves several risks, including limited control over pricing, availability,
quality and delivery schedules. The Company is dependent on sole-source
suppliers for ASICs and certain critical components used in its products. The
Company generally purchases sole-sourced components pursuant to purchase orders
placed in the ordinary course of business and has no guaranteed supply
arrangements with any of its sole-source suppliers. There can be no assurance
that the Company will not experience quality control problems or supply
shortages for these components in the future. Although the Company has attempted
to mitigate these risks by identifying alternate sources of sole-sourced
components and buying significant safety stocks. Any quality control problems or
interruptions in supply with respect to one or more components could have a
material adverse effect on the Company's business, operating results, cash flows
and financial condition. Because of the Company's reliance on these vendors, the
Company may also be subject to increases in component costs which could
materially adversely affect its business, operating results, cash flows and
financial condition.
The Company relies on third-party subcontractors for the manufacture of
certain of its products and components such as cable assemblies and circuit
boards. Reliance on third-party subcontractors involves
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several risks, including the potential inadequacy of capacity, the
unavailability of or interruptions in access to certain process technologies and
reduced control over product quality, delivery schedules, manufacturing yields
and costs. Shortages of raw materials to or production capacity constraints at
the Company's subcontractors could negatively affect the Company's ability to
meet its production obligations and result in increased prices for affected
parts. Any such factor may result in delays in shipments of the Company's
products or increases in the prices of components, either of which could have a
material adverse effect on the Company's business, operating results, cash flows
and financial condition.
BACKLOG
The Company typically ships its products within a short period after
acceptance of purchase orders from distributors and other customers.
Accordingly, the Company typically does not have a material backlog of unfilled
orders, and net sales in any quarter are substantially dependent on orders
booked in that quarter. Any significant weakening in customer demand would
therefore have an almost immediate adverse impact on the Company's operating
results and on the Company's ability to maintain profitability.
EMPLOYEES
As of July 31, 1997, the Company employed 151 individuals, including 59 in
research and development, 56 in sales, marketing and customer support, 14 in
manufacturing and 22 in administration, finance and MIS. The Company regularly
seeks to identify skilled engineering and other potential employee candidates,
and has found that competition for qualified personnel in the computer software
industry is intense. The Company believes that its ability to recruit and retain
highly skilled technical and other management personnel will be critical to its
ability to execute its business plans. None of the Company's employees is
represented by a labor union or is subject to a collective bargaining agreement.
The Company believes that its relations with its employees are good.
FACILITIES
The Company leases approximately 44,000 square feet of space in Irvine,
California, which serves as its headquarters. This space is used for research
and development, manufacturing, sales and marketing, customer support and
administration. The Company's lease expires in January 1999. The Company
believes that it will reach the effective capacity of this space when its lease
expires and will undertake to locate a new facility and to relocate its
headquarters. The Company believes there are adequate amounts of affordable
space in the nearby area, but expects that its rent expense will increase after
fiscal 1998 as a result of this relocation. The Company also leases
approximately 10,000 square feet of space in Tyngsboro, Massachusetts, which is
occupied by the Ascent Storage development team. This lease expires in August
2000.
The Company also maintains a number of sales and support offices in the
United States and Europe. The Company believes that existing field sales and
support facilities are adequate to meet its current requirements. The Company
plans to continue to expand its field sales and support facilities worldwide
where appropriate to further penetrate existing and new market opportunities.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
July 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ---------------------------------------
<S> <C> <C>
David S. Silver.................... 39 Chief Executive Officer, President and
Chairman of the Board
Dean A. Hough...................... 39 Vice President, Engineering and
Director
Richard M. Murphy.................. 50 Vice President, Sales
Ronald J. Fikert................... 48 Vice President, Finance, Chief
Financial Officer and Secretary
Dennis Joyce....................... 50 Vice President, Operations
Kevin Drum......................... 38 Vice President, Marketing
Alexander P. Cilento(2)............ 48 Director
William E. Drobish(2).............. 58 Director
Clifford L. Haas(1)................ 40 Director
B. Allen Lay(1).................... 62 Director
David C. Seigle(1)(2).............. 57 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee.
(2) Member of Audit Committee.
David S. Silver co-founded the Company in August 1985 and has served as
President and Chief Executive Officer and a director of the Company since its
inception. From 1982 to 1985, Mr. Silver was employed by FileNet Corporation, a
manufacturer of document image processing systems, as a member of the
development team for the FileNet imaging system. Prior to 1982, Mr. Silver held
various engineering positions with MAI Basic Four Corporation, a manufacturer of
computer equipment and associated application software programs.
Dean A. Hough co-founded the Company in August 1985 and has served as Vice
President, Engineering and a director of the Company since its inception. From
1983 to 1985, Mr. Hough was employed by FileNet Corporation, where he
participated in the development of a variety of the imaging components of the
FileNet imaging system. Prior to 1983, Mr. Hough held various design and
engineering positions with MAI Basic Four Corporation and Scientific Atlanta, a
manufacturer of scientific instruments and equipment.
Richard M. Murphy joined the Company as a Vice President, Sales in November
1989. From 1984 to 1989, Mr. Murphy held various sales management positions with
Emulex Corporation, a manufacturer of computer storage, communications, graphics
and peripheral products, where he served as Vice President, Domestic Sales from
September 1987 to January 1989 and as Vice President, North American Sales from
January 1989 to November 1989. Prior to 1984, Mr. Murphy held various sales
positions with Hamilton-Avnet Electronics, Kierulff Electronics and Telefile
Computer Products.
Ronald J. Fikert joined the Company as Vice President, Finance in February
1990. From March 1989 to February 1990, Mr. Fikert worked as an independent
management consultant. From 1984 to 1989, Mr. Fikert was employed by General
Monitors, a manufacturer of sensing, monitoring and detection equipment, where
he served as Controller. From 1979 to 1984, he was employed by Modular Command
Systems, a manufacturer of electronic communications hardware and software, as
Vice President, Finance and Secretary. Prior to joining Modular Command Systems,
Mr. Fikert was Director of Finance for Esterline Electronics, a manufacturer of
electronic products, and was an accountant with Arthur Andersen & Co. Mr. Fikert
is a Certified Public Accountant.
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Dennis Joyce joined the Company as Director of Manufacturing in June 1989
and was promoted to Vice President, Operations in July 1994. From 1984 to 1989,
Mr. Joyce was employed by FileNet Corporation as director of quality assurance
and test engineering.
Kevin Drum joined the Company in November 1992 and was promoted to Vice
President, Marketing in July 1995. Prior to that time, his positions with the
Company included Director of Marketing and Senior Product Manager. From 1984 to
1992, Mr. Drum was employed by Emulex Corporation, where he served as a senior
product manager from 1988 to 1992.
Alexander P. Cilento has been a member of the Company's Board of Directors
since 1986. Since 1991, Mr. Cilento has been a General Partner of Aspen Venture
Partners, a private venture capital investment partnership. From 1985 through
1991, Mr. Cilento was employed by 3i Securities Corporation, a venture capital
investment firm, where he served as Vice President.
William E. Drobish has been a member of the Company's Board of Directors
since 1986. Since 1984, Dr. Drobish has been an instructor at the University of
California, Irvine's Extension Program. Dr. Drobish was a founder, Vice
President, director and Secretary of Silicon Systems, Inc., a manufacturer of
integrated circuits. Dr. Drobish is also a director of Technology Modeling
Associates, Inc., a provider of software that simulates the integrated circuit
fabrication process.
Clifford L. Haas has been a member of the Company's Board of Directors
since 1987. Mr. Haas is a general partner of Sigma Partners and Sigma
Associates, private venture capital investment partnerships, which he has been
associated with since 1985.
B. Allen Lay has been a member of the Company's Board of Directors since
1990. Since 1982, Mr. Lay has been a general partner of Southern California
Ventures, a private venture capital investment partnership. Mr. Lay also serves
as Chief Executive Officer and a director of Westbrae Natural, Inc., a natural
foods company; and as a director of the following companies: PairGain
Technologies, Inc., a provider of telecommunications products; Viasat, Inc., a
provider of wireless telecommunications products; Helisys, Inc., a provider of
rapid prototyping systems.
David C. Seigle has been a member of the Company's Board of Directors since
1992. Mr. Seigle is president of Technology's Edge, a franchisor of technology
integrators. From 1982 to 1991, Mr. Seigle was employed by FileNet Corporation
in various positions, including Senior Vice President of International
Operations from 1987 to 1991. Mr. Seigle is currently a director of Interface
Systems, Inc., a manufacturer and distributor of computer peripherals and
software. He is also a director of ImageMatrix Corporation which supplies work
process management software to the health coverage provider market.
The Board of Directors of the Company is currently composed of seven
directors. All directors hold office until the next annual meeting of
stockholders or until their successors are elected and qualified. Officers serve
at the discretion of the Board of Directors. The Board of Directors has a
Compensation Committee that recommends salaries and incentive compensation for
executive officers of the Company and an Audit Committee that reviews the
results and scope of the audit and other services provided by the Company's
independent auditors.
The Company's directors do not receive compensation for attendance at Board
of Directors or committee meetings, but may be reimbursed for certain expenses
in connection with attendance at board and committee meetings.
37
<PAGE> 39
EXECUTIVE COMPENSATION
The following table sets forth compensation earned during fiscal 1997, by
the Company's Chief Executive Officer and the four other most highly compensated
executive officers whose total salary and bonus during such year exceeded
$100,000 (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)(1)
- -------------------------------------------------- --------- -------- ------------------
<S> <C> <C> <C>
David S. Silver................................... $ 135,000 $ 64,893 $750
President and Chief Executive Officer
Dean A. Hough..................................... 114,078 21,083 750
Vice President, Engineering
Ronald J. Fikert.................................. 103,843 23,908 750
Vice President -- Finance, Chief Financial
Officer and Secretary
Richard Murphy.................................... 100,000 76,761(2) 750
Vice President -- Sales
Kevin Drum........................................ 102,290 22,295 750
Vice President -- Marketing
</TABLE>
- ---------------
(1) Consists of matching payments made under its 401(k) Plan.
(2) Includes $59,895 in sales commissions earned by Mr. Murphy during fiscal
1997.
STOCK BENEFIT PLANS
Stock Incentive Plan.
The Company adopted an Amended and Restated Incentive Stock Option,
Nonqualified Stock Option and Restricted Stock Purchase Plan (the "1992 Plan")
in September 1992. The 1992 Plan covers an aggregate of 1,250,000 shares of
Common Stock. In November 1996, the 1992 Plan was terminated. In June 1996, the
Company adopted its 1996 Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan (the "1996 Plan"). The 1996 Plan covers an
aggregate of 800,000 shares of Common Stock.
The 1992 Plan and the 1996 Plan (collectively, the "Plans") provide for the
granting of "incentive stock options," within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), nonstatutory options and
the sale of shares of restricted stock. Under the Plans, options to purchase
shares of the Company's Common Stock and the right to purchase restricted shares
of Common Stock may be granted to directors, officers and employees of the
Company, except that incentive stock options may not be granted to non-employee
directors. The Plans are administered by the Board of Directors. As of August
22, 1997, there were 421,638 options outstanding under the Plans at a weighted
average exercise price of $3.39 per share, and 538,769 shares of restricted
stock had been issued and sold under the Plans at a weighted average purchase
price of $0.25 per share.
Employee Stock Purchase Plan
The Company's Employee Stock Purchase Plan (the "Purchase Plan") covering
an aggregate of 150,000 shares of Common Stock was adopted by the Board of
Directors and approved by the Company's stockholders in August 1997. The
Purchase Plan, which is intended to qualify as an "employee stock purchase plan"
under Section 423 of the Internal Revenue Code, will be implemented by
twelve-month offerings with purchases occurring at three-month intervals
commencing on the date of this Prospectus. The Purchase Plan will be
administered by the Board of Directors. The Purchase Plan permits eligible
employees to purchase
38
<PAGE> 40
Common Stock through payroll deductions, which may not exceed 15% of an
employee's compensation. The price of stock purchased under the Purchase Plan
will be 85% of the lower of the fair market value of the Common Stock at the
beginning of the offering period or on the applicable purchase date.
Stock Option Plan for Non-Employee Directors
In August 1997, the Company adopted its 1997 Stock Option Plan for
Non-Employee Directors (the "Director Plan"), covering an aggregate of 100,000
shares of Common Stock. Under the Director Plan, each non-employee director of
the Company who was a director of the Company on August 31, 1997, or who is
thereafter elected as a director during the term of the Director Plan, shall be
granted an option consisting of 10,000 shares of Common Stock, which option
shall vest and become exercisable at the rate of 25% per year over the four-year
period following the grant date. The initial option grants under the Director
Plan shall be made at the effective date of this offering at the initial public
offering price. The exercise price of options granted under the Director Plan
shall be 100% of the fair market value of the Common Stock on the date of grant,
and such options shall have a term of ten years. In addition, upon the
expiration of each four-year period during a non-employee director's term of
office, such non-employee director shall receive an additional option covering
10,000 shares of Common Stock, with the same vesting schedule, subject to the
limitations set forth in the Director Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997, decisions regarding executive compensation were made by
the Compensation Committee of the Board of Directors, which consisted of
Clifford L. Haas, B. Allen Lay and David C. Seigle, none of whom are, or have at
any time been, an officer or employee of the Company. No executive officer of
the Company serves as a member of the board of directors or compensation
committee of any entity that has one or more executive officers serving as a
member of the Company's Board of Directors or Compensation Committee.
No members of the Company's Board of Directors have entered into
transactions with the Company during the period from July 1, 1994 to the date of
this prospectus.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Bylaws provide that the Company will indemnify its directors
and officers and may indemnify its employees and other agents to the fullest
extent permitted by law. The Company believes that indemnification under its
Bylaws covers at least negligence and gross negligence by indemnified parties,
and permits the Company to advance litigation expenses in the case of
stockholder derivative actions or other actions, against an undertaking by the
indemnified party to repay such advances if it is ultimately determined that the
indemnified party is not entitled to indemnification. Prior to the closing of
this offering, the Company expects to have in place liability insurance for its
officers and directors.
In addition, the Company's Certificate of Incorporation provides that,
pursuant to Delaware law, its directors shall not be liable for monetary damages
for breach of the directors' fiduciary duty to the Company and its stockholders.
This provision in the Certificate of Incorporation does not eliminate the
directors' fiduciary duty, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Company for acts
or omissions not in good faith or involving intentional misconduct, for knowing
violations of law, for actions leading to improper personal benefit to the
director, and for payment of dividends or approval of stock repurchases or
redemptions that are unlawful under Delaware law. The provision also does not
affect a director's responsibilities under any other law, such as the federal
securities laws or state or federal environmental laws.
The Company has entered into separate indemnification agreements with its
directors and officers. These agreements require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers (other than liabilities
arising from actions not taken in good faith or in a manner the indemnitee
believed to be opposed to the best interests of the
39
<PAGE> 41
Company) to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified and to obtain directors'
insurance if available on reasonable terms. Insofar as indemnification for
liabilities arising under the Securities Act may be permitted to directors,
officers or persons controlling the Company pursuant to the foregoing
provisions, the Company has been informed that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable. The Company
believes that its Certificate of Incorporation and Bylaw provisions and
indemnification agreements are necessary to attract and retain qualified persons
as directors and officers.
CERTAIN TRANSACTIONS
The Company did not enter into any transactions with its executive
officers, directors and principal stockholders during the period from July 1,
1994 to the date of this prospectus.
40
<PAGE> 42
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of the Common Stock
as of July 31, 1997 by (i) each person or entity known to the Company to own
beneficially 5% or more of the outstanding shares of Common Stock, (ii) each of
the Company's directors, (iii) each of the Named Executive Officers, (iv) the
Selling Stockholders and (v) all directors and executive officers of the Company
as a group. The information as to each person or entity has been furnished by
such person or entity.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO OFFERING(1) NUMBER OF AFTER OFFERING
--------------------- SHARES BEING ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS NUMBER PERCENT OFFERED(2) NUMBER PERCENT
- -------------------------------------- --------- ------- ------------ --------- -------
<S> <C> <C> <C> <C> <C>
Aspen Venture Partners, L.P.(3)....... 1,061,059 26.6 285,479 775,580 14.6
1000 Fremont Avenue, Suite V
Los Altos, CA 94024
Sigma Partners(4)..................... 700,000(5) 17.5 188,330 511,670 9.7
Sigma Associates
2884 Sand Hill Road, Suite 121
Menlo Park, CA 94025
Southern California Ventures(6)....... 614,392 15.4 165,304 449,088 8.5
406 Amapola Avenue, Suite 205
Torrance, CA 90501
William E. Drobish(7)................. 156,667 3.9 36,667 120,000 2.3
David S. Silver....................... 375,000 9.4 -- 375,000 7.1
3 Jenner Street
Irvine, California 92618
Dean A. Hough......................... 375,000 9.4 -- 375,000 7.1
3 Jenner Street
Irvine, California 92618
David C. Seigle....................... 10,000 * -- 10,000 *
Ronald J. Fikert(8)................... 40,000 1.0 -- 40,000 *
Kevin Drum(9)......................... 25,625 * -- 25,625 *
Richard Murphy........................ 50,000 1.3 -- 50,000 *
Avery Trust........................... 45,000 1.1 12,110 32,890 *
Overland Enterprises, Ltd. ........... 45,000 1.1 12,110 32,890 *
Alexander P. Cilento(10).............. 1,061,059 26.6 285,479 775,580 14.6
c/o Aspen Venture Partners, L.P.
1000 Fremont Avenue, Suite V
Los Altos, CA 94024
Clifford L. Haas(11).................. 700,000(4) 17.5 188,330 511,670 9.7
c/o Sigma Partners
Sigma Associates
2884 Sand Hill Road, Suite 121
Menlo Park, CA 94025
B. Allen Lay(12)...................... 614,392 15.4 165,304 449,088 8.5
c/o Southern California Ventures
406 Amapola Avenue, Suite 205
Torrance, CA 90501
All executive officers and directors
as a group (11 persons)(13)(14)..... 3,428,368 85.2 675,780 2,752,588 51.7
</TABLE>
- ---------------
* Less than 1%
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock subject
to options currently exercisable, or exercisable within 60 days of the date
hereof, are deemed outstanding for computing the percentage of the person
holding such options but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote
41
<PAGE> 43
and subject to community property laws where applicable, the persons named in
the table have sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by them.
(2) Assumes no exercise of the Underwriters over-allotment option. If the
over-allotment option is exercised in full, the following additional shares
will be sold by the following stockholders: Aspen Venture Partners,
L.P. -- 106,019; Sigma Partners -- 69,940; Southern California
Ventures -- 61,391; David S. Silver -- 25,000; Dean A. Hough -- 15,000;
Avery Trust -- 6,000; Overland Enterprises, Ltd. -- 6,000; Igor
Mamedalin -- 3,500; David Frazer -- 3,000; Michael Chernoy -- 2,000;
Valerie Braun -- 1,000; Donald Calkins -- 750; Nancy Carroll -- 400.
(3) Alexander P. Cilento is a General Partner of Aspen Venture Partners, L.P.
and, accordingly, may be deemed to beneficially own such shares. Mr.
Cilento disclaims beneficial ownership of the shares owned by Aspen Venture
Partners, L.P., except to the extent of his pecuniary interest therein.
(4) Clifford L. Haas is a General Partner of Sigma Partners and Sigma
Associates and, accordingly, may be deemed to beneficially own such shares.
Mr. Haas disclaims beneficial ownership of the shares owned by Sigma
Partners and Sigma Associates, except to the extent of his pecuniary
interest therein.
(5) Includes 651,300 shares beneficially owned by Sigma Partners and 48,700
shares beneficially owned by Sigma Associates. Each such entity disclaims
beneficial ownership of the shares held by the other entity.
(6) B. Allen Lay is a General Partner of Southern California Ventures and,
accordingly, may be deemed to beneficially own such shares. Mr. Lay
disclaims beneficial ownership of the shares owned by Southern California
Ventures, except to the extent of his pecuniary interest therein.
(7) Includes 156,667 shares held by the Drobish Family Trust, dated November
12, 1980. Mr. Drobish disclaims beneficial ownership of the shares owned by
the Drobish Family Trust, dated November 12, 1980, except to the extent of
his pecuniary interest therein.
(8) Includes 2,500 shares subject to options exercisable within 60 days from
the date hereof. Also includes 37,500 shares held by the Fikert Family
Trust, dated June 30, 1986. Mr. Fikert disclaims beneficial ownership of
the shares owned by the Fikert Family Trust, dated June, 30, 1986, except
to the extent of his pecuniary interest therein.
(9) Consists of shares subject to options exercisable within 60 days from the
date hereof.
(10) Mr. Cilento, a director of the Company, is a General Partner of Aspen
Venture Partners, L.P. Mr. Cilento disclaims beneficial ownership of the
shares held by Aspen Venture Partners, L.P. except to the extent of his
pecuniary interest arising from his partnership interest in Aspen Venture
Partners, L.P.
(11) Mr. Haas, a director of the Company, is a General Partner of Sigma Partners
and Sigma Associates. Mr. Haas disclaims beneficial ownership of the shares
held by Sigma Partners and Sigma Associates, except to the extent of his
pecuniary interest arising from his partnership interests in Sigma Partners
and Sigma Associates.
(12) Mr. Lay, a director of the Company, is a General Partner of Southern
California Ventures. Mr. Lay disclaims beneficial ownership of the shares
held by Southern California Ventures except to the extent of his pecuniary
interest arising from his partnership interest in Southern California
Ventures.
(13) Includes all shares owned of record by Aspen Venture Partners, L.P., Sigma
Partners, Sigma Associates and Southern California Ventures, as to which
the respective affiliated directors disclaim beneficial ownership.
(14) Includes 30,625 shares of Common Stock subject to options exercisable
within 60 days from the date hereof.
42
<PAGE> 44
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares
of Common Stock, $0.001 par value, and 5,000,000 shares of Preferred Stock,
$0.001 par value.
COMMON STOCK
As of June 30, 1997, there were 1,327,256 shares of Common Stock
outstanding held of record by 150 stockholders. There will be 5,294,258 shares
of Common Stock outstanding after giving effect to the sale of the shares of
Common Stock offered by the Company hereby and the conversion of the Company's
Series A, Series B and Series C Preferred Stock.
Holders of Common Stock are entitled to one vote per share on all matters
to be voted upon by the stockholders. Subject to preferences that may be
applicable to the holders of outstanding shares of Preferred Stock, the holders
of Common Stock are entitled to receive ratably such dividends, if any, as may
be declared from time to time by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of liquidation,
dissolution or winding up of the Company, and subject to the prior distribution
rights of the holders of outstanding shares of Preferred Stock, if any, the
holders of shares of Common Stock shall be entitled to receive pro rata all of
the remaining assets of the Company available for distribution to its
stockholders. The Common Stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and nonassessable, and shares of Common Stock to be issued pursuant to this
offering shall be fully paid and nonassessable.
PREFERRED STOCK
Upon the closing of this offering, no shares of Preferred Stock will be
outstanding. The Board of Directors has the authority, without further action by
the stockholders, to issue shares of Preferred Stock in one or more series and
to fix the rights, preferences and privileges thereof, including dividend rates
and preferences, conversion rights, voting rights, terms of redemption,
redemption prices, liquidation preferences and the number of shares constituting
any series or the designation of such series, without further vote or action by
the stockholders. Although it presently has no intention to do so, the Board of
Directors, without stockholder approval, could issue Preferred Stock with voting
and conversion rights which could adversely affect the voting power of the
holders of Common Stock. The issuance of Preferred Stock may also have the
effect of delaying or preventing a change of control of the Company.
REGISTRATION RIGHTS
Pursuant to the First Restated Registration Rights Agreement, dated as of
March 6, 1989 (the "Registration Rights Agreement"), the holders of 1,967,002
outstanding shares of Common Stock (upon the closing of this offering) are
entitled to certain demand registration rights with respect to such shares (the
"Registrable Securities"), subject to the terms and conditions of the
Registration Rights Agreement. Under the Registration Rights Agreement, subject
to certain exceptions, the holders of at least 33% of the Registrable Securities
may require the Company to use its best efforts to register on two occasions the
Registrable Securities for public resale, subject to the underwriters' marketing
limitation. In addition, subject to certain exceptions, holders of Registrable
Securities may require the Company to use its best efforts to register on four
occasions Registrable Securities on Form S-3 for public resale. In addition,
whenever the Company proposes to register any of its securities under the
Securities Act, holders of Registrable Securities are entitled to notice of each
such registration and to include their Registrable Securities in such
registration, subject to certain restrictions, including any proposed
underwriter's right to limit the number of shares being registered. The Company
is required to bear all registration expenses in connection with the
registration of Registrable Securities in two demand registrations, four Form
S-3 registrations and all Company registrations. All selling expenses related to
securities registered by the holders are required to be paid by the holders. The
Company is required to indemnify the holders of such Registrable Securities and
the underwriters for such holders, if any, under certain circumstances.
43
<PAGE> 45
Registration rights may be transferred only to a transferee of Registrable
Securities who, in connection with such transfer, acquires at least the lesser
of 50,000 shares, or all of the transferor's shares. The registration rights may
be amended or waived only with the written consent of the Company and the
holders of at least two-thirds of the Registrable Securities then issuable and
outstanding.
The holders of Registrable Securities other than the Selling Stockholders
have waived any rights to include any Registrable Securities in this offering.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless either
(i) prior to the date at which the person becomes an interested stockholder, the
Board of Directors approves such transaction or business combination, (ii) the
stockholder acquires more than 85% of the outstanding voting stock of the
corporation (excluding shares held by directors who are officers or held in
certain employee stock plans) upon consummation of such transaction, or (iii)
the business combination is approved by the Board of Directors and by two-thirds
of the outstanding voting stock of the corporation (excluding shares held by the
interested stockholder) at a meeting of stockholders (and not by written
consent). A "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to such interested stockholder. For
purposes of Section 203, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior, did own) 15%
or more of the corporation's voting stock.
The Company's Restated Certificate of Incorporation includes a provision
that allows the Board of Directors to issue Preferred Stock in one or more
series with such voting rights and other provisions as the Board of Directors
may determine. This provision may be deemed to have a potential anti-takeover
effect and the issuance of Preferred Stock in accordance with such provisions
may delay or prevent a change of control of the Company. See "Preferred Stock."
STOCK TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for the Company's Common Stock is
U.S. Stock Transfer Corporation.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices and adversely affect the
Company's ability to raise additional capital in the capital markets at a time
and price favorable to the Company.
Upon completion of the offering, the Company will have 5,294,258 shares of
Common Stock outstanding, assuming no exercise of options after June 30, 1997.
Of these shares, the 2,000,000 shares sold in the offering (2,300,000 shares if
the Underwriters' over-allotment option is exercised in full) will be freely
tradable without restriction or further registration under the Securities Act,
unless they are purchased by "affiliates" of the Company as that term is used
under the Securities Act. The remaining 3,294,258 shares held by existing
stockholders will be "restricted securities" as defined in Rule 144 under the
Securities Act ("Restricted Shares"). Restricted Shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 701 promulgated under the Securities Act, which
are summarized below. Sales of Restricted Shares in the public market, or the
availability of such shares for sale, could adversely affect the market price of
the Common Stock.
All officers and directors and certain stockholders and option holders have
agreed with the Underwriters that they will not sell any Common Stock owned by
them for a period of 180 days after the effective date of the offering without
the prior written consent of Needham & Company, Inc. (the "Lock-Up Agreements").
44
<PAGE> 46
Of the 3,294,258 shares held by existing shareholders, 3,116,494 shares of
Common Stock are subject to the Lock-Up Agreements. Upon the expiration of the
Lock-Up Agreements, approximately 31,412 Restricted Shares will be eligible for
sale under Rule 701 (plus shares issuable upon exercise of then vested
outstanding options), 315,619 Restricted Shares will be eligible for sale under
Rule 144(k) and 2,721,963 Restricted Shares held by "affiliates" of the Company,
as that term is defined in Rule 144, will be eligible for sale under Rule 144
subject to the volume and other restrictions of Rule 144. Pursuant to Rule 701,
8,075 Restricted Shares will be eligible for sale 90 days following this
offering. An additional 23,750 Restricted Shares will be eligible for sale 30
days following this offering, and an additional 23,750 Restricted Shares will be
eligible for sale 60 days following this offering. Immediately following this
offering approximately 179,189 Restricted Shares will be eligible for sale under
Rule 144.
In general, under Rule 144, as recently amended by the Securities and
Exchange Commission, beginning 90 days after the effective date of the offering,
any person who has beneficially owned Restricted Shares for at least one year is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the then outstanding shares of the Company's
Common Stock (approximately 52,942 shares immediately after the offering) or the
average weekly trading volume during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain requirements as to the
manner of sale, notice and availability of current public information about the
Company. A person who is not an affiliate, has not been an affiliate within
three months prior the sale and has beneficially owned the Restricted Shares for
a least two years is entitled to sell such shares under Rule 144(k) as currently
in effect without regard to any of the limitations described above.
In general, Rule 701 permits resales of shares issued pursuant to certain
compensatory benefit plans and contracts 90 days after the Company becomes
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended, in reliance upon Rule 144, but without compliance with certain
restrictions contained in Rule 144, including the holding period requirements.
The Company intends to file a registration statement on Form S-8 under the
Act to register shares of Common Stock reserved for issuance under its stock
option plans, thus permitting the resale of shares issued under the plans by
non-affiliates in the public market without restriction under the Securities
Act. Such registration statement will become effective immediately upon filing
which is expected on or shortly after the closing of the offering. As of August
22, 1997, options or rights to purchase 421,638 shares of Common Stock were
outstanding under the Company's stock option plans, of which 416,763 shares are
subject to the Lock-Up Agreements.
After this offering, the holders of approximately 1,967,002 shares of
Common Stock will be entitled to certain demand and piggyback rights with
respect to registration of such shares under the Securities Act. Registration of
such shares under the Securities Act would result in such shares becoming freely
tradeable without restriction under the Securities Act (except for shares
purchased by affiliates of the Company) immediately upon the effectiveness of
such registration. See "Description of Capital Stock -- Registration Rights." If
such holders, by exercising their demand registration rights, cause a large
number of securities to be registered and sold in the public market, such sales
could have an adverse effect on the market price for the Company's Common Stock.
If the Company were to include in a Company-initiated registration any such
shares pursuant to the exercise of piggyback registration rights, such sales may
have an adverse effect on the Company's ability to raise additional capital.
45
<PAGE> 47
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting
Agreement, the Underwriters named below, for whom Needham & Company, Inc. and
Unterberg Harris are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Company and Selling Stockholders, and the
Company and Selling Stockholders have agreed to sell to each Underwriter, the
aggregate number of shares of Common Stock set forth opposite their respective
names in the table below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
------------------------------------------------------------------ ---------
<S> <C>
Needham & Company, Inc............................................
Unterberg Harris..................................................
---------
Total................................................... 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to certain conditions precedent. The Underwriters are obligated to take
and pay for all of the shares offered hereby (other than those covered by the
Underwriters' over-allotment option described below), if any such shares are
taken.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the public offering price
set forth on the cover page of this prospectus and to certain dealers (who may
include the Underwriters) at such price less a concession not in excess of
$ per share, of which $ may be reallowed to other dealers. After the
offering to the public, the offering price and other selling terms may be
changed by the Representatives. No such reduction shall change the amount of the
proceeds to be received the Company and the Selling Stockholders as set forth on
the cover page of this prospectus.
Certain Selling Stockholders have granted an option to the Underwriters,
exercisable during the 30-day period after the date of this prospectus, to
purchase up to an aggregate of 300,000 additional shares of Common Stock at the
same price per share as the Company and the Selling Stockholders receive for the
2,000,000 shares that the Underwriters have agreed to purchase from them. To the
extent the Underwriters exercise such option, each of the Underwriters will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares as the number of shares of Common
Stock to be purchased by such Underwriter, as shown in the above table, bears to
the total shown. If purchased, such additional shares will be sold by the
Underwriters on the same terms as those on which the 2,000,000 shares are being
sold.
The Underwriting Agreement contains covenants of indemnity and contribution
between the Company and the Underwriters and the Selling Stockholders against
certain civil liabilities that may be incurred in connection with this offering,
including liabilities under the Securities Act.
Pursuant to the terms of Lock-Up Agreements, all officers and directors and
certain stockholders holding an aggregate of approximately 3,116,494 shares of
the Company's Common Stock have agreed with the Representatives not to sell,
otherwise dispose of, contract to sell, grant any option to sell, transfer or
otherwise dispose of, directly or indirectly, shares of Common Stock, or
securities exchangeable for or convertible into shares of Common Stock or any
substantially similar securities for a period of 180 days after the date of this
prospectus, without the prior written consent of Needham & Company, Inc. The
Company has agreed, with certain limited exceptions, not to sell, contract to
sell, grant any option to sell, transfer or otherwise dispose of, directly or
indirectly, shares of Common Stock, or securities exchangeable for or
convertible into shares of Common Stock, or any substantially similar
securities, other than the Company's sales of shares in this
46
<PAGE> 48
offering, the issuance of shares of Common Stock upon the exercise of
outstanding options, the grant of options to purchase shares or the issuance of
shares of Common Stock under the Company's 1996 Plan, Director Plan and Employee
Stock Purchase Plan, for a period of 180 days after the date of this prospectus,
without the prior written consent of Needham & Company, Inc.
The Underwriters will not make sales to accounts over which they exercise
discretionary authority in excess of 5% of the number of shares of Common Stock
offered hereby, and unless they obtain specific written consent of the customer.
In connection with the offering, the Underwriters and other persons
participating in the offering may engage in transactions that stabilize,
maintain or otherwise affect the price of the Common Stock. Specifically, the
Underwriters may over-allot in connection with the offering, creating a short
position in the Common Stock for their own account. To cover over-allotments or
to stabilize the price of the Common Stock, the Underwriters may bid for, and
purchase, Common Stock in the open market. The Underwriters may also impose a
penalty bid whereby they may reclaim selling concessions allowed to an
underwriter or a dealer for distributing Common Stock in the offering if the
Underwriters repurchase previously distributed Common Stock in transactions to
cover their short position, in stabilization transactions or otherwise. Finally,
the Underwriters may bid for, and purchase, shares of Common Stock in market
making transactions. These activities may stabilize or maintain the market price
of the Common Stock above market levels that might otherwise prevail. The
Underwriters are not required to engage in these activities and may end these
activities at any time.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price will be
determined through negotiations among the Company, the Selling Stockholders and
the Representatives. Among the factors to be considered in such negotiations
will be prevailing market conditions, the net sales and results of operations of
the Company in recent periods, market valuations of publicly traded companies
that the Company, the Selling Stockholders and the Representatives believe to be
comparable to the Company, estimates of the business potential of the Company,
the present state of the Company's development, the current state of the
industry and the economy as a whole, and other factors deemed relevant.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company and the Selling Stockholders by Stradling, Yocca, Carlson & Rauth, a
Professional Corporation, Newport Beach, California. A shareholder of Stradling,
Yocca, Carlson & Rauth, a Professional Corporation, beneficially owns 6,667
shares of Common Stock. Certain legal matters in connection with this offering
will be passed upon for the Underwriters by McCutchen, Doyle, Brown & Enersen
LLP, Palo Alto, California.
EXPERTS
The consolidated financial statements and schedule of the Company as of
June 30, 1996 and 1997 and for each of the three years in the period ended June
30, 1997, included in this prospectus and elsewhere in the Registration
Statement have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their reports appearing herein and elsewhere in the Registration
Statement, and are included in reliance upon the reports given upon their
authority as experts in accounting and auditing.
47
<PAGE> 49
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the shares of Common Stock offered
hereby. This prospectus, which constitutes a part of the Registration Statement,
does not contain all the information set forth in the Registration Statement and
the exhibits and schedules thereto. For further information with respect to the
Company and the Common Stock offered hereby, reference is made to the
Registration Statement and to the exhibits and schedules filed therewith. A copy
of the Registration Statement may be inspected without charge at the public
reference facilities of the Commission located at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
7 World Trade Center, Suite 1300, New York, New York 10048, and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of all or any part of the
Registration Statement may be obtained at the prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 and its public reference facilities in New York, New York and Chicago,
Illinois, upon the payment of the fees prescribed by the Commission. The
Registration Statement is also available through the Commission's Website on the
World Wide Web at http://www.sec.gov.
Statements made in this prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified by such reference.
48
<PAGE> 50
KOFAX IMAGE PRODUCTS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-1
Consolidated Balance Sheets as of June 30, 1996 and 1997.............................. F-2
Consolidated Statements of Operations for the years ended June 30, 1995, 1996 and
1997................................................................................ F-3
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1995,
1996 and 1997....................................................................... F-4
Consolidated Statements of Cash Flows for the years ended June 30, 1995, 1996 and
1997................................................................................ F-5
Notes to Consolidated Financial Statements............................................ F-6
</TABLE>
49
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Kofax Image Products, Inc.:
We have audited the accompanying consolidated balance sheets of Kofax Image
Products, Inc. and its subsidiary (the Company) as of June 30, 1996 and 1997,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Kofax Image Products, Inc. and its
subsidiary as of June 30, 1996 and 1997, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1997
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Costa Mesa, California
July 29, 1997 (except Note 14
as to which the date is August 27, 1997)
F-1
<PAGE> 52
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF JUNE 30,
-------------------------------------------
1996 1997 PRO FORMA
----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................... $ 741,300 $ 801,500
Investments (Note 4)......................................... 2,773,100 4,602,900
Accounts receivable, net of allowance for doubtful accounts
and sales returns of $381,500 in 1996 and $422,900 in 1997
(Note 6)................................................... 4,092,900 4,133,800
Inventories (Note 5)......................................... 1,869,500 2,011,700
Deferred income taxes (Note 7)............................... 517,900 566,700
Prepaid expenses and other current assets.................... 190,300 204,500
----------- -----------
Total current assets............................... 10,185,000 12,321,100
PROPERTY:
Machinery and equipment...................................... 3,662,100 4,878,800
Furniture and fixtures....................................... 732,100 865,900
Leasehold improvements....................................... 198,900 260,600
----------- -----------
4,593,100 6,005,300
Less accumulated depreciation and amortization............... (2,952,600) (4,040,100)
----------- -----------
Property, net.............................................. 1,640,500 1,965,200
NONCURRENT DEFERRED INCOME TAXES (Note 7).................... 1,382,500 1,463,700
OTHER ASSETS, net............................................ 933,200 576,900
----------- -----------
$14,141,200 $16,326,900
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of note payable (Note 6)..................... $ 351,400 $ 394,300
Accounts payable............................................. 713,200 771,900
Accrued compensation and related costs....................... 718,200 1,044,100
Accrued warranty............................................. 154,700 185,400
Accrued cooperative marketing (Note 9)....................... 253,300 335,500
Deferred revenue............................................. 188,300 356,400
Accrued acquisition costs (Note 3)........................... 469,200 --
Other accrued liabilities (Note 7)........................... 387,900 557,900
----------- -----------
Total current liabilities.......................... 3,236,200 3,645,500
LONG-TERM NOTES PAYABLE (Note 6)............................. 798,600 427,100
REDEEMABLE CONVERTIBLE PREFERRED STOCK (Note 8), $.001 par
value; 5,000,000 shares authorized; 2,667,002 actual shares
issued and outstanding in 1996 and 1997; no pro forma
shares outstanding......................................... 6,812,200 7,146,200
COMMITMENTS AND CONTINGENCIES (Notes 9 and 12)
STOCKHOLDERS' EQUITY (Notes 1 and 8):
Common stock, $.001 par value; 40,000,000 shares authorized;
1,311,419 and 1,327,256 actual shares outstanding in 1996
and 1997, 3,994,258 pro forma shares outstanding........... 159,400 172,000 $ 4,261,600
Retained earnings............................................ 3,134,800 4,936,100 7,992,700
----------- ----------- -----------
Total stockholders' equity......................... 3,294,200 5,108,100 $12,254,300
----------- -----------
$14,141,200 $16,326,900
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 53
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales (Notes 9 and 10).......................... $21,085,300 $24,964,000 $29,265,700
Cost of sales....................................... 7,218,300 7,926,200 7,720,100
----------- ----------- -----------
Gross profit........................................ 13,867,000 17,037,800 21,545,600
Operating expenses (Notes 3 and 9):
Sales and marketing............................ 5,976,900 7,456,600 9,565,300
Research and development....................... 3,693,400 5,089,700 6,652,500
General and administrative..................... 1,553,500 1,748,100 1,935,900
Acquired in-process research and development
costs........................................ 4,176,800
----------- ----------- -----------
Total operating expenses.................. 11,223,800 18,471,200 18,153,700
----------- ----------- -----------
Income (loss) from operations....................... 2,643,200 (1,433,400) 3,391,900
Other income, net................................... 264,000 200,500 69,300
----------- ----------- -----------
Income (loss) before provision (benefit)............ 2,907,200 (1,232,900) 3,461,200
Provision (benefit) for income taxes (Note 7)....... 1,096,000 (499,800) 1,325,900
----------- ----------- -----------
Net income (loss)................................... $ 1,811,200 $ (733,100) $ 2,135,300
=========== =========== ===========
Pro forma income per share.......................... $ .50
===========
Pro forma weighted average common shares (Note 2)... 4,282,000
===========
Net income (loss) applicable to common stockholders
(Note 2).......................................... $ 1,477,200 $(1,067,100) $ 1,801,300
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 54
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCES, July 1, 1994.................... 1,290,044 $139,200 $2,724,700 $2,863,900
Issuance of common stock.................. 8,625 13,900 -- 13,900
Repurchase of common stock................ (1,150) (1,200) -- (1,200)
Accretion to current liquidation or
redemption value of preferred stock..... -- -- (334,000) (334,000)
Net income................................ -- -- 1,811,200 1,811,200
--------- -------- ---------- ----------
BALANCES, June 30, 1995................... 1,297,519 151,900 4,201,900 4,353,800
Issuance of common stock.................. 14,025 7,500 -- 7,500
Repurchase of common stock................ (125) -- -- --
Accretion to current liquidation or
redemption value of preferred stock..... -- -- (334,000) (334,000)
Net loss.................................. -- -- (733,100) (733,100)
--------- -------- ---------- ----------
BALANCES, June 30, 1996................... 1,311,419 159,400 3,134,800 3,294,200
Issuance of common stock.................. 15,837 12,600 -- 12,600
Accretion to current liquidation or
redemption value of preferred stock..... -- -- (334,000) (334,000)
Net income................................ -- -- 2,135,300 2,135,300
--------- -------- ---------- ----------
BALANCES, June 30, 1997................... 1,327,256 $172,000 $4,936,100 $5,108,100
========= ======== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 55
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-----------------------------------------
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................................... $ 1,811,200 $ (733,100) $ 2,135,300
Adjustments to reconcile net income (loss) to net cash provided by operating
activities, net of effects of acquisition:
Depreciation and amortization............................................. 843,400 1,162,200 1,496,500
Acquired in-process research and development costs........................ -- 4,176,800 --
Provision for doubtful accounts and sales returns......................... 172,300 199,800 41,400
Provision for inventory reserves.......................................... 165,600 184,100 189,600
Loss on disposal of property.............................................. 1,300 1,200 900
Deferred income taxes..................................................... (12,400) (1,523,100) (130,000)
Changes in operating assets and liabilities, net of effect of acquisition:
Accounts receivable..................................................... (498,800) (656,900) (82,300)
Inventories............................................................. (565,600) (217,300) (331,800)
Prepaid expenses and other current assets............................... 132,100 (53,600) (14,200)
Accounts payable........................................................ 264,000 (636,000) 58,700
Accrued compensation and related costs.................................. 235,900 7,400 325,900
Accrued warranty........................................................ 1,300 (27,300) 30,700
Accrued cooperative marketing........................................... 69,300 32,500 82,200
Other accrued liabilities............................................... 100,600 208,300 (131,100)
----------- ----------- -----------
Net cash provided by operating activities.......................... 2,720,200 2,125,000 3,671,800
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in short-term investments............................... (1,335,300) 1,363,700 (1,829,800)
Acquisition of property..................................................... (815,600) (1,289,400) (1,532,200)
(Increase) decrease in other assets......................................... (207,300) (139,300) 66,400
Cash paid for acquisition................................................... -- (4,610,600) --
----------- ----------- -----------
Net cash used in investing activities.............................. (2,358,200) (4,675,600) (3,295,600)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from note payable.................................................. -- 1,150,000 --
Principal payments on notes payable......................................... (70,600) (487,500) (328,600)
Net proceeds from issuance of common stock.................................. 13,900 7,500 12,600
Repurchase of common stock.................................................. (1,200) -- --
----------- ----------- -----------
Net cash (used in) provided by financing activities................ (57,900) 670,000 (316,000)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........................ 304,100 (1,880,600) 60,200
CASH AND CASH EQUIVALENTS, beginning of year................................ 2,317,800 2,621,900 741,300
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year...................................... $ 2,621,900 $ 741,300 $ 801,500
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid............................................................... $ 3,900 $ 54,200 $ 108,800
=========== =========== ===========
Income taxes paid........................................................... $ 1,017,060 $ 1,018,000 $ 1,427,800
=========== =========== ===========
SCHEDULE OF NONCASH TRANSACTIONS -- The Company acquired certain assets of
LaserData, Inc. during the year ended June 30, 1996 (Note 3). In
conjunction with the acquisition, certain liabilities were assumed as
follows:
Fair value of assets acquired........................................... $ 1,394,800
Acquired in-process research and development costs...................... 4,176,800
Acquired developed technology........................................... 652,100
Cash paid............................................................... (4,610,600)
-----------
Liabilities assumed................................................ $ 1,613,100
===========
</TABLE>
NONCASH ACTIVITY -- During each of the three years in the period ended June 30,
1997, the Company recorded accretion of $334,000 for the increase in the
liquidation or redemption value of the redeemable convertible preferred stock
(Note 8).
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 56
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL AND NATURE OF OPERATIONS
Kofax Image Products (the Company) was incorporated in California on August
13, 1985 and reincorporated in the State of Delaware on February 13, 1996. The
reincorporation resulted in a change in the Company name from Kofax Image
Products to Kofax Image Products, Inc., a change in the authorized number of
shares of common stock from 10,000,000 to 40,000,000, and a change in the par
value of both the Company's common stock and preferred stock from no par value
to $.001 par value. All share amounts have been restated to reflect the
reincorporation of the Company.
The Company is a leading supplier of application software, developers
toolkits, and image processing hardware for the image and document management
market. The Company specializes primarily in the area of document capture, which
involves converting paper documents into electronic images, indexing the
documents, and then compressing and routing the images across a network for
permanent storage. The Company's products are all designed for use on
Windows-based PC platforms and industry standard network operating systems. The
Company sells its products through a worldwide network of distributors, value
added resellers, systems integrators, and Original Equipment Manufacturers
(OEMs).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation -- The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiary. All
intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents -- Short-term investments which have an original
maturity of three months or less are considered cash equivalents.
Investments -- The Company accounts for its investments under the
provisions of Statement of Financial Accounting Standards (SFAS) No. 115,
Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115
requires investments to be classified into one of three categories:
held-to-maturity securities, trading securities and available-for-sale
securities. At June 30, 1997, all of the Company's investments were considered
to be held-to-maturity securities, which are reported at amortized cost. The
Company has the positive intent and ability to hold these securities to
maturity.
Accounts Receivable -- Accounts receivable arise in the normal course of
granting trade credit terms to customers. The Company performs credit
evaluations of its customers and generally does not require collateral. The
Company maintains reserves for potential credit losses. At June 30, 1996 and
1997, 29% and 30% of the Company's accounts receivable were due from two
distributors.
Inventories -- Inventories are stated at the lower of first-in, first-out
cost or market.
Property -- Property is stated at cost. Depreciation and amortization are
computed using the straight-line method over the shorter of the estimated useful
lives of the related assets, which are generally between two and five years, or
the term of the related lease agreement, if applicable.
Other Assets -- Other assets include software development costs, intangible
assets and prepaid license and royalty fees.
Software development costs capitalized are incurred subsequent to
establishing the technological feasibility of a product and are amortized over
the life of the product, which typically ranges from 12 to 24 months. At June
30, 1996, the Company had software development costs capitalized of $53,700, net
of accumulated amortization of $137,900. Because the Company believes that its
current process for developing new software products is essentially completed
concurrently with the establishment of technological feasibility, no costs are
capitalized as of June 30, 1997.
F-6
<PAGE> 57
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Intangible assets represent the value of the Company's developed technology
from the acquisition of LaserData (Note 3), as determined by an independent
valuation. Such intangibles are amortized on a straight-line basis over three
years, the estimated recovery period.
Prepaid license and royalty fees are recorded at cost and amortized based
on estimated total revenue for the related product with an annual minimum equal
to the straight-line amortization over a maximum period of two years.
Long-Lived Assets -- The Company accounts for the impairment and
disposition of long-lived assets in accordance with SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
In accordance with SFAS No. 121, long-lived assets to be held are reviewed for
events or changes in circumstances which indicate that their carrying value may
not be recoverable. There was no impairment of the value of such assets for the
year ended June 30, 1997.
Income Taxes -- The provision for income taxes is determined in accordance
with SFAS No. 109, Accounting for Income Taxes. Deferred tax assets and
liabilities arise from temporary differences between the tax basis of assets and
liabilities and their reported amounts in the consolidated financial statements
that will result in taxable or deductible amounts in future years.
Revenue Recognition and Right of Return -- Revenues from software and
hardware sales are recognized upon the later of shipment of the related product
or transfer of title and are in accordance with Statement of Position 91-1,
Software Revenue Recognition, as there are no significant vendor obligations or
post-contract support at the time of delivery. The Company also offers its
distributors certain rights of return, price protection and exchange privileges
on sales. The Company records estimates for such rights of return, price
protection and exchange privileges at the time of product sale, based on
historical experience. Revenue from service and post-contract customer support
is recognized ratably over the term of the contract.
Product Warranty -- The Company provides a warranty for its products
against defects in materials and workmanship. A provision for estimated warranty
costs is recorded at the time of sale and periodically adjusted to reflect
actual experience.
Pro Forma Income per Share -- Pro forma income per share is calculated
using the weighted average number of shares of common stock and common stock
equivalents outstanding during the year and the assumed conversion of all
outstanding preferred shares into common shares at or prior to the Company's
proposed initial public offering. Pursuant to Staff Accounting Bulletin Topic
4(D), all options to purchase common shares issued in the twelve months
preceding the initial filing of the Company's Registration Statement for its
initial public offering have been treated as if they were outstanding for all
periods using the treasury stock method. The Financial Accounting Standards
Board issued SFAS No. 128, Earnings Per Share, in February 1997, effective for
financial statements issued after December 15, 1997 (Note 13).
Net Income (Loss) Applicable to Common Stockholders -- Net income
applicable to common stockholders represents net income less the accretion
attributable to the preferred stock redemption value (Note 8).
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Fair Value of Financial Statements -- Long-term debt bears interest at a
rate indexed to the prime rate; therefore, management believes the carrying
amount for the outstanding borrowings at June 30, 1997 approximates fair value.
F-7
<PAGE> 58
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock-Based Compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees
(Note 8).
Pro Forma Information -- The pro forma information, which is unaudited,
reflects the conversion of all outstanding shares of preferred stock into shares
of common stock on a share-for-share basis and an increase to retained earnings
of $3,056,600 to reflect a reduction of the cumulative amounts accreted to
preferred stock liquidation value through June 30, 1997 (Note 8).
Supplier and Subcontractor Concentration. The Company purchases circuit
boards, integrated circuits and other components from third parties. The
Company's dependence on third-party suppliers involves several risks, including
limited control over pricing, availability, quality and delivery schedules. The
Company is dependent on sole-source suppliers for ASICs and certain other
critical components used in its products. The Company generally purchases
sole-sourced components pursuant to purchase orders placed in the ordinary
course of business and has no guaranteed supply arrangements with any of its
sole-source suppliers. There can be no assurance that the Company will not
experience quality control problems or supply shortages for these components in
the future. Any quality control problems or interruptions in supply with respect
to one or more components could have a material adverse effect on the Company's
business, operating results and financial condition. Because of the Company's
reliance on these suppliers, the Company may also be subject to increases in
component costs which could materially adversely affect its business, operating
results and financial condition.
The Company relies on third-party subcontractors for the manufacture of
certain of its products and components such as cable assemblies and circuit
boards, reliance on third-party subcontractors involves several risks, including
the potential inadequacy of capacity, the unavailability of or interruptions in
access to certain process technologies and reduced control over product quality,
delivery schedules, manufacturing yields and costs. Shortages of raw materials
to or production capacity constraints at the Company's subcontractors could
negatively affect the Company's ability to meet its production obligations and
result in increased prices for affected parts. Any such reduction or constraint
could result in delays in shipments of the Company's products or increases in
the prices of components, either of which could have a material adverse effect
on the Company's business, operating results and financial condition.
3. ACQUISITION
On December 30, 1995, the Company acquired certain assets and assumed
certain liabilities of LaserData, Inc. ("LaserData"), a developer of optical
storage and document management software and related hardware products. The
purpose of the acquisition was to acquire LaserData's optical storage product
(which was previously a component of LaserData's systems product), in-process
research and development and the related development team. The asset acquisition
was accounted for as a purchase, and the purchase price of $4,610,600, including
transaction expenses, was allocated to tangible net liabilities acquired of
$218,300, intangible assets of $652,100, and in-process research and development
expenses of $4,176,800, which had no future alternative use, based on an
independent appraisal.
The accompanying consolidated statements of operations include the results
of operations of LaserData, Inc. from its acquisition date of December 30, 1995.
The following unaudited pro forma information presents results of operations of
the Company for the years ended June 30, 1995 and 1996, as if the asset
acquisition had been consummated as of the beginning of fiscal 1995. The pro
forma information is presented for information purposes only. It is based on
historical information and does not necessarily reflect the actual results that
would have occurred nor is it necessarily indicative of future results of
operations of the combined enterprise.
F-8
<PAGE> 59
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net sales........................................... $29,806,000 $28,273,600
Net income (loss)................................... $ 592,000 $ (949,000)
</TABLE>
4. INVESTMENTS
Held-to-maturity investments were comprised of the following:
<TABLE>
<CAPTION>
GROSS UNREALIZED
MATURITY AMORTIZED ---------------- ESTIMATED
DESCRIPTION DATES COST GAINS LOSSES FAIR VALUE
- ------------------------------------ ----------------- ---------- ------- ------ ----------
<S> <C> <C> <C> <C> <C>
June 30, 1997
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies.......... Within one year $4,560,500 $ -- $4,700 $4,555,800
Mortgage-backed securities.......... Five years
through ten years 42,400 1,400 41,000
---------- ------- ------ ----------
$4,602,900 $ -- $6,100 $4,596,800
========== ======= ====== ==========
</TABLE>
<TABLE>
<CAPTION>
GROSS UNREALIZED
MATURITY AMORTIZED ----------------- ESTIMATED
DESCRIPTION DATES COST GAINS LOSSES FAIR VALUE
- ----------------------------------- ----------------- ---------- ------- ------- ----------
<S> <C> <C> <C> <C> <C>
June 30, 1996
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies......... Within one year $2,666,900 $ -- $ 5,800 $2,661,100
Mortgage-backed securities......... Five years
through ten years 106,200 6,000 100,200
---------- ------- ------- ----------
$2,773,100 $ -- $11,800 $2,761,300
========== ======= ======= ==========
</TABLE>
5. INVENTORIES
Inventories at June 30 consist of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Raw materials....................................... $1,228,200 $1,063,300
Work-in-process..................................... 410,200 550,100
Finished goods...................................... 231,100 398,300
---------- ----------
$1,869,500 $2,011,700
========== ==========
</TABLE>
6. NOTES PAYABLE
The Company has a financing agreement with a bank expiring in October 1997,
providing for borrowings under a line of credit up to the lesser of $2,000,000
or 80% of eligible accounts receivable (as defined) at the bank's prime rate
(8.5% at June 30, 1997).
Borrowings under the line of credit are unsecured. There were no borrowings
outstanding under the financing agreement at June 30, 1996 and 1997. The
financing agreement contains certain restrictive covenants, including certain
tangible net worth levels, current ratio percentages, profitability levels and
the nonpayment or declaration of cash dividends, with which the Company was in
compliance at June 30, 1997.
In January 1996, the Company entered into a three-year, $1,150,000 term
loan. The loan bears interest at the bank's prime rate plus 1.0% (9.5% at June
30, 1997) with interest payable on a monthly basis. The
F-9
<PAGE> 60
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
principal payments are due in 35 equal installments, commencing on September 5,
1996 and continuing on the same day of each month thereafter until July 5, 1999,
on which date the entire unpaid aggregate principal and interest shall be due
and payable. Principal payments under the term loan amount to $394,300, $394,300
and $32,800 for fiscal 1998, 1999 and 2000, respectively. Borrowings under the
term loan are collateralized by substantially all of the Company's assets. The
financing agreement contains certain restrictive covenants including certain
tangible net worth levels, current ratio percentages, profitability levels and
the nonpayment or declaration of cash dividends with which the Company was in
compliance at June 30, 1997. Interest expense was $3,486, $54,212 and $106,783
for fiscal 1995, 1996 and 1997, respectively.
7. INCOME TAXES
The components of the Company's income tax provision (benefit) are as
follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ----------- ----------
<S> <C> <C> <C>
Current............................... $1,108,400 $ 1,023,300 $1,455,900
Deferred.............................. (12,400) (1,523,100) (130,000)
---------- ----------- ----------
Total....................... $1,096,000 $ (499,800) $1,325,900
========== =========== ==========
</TABLE>
Reconciliations between the provision for income taxes for fiscal 1995,
1996 and 1997 and the amounts computed by applying the federal statutory tax
rate to income before the provision for income taxes are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---------------- --------------- ----------------
AMOUNT % AMOUNT % AMOUNT %
---------- --- --------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes at statutory
rate................................... $1,017,500 35% $(431,500) (35)% $1,211,400 35%
State income taxes, net of federal income
tax benefit............................ 158,400 5 (61,600) (5) 140,100 4
Benefit of foreign sales corporation
subsidiary............................. (62,900) (3) (70,900) (6) (97,500) (3)
Other.................................... (17,000) 1 64,200 5 71,900 2
-- --
---------- --------- --- ----------
Provision for income taxes............... $1,096,000 38% $(499,800) (41)% $1,325,900 38%
========== == ========= === ========== ==
</TABLE>
At June 30, the Company's net deferred tax assets consisted of the
following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Bad debt and sales return reserves.......................... $ 119,500 $ 188,600
Inventory reserves.......................................... 76,500 157,300
Uniform capitalization of inventories....................... 42,600 53,100
Accrued vacation and bonus.................................. 112,400 74,600
Warranty reserves........................................... 67,200 80,500
State taxes................................................. (80,400) (72,400)
Depreciation................................................ 71,400 160,200
Capitalized software........................................ (23,100)
Difference between book and tax basis of acquired in-process
research and development and other intangible assets...... 1,311,100 1,303,300
Other reserves.............................................. 203,200 85,200
---------- ----------
Net deferred tax assets..................................... $1,900,400 $2,030,400
========== ==========
</TABLE>
F-10
<PAGE> 61
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY
The Company has authorized 5,000,000 shares of $.001 par value preferred
stock (Note 1), 2,667,002 shares of which have been designated as Series A, B or
C preferred stock. The Company has issued 750,000 shares of its Series A
redeemable convertible preferred stock in exchange for $482,400, 1,117,002
shares of its Series B redeemable convertible preferred stock in exchange for
$1,628,800, and 800,000 shares of its Series C redeemable convertible preferred
stock in exchange for $1,978,400. The preferred stock has preference in
liquidation and is redeemable at any time at the election of the stockholders,
in each case at $.6667 per share for Series A, $1.50 per share for Series B and
$2.50 per share for Series C. The preferred stock has voting rights and entitles
the holder to an 8% cumulative dividend upon liquidation or redemption. The
value of the preferred stock has been accreted to reflect the current redemption
or liquidation value, which includes cumulative dividends in arrears amounting
to $3,056,600 as of June 30, 1997. Cumulative dividends in arrears would be
payable upon liquidation or redemption and would not be payable upon conversion
of the preferred stock into common stock.
Each share of Series A, Series B and Series C redeemable convertible
preferred stock is convertible at the holder's option into shares of the
Company's common stock on a one-for-one basis. The conversion ratio would be
adjusted to allow the preferred stock to be converted into a greater number of
shares if certain future stock sales by the Company (as defined) are made or in
the event of common stock splits or common stock dividends. If the preferred
stock has not been redeemed or converted as of the effective date of a public
offering of the Company's common stock, it will be converted automatically to
common stock at such time on a one-for-one basis. In addition, the preferred
stock agreement restricts the Company from paying dividends on its common stock
prior to the payment of dividends on preferred stock, selling or purchasing its
common stock under certain conditions, and disposing of substantial amounts of
assets (as defined). Rights of holders of preferred stock will discontinue upon
conversion of the preferred stock into common stock.
During 1986, the Company adopted a stock purchase plan for key employees,
directors and consultants. The plan was later amended in 1992 (the "Amended
Plan") to include the granting of incentive stock options and nonqualified stock
options. The Amended Plan provides for the granting of options to purchase or
the right to purchase up to an aggregate of 1,250,000 shares of the Company's
common stock at the fair market value at the date of grant or not less than 85%
of the fair market value at the date of grant for nonqualified options and stock
purchases (110% of fair market value if sold to individuals holding 10% or more
of the voting power of the then outstanding shares). Shares sold or options
granted under the plan generally vest over a four-year period, starting with the
date of employment or the respective vesting date as determined by the Board of
Directors, and terminate no later than ten years from the date of grant. The
Amended Plan also provides that, upon termination of employment of a
stockholder, the Company may repurchase any sold but unvested restricted shares
at the original purchase price, plus 5% interest per year.
The Amended Plan was terminated in November 1996, on the tenth anniversary
of the Effective Date of such plan and no options or rights to purchase may be
granted under the plan, but option agreements, stock purchase agreements and
rights to purchase then outstanding shall continue in effect in accordance with
their respective terms.
On June 19, 1996, the Company adopted an incentive stock option,
nonqualified stock option and restricted stock purchase plan (the 1996 Plan) for
qualified employees, officers and directors (including nonemployee directors)
and consultants. The 1996 Plan provides for the granting of options to purchase
or the right to purchase up to an aggregate of 800,000 shares, as amended, of
the Company's common stock at the fair market value at the date of grant for an
incentive stock option or not less than 85% of the fair market value at the date
of grant for nonqualified options (110% of fair market value if an option is
granted to a 10% stockholder on the date of grant). The purchase price per share
of restricted stock covered by each right to purchase shall not be less than 85%
of the fair market value on the date the right to purchase is granted (100%
F-11
<PAGE> 62
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
of fair market value at the date of grant if the right to purchase is granted to
a 10% stockholder on the date of grant).
Stock purchase and option activity for each of the three years in the
period ended June 30, 1997 is as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES PROVIDED FOR PRICE RANGE PER SHARE
----------------------------------- -------------------------------------------
RESTRICTED NONQUALIFIED RESTRICTED NONQUALIFIED
STOCK OPTIONS OPTIONS STOCK OPTIONS OPTIONS
---------- ------- ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, July 1, 1994............. 539,544 141,250 -- $.10 - $ .60 $ .50 - $ .60
Granted............................ 89,600 .60 - 1.20
Shares sold or options exercised... 500 (8,125) 1.20 .50 - .60
Stock repurchased.................. (1,150) .30
Canceled........................... (29,975) .50 - 1.20
------- ------- ------
BALANCES, June 30, 1995............ 538,894 192,750 .10 - 1.20 .50 - 1.60
Granted............................ 142,975 13,000 2.50 - 5.00 5.00
Exercised.......................... (14,025) .50 - .60
Stock repurchased.................. (125) .30
Canceled........................... (16,950) .50 - 5.00
------- ------- ------
BALANCES, June 30, 1996............ 538,769 304,750 13,000 .10 - .30 .50 - 5.00 5.00
Granted............................ 123,400 5.00 - 5.00
Exercised.......................... (15,837) .50 - 5.00
Canceled........................... (40,500) .50 - 5.00
------- ------- ------
BALANCES, June 30, 1997............ 538,769 371,813 13,000 $.10 - .30 $ .50 - $5.00 $ 5.00
======= ======= ======
</TABLE>
At June 30, 1997, 483,300 shares of common stock were available for
issuance under the Company's stock option and purchase plan.
The following is a summary of the weighted average exercise prices for
activity during the years ended June 30, 1996 and 1997:
<TABLE>
<CAPTION>
NUMBER OF SHARES PROVIDED FOR WEIGHTED AVERAGE EXERCISE PRICE
----------------------------------- -----------------------------------
RESTRICTED NONQUALIFIED RESTRICTED NONQUALIFIED
STOCK OPTIONS OPTIONS STOCK OPTIONS OPTIONS
---------- ------- ------------ ---------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
OUTSTANDING, July 1, 1995.................. 538,894 192,750 -- $ 0.25 $0.73 $ --
Granted.................................... 142,975 13,000 $ 4.13
Exercised.................................. (14,025) $0.54
Canceled................................... (16,950) $1.98
Stock repurchased.......................... (125) $ 0.30
------- ------- ------
OUTSTANDING, June 30, 1996................. 538,769 304,750 13,000 $ 0.25 $2.27 $ 5.00
Granted.................................... 123,400 $5.00
Exercised.................................. (15,837) $0.80
Canceled................................... (40,500) $3.22
------- ------- ------
OUTSTANDING, June 30, 1997................. 538,769 371,813 13,000 $ 0.25 $3.13 $ 5.00
======= ======= ======
Exercisable as of June 30, 1997............ 131,942 4,875 $1.72 $ 5.00
======= ======
</TABLE>
F-12
<PAGE> 63
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Additional information regarding options outstanding as of June 30, 1997 is
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
WEIGHTED -------------------------
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF JUNE 30, CONTRACTUAL EXERCISE AS OF JUNE 30, EXERCISE
EXERCISE PRICES 1997 LIFE IN YEARS PRICE 1997 PRICE
- ----------------------------------------- -------------- ------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$.50 - .60............................... 110,113 1.39 $ 0.56 80,174 $ 0.55
1.20 - 1.60.............................. 26,100 2.59 $ 1.43 12,950 $ 1.43
2.50 - 3.50.............................. 45,400 3.05 $ 2.52 12,412 $ 2.54
5.00 - 5.00.............................. 190,200 4.12 $ 5.00 26,406 $ 5.00
------- -------
$.50 - 5.00.............................. 371,813 3.08 $ 3.13 131,942 $ 1.72
======= =======
</TABLE>
As discussed in Note 2, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with APB
Opinion No. 25, Accounting for Stock Issued to Employees, and its related
interpretations. No compensation expense has been recognized in the financial
statements for employee stock arrangements.
In July 1997, the Company issued additional options to purchase 13,000
shares of common stock at $5.00 per share. The Company expects to record
compensation expense over the vesting period for the difference between option
price and the estimated fair value of $8.25 relating to these options.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income and earnings per share had the Company
adopted the fair value method as of the beginning of fiscal 1996. Under SFAS No.
123, the fair value of stock-based awards to employees is calculated through the
use of option-pricing models, even though such models were developed to estimate
the fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future stock price
volatility and expected time to exercise, which greatly affect the calculated
values. The Company's calculations were made using the Black-Scholes
option-pricing model with the following weighted average assumptions: Expected
life, 48 months, no stock volatility in fiscal 1996 or in fiscal 1997; risk-free
interest rates, 5.63% in fiscal 1996 and 6.40% in fiscal 1997 and no dividends
during the expected term. The Company's calculations are based on a
single-option valuation approach and forfeitures are recognized as they occur,
if the computed fair values of the fiscal 1996 and 1997 awards had been
amortized to expense over the vesting period of the awards, net (loss) income
and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Pro forma net (loss) income......................... $(750,288) $2,091,393
Pro forma net (loss) income per share............... $ (0.83) $ 0.51
</TABLE>
The impact of outstanding nonvested stock options granted prior to 1996 has
been excluded from the pro forma calculation; accordingly, the fiscal 1996 and
fiscal 1997 pro forma adjustments are not indicative of future period pro forma
adjustments when the calculation will apply to all applicable stock options.
9. COMMITMENTS
The Company leases its production and office facilities under operating
leases, expiring on various dates through fiscal 2000. The leases require the
Company to pay certain building operating costs. Rent, which is recognized
ratably over the terms of the leases, and related building maintenance costs was
$505,700, $609,500 and $744,300 during fiscal 1995, 1996 and 1997, respectively.
Future minimum annual lease payments under facility and other operating leases
amount to $722,900, $476,800 and $147,100 for fiscal 1998, 1999 and 2000,
respectively.
F-13
<PAGE> 64
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has also entered into various licensing agreements which
require per unit fees or royalties between 3.5% and 5.0% of net sales of certain
products. The agreements are generally in effect over the life of the products.
Royalty expense for fiscal 1995, 1996 and 1997 was $26,800, $102,000 and
$390,400, respectively. Royalty fees of $33,000 and $116,600 were accrued for as
of June 30, 1996 and 1997.
The Company has agreements with various domestic distributors which are
cancelable at specified dates defined in the agreements. The agreements allow
for one or more of the following: certain price protection provisions, the right
to exchange inventories provided that subsequent purchases are made and/or the
right to return Company inventories for refunds of between 80% and 100% of the
actual net invoice price paid by the distributor upon termination of the
distribution agreement.
The Company offers a program to certain distributors to provide for
reimbursement of qualified cooperative marketing costs (as defined). Amounts
reimbursed under such programs were $245,400, $301,600 and $372,900 in fiscal
1995, 1996 and 1997, respectively.
10. EXPORT SALES AND SIGNIFICANT CUSTOMERS
The Company had export sales as a percentage of net sales for each of the
three years ended June 30, as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Europe........................................ 26% 26% 25%
Asia.......................................... 5 6 5
Other......................................... 5 4 4
--- --- ---
36% 36% 34%
=== === ===
</TABLE>
The Company had sales to certain distributors as a percentage of net sales
for the three years ended June 30, as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Law-Cypress Distributing Co. ................. 13% 16% 14%
Tech Data Corporation......................... 14% 13% 14%
Cranel Inc. .................................. -- -- 10%
</TABLE>
A decision by a significant customer to decrease the amount purchased from
the Company could have a material adverse effect on the Company's financial
condition and results of operations.
11. 401(K) SAVINGS PLAN
The Company has a 401(k) savings plan (the Plan). The Plan is a defined
contribution plan for all full-time employees (participants) of the Company who
have reached age 21 and have met the required service of 90 days. The Plan
permits a participant to contribute up to the lesser of 15% of the participant's
compensation for that calendar year or $9,500 for 1997. The Plan provides for
employer discretionary contributions determined by the Board of Directors on an
annual basis. Participant contributions are fully vested at all times. Employer
contributions vest at a rate of 20% per year after the second year of
participation. There were no employer contributions to the Plan during fiscal
1995 and 1996. Employer contributions of $67,500 were made to the Plan in fiscal
1997.
12. CONTINGENT LIABILITIES
The Company is involved from time to time in litigation or claims arising
in the ordinary course of its business. While the ultimate liability, if any,
arising from these claims cannot be predicted with certainty, the
F-14
<PAGE> 65
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Company believes that the resolution of these matters will not likely have a
material adverse effect on the Company's financial statements.
13. RECENT ACCOUNTING PRONOUNCEMENT
Effective December 27, 1997, the Company will adopt SFAS No. 128, "Earnings
per Share." At that time, the Company will be required to change the method
currently used to calculate earnings per share and to restate all prior periods.
Early adoption is not permitted. The new requirements will include a calculation
of basic earnings per share from which the dilutive effect of stock options will
be excluded. A calculation of diluted earnings per share will also be required.
A pro forma calculation of basic earnings per share and diluted earnings per
share for fiscal 1997 would have been $1.37 and $0.52 per share.
For the years beginning after July 1, 1998, the Company will adopt SFAS No.
130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The Company is reviewing the
impact of such statements on its financial statements.
14. SUBSEQUENT EVENTS
The Company's Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors on August 27, 1997 and approved by the
Company's stockholders on August 27, 1997, covering an aggregate of 150,000
shares of common stock. The Purchase Plan, which is intended to qualify as an
"employee stock purchase plan" under Section 423 of the Internal Revenue Code,
will be implemented by twelve-month offerings with purchases occurring at
three-month intervals commencing on the date of this Prospectus. For the initial
offering period, the offering period will commence on the effective date for the
Purchase Plan and conclude on December 31, 1998. The Purchase Plan will be
administered by the Stock Option Committee. Employees will be eligible to
participate if they are employed by the Company for at least 30 hours per week
and if they have been employed by the Company for at least one year. The
Purchase Plan permits eligible employees to purchase common stock through
payroll deductions, which may not exceed 15% of an employee's compensation. The
price of stock purchased under the Purchase Plan will be 85% of the lower of the
fair market value of the common stock at the beginning of the three-month
offering period or on the applicable purchase date. Employees may end their
participation in the offering at any time during the offering period, and
participation ends automatically on termination of employment. The Board of
Directors may at any time amend or terminate the Purchase Plan, except that no
such amendment or termination may adversely affect rights previously granted
under the Purchase Plan. The Purchase Plan will in all events terminate in
September 2007.
On August 27, 1997 the Company adopted its 1997 Stock Option Plan for
Non-Employee Directors (the "Director Plan"), covering an aggregate of 100,000
shares of common stock. Under the Director Plan, each non-employee director of
the Company who was a director of the Company on August 27, 1997, or who is
thereafter elected as a director during the term of the Director Plan, shall be
granted an option consisting of 10,000 shares of common stock, which option
shall vest and become exercisable at the rate of 25% per year over the four-year
period following the grant date. The exercise price of all options granted under
the Director Plan shall be 100% of the fair market value of the common stock on
the date of grant, and all such options shall have a term of 10 years. In
addition, upon the expiration of each such four-year period during such
non-employee director's term of office such non-employee director shall receive
an additional option covering 10,000 shares of common stock, with the same
vesting schedule, subject to the limitations set forth in the Director Plan.
F-15
<PAGE> 66
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SHARES OF COMMON STOCK TO WHICH THIS PROSPECTUS RELATES, OR AN
OFFER IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED,
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Summary Consolidated Financial Data.... 4
Risk Factors........................... 5
Use of Proceeds........................ 12
Dividend Policy........................ 12
Capitalization......................... 13
Dilution............................... 14
Selected Consolidated Financial Data... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 16
Business............................... 21
Management............................. 36
Certain Transactions................... 40
Principal and Selling Stockholders..... 41
Description of Capital Stock........... 43
Shares Eligible for Future Sale........ 44
Underwriting........................... 46
Legal Matters.......................... 47
Experts................................ 47
Additional Information................. 48
Index to Financial Statements.......... 49
</TABLE>
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
2,000,000 Shares
LOGO
Common Stock
------------------------
PROSPECTUS
------------------------
Needham & Company, Inc.
Unterberg Harris
------------------------
, 1997
======================================================
<PAGE> 67
APPENDIX
Inside front cover:
Product photos and screen shots of Ascent Software.
Gatefold:
Schematic diagram of scanning/capture/storage process
Inside back cover:
Product photos and screen shots of Andrenaline image
processing boards and ImageControls.
<PAGE> 68
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of the Common Stock being registered hereunder. All of the amounts
shown are estimates except for the SEC registration fee, the NASD filing fee and
the Nasdaq National Market application fee.
<TABLE>
<CAPTION>
TO BE PAID BY
THE COMPANY
--------------
<S> <C>
SEC registration fee............................................ $ 9,061
NASD filing fee................................................. 3,490
Nasdaq National Market application fee.......................... 30,736
Printing expenses............................................... 115,000
Legal fees and expenses......................................... 200,000
Accounting fees and expenses.................................... 130,000
Blue sky fees and expenses...................................... 10,000
Transfer agent and registrar fees............................... 4,000
Director and Officer liability insurance........................ 250,000
Miscellaneous................................................... 47,713
--------
Total................................................. $800,000
========
</TABLE>
- ---------------
* To be filed by amendment.
The Company will bear the expenses of the Selling Stockholders in
connection with the registration of their shares, other than the underwriting
discounts and commissions.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by the Delaware General Corporation Law, the Restated
Certificate of Incorporation of the Company (Exhibit 3.1 hereto) eliminates the
liability of directors to the Company or its stockholders for monetary damages
for breach of fiduciary duty as a directors, except to the extent otherwise
required by the Delaware General Corporation Law.
The Restated Certificate of Incorporation provides that the Company will
indemnify each person who was or is made a party to any proceeding by reason of
the fact that such person is or was a director or officer of the Company against
all expense, liability and loss reasonably incurred or suffered by such person
in connection therewith to the fullest extent authorized by the Delaware General
Corporation Law. The Company's Bylaws (Exhibit 3.3 hereto) provide for a similar
indemnity to directors and officers of the Company to the fullest extent
authorized by the Delaware General Corporation Law.
The Restated Certificate of Incorporation also gives the Company the
ability to enter into indemnification agreements with each of its directors and
officers. The Company has entered into indemnification agreement with each of
its directors and officers (Exhibit 10.8 hereto), which provide for the
indemnification of directors an officers of the Company against any an all
expenses, judgments, fines, penalties and amounts paid in settlement, to the
fullest extent permitted by law.
II-1
<PAGE> 69
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is a summary of transactions by the Company during the last
three years preceding the date hereof involving sales of the Company's
securities that were not registered under the Securities Act:
From time to time since July 1, 1994, the Registrant issued an aggregate of
410,625 incentive stock options, nonqualified stock options and rights to
purchase Common Stock pursuant to the Registrant's Amended and Restated
Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase
Plan and the 1996 Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan (collectively the "Plans") to officers, directors
and employees of the Registrant. During the period referred to above through
August 22, 1997, 40,987 options and rights to purchase granted pursuant to the
Plans were exercised for an aggregate exercise price of $35,250. Exemption from
the registration provisions of the Securities Act is claimed, with respect to
the grant of options referred to above, on the basis that the grant of options
did not involve a "sale" of securities and, therefore, registration thereof was
not required, and with respect to the exercise of options and rights to purchase
referred to above, on the basis that such transactions met the requirements of
Rule 701 as promulgated under Section 3(b) of the Securities Act.
In February 1996, Kofax Image Products, a California corporation ("Kofax
California"), merged with and into its wholly-owned subsidiary, Kofax Image
Products, Inc., a Delaware corporation ("Kofax Delaware"). In connection with
the merger, Kofax Delaware issued an aggregate of 1,307,069 shares of Common
Stock to the holders of common stock of Kofax California and an aggregate of
2,667,002 shares of preferred stock to the holders of preferred stock of Kofax
California, such that holders of Common Stock and preferred stock of Kofax
California received a proportionate interest in Kofax Delaware common stock and
preferred stock, respectively, without giving effect to the offering. The
issuances of securities will not be registered under the Securities Act due to
the exemption from registration thereunder provided by Section 3(a)(9) thereof.
II-2
<PAGE> 70
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation of the Company.(1)
3.2 Bylaws of the Company, as currently in effect.(1)
4.1 Specimen Certificate of Common Stock.(1)
5.1 Opinion of Stradling, Yocca, Carlson & Rauth, a Professional Corporation.
10.1 Amended and Restated Incentive Stock Option, Nonqualified Stock Option and
Restricted Stock Purchase Plan (the "1992 Plan"), as amended on September 11,
1992.(1)
10.2 Form of Incentive Option Agreement pertaining to the 1992 Plan.(1)
10.3 Form of Nonqualified Option Agreement pertaining to the 1992 Plan.(1)
10.4 Form of Restricted Stock Agreement pertaining to the 1992 Plan.(1)
10.5 1996 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock
Purchase Plan (the "1996 Plan").(1)
10.6 Form of Stock Option Agreement pertaining to the 1996 Plan.(1)
10.7 Intentionally omitted.
10.8 Kofax Image Products, Inc. 1997 Stock Option Plan for Non-Employee Directors (the
"Director Plan").(1)
10.9 Form of Stock Option Agreement pertaining to the Director Plan.(1)
10.10 Kofax Image Products, Inc. 1997 Employee Stock Purchase Plan.(1)
10.11 Form of Indemnification Agreement for Officers and Directors of the Company.(1)
10.12 Loan and Security Agreement, dated February 28, 1992, between the Company and
Silicon Valley Bank; Amendment to Loan Agreement, dated March 9, 1993; Amendment
to Loan and Security Agreement, dated October 10, 1994; Amendment to Loan and
Security Agreement, dated October 5, 1995; Amendment to Loan and Security
Agreement, dated January 26, 1996; and Amendment to Loan and Security Agreement,
dated October 31, 1996.(1)
10.13 First Restated Registration Rights Agreement, dated as of March 6, 1989, by and
among the Company and the Purchasers identified therein.(1)
10.14 Lease, dated March 31, 1988, between The Irvine Company, as Landlord, and the
Company, as Tenant, relating to the Company's Irvine, California offices; First
Amendment to Lease, dated March 7, 1990; Second Amendment to Lease, dated May 4,
1990; Third Amendment to Lease, dated August 22, 1991; Fourth Amendment to Lease,
dated March 15, 1994; and Fifth Amendment to Lease, dated September 25, 1996.(1)
10.15 Net Lease, dated February 24, 1989, between LaserData, Inc. and Vesper Properties
I Trust; Amendment 1, dated September 11, 1991; Amendment No. 2, dated August 31,
1994; and Amendment No. 3, dated July 24, 1997.(1)
10.16 Asset Purchase Agreement, dated December 30, 1995, between the Company and
LaserData, Inc.(1)
10.17 Distributor Agreement, dated August 16, 1990, between the Company and Law-Cypress
Distributing.(1)
10.18 Distributor Agreement, dated March 1, 1993, between the Company and Tech Data
Corporation; Modification Agreement, dated September 24, 1996; Letter Amendment,
dated October 16, 1996; Addendum, dated October 23, 1996.(1)
</TABLE>
II-3
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- ----------------------------------------------------------------------------------
<C> <S>
10.19 Distributor Agreement, dated July 25, 1990, between the Company and Cranel Inc.(1)
10.20 License Agreement, dated September 10, 1996, between the Company and CAERE
Corporation.(1)
10.21 Software License Agreement, dated October 1, 1993, between the Company and
Softbridge Inc.(1)
10.22 Software License Agreement, dated June 1, 1993, between the Company and Pixel
Translations, Inc.; Modification to Software License Agreement, dated July 1,
1995; and Modification to Software License Agreement, dated June 1, 1996.(1)
10.23 Services Contract, dated September 25, 1995, between the Company and Midcontinent
Business Systems, Inc.(1)
10.24 License Contract, dated July 1, 1996, between the Company and Midcontinent
Business Systems, Inc.(1)
10.25 NEST SDK Developer Product Distribution License Exhibit, dated July 31, 1996,
between the Company and Novell, Inc.(1)
10.26 Temporary Distribution License, dated October 17, 1996, between the Company and
Novell, Inc.(1)
11.1 Computation of pro forma net income (loss) per share.(1)
23.1 Consent of Stradling, Yocca, Carlson & Rauth (see Exhibit 5.1).
23.2 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney (see page II-6).(1)
27.1 Financial Data Schedule.(1)
</TABLE>
- ---------------
(1) Previously filed.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore have
been omitted.
ITEM 17. UNDERTAKINGS
The Company hereby undertakes to provide to the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Company of expenses
incurred or paid by a director, officer or controlling person of the Company in
the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Company will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
II-4
<PAGE> 72
The Company hereby undertakes that:
For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of a
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 73
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Irvine,
State of California, on the 30th day of September, 1997.
KOFAX IMAGE PRODUCTS, INC.
By: /s/ DAVID S. SILVER
------------------------------------
David S. Silver
President and Chief Executive
Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- -------------------------- -------------------
<S> <C> <C>
/s/ DAVID S. SILVER Chairman of the Board, September 30, 1997
- --------------------------------------------- President, Chief Executive
David S. Silver Officer and Director
(Principal Executive
Officer)
/s/ RONALD J. FIKERT* Vice President Finance, September 30, 1997
- --------------------------------------------- Chief Financial Officer
Ronald J. Fikert and Secretary (Principal
Financial and Principal
Accounting Officer)
/s/ DEAN A. HOUGH* Vice President, September 30, 1997
- --------------------------------------------- Engineering and Director
Dean A. Hough
/s/ ALEXANDER CILENTO* Director September 30, 1997
- ---------------------------------------------
Alexander Cilento
/s/ WILLIAM E. DROBISH* Director September 30, 1997
- ---------------------------------------------
William E. Drobish
/s/ CLIFFORD L. HAAS* Director September 30, 1997
- ---------------------------------------------
Clifford L. Haas
/s/ B. ALLEN LAY* Director September 30, 1997
- ---------------------------------------------
B. Allen Lay
/s/ DAVID C. SEIGLE* Director September 30, 1997
- ---------------------------------------------
David C. Seigle
</TABLE>
*By:/s/ DAVID S. SILVER
- ------------------------------------
David S. Silver,
as Attorney-In-Fact
II-6
<PAGE> 74
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING COSTS AND BALANCE AT
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS END OF YEAR
- --------------------------------------------------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Year ended June 30, 1995:
Allowance for doubtful accounts and sales
returns....................................... $ 191,500 172,300 (800) $ 363,000
Obsolete inventory reserve....................... $ 231,300 165,600 (238,500) $ 158,400
Year ended June 30, 1996:
Allowance for doubtful accounts and sales
returns....................................... $ 363,000 140,300 (121,800) $ 381,500
Obsolete inventory reserve....................... $ 158,400 184,100 (169,000) $ 173,500
Year ended June 30, 1997:
Allowance for doubtful accounts and sales
returns....................................... $ 381,500 155,800 (114,400) $ 422,900
Obsolete inventory reserve....................... $ 173,500 376,500 (186,800) $ 363,200
</TABLE>
<PAGE> 75
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement..........................................
3.1 Restated Certificate of Incorporation of the Company(1).................
3.2 Bylaws of the Company, as currently in effect(1)........................
4.1 Specimen Certificate of Common Stock(1).................................
5.1 Opinion of Stradling, Yocca, Carlson & Rauth, a Professional
Corporation.............................................................
10.1 Amended and Restated Incentive Stock Option, Nonqualified Stock Option
and Restricted Stock Purchase Plan (the "1992 Plan"), as amended on
September 11, 1992(1)...................................................
10.2 Form of Incentive Option Agreement pertaining to the 1992 Plan(1).......
10.3 Form of Nonqualified Option Agreement pertaining to the 1992 Plan(1)....
10.4 Form of Restricted Stock Agreement pertaining to the 1992 Plan(1).......
10.5 1996 Incentive Stock Option, Nonqualified Stock Option and Restricted
Stock Purchase Plan (the "1996 Plan")(1)................................
10.6 Form of Stock Option Agreement pertaining to the 1996 Plan(1)...........
10.7 Intentionally omitted...................................................
10.8 Kofax Image Products, Inc. 1997 Stock Option Plan for Non-Employee
Directors (the "Director Plan")(1)......................................
10.9 Form of Stock Option Agreement pertaining to the Director Plan(1).......
10.10 Kofax Image Products, Inc. 1997 Employee Stock Purchase Plan(1).........
10.11 Form of Indemnification Agreement for Officers and Directors of the
Company(1)..............................................................
10.12 Loan and Security Agreement, dated February 28, 1992, between the
Company and Silicon Valley Bank; Amendment to Loan Agreement, dated
March 9, 1993; Amendment to Loan and Security Agreement, dated October
10, 1994; Amendment to Loan and Security Agreement, dated October 5,
1995; Amendment to Loan and Security Agreement, dated January 26, 1996;
and Amendment to Loan and Security Agreement, dated October 31,
1996(1).................................................................
10.13 First Restated Registration Rights Agreement, dated as of March 6, 1989,
by and among the Company and the Purchasers identified therein(1).......
10.14 Lease, dated March 31, 1988, between The Irvine Company, as Landlord,
and the Company, as Tenant, relating to the Company's Irvine, California
offices; First Amendment to Lease, dated March 7, 1990; Second Amendment
to Lease, dated May 4, 1990; Third Amendment to Lease, dated August 22,
1991; Fourth Amendment to Lease, dated March 15, 1994; and Fifth
Amendment to Lease, dated September 25, 1996(1).........................
10.15 Net Lease, dated February 24, 1989, between LaserData, Inc. and Vesper
Properties I Trust; Amendment 1, dated September 11, 1991; Amendment No.
2, dated August 31, 1994; and Amendment No. 3, dated July 24, 1997(1)...
10.16 Asset Purchase Agreement, dated December 30, 1995, between the Company
and LaserData, Inc.(1)..................................................
10.17 Distributor Agreement, dated August 16, 1990, between the Company and
Law-Cypress Distributing(1).............................................
</TABLE>
<PAGE> 76
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
10.18 Distributor Agreement, dated March 1, 1993, between the Company and Tech
Data Corporation; Modification Agreement, dated September 24, 1996;
Letter Amendment, dated October 16, 1996; Addendum, dated October 23,
1996(1).................................................................
10.19 Distributor Agreement, dated July 25, 1990, between the Company and
Cranel Inc.(1)..........................................................
10.20 License Agreement, dated September 10, 1996, between the Company and
CAERE Corporation(1)....................................................
10.21 Software License Agreement, dated October 1, 1993, between the Company
and Softbridge Inc.(1)..................................................
10.22 Software License Agreement, dated June 1, 1993, between the Company and
Pixel Translations, Inc.; Modification to Software License Agreement,
dated July 1, 1995; and Modification to Software License Agreement,
dated June 1, 1996(1)...................................................
10.23 Services Contract, dated September 25, 1995, between the Company and
Midcontinent Business Systems, Inc.(1)..................................
10.24 License Contract, dated July 1, 1996, between the Company and
Midcontinent Business Systems, Inc.(1)..................................
10.25 NEST SDK Developer Product Distribution License Exhibit, dated July 31,
1996, between the Company and Novell, Inc.(1)...........................
10.26 Temporary Distribution License, dated October 17, 1996, between the
Company and Novell, Inc.(1).............................................
11.1 Computation of pro forma net income (loss) per share(1).................
23.1 Consent of Stradling, Yocca, Carlson & Rauth (see Exhibit 5.1)..........
23.2 Consent of Deloitte & Touche LLP........................................
24.1 Power of Attorney (see page II-6)(1)....................................
27.1 Financial Data Schedule(1)..............................................
</TABLE>
- ---------------
(1) Previously filed.
<PAGE> 1
DRAFT
9/29/97
EXHIBIT 1.1
2,000,000 SHARES*
KOFAX IMAGE PRODUCTS, INC.
COMMON STOCK
UNDERWRITING AGREEMENT
_______________, 1997
NEEDHAM & COMPANY, INC.
UNTERBERG HARRIS
As Representatives of the several Underwriters
c/o Needham & Company, Inc.
445 Park Avenue
New York, New York 10022
Ladies and Gentlemen:
Kofax Image Products, Inc., a Delaware corporation (the "COMPANY"),
proposes to issue and sell 1,300,000 shares (the "COMPANY FIRM SHARES") of the
Company's Common Stock, $0.001 par value per share (the "COMMON STOCK"), and
certain of the stockholders of the Company named in Schedule II hereto (the
"SELLING STOCKHOLDERS") propose to sell an aggregate of 700,000 shares (the
"SELLING STOCKHOLDER FIRM SHARES") of Common Stock, in each case to you and to
the several other Underwriters named in Schedule I hereto (collectively, the
"UNDERWRITERS"), for whom you are acting as representatives (the
"REPRESENTATIVES"). Certain of the Selling Stockholders named in Schedule II
hereto have also agreed to grant to you and the other Underwriters an option
(the "OPTION") to purchase up to an additional 300,000 shares of Common Stock,
on the terms and for the purposes set forth in Section 1(b) (the "OPTION
SHARES"). The Company Firm Shares and the Selling Stockholder Firm Shares are
referred to collectively herein as the "FIRM SHARES," and the Firm Shares and
the Option Shares are referred to collectively herein as the "SHARES."
The Company and each of the Selling Stockholders confirm as follows
their respective agreements with the Representatives and the several other
Underwriters.
1. AGREEMENT TO SELL AND PURCHASE.
(a) On the basis of the representations, warranties and agreements
of the Company and the Selling Stockholders herein contained and subject to all
the terms and conditions of this Agreement,
__________________________________
* Plus an option to purchase up to an additional 300,000 shares to cover
over-allotments.
<PAGE> 2
(i) the Company agrees to issue and sell the Company Firm Shares to the several
Underwriters, (ii) each Selling Stockholder, severally and not jointly, agrees
to sell to the several Underwriters the respective number of Selling
Stockholder Firm Shares set forth opposite that Selling Stockholders' name on
Schedule II hereto and (iii) each of the Underwriters, severally and not
jointly, agrees to purchase from the Company and the Selling Stockholders the
respective number of Firm Shares set forth opposite that Underwriter's name in
Schedule I hereto, at the purchase price of $____ for each Firm Share. The
number of Firm Shares to be purchased by each Underwriter from the Company and
each Selling Stockholder shall be as nearly as practicable in the same
proportion to the total number of Firm Shares being sold by the Company and
each Selling Stockholder as the number of Firm Shares being purchased by each
Underwriter bears to the total number of Firm Shares to be sold hereunder.
(b) Subject to all the terms and conditions of this Agreement,
certain of the Selling Stockholders grant the Option to the several
Underwriters to purchase, severally and not jointly, up to the maximum number
of Option Shares set forth opposite the names of such Selling Stockholders in
Schedule II hereto at the same price per share as the Underwriters shall pay
for the Firm Shares. The Option may be exercised only to cover over-allotments
in the sale of the Firm Shares by the Underwriters and may be exercised in
whole or in part at any time (but not more than once) on or before the 30th day
after the date of this Agreement upon written notice (the "OPTION SHARES
NOTICE") by the Representatives to the Company and the Selling Stockholders no
later than 12:00 noon, New York City time, at least two and no more than five
business days before the date specified for closing in the Option Shares Notice
(the "OPTION CLOSING DATE"), setting forth the aggregate number of Option
Shares to be purchased and the time and date for such purchase. On the Option
Closing Date, the Selling Stockholders will sell to the Underwriters the number
of Option Shares set forth in the Option Shares Notice, and each Underwriter
will purchase such percentage of the Option Shares as is equal to the
percentage of Firm Shares that such Underwriter is purchasing, as adjusted by
the Representatives in such manner as they deem advisable to avoid fractional
shares.
2. DELIVERY AND PAYMENT. Delivery of the Firm Shares shall be
made to the Representatives for the accounts of the Underwriters against
payment of the purchase price by certified or official bank checks or by wire
transfers payable in same-day funds to the order of the Company for the Company
Firm Shares to be sold by it and to U.S. Stock Transfer Corporation, as
custodian for the Selling Stockholders (the "CUSTODIAN") for the Firm Shares to
be sold by the Selling Stockholders, at the office of Needham & Company, Inc.,
445 Park Avenue, New York, New York 10022, at 10:00 a.m., New York City time,
on the third (or, if the purchase price set forth in Section 1(b) hereof is
determined after 4:30 p.m., Washington D.C. time, the fourth) business day
following the commencement of the offering contemplated by this Agreement, or
at such time on such other date, not later than seven business days after the
date of this Agreement, as may be agreed upon by the Company and the
Representatives (such date is hereinafter referred to as the "CLOSING DATE").
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and
shall be registered in such names and in such denominations as the
Representatives shall request at least two business days prior to the Closing
Date or the Option Closing Date, as the case may be, by written notice to the
Company.
2
<PAGE> 3
For the purpose of expediting the checking and packaging of certificates for
the Shares, the Company agrees to make such certificates available for
inspection at least 24 hours prior to the Closing Date or the Option Closing
Date, as the case may be.
The cost of original issue tax stamps, if any, in connection with the
issuance and delivery of the Firm Shares and Option Shares by the Company to
the respective Underwriters shall be borne by the Company. The Company will pay
and save each Underwriter and any subsequent holder of the Shares harmless from
any and all liabilities with respect to or resulting from any failure or delay
in paying Federal and state stamp and other transfer taxes, if any, which may
be payable or determined to be payable in connection with the original issuance
or sale to such Underwriter of the Shares.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents, warrants and covenants to each Underwriter that:
(a) A registration statement (Registration No. 333-34531) on Form
S-1 relating to the Shares, including a preliminary prospectus and such
amendments to such registration statement as may have been required to the date
of this Agreement, has been prepared by the Company under the provisions of the
Securities Act of 1933, as amended (the "ACT"), and the rules and regulations
(collectively referred to as the "RULES AND REGULATIONS") of the Securities and
Exchange Commission (the "COMMISSION") thereunder, and has been filed with the
Commission. The term "PRELIMINARY PROSPECTUS" as used herein means a
preliminary prospectus as contemplated by Rule 430 or Rule 430A of the Rules
and Regulations included at any time as part of the registration statement.
Copies of such registration statement and amendments and of each related
preliminary prospectus have been delivered to the Representatives. If such
registration statement has not become effective, a further amendment to such
registration statement, including a form of final prospectus, necessary to
permit such registration statement to become effective will be filed promptly
by the Company with the Commission. If such registration statement has become
effective, a final prospectus containing information permitted to be omitted at
the time of effectiveness by Rule 430A of the Rules and Regulations will be
filed promptly by the Company with the Commission in accordance with Rule
424(b) of the Rules and Regulations. The term "REGISTRATION STATEMENT" means
the registration statement as amended at the time it becomes or became
effective (the "EFFECTIVE DATE"), including financial statements and all
exhibits and any information deemed to be included by Rule 430A and includes
any registration statement relating to the offering contemplated by this
Agreement and filed pursuant to Rule 462(b) of the Rules and Regulations. The
term "PROSPECTUS" means the prospectus as first filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is
required, the form of final prospectus included in the Registration Statement
at the Effective Date.
(b) No order preventing or suspending the use of any preliminary
prospectus has been issued by the Commission. On the Effective Date, the date
the Prospectus is first filed with the Commission pursuant to Rule 424(b) (if
required), at all times subsequent to and including the Closing Date and, if
later, the Option Closing Date and when any post-effective amendment to the
Registration Statement becomes effective or any amendment or supplement to the
Prospectus is filed with the Commission, the Registration Statement and the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment or supplement thereto), including the financial
statements included in the Prospectus, did and will comply with all applicable
provisions of the Act and the Rules and Regulations and will contain all
statements required to be stated therein in
3
<PAGE> 4
accordance with the Act and the Rules and Regulations. On the Effective Date
and when any post-effective amendment to the Registration Statement becomes
effective, no part of the Registration Statement, the Prospectus or any such
amendment or supplement did or will contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading. At the
Effective Date, the date the Prospectus or any amendment or supplement to the
Prospectus is filed with the Commission and at the Closing Date and, if later,
the Option Closing Date, the Prospectus did not and will not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing representations and warranties in this
Section 3(b) do not apply to any statements or omissions made in reliance on
and in conformity with information relating to any Underwriter furnished in
writing to the Company by the Representatives specifically for inclusion in the
Registration Statement or Prospectus or any amendment or supplement thereto.
The Company acknowledges that the statements set forth under the heading
"Underwriting" in the Prospectus constitute the only information relating to
any Underwriter furnished in writing to the Company by the Representatives
specifically for inclusion in the Registration Statement.
(c) The Company does not own, and at the Closing Date and, if
later, the Option Closing Date, will not own, directly or indirectly, any
shares of stock or any other equity or long-term debt securities of any
corporation or have any equity interest in any corporation, firm, partnership,
joint venture, association or other entity, other than Kofax Foreign Sales
Corp., a wholly-owned subsidiary of the Company organized under the laws of the
Virgin Islands (the "SUBSIDIARY"). Each of the Company and the Subsidiary is,
and at the Closing Date and, if later, the Option Closing Date, will be, a
corporation duly organized, validly existing and in good standing under the
laws of its jurisdiction of incorporation. Each of the Company and the
Subsidiary has, and at the Closing Date and, if later, the Option Closing Date,
will have, full power and authority to conduct all the activities conducted by
it, to own or lease all the assets owned or leased by it and to conduct its
business as described in the Registration Statement and the Prospectus. Each of
the Company and the Subsidiary is, and at the Closing Date and, if later, the
Option Closing Date, will be, duly licensed or qualified to do business and in
good standing as a foreign corporation in all jurisdictions in which the nature
of the activities conducted by it or the character of the assets owned or
leased by it makes such license or qualification necessary, except to the
extent that the failure to be so qualified or be in good standing would not
materially and adversely affect the Company or its business, properties,
business prospects, condition (financial or other) or results of operations.
All of the outstanding shares of capital stock of the Subsidiary have been duly
authorized and validly issued and are fully paid and nonassessable, and owned
by the Company free and clear of all claims, liens, charges and encumbrances;
there are no securities outstanding that are convertible into or exercisable or
exchangeable for capital stock of the Subsidiary. The Company is not, and at
the Closing Date and, if later, the Option Closing Date, will not be, engaged
in any discussions or a party to any agreement or understanding, written or
oral, regarding the acquisition of an interest in any corporation, firm,
partnership, joint venture, association or other entity where such discussions,
agreements or understandings would require amendment to the Registration
Statement pursuant to applicable securities laws. Complete and correct copies
of the certificate of incorporation and by-laws of the Company and of the
memorandum of association and articles of association of the Subsidiary and all
amendments thereto have been delivered to the Representatives, and no changes
therein will be made subsequent to the date hereof and prior to the Closing
Date or, if later, the Option Closing Date.
4
<PAGE> 5
(d) All of the outstanding shares of capital stock of the Company
(including the Selling Stockholder Firm Shares and the Option Shares) have been
duly authorized, validly issued and are fully paid and nonassessable and were
issued in compliance with all applicable state and federal securities laws; the
Company Firm Shares have been duly authorized and when issued and paid for as
contemplated herein will be validly issued, fully paid and nonassessable; no
preemptive or other similar rights exist with respect to any of the Shares or
the issue and sale thereof. The description of the capital stock of the Company
in the Registration Statement and the Prospectus is, and at the Closing Date
and, if later, the Option Closing Date, will be, complete and accurate in all
material respects. Except as set forth in the Prospectus, the Company does not
have outstanding, and at the Closing Date and, if later, the Option Closing
Date, will not have outstanding, any options to purchase, or any rights or
warrants to subscribe for, or any securities or obligations convertible into,
or any contracts or commitments to issue or sell, any shares of capital stock,
or any such warrants, convertible securities or obligations. No further
approval or authority of stockholders or the Board of Directors of the Company
will be required for the transfer and sale of the Selling Stockholder Firm
Shares or the Option Shares or the issuance and sale of the Company Firm Shares
as contemplated herein.
(e) The financial statements and schedules included in the
Registration Statement or the Prospectus present fairly the financial condition
of the Company and its consolidated Subsidiary as of the respective dates
thereof and the results of operations and cash flows of the Company and its
consolidated Subsidiary for the respective periods covered thereby, all in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the entire period involved, except as otherwise
disclosed in the Prospectus. No other financial statements or schedules of the
Company are required by the Act to be included in the Registration Statement or
the Prospectus. Deloitte & Touche LLP (the "ACCOUNTANTS"), who have reported
on such financial statements and schedules, are independent accountants with
respect to the Company as required by the Act and the Rules and Regulations.
The summary consolidated financial and statistical data included in the
Registration Statement present fairly the information shown therein and have
been compiled on a basis consistent with the financial statements presented
therein.
(f) Subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus and prior to the Closing
Date and, if later, the Option Closing Date, except as set forth in or
contemplated by the Registration Statement and the Prospectus, (i) there has
not been and will not have been any change in the capitalization of the Company
(other than in connection with the exercise of options to purchase the
Company's Common Stock granted pursuant to the Company's stock option plans
from the shares reserved therefor as described in the Registration Statement),
or any material adverse change in the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company and
the Subsidiary, taken as a whole, arising for any reason whatsoever, (ii)
neither the Company nor the Subsidiary has incurred nor will either of them
incur, except in the ordinary course of business as described in the
Prospectus, any material liabilities or obligations, direct or contingent, nor
has the Company or the Subsidiary entered into nor will either of them enter
into, except in the ordinary course of business as described in the Prospectus,
any material transactions other than pursuant to this Agreement and the
transactions referred to herein and (iii) the Company has not and will not have
paid or declared any dividends or other distributions of any kind on any class
of its capital stock.
(g) The Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its business
in a manner that would cause it to become, an
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<PAGE> 6
"INVESTMENT COMPANY" or an "AFFILIATED PERSON" of, or "PROMOTER" or "PRINCIPAL
UNDERWRITER" for, an "INVESTMENT COMPANY," as such terms are defined in the
Investment Company Act of 1940, as amended.
(h) Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company or the
Subsidiary or any of their officers in their capacity as such, nor any basis
therefor, before or by any Federal or state court, commission, regulatory body,
administrative agency or other governmental body, domestic or foreign, wherein
an unfavorable ruling, decision or finding might materially and adversely
affect the Company and the Subsidiary, taken as a whole, or the business,
properties, business prospects, condition (financial or otherwise) or results
of operations of the Company and the Subsidiary, taken as a whole.
(i) Each of the Company and the Subsidiary has, and at the Closing
Date and, if later, the Option Closing Date, will have, performed all the
obligations required to be performed by it, and is not, and at the Closing
Date, and, if later, the Option Closing Date, will not be, in default, under
any contract or other instrument to which it is a party or by which its
property is bound or affected, which default might reasonably be expected to
materially and adversely affect the Company or the business, properties,
business prospects, condition (financial or other) or results of operations of
the Company and the Subsidiary, taken as a whole. To the best knowledge of the
Company, no other party under any contract or other instrument to which it or
the Subsidiary is a party is in default in any respect thereunder, which
default might reasonably be expected to materially and adversely affect the
Company and the Subsidiary, taken as a whole, or the business, properties,
business prospects, condition (financial or other) or results of operations of
the Company and the Subsidiary, taken as a whole. Neither the Company nor the
Subsidiary is, and at the Closing Date and, if later, the Option Closing Date,
will be, in violation of any provision of its certificate of incorporation or
by-laws or other organizational documents, as applicable.
(j) No consent, approval, authorization or order of, or any filing
or declaration with, any court or governmental agency or body is required for
the consummation by the Company of the transactions on its part contemplated
herein, except such as have been obtained under the Act or the Rules and
Regulations and such as may be required under state securities or Blue Sky laws
or the by-laws and rules of the National Association of Securities Dealers,
Inc. (the "NASD") in connection with the purchase and distribution by the
Underwriters of the Shares.
(k) The Company has full corporate power and authority to enter
into this Agreement. This Agreement has been duly authorized, executed and
delivered by the Company and constitutes a valid and binding agreement of the
Company, enforceable against the Company in accordance with the terms hereof.
The performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in the creation or imposition of any lien,
charge or encumbrance upon any of the assets of the Company pursuant to the
terms or provisions of, or result in a breach or violation of any of the terms
or provisions of, or constitute a default under, or give any party a right to
terminate any of its obligations under, or result in the acceleration of any
obligation under, the certificate or articles of incorporation or by-laws of
the Company or the Subsidiary, any indenture, mortgage, deed of trust, voting
trust agreement, loan agreement, bond, debenture, note agreement or other
evidence of indebtedness, lease, contract or other agreement or instrument to
which the Company or the Subsidiary is a party or by which the Company, the
Subsidiary or any of the properties of either
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<PAGE> 7
of them is bound or affected, or violate or conflict with any judgment, ruling,
decree, order, statute, rule or regulation of any court or other governmental
agency or body applicable to the business or properties of the Company or the
Subsidiary, except to the extent that any such imposition, breach, violation or
right of acceleration would not have a material adverse effect on the Company
and the Subsidiary, taken as a whole.
(l) Each of the Company and the Subsidiary has good and marketable
title to all properties and assets described in the Prospectus as owned by
them, free and clear of all liens, charges, encumbrances or restrictions,
except such as are described in the Prospectus or are not material to the
business of the Company and the Subsidiary, taken as a whole. Each of the
Company and the Subsidiary has valid, subsisting and enforceable leases for the
properties described in the Prospectus as leased by it. Each of the Company and
the Subsidiary owns or leases all such properties as are necessary to its
operations as now conducted or as proposed to be conducted, except where the
failure to so own or lease would not materially and adversely affect the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company and the Subsidiary, taken as a whole.
(m) There is no document or contract of a character required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement which is not described or filed as
required. All such contracts to which the Company or the Subsidiary is a party
have been duly authorized, executed and delivered by the Company or the
Subsidiary, constitute valid and binding agreements of the Company or the
Subsidiary and are enforceable against and by the Company or the Subsidiary in
accordance with the terms thereof.
(n) No statement, representation, warranty or covenant made by the
Company in this Agreement or made in any certificate or document required by
Section 6 of this Agreement to be delivered to the Representatives was or will
be, when made, inaccurate, untrue or incorrect.
(o) Neither the Company nor, to the best of the Company's
knowledge after reasonable inquiry, any of its directors, officers or
controlling persons has taken, directly or indirectly, any action designed, or
which might reasonably be expected, to cause or result, under the Act or
otherwise, in, or which has constituted, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Shares.
(p) No holder of securities of the Company has rights to the
registration of any securities of the Company because of the filing of the
Registration Statement, which rights have not been waived by the holder thereof
as of the date hereof.
(q) The Company has filed a registration statement pursuant to
Section 12(g) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE
ACT"), to register the Common Stock and has filed an application to list the
Shares on the Nasdaq National Market ("NNM"). The Company has received
notification that the listing of the Company Firm Shares on the NNM has been
approved, subject to notice of issuance of such Shares and that the Selling
Stockholder Shares and the Option Shares are listed on the NNM.
(r) Except as disclosed in or specifically contemplated by the
Prospectus (i) each of the Company and the Subsidiary has sufficient
trademarks, trade names, patent rights, copyrights, licenses, approvals and
governmental authorizations to conduct its business as now conducted, (ii) the
Company
7
<PAGE> 8
has no knowledge of any infringement by it or the Subsidiary of trademarks,
trade name rights, patent rights, copyrights, licenses, trade secrets or other
similar rights of others, where such infringement could have a material adverse
effect on the Company and the Subsidiary, taken as a whole, or the business,
properties, business prospects, condition (financial or otherwise) or results
of operations of the Company and the Subsidiary, taken as a whole, and (iii)
there is no claim pending or threatened against the Company or the Subsidiary,
or to the best of the Company's knowledge, any employee of the Company or the
Subsidiary, regarding trademark, trade name, patent, copyright, license, trade
secret or other infringement which could have a material and adverse effect on
the Company and the Subsidiary, taken as a whole, or the business, properties,
business prospects, condition (financial or otherwise) or results of operations
of the Company and the Subsidiary, taken as a whole.
(s) Each of the Company and the Subsidiary has filed all federal,
state, local and foreign income tax returns which have been required to be
filed and has paid all taxes and assessments received by it to the extent that
such taxes or assessments have become due. Neither the Company nor the
Subsidiary has any tax deficiency which has been or, to the best knowledge of
the Company, might be asserted or threatened against it which could have a
material and adverse effect on the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company and
the Subsidiary, taken as a whole.
(t) The pro forma financial information set forth in the
Registration Statement reflects, subject to the limitations set forth in the
Registration Statement as to such pro forma financial information, the results
of operations of the Company and its consolidated Subsidiary purported to be
shown thereby for the periods indicated and conforms to the requirements of
Regulation S-X of the Rules and Regulations, and management of the Company
believes (i) the assumptions underlying the pro forma adjustments are
reasonable, (ii) that such adjustments have been properly applied to the
historical amounts in the compilation of such statements, and (iii) that such
statements present fairly, with respect to the Company and its consolidated
Subsidiary, the pro forma financial position and results of operations and the
other information purported to be shown therein at the respective dates or for
the respective periods therein specified.
(u) Each of the Company and the Subsidiary owns or possesses all
authorizations, approvals, orders, licenses, registrations, other certificates
and permits of and from all governmental regulatory officials and bodies,
necessary to conduct its business, as contemplated in the Prospectus, except
where the failure to own or possess all such authorizations, approvals, orders,
licenses, registrations, other certificates and permits would not materially
and adversely affect the Company and the Subsidiary, taken as a whole, or the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company and the Subsidiary, taken as a whole.
There is no proceeding pending or threatened (or any basis therefor known to
the Company) which may cause any such authorization, approval, order, license,
registration, certificate or permit to be revoked, withdrawn, canceled,
suspended or not renewed; and each of the Company and the Subsidiary is
conducting its business in compliance with all laws, rules and regulations
applicable thereto (including, without limitation, all applicable federal,
state and local environmental laws and regulations) except where such
noncompliance would not materially and adversely affect the Company and the
Subsidiary, taken as a whole, or the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company and
the Subsidiary, taken as a whole.
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<PAGE> 9
(v) Each of the Company and the Subsidiary maintains insurance of
the types and in the amounts generally deemed adequate for its business,
including, but not limited to, insurance covering real and personal property
owned or leased by the Company and the Subsidiary against theft, damage,
destruction, acts of vandalism and all other risks customarily insured against,
all of which insurance is in full force and effect.
(w) Neither the Company nor the Subsidiary has nor, to the best of
the Company's knowledge, any of its or their respective employees or agents at
any time during the last five years (i) made any unlawful contribution to any
candidate for foreign office, or failed to disclose fully any contribution in
violation of law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or
quasi-public duties, other than payments required or permitted by the laws of
the United States or any jurisdiction thereof.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLING
STOCKHOLDERS. Each Selling Stockholder, severally and not jointly, represents,
warrants and covenants to each Underwriter that:
(a) All consents, approvals, authorizations and orders necessary
for the execution and delivery by such Selling Stockholder of this Agreement
and the Power-of-Attorney and Custody Agreement (hereinafter referred to as a
"STOCKHOLDERS' AGREEMENT") hereinafter referred to, and for the sale and
delivery of the Selling Stockholder Firm Shares, and, if applicable, the Option
Shares to be sold by such Selling Stockholder hereunder, have been obtained;
and such Selling Stockholder has full right, power and authority to enter into
this Agreement and the Stockholders' Agreement, to make the representations,
warranties and agreements hereunder and thereunder, and to sell, assign,
transfer and deliver the Shares to be sold by such Selling Stockholder
hereunder.
(b) Certificates in negotiable form representing all of the
Selling Stockholder Firm Shares to be sold by such Selling Stockholder have
been placed in custody under the Stockholders' Agreement, in the form
heretofore furnished to you, duly executed and delivered by such Selling
Stockholder to the Custodian, and such Selling Stockholder has duly executed
and delivered a power-of-attorney, in the form heretofore furnished to you and
included in the Stockholders' Agreement (the "POWER-OF-ATTORNEY"), appointing
David S. Silver and Ronald J. Fikert, and each of them, as such Selling
Stockholder's attorney-in-fact (the "ATTORNEYS-IN-FACT") with authority to
execute and deliver this Agreement on behalf of such Selling Stockholder, to
determine (subject to the provisions of the Stockholders' Agreement) the
purchase price to be paid by the Underwriters to the Selling Stockholders as
provided in Section 2 hereof, to authorize the delivery of the Selling
Stockholder Firm Shares to be sold by such Selling Stockholder hereunder and
otherwise to act on behalf of such Selling Stockholder in connection with the
transactions contemplated by this Agreement and the Stockholders' Agreement.
(c) Such Selling Stockholder specifically agrees that the Selling
Stockholder Firm Shares represented by the certificates held in custody for
such Selling Stockholder under the Stockholders' Agreement are for the benefit
of and coupled with and subject to the interests of the Underwriters, the
Custodian, the Attorneys-in-Fact, each other Selling Stockholder and the
Company, that the arrangements made by such Selling Stockholder for such
custody, and the appointment by such Selling Stockholder of the
Attorneys-in-Fact by the Power-of-Attorney, are to that extent irrevocable, and
that the obligations of such Selling Stockholder hereunder shall not be
terminated by operation of law,
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<PAGE> 10
whether by the death, disability, incapacity, liquidation or dissolution of any
Selling Stockholder or by the occurrence of any other event. If any individual
Selling Stockholder or any executor or trustee for a Selling Stockholder should
die or become incapacitated, or if any Selling Stockholder that is an estate or
trust should be terminated, or if any Selling Stockholder that is a partnership
or corporation should be dissolved, or if any other such event should occur,
before the delivery of the Selling Stockholder Firm Shares hereunder,
certificates representing the Selling Stockholder Firm Shares shall be
delivered by or on behalf of the Selling Stockholders in accordance with the
terms and conditions of this Agreement and of the Stockholders' Agreement, and
actions taken by the Attorneys-in-Fact pursuant to the Powers-of- Attorney
shall be as valid as if such death, incapacity, termination, dissolution or
other event had not occurred, regardless of whether or not the Custodian, the
Attorneys-in-Fact, or any of them, shall have received notice of such death,
incapacity, termination, dissolution or other event.
(d) This Agreement and the Stockholders' Agreement have each been
duly authorized, executed and delivered by such Selling Stockholder and each
such document constitutes a valid and binding obligation of such Selling
Stockholder, enforceable in accordance with its terms.
(e) No consent, approval, authorization or order of, or any filing
or declaration with, any court or governmental agency or body is required in
connection with the sale of the Selling Stockholder Firm Shares by such Selling
Stockholder or the consummation by such Selling Stockholder of the transactions
on its part contemplated by this Agreement and the Stockholders' Agreement,
except such as have been obtained under the Act or the Rules and Regulations
and such as may be required under state securities or Blue Sky laws or the
by-laws and rules of the NASD in connection with the purchase and distribution
by the Underwriters of the Shares to be sold by such Selling Stockholder.
(f) The sale of the Selling Stockholder Firm Shares to be sold by
such Selling Stockholder hereunder and the performance by such Selling
Stockholder of this Agreement and the Stockholders' Agreement and the
consummation of the transactions contemplated hereby and thereby will not
result in the creation or imposition of any lien, charge or encumbrance upon
any of the Selling Stockholder Firm Shares or Option Shares of such Selling
Stockholder pursuant to the terms or provisions of, or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
or give any party a right to terminate any of its obligations under, or result
in the acceleration of any obligation under, any indenture, mortgage, deed of
trust, voting trust agreement, loan agreement, bond, debenture, note agreement
or other evidence of indebtedness, lease, contract or other agreement or
instrument to which such Selling Stockholder is a party or by which such
Selling Stockholder or any of its properties is bound or affected, or violate
or conflict with any judgment, ruling, decree, order, statute, rule or
regulation of any court or other governmental agency or body applicable to such
Selling Stockholder or, if such Selling Stockholder is a corporation,
partnership or other entity, the organizational documents of such Selling
Stockholder.
(g) Such Selling Stockholder has, and at the Closing Date and, if
later, the Option Closing Date, will have, good and marketable title to the
Shares to be sold by such Selling Stockholder hereunder, free and clear of all
liens, encumbrances, equities or claims whatsoever; and, upon delivery of such
Shares and payment therefor pursuant hereto, good and marketable title to such
Shares, free and clear of all liens, encumbrances, equities or claims
whatsoever, will be delivered to the Underwriters.
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<PAGE> 11
(h) On the Closing Date or, if later, the Option Closing Date, all
stock transfer or other taxes (other than income taxes) that are required to be
paid in connection with the sale and transfer of the Shares to be sold by such
Selling Stockholder to the several Underwriters hereunder will be have been
fully paid or provided for by such Selling Stockholder and all laws imposing
such taxes will have been fully complied with.
(i) Other than as permitted by the Act and the Rules and
Regulations, such Selling Stockholder has not distributed and will not
distribute any preliminary prospectus, the Prospectus or any other offering
material in connection with the offering and sale of the Shares. Such Selling
Stockholder has not taken and will not at any time take, directly or
indirectly, any action designed, or which might reasonably be expected, to
cause or result in, or which will constitute, stabilization of the price of
shares of Common Stock to facilitate the sale or resale of any of the Shares.
(j) All information with respect to such Selling Stockholder
contained in the Registration Statement, any preliminary prospectus, the
Prospectus or any amendment or supplement thereto complied or will comply in
all material respects with all applicable requirements of the Act and the Rules
and Regulations and does not and will not contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
(k) Such Selling Stockholder has no knowledge of any material fact
or condition not set forth in the Registration Statement or the Prospectus that
has adversely affected, or may adversely affect, the business, properties,
business prospects, condition (financial or otherwise) or results of operations
of the Company and the Subsidiary, taken as a whole, and the sale of the Shares
proposed to be sold by such Selling Stockholder is not prompted by any such
knowledge.
(l) Such Selling Stockholder has no reason to believe that the
representations and warranties of the Company contained in Section 3 hereof are
not true and correct.
(m) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Stockholder agrees to deliver to you prior to or at
the Closing Date a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
5. AGREEMENTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. Each
of the Company and the Selling Stockholders , with respect to the specific
covenants of the Selling Stockholders set forth in Sections 5(j) and 5(o),
severally covenants and agrees with the several Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or
thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a reasonable period of time prior to the filing thereof
and the Representatives shall not have objected thereto in good faith.
(b) The Company will use its best efforts to cause the
Registration Statement to become effective, and will notify the Representatives
promptly, and will confirm such advice in writing,
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(i) when the Registration Statement has become effective and when any
post-effective amendment thereto becomes effective, (ii) of any request by the
Commission for amendments or supplements to the Registration Statement or the
Prospectus or for additional information, (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose or the threat
thereof, (iv) of the happening of any event during the period mentioned in the
second sentence of Section 5(e) that in the judgment of the Company makes any
statement made in the Registration Statement or the Prospectus untrue or that
requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in the light of the
circumstances in which they are made, not misleading and (v) of receipt by the
Company or any representative or attorney of the Company of any other
communication from the Commission relating to the Company, the Registration
Statement, any preliminary prospectus or the Prospectus. If at any time the
Commission shall issue any order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort to obtain
the withdrawal of such order at the earliest possible moment. If the Company
has omitted any information from the Registration Statement pursuant to Rule
430A of the Rules and Regulations, the Company will comply with the provisions
of and make all requisite filings with the Commission pursuant to said Rule
430A and notify the Representatives promptly of all such filings.
(c) The Company will furnish to each Representative, without
charge, one signed copy of each of the Registration Statement and of any
post-effective amendment thereto, including financial statements and schedules,
and all exhibits thereto and will furnish to the Representatives, without
charge, for transmittal to each of the other Underwriters, a copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules but without exhibits.
(d) The Company will use its best efforts to comply with all the
provisions of any undertakings contained in the Registration Statement.
(e) On the Effective Date, and thereafter from time to time, the
Company will deliver to each of the Underwriters, without charge, as many
copies of the Prospectus or any amendment or supplement thereto as the
Representatives may reasonably request. The Company consents to the use of the
Prospectus or any amendment or supplement thereto by the several Underwriters
and by all dealers to whom the Shares may be sold, both in connection with the
offering or sale of the Shares and for any period of time thereafter during
which the Prospectus is required by law to be delivered in connection
therewith. If during such period of time any event shall occur which in the
judgment of the Company or counsel to the Underwriters should be set forth in
the Prospectus in order to make any statement therein, in the light of the
circumstances under which it was made, not misleading, or if it is necessary to
supplement or amend the Prospectus to comply with law, the Company will
forthwith prepare and duly file with the Commission an appropriate supplement
or amendment thereto, and will deliver to each of the Underwriters, without
charge, such number of copies of such supplement or amendment to the Prospectus
as the Representatives may reasonably request.
(f) Prior to any public offering of the Shares, the Company will
cooperate with the Representatives and counsel to the Underwriters in
connection with the registration or qualification of the Shares for offer and
sale under the securities or Blue Sky laws of such jurisdictions as the
Representatives may reasonably request; provided, that in no event shall the
Company be obligated to qualify to do business in any jurisdiction where it is
not now so qualified or to take any action which would subject it to general
service of process in any jurisdiction where it is not now so subject.
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<PAGE> 13
(g) The Company will, so long as required under the Rules and
Regulations, furnish to its stockholders as soon as practicable after the end
of each fiscal year an annual report (including a balance sheet and statements
of income, stockholders' equity and cash flow of the Company and its
consolidated Subsidiary, if any, certified by independent public accountants)
and, as soon as practicable after the end of each of the first three quarters
of each fiscal year (beginning with the fiscal quarter ending after the
effective date of the Registration Statement), consolidated summary financial
information of the Company and the Subsidiary, if any, for such quarter in
reasonable detail.
(h) During the period of five years commencing on the Effective
Date, the Company will furnish to the Representatives and each other
Underwriter who may so request copies of such financial statements and other
periodic and special reports as the Company may from time to time distribute
generally to the holders of any class of its capital stock, and will furnish to
the Representatives and each other Underwriter who may so request a copy of
each annual or other report it shall be required to file with the Commission.
(i) The Company will make generally available to holders of its
securities as soon as may be practicable but in no event later than the last
day of the 15th full calendar month following the calendar quarter in which the
Effective Date falls, an earnings statement (which need not be audited but
shall be in reasonable detail) for a period of 12 months ended commencing after
the Effective Date, and satisfying the provisions of Section 11(a) of the Act
(including Rule 158 of the Rules and Regulations).
(j) Whether or not the transactions contemplated by this Agreement
are consummated or this Agreement is terminated, the Company will pay or
reimburse if paid by the Representatives, in such proportions as they may agree
among themselves, all costs and expenses incident to the performance of the
obligations of the Company and the Selling Stockholders under this Agreement
and in connection with the transactions contemplated hereby, including but not
limited to costs and expenses of or relating to (i) the preparation, printing
and filing of the Registration Statement and exhibits to it, each preliminary
prospectus, Prospectus and any amendment or supplement to the Registration
Statement or Prospectus, (ii) the preparation and delivery of certificates
representing the Shares, (iii) the printing or duplication of this Agreement,
the Agreement Among Underwriters, any Selected Dealer Agreements, any
Underwriters' Questionnaires, the Stockholders' Agreements, any Underwriters'
Powers of Attorney, and any invitation letters to prospective Underwriters,
(iv) furnishing (including costs of shipping and mailing) such copies of the
Registration Statement, the Prospectus and any preliminary prospectus, and all
amendments and supplements thereto, as may reasonably be requested for use in
connection with the offering and sale of the Shares by the Underwriters or by
dealers to whom Shares may be sold, (v) the listing of the Shares on the NNM,
(vi) any filings required to be made by the Underwriters with the NASD, and the
filing fees in connection therewith, (vii) the registration or qualification of
the Shares for offer and sale under the securities or Blue Sky laws of such
jurisdictions designated pursuant to Section 5(f), including the fees,
disbursements and other reasonable charges of counsel to the Underwriters in
connection therewith, and the preparation and printing of preliminary,
supplemental and final Blue Sky memoranda, (viii) fees, disbursements and other
charges of counsel to the Company (but not those of counsel for the
Underwriters, except as otherwise provided herein) and (ix) the transfer agent
for the Shares. The Selling Stockholders will pay (directly or by
reimbursement) all fees and expenses incident to the performance of their
obligations under this Agreement that are not otherwise specifically provided
for herein, including but not limited to any fees and expenses of any counsel
for such Selling Stockholders, any fees and expenses of the Attorneys-in-Fact
and the Custodian, and all expenses and taxes incident
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to the sale and delivery of the Shares to be sold by such Selling Stockholders
to the Underwriters hereunder.
(k) The Company will not at any time, directly or indirectly, take
any action designed or which might reasonably be expected to cause or result
in, or which will constitute, stabilization of the price of the shares of
Common Stock to facilitate the sale or resale of any of the Shares.
(l) The Company will apply the net proceeds from the offering and
sale of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds" and shall file such reports with the
Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the
Act.
(m) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the Prospectus,
without the prior written consent of Needham & Company, Inc., the Company will
not offer, sell, contract to sell, grant options to purchase or otherwise
dispose of any of the Company's equity securities of the Company or any other
securities convertible into or exchangeable with its Common Stock or other
equity security (other than the sale of Shares hereunder or pursuant to
employee stock option or stock purchase plans or the conversion of convertible
securities or the exercise of warrants or options outstanding on the date of
this Agreement).
(n) During the period of 180 days after the date of the
Prospectus, the Company will not, without the prior written consent of Needham
& Company, Inc., grant options to purchase shares of Common Stock at a price
less than the fair market value of the shares. During the period of 180 days
after the date of the Prospectus, the Company will not file with the Commission
or cause to become effective any registration statement relating to any
securities of the Company without the prior written consent of Needham &
Company, Inc., except for the registration of shares issued or issuable under
employee stock option or stock purchase plans registered on Form S-8 or any
successor form thereto.
(o) The Selling Stockholders will have, and the Company will have
caused each of its officers, directors and certain stockholders designated by
the Representatives to, enter into lock-up agreements with the Representatives
to the effect that they will not, without the prior written consent of Needham
& Company, Inc., sell, contract to sell or otherwise dispose of any shares of
Common Stock or rights to acquire such shares according to the terms set forth
in Schedule III hereto.
(p) The Company will not file with the Commission any registration
statement on Form S-8 relating to shares of its Common Stock prior to 90 days
after the effective date of the Registration Statement.
6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of each Underwriter hereunder are subject to the following
conditions:
(a) Notification that the Registration Statement has become
effective shall be received by the Representatives not later than 5:00 p.m.,
New York City time, on the date of this Agreement or at such later date and
time as shall be consented to in writing by the Representatives and all filings
required by Rule 424 and Rule 430A of the Rules and Regulations shall have been
made within the time period required by such Rules and Regulations.
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<PAGE> 15
(b) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall be pending or threatened by the Commission, (ii) no order
suspending the effectiveness of the Registration Statement or the qualification
or registration of the Shares under the securities or Blue Sky laws of any
jurisdiction shall be in effect and no proceeding for such purpose shall be
pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such authorities
shall have been complied with to the satisfaction of the staff of the
Commission or such authorities and (iv) after the date hereof no amendment or
supplement to the Registration Statement or the Prospectus shall have been
filed unless a copy thereof was first submitted to the Representatives and the
Representatives do not object thereto in good faith, and the Representatives
shall have received certificates, dated the Closing Date and, if later, the
Option Closing Date and signed by the Chief Executive Officer and the Chief
Financial Officer of the Company (who may, as to proceedings threatened, rely
upon the best of their information and belief), to the effect of clauses (i),
(ii) and (iii) of this paragraph.
(c) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change in the general affairs, business, business prospects,
properties, management, condition (financial or otherwise) or results of
operations of the Company and the Subsidiary, taken as a whole, whether or not
arising from transactions in the ordinary course of business, in each case
other than as described in or contemplated by the Registration Statement and
the Prospectus, and (ii) the Company shall not have sustained any material loss
or interference with its business or properties from fire, explosion, flood or
other casualty, whether or not covered by insurance, or from any labor dispute
or any court or legislative or other governmental action, order or decree,
which is not described in the Registration Statement and the Prospectus, if in
the reasonable judgment of the Representatives any such development makes it
impracticable or inadvisable to consummate the sale and delivery of the Shares
by the Underwriters at the initial public offering price.
(d) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there shall have been no
litigation or other proceeding instituted against the Company, the Subsidiary,
or any of their officers or directors in their capacities as such, before or by
any Federal, state or local court, commission, regulatory body, administrative
agency or other governmental body, domestic or foreign, in which litigation or
proceeding an unfavorable ruling, decision or finding would, in the reasonable
judgment of the Representatives, materially and adversely affect the business,
properties, business prospects, condition (financial or otherwise) or results
of operations of the Company and the Subsidiary, taken as a whole.
(e) Each of the representations and warranties of the Company and
the Selling Stockholders contained herein shall be true and correct in all
material respects at the Closing Date and, with respect to the Option Shares,
at the Option Closing Date, and all covenants and agreements contained herein
to be performed on the part of the Company or the Selling Stockholders and all
conditions contained herein to be fulfilled or complied with by the Company or
the Selling Stockholders at or prior to the Closing Date and, with respect to
the Option Shares, at or prior to the Option Closing Date, shall have been duly
performed, fulfilled or complied with.
(f) The Representatives shall have received an opinion, dated the
Closing Date and, with respect to the Option Shares, the Option Closing Date,
reasonably satisfactory in form and substance to
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the Representatives and counsel for the Underwriters from Stradling, Yocca,
Carlson & Rauth, counsel to the Company and the Selling Stockholders, with
respect to the following matters:
(i) The Company is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation; has full corporate power and authority to conduct all the
activities conducted by it, to own or lease all the assets owed or leased by it
and to conduct its business as described in the Registration Statement and
Prospectus; and is duly licensed or qualified to do business and is in good
standing as a foreign corporation in all jurisdictions in which the nature of
the activities conducted by it or the character of the assets owned or leased
by it makes such license or qualification necessary and where the failure to be
licensed or qualified would have a material and adverse effect on the business
or financial condition of the Company and the Subsidiary, taken as a whole.
(ii) All of the outstanding shares of capital stock of the
Company (including the Selling Stockholder Shares and the Option Shares) have
been duly authorized, validly issued and are fully paid and nonassessable, to
such counsel's knowledge, were issued pursuant to exemptions from the
registration and qualification requirements of federal and applicable state
securities laws, and were not issued in violation of or subject to any
preemptive or, to such counsel's knowledge, similar rights.
(iii) The specimen certificate evidencing the Common Stock
filed as an exhibit to the Registration Statement is in due and proper form
under Delaware law, the Shares to be sold by the Company hereunder have been
duly authorized and, when issued and paid for as contemplated by this
Agreement, will be validly issued, fully paid and nonassessable; and no
preemptive or similar rights exist with respect to any of the Shares or the
issue and sale thereof.
(iv) To such counsel's knowledge, other than the ownership
of Shares of Stock of the Subsidiary, the Company does not own or control,
directly or indirectly, any shares of stock or any other equity or long-term
debt securities of any corporation or have any equity interest in any
corporation, firm, partnership, joint venture, association or other entity. All
of the outstanding shares of capital stock of the Subsidiary have been duly
authorized and validly issued and are fully paid and nonassessable, and owned
by the Company free and clear of all claims, liens, charges and encumbrances
other than on restrictions on transfer under applicable securities laws; to
such counsel's knowledge, there are no securities outstanding that are
convertible into or exercisable or exchangeable for capital stock of the
Subsidiary.
(v) As of June 30, 1997, the authorized and outstanding
capital stock of the Company was as set forth in the Registration Statement and
the Prospectus in the column entitled "Actual" under the caption
"Capitalization" (except for subsequent issuances, if any, pursuant to this
Agreement or pursuant to reservations, agreements, employee benefit plans or
the exercise of convertible securities, options or warrants referred to in the
Prospectus). To such counsel's knowledge, except as disclosed in or
specifically contemplated by the Prospectus, there are no outstanding options,
warrants of other rights calling for the issuance of, and no commitments, plans
or arrangements to issue, any shares of capital stock of the Company or any
security convertible into or exchangeable or exercisable for capital stock of
the Company. The description of the capital stock of the Company in the
Registration Statement and the Prospectus conforms in all material respects to
the terms thereof.
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<PAGE> 17
(vi) To such counsel's knowledge, there are no legal or
governmental proceedings pending or threatened to which the Company or the
Subsidiary is a party or to which any of their respective properties is
subject.
(vii) No consent, approval, authorization or order of, or
any filing or declaration with, any court or governmental agency or body is
required for the consummation by the Company of the transactions on its part
contemplated under this Agreement, except such as have been obtained or made
under the Act or the Rules and Regulations and such as may be required under
state securities or Blue Sky laws or the by- laws and rules of the NASD in
connection with the purchase and distribution by the Underwriters of the
Shares.
(viii) The Company has full corporate power and authority to
enter into this Agreement. This Agreement has been duly authorized, executed
and delivered by the Company.
(ix) The execution and delivery of this Agreement, the
compliance by the Company with all of the terms hereof and the consummation of
the transactions contemplated hereby does not contravene any provision of the
certificate of incorporation or by-laws of the Company, and to the best of such
counsel's knowledge will not result in the creation or imposition of any lien,
charge or encumbrance upon any of the assets of the Company pursuant to the
terms and provisions of, result in a breach or violation of any of the terms or
provisions of, or constitute a default under, or give any party a right to
terminate any of its obligations under, or result in the acceleration of any
obligation under any agreement or instrument filed as an exhibit to the
Registration Statement, or violate or conflict with (i) any judgment, ruling,
decree or order known to such counsel or (ii) any California or federal
statute, rule or regulation of any court or other California or federal
governmental agency or body that such counsel has, in the exercise of customary
professional diligence, recognized as applicable to the business or properties
of the Company or to the transactions of the type contemplated by the
Agreement.
(x) To such counsel's knowledge, there is no document or
contract of a character required to be described in the Registration Statement
or the Prospectus or to be filed as an exhibit to the Registration Statement
which is not described or filed as required, and each description of such
contracts and documents that is contained in the Registration Statement and
Prospectus fairly presents in all material respects the information required
under the Act and the Rules and Regulations.
(xi) The statements under the captions "Risk Factors -3/4
Shares Eligible for Future Sale; Registration Rights," "Risk Factors -3/4
Potential Effect of Anti-Takeover Provisions," "Management -3/4 Stock Benefit
Plans," "Management-3/4Limitation of Liability and Indemnification Matters, "
"Description of Capital Stock" and "Shares Eligible for Future Sale" in the
Prospectus, insofar as the statements constitute a summary of documents
referred to therein or matters of law, are accurate summaries and fairly and
correctly present, in all material respects, the information called for with
respect to such documents and matters (provided, however, that such counsel may
rely on representations of the Company with respect to the factual matters
contained in such statements, and provided further that such counsel shall
state that nothing has come to the attention of such counsel which leads them
to believe that such representations are not true and correct in all material
respects).
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<PAGE> 18
(xii) The Company is not an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act
of 1940, as amended.
(xiii) The Selling Stockholder Shares are duly listed on the
NNM and the Company Shares have been duly authorized for listing on the NNM,
subject to notice of issuance.
(xiv) To such counsel's knowledge, no holder of securities
of the Company has rights, which have not been waived or satisfied, to require
the registration with the Commission of shares of Common Stock or other
securities, as part of the offering contemplated hereby.
(xv) The Registration Statement has become effective under
the Act, and to the best of such counsel's knowledge, no stop order suspending
the effectiveness of the Registration Statement has been issued and no
proceeding for that purpose has been instituted or is pending, threatened or
contemplated.
(xvi) The Registration Statement and the Prospectus comply
as to form in all material respects with the requirement of the Act and the
Rules and Regulations (other than the financial statements, notes to financial
statements, schedules and other financial or statistical data contained in the
Registration Statement or the Prospectus, as to which such counsel need express
no opinion).
(xvii) This Agreement and the Stockholders' Agreement have
each been duly executed and delivered by or on behalf of each Selling
Stockholder; the Stockholders' Agreement constitutes a valid and binding
agreement of such Selling Stockholder in accordance with its terms, except as
enforceability may be limited by the application of bankruptcy, insolvency or
other laws affecting creditors' rights generally or by general principles of
equity; the Attorneys-in-Fact and the Custodian have been duly authorized by
such Selling Stockholder to deliver the Shares on behalf of such Selling
Stockholder in accordance with the terms of this Agreement.
(xviii) To the best of such counsel's knowledge, no consent,
approval, authorization or order of, or any filing or declaration with, any
court or governmental agency or body is required for the consummation by the
Selling Stockholders of the transactions on their part contemplated by this
Agreement, except such as have been obtained or made under the Act or the Rules
and Regulations and such as may be required under state securities or Blue Sky
laws or the by-laws and rules of the NASD in connection with the purchase and
distribution by the Underwriters of the Shares.
(xix) Each Selling Stockholder has full legal right, power
and authority to enter into this Agreement and the Stockholders' Agreement and
to sell, assign, transfer and deliver the Shares to be sold by such Selling
Stockholder hereunder and, upon payment for such Shares and assuming that the
Underwriters are purchasing such Shares in good faith and without notice of any
other adverse claim within the meaning of the Uniform Commercial Code, the
Underwriters will have acquired all rights of such Selling Stockholder in such
Shares free of any adverse claim, any lien in favor of the Company and any
restrictions on transfer imposed by the Company.
In addition, such counsel shall state that such counsel has
participated in the preparation of the Registration Statement and Prospectus
and has no reason to believe that, as of the Effective Date, the Registration
Statement, or any amendment or supplement thereto, (other than the
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<PAGE> 19
financial statements, schedules and other financial or statistical data
contained therein, as to which such counsel need express no comment) contained
any untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus, or any amendment or supplement thereto, as
of its date and the Closing Date and, if later, the Option Closing Date,
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading (other
than the financial statements, notes to financial statements, schedules and
other financial or statistical data contained therein, as to which such counsel
need express no comment).
In rendering the opinions in subparagraphs (xvii) - (xix), such
counsel may rely upon opinions of other counsel retained by the Selling
Stockholders reasonably acceptable to the Representatives and as to matters of
fact on certificates of the Selling Stockholders, officers of the Company and
governmental officials and the representations and warranties of the Company
and the Selling Stockholders contained in this Agreement and the Stockholders'
Agreement, provided that the opinion of counsel to the Company and Selling
Stockholders shall state that they are doing so, that they have no reason to
believe that they and the Underwriters are not entitled to rely on such
opinions or certificates and that copies of such opinions or certificates are
to be attached to the opinion.
(g) The representatives shall have received an opinion, dated the
Closing Date and the Option Closing Date, from McCutchen, Doyle, Brown &
Enersen LLP, counsel to the Underwriters, with respect to the Registration
Statement, the Prospectus and this Agreement, which opinion shall be
satisfactory in all respects to the Representatives.
(h) Concurrently with the execution and delivery of this
Agreement, the Accountants shall have furnished to the Representatives a
letter, dated the date of its delivery, addressed to the Representatives and in
form and substance reasonably satisfactory to the Representatives, confirming
that they are independent accountants with respect to the Company and the
Subsidiary as required by the Act and the Rules and Regulations and with
respect to certain financial and other statistical and numerical information
contained in the Registration Statement. At the Closing Date and, as to the
Option Shares, the Option Closing Date, the Accountants shall have furnished to
the Representatives a letter, dated the date of its delivery, which shall
confirm, on the basis of a review in accordance with the procedures set forth
in the letter from the Accountants, that nothing has come to their attention
during the period from the date of the letter referred to in the prior sentence
to a date (specified in the letter) not more than five days prior to the
Closing Date and the Option Closing Date, as the case may be, which would
require any change in their letter dated the date hereof if it were required to
be dated and delivered at the Closing Date and the Option Closing Date.
(i) Concurrently with the execution and delivery of this Agreement
and at the Closing Date and, as to the Option Shares, the Option Closing Date,
there shall be furnished to the Representatives a certificate, dated the date
of its delivery, signed by each of the Chief Executive Officer and the Chief
Financial Officer of the Company, in form and substance satisfactory to the
Representatives, to the effect that:
(i) Each signer of such certificate has carefully
examined the Registration Statement and the Prospectus and (A) as of the date
of such certificate, such documents are true and correct in all material
respects and do not omit to state a material fact required to be stated therein
or
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<PAGE> 20
necessary in order to make the statements therein not untrue or misleading and
(B) in the case of the certificate delivered at the Closing Date and the Option
Closing Date, since the Effective Date no event has occurred as a result of
which it is necessary to amend or supplement the Prospectus in order to make
the statements therein not untrue or misleading.
(ii) Each of the representations and warranties of the
Company contained in this Agreement were, when originally made, and are, at the
time such certificate is delivered, true and correct.
(iii) Each of the covenants required to be performed by the
Company herein on or prior to the date of such certificate has been duly,
timely and fully performed and each condition herein required to be satisfied
or fulfilled on or prior to the date of such certificate has been duly, timely
and fully satisfied or fulfilled.
(j) Concurrently with the execution and delivery of this Agreement
and at the Closing Date and, as to the Option Shares, the Option Closing Date,
there shall be furnished to the Representatives a certificate, dated the date
of its delivery, signed by the Selling Stockholders (or the Attorneys-in-Fact
on their behalf), in form and substance satisfactory to the Representatives, to
the effect that the representations and warranties of the Selling Stockholders
contained herein are true and correct in all material respects on and as of the
date of such certificate as if made on and as of the date of such certificate,
and each of the covenants and conditions required herein to be performed or
complied with by the Selling Stockholders on or prior to the date of such
certificate has been duly, timely and fully performed or complied with.
(k) On or prior to the Closing Date, the Representatives shall
have received the executed agreements referred to in Section 5(o).
(l) The Shares shall be qualified for sale in such jurisdictions
as the Representatives may reasonably request and each such qualification shall
be in effect and not subject to any stop order or other proceeding on the
Closing Date or the Option Closing Date.
(m) Prior to the Closing Date, the Shares shall have been duly
authorized for listing on the NNM upon official notice of issuance.
(n) The Company and the Selling Stockholders shall have furnished
to the Representatives such certificates, in addition to those specifically
mentioned herein, as the Representatives may have reasonably requested as to
the accuracy and completeness at the Closing Date and the Option Closing Date
of any statement in the Registration Statement or the Prospectus, as to the
accuracy at the Closing Date and the Option Closing Date of the representations
and warranties of the Company and the Selling Stockholders herein, as to the
performance by the Company and the Selling Stockholders of its and their
respective obligations hereunder, or as to the fulfillment of the conditions
concurrent and precedent to the obligations hereunder of the Representatives.
7. INDEMNIFICATION.
(a) The Company and each of the Selling Stockholders, jointly and
severally, will indemnify and hold harmless each Underwriter, the directors,
officers, employees and agents of each Underwriter and each person, if any, who
controls each Underwriter within the meaning of Section 15
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of the Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, liabilities, expenses and damages (including any and all
investigative, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted), to which they, or any of them, may become subject under the
Act, the Exchange Act or other Federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, liabilities, expenses
or damages arise out of or are based on any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus, the
Registration Statement or the Prospectus or any amendment or supplement to the
Registration Statement or the Prospectus, or the omission or alleged omission
to state in such document a material fact required to be stated in it or
necessary to make the statements in it not misleading in the light of the
circumstances in which they were made, or arise out of or are based in whole or
in part on any inaccuracy in the representations and warranties of the Company
or the Selling Stockholders contained herein or any failure of the Company or
the Selling Stockholders to perform its or their obligations hereunder or under
law in connection with the transactions contemplated hereby; provided, however,
that (i) the Company and the Selling Stockholders will not be liable to the
extent that such loss, claim, liability, expense or damage arises from the sale
of the Shares in the public offering to any person by an Underwriter and is
based on an untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information relating to any
Underwriter furnished in writing to the Company by the Representatives, on
behalf of any Underwriter, expressly for inclusion in the Registration
Statement, the preliminary prospectus or the Prospectus; (ii) the Company and
the Selling Stockholders will not be liable to any Underwriter, the directors,
officers, employees or agents of such Underwriter or any person controlling
such Underwriter with respect to any loss, claim, liability, expense, or damage
arising out of or based on any untrue statement or omission or alleged untrue
statement or omission or alleged omission to state a material fact in the
preliminary prospectus which is corrected in the Prospectus if the person
asserting any such loss, claim, liability, charge or damage purchased Shares
from such Underwriter but was not sent or given a copy of the Prospectus at or
prior to the written confirmation of the sale of such Shares to such person;
(iii) the liability of each Selling Stockholder under this Section 7(a) shall
not exceed the product of the purchase price for each Share set forth in
Section 1(a) hereof multiplied by the number of Shares sold by such Selling
Stockholder hereunder; and (iv) the liability of each Selling Stockholder under
this Section 7(a) shall not exceed such Selling Stockholder's pro rata share of
the aggregate liability paid by all Selling Stockholders, based upon the number
of Shares sold by Selling Stockholders. The Company and the Selling
Stockholders acknowledge that the statements set forth under the heading
"Underwriting" in the preliminary prospectus and the Prospectus constitute the
only information relating to any Underwriter furnished in writing to the
Company by the Representatives on behalf of the Underwriters expressly for
inclusion in the Registration Statement, the preliminary prospectus or the
Prospectus. This indemnity agreement will be in addition to any liability that
the Company and the Selling Stockholders might otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company,
each director of the Company, each officer of the Company who signs the
Registration Statement, each person, if any, who controls the Company within
the meaning of Section 15 of the Act or Section 20 of the Exchange Act, and
each Selling Stockholder to the same extent as the foregoing indemnity from the
Company and each Selling Stockholder to each Underwriter, as set forth in
Section 7(a), but only insofar as losses, claims, liabilities, expenses or
damages arise out of or are based on any untrue statement or omission or
alleged untrue statement or omission made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives, on behalf of such Underwriter, expressly for use in the
Registration Statement, the preliminary prospectus or the
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Prospectus. The Company and the Selling Stockholders acknowledge that the
statements set forth under the heading "Underwriting" in the preliminary
prospectus and the Prospectus constitute the only information relating to any
Underwriter furnished in writing to the Company by the Representatives on
behalf of the Underwriters expressly for inclusion in the Registration
Statement, the preliminary prospectus or the Prospectus. This indemnity will be
in addition to any liability that each Underwriter might otherwise have.
(c) Any party that proposes to assert the right to be indemnified
under this Section 7 shall, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made against
an indemnifying party or parties under this Section 7, notify each such
indemnifying party in writing of the commencement of such action, enclosing
with such notice a copy of all papers served, but the omission so to notify
such indemnifying party will not relieve it from any liability that it may have
to any indemnified party under the foregoing provisions of this Section 7
unless, and only to the extent that, such omission results in the loss of
substantive rights or defenses by the indemnifying party. If any such action is
brought against any indemnified party and it notifies the indemnifying party of
its commencement, the indemnifying party will be entitled to participate in
and, to the extent that it elects by delivering written notice to the
indemnified party promptly after receiving notice of the commencement of the
action from the indemnified party, jointly with any other indemnifying party
similarly notified, to assume the defense of the action, with counsel
reasonably satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense, the indemnifying party will not be liable to the indemnified party for
any legal or other expenses except as provided below and except for the
reasonable costs of investigation subsequently incurred by the indemnified
party in connection with the defense. The indemnified party will have the right
to employ its own counsel in any such action, but the fees, expenses and other
charges of such counsel will be at the expense of such indemnified party unless
(i) the employment of counsel by the indemnified party has been authorized in
writing by the indemnifying party, (ii) a conflict or potential conflict
exists (based on advice of counsel to the indemnified party) between the
indemnified party and the indemnifying party (in which case the indemnifying
party will not have the right to direct the defense of such action on behalf of
the indemnified party) or (iii) the indemnifying party has not in fact employed
counsel to assume the defense of such action within a reasonable time after
receiving notice of the commencement of the action, in each of which cases the
reasonable fees, disbursements and other charges of counsel will be at the
expense of the indemnifying party or parties. It is understood that the
indemnifying party or parties shall not, in connection with any proceeding or
related proceedings in the same jurisdiction, be liable for the reasonable
fees, disbursements and other charges of more than one separate firm admitted
to practice in such jurisdiction at any one time for all such indemnified party
or parties. All such fees, disbursements and other charges will be reimbursed
by the indemnifying party promptly as they are incurred. Any indemnifying party
will not be liable for any settlement of any action or claim effected without
its written consent (which consent will not be unreasonably withheld).
(d) If the indemnification provided for in this Section 7 is
applicable in accordance with its terms but for any reason is held to be
unavailable to or insufficient to hold harmless an indemnified party under
paragraphs (a), (b) and (c) of this Section 7 in respect of any losses, claims,
liabilities, expenses and damages referred to therein, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable (including any investigative, legal
and other expenses reasonably incurred in connection with, and any amount paid
in settlement of, any action, suit or proceeding or any claim asserted, but
after deducting any contribution
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<PAGE> 23
received by the Company or the Selling Stockholders from persons other than the
Underwriters, such as persons who control the Company within the meaning of the
Act, officers of the Company who signed the Registration Statement and
directors of the Company, who also may be liable for contribution) by such
indemnified party as a result of such losses, claims, liabilities, expenses and
damages in such proportion as shall be appropriate to reflect the relative
benefits received by the Company and the Selling Stockholders, on the one hand,
and the Underwriters, on the other hand. The relative benefits received by the
Company and the Selling Stockholders, on the one hand, and the Underwriters, on
the other hand, shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
and the Selling Stockholders bear to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. If, but only if, the allocation
provided by the foregoing sentence is not permitted by applicable law, the
allocation of contribution shall be made in such proportion as is appropriate
to reflect not only the relative benefits referred to in the foregoing sentence
but also the relative fault of the Company and the Selling Stockholders, on the
one hand, and the Underwriters, on the other hand, with respect to the
statements or omissions which resulted in such loss, claim, liability, expense
or damage, or action in respect thereof, as well as any other relevant
equitable considerations with respect to such offering. Such relative fault
shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact relates to information supplied by the Company, the Selling
Stockholders or the Representatives on behalf of the Underwriters, the intent
of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company, the
Selling Stockholders and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 7(d) were to be determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take into
account the equitable considerations referred to herein. The amount paid or
payable by an indemnified party as a result of the loss claim, liability,
expense or damage, or action in respect thereof, referred to above in this
Section 7(d) shall be deemed to include, for purposes of this Section 7(d), any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7(d), no Underwriter shall be
required to contribute any amount in excess of the underwriting discounts
received by it and no Selling Stockholder shall be required to contribute any
amount in excess of the net proceeds from the offering received by such Selling
Stockholder and no person found guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) will be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. The
Underwriters' obligations to contribute as provided in this Section 7(d) are
several in proportion to their respective underwriting obligations and not
joint. For purposes of this Section 7(d), any person who controls a party to
this Agreement within the meaning of the Act will have the same rights to
contribution as that party, and each officer of the Company who signed the
Registration Statement will have the same rights to contribution as the
Company, subject in each case to the provisions hereof. Any party entitled to
contribution, promptly after receipt of notice of commencement of any action
against any such party in respect of which a claim for contribution may be made
under this Section 7(d), will notify any such party or parties from whom
contribution may be sought, but the omission so to notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 7(d). No party will be liable for
contribution with respect to any action or claim settled without its written
consent (which consent will not be unreasonably withheld).
23
<PAGE> 24
(e) The indemnity and contribution agreements contained in this
Section 7 and the representations and warranties of the Company and the Selling
Stockholders contained in this Agreement shall remain operative and in full
force and effect regardless of (i) any investigation made by or on behalf of
the Underwriters, (ii) acceptance of any of the Shares and payment therefor or
(iii) any termination of this Agreement.
8. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 7(a) of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon, in whole or in part, any statement or omission or alleged statement
or omission, or any inaccuracy in the representations and warranties of the
Company or the Selling Stockholders contained herein or failure of the Company
or the Selling Stockholders to perform its or their respective obligations
hereunder or under law, all as described in Section 7(a), notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the obligations under this Section 8 and the possibility that such payment
might later be held to be improper; provided, however, that, to the extent any
such payment is ultimately held to be improper, the persons receiving such
payments shall promptly refund them.
9. TERMINATION. The obligations of the several Underwriters under
this Agreement may be terminated at any time on or prior to the Closing Date
(or, with respect to the Option Shares, on or prior to the Option Closing
Date), by notice to the Company and the Selling Stockholders from the
Representatives, without liability on the part of any Underwriter to the
Company if, prior to delivery and payment for the Firm Shares or Option Shares,
as the case may be, in the reasonable judgment of the Representatives, (i)
trading in any of the equity securities of the Company shall have been
suspended by the Commission or by The Nasdaq Stock Market, (ii) trading in
securities generally on The Nasdaq Stock Market shall have been suspended or
limited or minimum or maximum prices shall have been generally established on
such exchange, or additional material governmental restrictions, not in force
on the date of this Agreement, shall have been imposed upon trading in
securities generally by such exchange, by order of the Commission or any court
or other governmental authority, or by The Nasdaq Stock Market, (iii) a general
banking moratorium shall have been declared by Federal or New York State or
California authorities or (iv) any material adverse change in the financial or
securities markets in the United States or in political, financial or economic
conditions in the United States or any outbreak or material escalation of
hostilities or other calamity or crisis shall have occurred, the effect of
which is such as to make it, in the reasonable judgment of the Representatives,
impracticable or inadvisable to proceed with completion of the public offering
or the delivery of and payment for the Shares.
If this Agreement is terminated pursuant to Section 9 or 10 hereof,
neither the Company nor any Selling Stockholder shall be under any liability to
any Underwriter except as provided in Sections 5(j), 7 and 8 hereof.
10. SUBSTITUTION OF UNDERWRITERS. If any one or more of the
Underwriters shall fail or refuse to purchase any of the Firm Shares which it
or they have agreed to purchase hereunder, and the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase is not more than one-tenth of the aggregate number of Firm
Shares, the other Underwriters shall be obligated, severally, to purchase the
Firm Shares which such defaulting Underwriter or Underwriters agreed but failed
or refused to purchase, in the proportions which the
24
<PAGE> 25
number of Firm Shares which they have respectively agreed to purchase pursuant
to Section 1 bears to the aggregate number of Firm Shares which all such
non-defaulting Underwriters have so agreed to purchase, or in such other
proportions as the Representatives may specify; provided that in no event shall
the maximum number of Firm Shares which any Underwriter has become obligated to
purchase pursuant to Section 1 be increased pursuant to this Section 10 by more
than one-ninth of such number of Firm Shares without the prior written consent
of such Underwriter. If any Underwriter or Underwriters shall fail or refuse to
purchase any Firm Shares and the aggregate number of Firm Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
exceeds one-tenth of the aggregate number of the Firm Shares and arrangements
satisfactory to the Representatives and the Company for the purchase of such
Firm Shares are not made within 48 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting Underwriter,
the Company or the Selling Stockholders for the purchase or sale of any Shares
under this Agreement. In any such case either the Representatives or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or in any other documents or
arrangements may be effected. Any action taken pursuant to this Section 10
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
11. MISCELLANEOUS.
(a) Notice given pursuant to any of the provisions of this
Agreement shall be in writing and, unless otherwise specified, shall be mailed
or delivered (i) if to the Company or the Selling Stockholders, at the office
of the Company, 3 Jenner Street, Irvine, California 92618, Attention: David
Silver, with a copy to K.C. Schaaf, Esq., Stradling, Yocca, Carlson & Rauth,
660 Newport Center Drive, Suite 1600, Newport Beach, California 92660, or (ii)
if to the Underwriters, to the Representatives at the offices of Needham &
Company, Inc., 445 Park Avenue, New York, New York 10022, Attention: Corporate
Finance Department, with a copy to Lior O. Nuchi, Esq., McCutchen, Doyle, Brown
& Enersen, LLP, One Embarcadero Center, 2100 Geng Road, Palo Alto, California
94303-0913. Any such notice shall be effective only upon receipt. Any notice
under such Section 9 or 10 may be made by telex or telephone, but if so made
shall be subsequently confirmed in writing.
(b) This Agreement has been and is made solely for the benefit of
the several Underwriters, the Company, the Selling Stockholders and the
controlling persons, directors and officers referred to in Section 7, and their
respective successors and assigns, and no other person shall acquire or have
any right under or by virtue of this Agreement. The term "successors and
assigns" as used in this Agreement shall not include a purchaser, as such
purchaser, of Shares from any of the several Underwriters.
(c) Any action required or permitted to be made by the
Representatives under this Agreement may be taken by them jointly or by Needham
& Company, Inc.
(d) This Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts
made and to be performed entirely within such State.
(e) This Agreement may be signed in two or more counterparts with
the same effect as if the signatures thereto and hereto were upon the same
instrument.
25
<PAGE> 26
(f) In case any provision in this Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
(g) The Company and the Underwriters each hereby waive any right
they may have to a trial by jury in respect of any claim based upon or arising
out of this Agreement or the transactions contemplated hereby.
26
<PAGE> 27
Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Underwriters.
Very truly yours,
KOFAX IMAGE PRODUCTS, INC.
By:
--------------------------
Title:
-----------------------
SELLING STOCKHOLDERS
(named in Schedule II hereto)
By:
-------------------------
Attorney-in-Fact
Confirmed as of the date first
above mentioned:
NEEDHAM & COMPANY, INC.
Acting on behalf of themselves and as the
Representatives of the other several
Underwriters named in Schedule I hereto.
By: Needham & Company, Inc.
By:
----------------------------------
Title:
------------------------------
27
<PAGE> 28
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM
SHARES
UNDERWRITERS TO BE PURCHASED
- ------------ ---------------
<S> <C>
Needham & Company, Inc.
Unterberg Harris
________
Total 2,000,000
=========
</TABLE>
28
<PAGE> 29
SCHEDULE II
<TABLE>
<CAPTION>
TOTAL NUMBER TOTAL NUMBER OF
OF FIRM SHARES OPTION SHARES
TO BE SOLD TO BE SOLD
---------- ----------
<S> <C> <C>
Kofax Image Products, Inc. 1,300,000
Aspen Venture Partners, L.P. 285,479 __________
Sigma Partners 175,230 __________
Sigma Associates 13,100 __________
Southern California Ventures 165,304 __________
Drobish Family Trust 26,667 __________
Avery Trust 12,110 __________
Overland Enterprises, Ltd. 12,110 __________
TOTALS 2,000,000 300,000
========= =======
</TABLE>
29
<PAGE> 30
SCHEDULE III
FORM OF LOCK-UP AGREEMENT
30
<PAGE> 1
EXHIBIT 5.1
STRADLING YOCCA CARLSON & RAUTH
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
660 NEWPORT CENTER DRIVE, SUITE 1600
NEWPORT BEACH, CALIFORNIA 92660-6441
TELEPHONE (714) 725-4000
FACSIMILE (714) 725-4100
SAN FRANCISCO OFFICE
44 MONTGOMERY STREET, SUITE 2950
SAN FRANCISCO, CALIFORNIA 94104
TELEPHONE (415) 765-9180
FACSIMILE (415) 765-9187
October 1, 1997
Kofax Image Products, Inc.
3 Jenner Street
Irvine, California 92618
Re: Registration Statement on Form S-1; Registration No. 333-34531
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
S-1, Registration No. 333-34531, filed by Kofax Image Products, Inc., a Delaware
corporation (the "Company"), with the Securities and Exchange Commission on
August 28, 1997 (as amended by Amendment No. 1 thereto filed on September 18,
1997 and Amendment No. 2 thereto filed on October 1, 1997, as such may be
amended or supplemented, the "Registration Statement"), in connection with the
registration under the Securities Act of 1933, as amended, of 2,300,000 shares
of common stock, $.001 par value (the "Shares"). The Shares, which include up
to 300,000 shares of common stock issuable pursuant to an over-allotment option
granted to the underwriters, are to be sold to the underwriters as described
in such Registration Statement for the sale to the public or issued to the
representatives of the underwriters.
As your counsel in connection with this transaction, we have examined
the proceedings taken and are familiar with the proceedings proposed to be taken
by you in connection with the sale and issuance of the Shares.
Based on the foregoing, it is our opinion that, upon conclusion of the
proceedings being taken or contemplated by us, as your counsel, to be taken
prior to the issuance of the Shares and upon completion of the proceedings taken
in order to permit such transactions to be carried out in accordance with the
securities laws of various states where required, the Shares, when issued and
sold in the manner described in the Registration Statement will be legally
issued, fully paid and nonassessable.
We consent to the use of the opinion as an exhibit to the Registration
Statement and to the use of our name under the caption "Legal Matters" in the
Prospectus which is a part of the Registration Statement, including the
Prospectus constituting a part thereof and any amendment thereto.
Very truly yours,
STRADLING, YOCCA, CARLSON & RAUTH
/s/ Stradling, Yocca, Carlson & Rauth
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of
Kofax Image Products, Inc.
Irvine, California
We consent to the use in Amendment No. 2 to Registration Statement No. 333-34531
of Kofax Image Products, Inc. on Form S-1 of our reports dated July 29, 1997
(except for Note 14, as to which the date is August 27, 1997), appearing in the
Prospectus, which is a part of the Registration Statement, and to the references
to us under the headings "Selected Financial Data" and "Experts" in such
Prospectus.
Deloitte & Touche LLP
Costa Mesa, California
September 30, 1997
