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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-K
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[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the fiscal year ended June 30, 1999
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
for the transition period from _____ to _____
Commission File Number 000-23119
KOFAX IMAGE PRODUCTS, INC.
(Exact name of registrant as specified in its charter)
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Delaware 33-0114967
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
16245 Laguna Canyon Rd, Irvine, California 92618
(Address of principal executive offices) (Zip Code)
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(949) 727-1733
(Registrant's telephone number, including area code)
3 Jenner Street, Irvine, California
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of $12.50 per share of Common
Stock on September 17, 1999, as reported on the Nasdaq National Market, was
approximately $8,740,000. The number of outstanding shares of the registrant's
Common Stock, par value $.001 per share, was 5,254,206 on September 17, 1999.
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KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
INDEX
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ITEM PAGE
NUMBER NUMBER
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PART I.
ITEM 1. Business............................................................................. 3
ITEM 2. Properties........................................................................... 19
ITEM 3. Legal Proceedings.................................................................... 19
ITEM 4. Submission of Matters to a Vote of Security Holders.................................. 19
PART II.
ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters............. 20
ITEM 6. Selected Financial Data.............................................................. 21
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................................ 22
ITEM 8. Consolidated Financial Statements and Supplementary Data............................. 27
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................................. 27
PART III.
ITEM 10. Directors and Executive Officers of the Registrant................................... 28
ITEM 11. Executive Compensation............................................................... 29
ITEM 12. Security Ownership of Certain Beneficial Owners and Management....................... 35
ITEM 13. Certain Relationships and Related Transactions....................................... 35
PART IV.
ITEM 14. Exhibits, Consolidated Financial Statements, Financial Statement Schedule, and
Reports on Form 8-K.................................................................. 36
SIGNATURES
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PART I
This Annual Report on Form 10-K contains forward-looking statements relating to
future events or the future financial performance of the Company, including but
not limited to statements contained in "Factors That May Affect Future Operating
Results," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business." Readers are cautioned that such
statements, which may be identified by words including "anticipates,"
"believes," "intends," "estimates," "expects," and similar expressions, are only
predictions or estimations and are subject to known and unknown risks and
uncertainties. In evaluating such statements, readers should consider the
various factors identified in this Annual Report on Form 10-K, including matters
set forth in "Factors That May Affect Future Operating Results," which could
cause actual events, performance or results to differ materially from those
indicated by such statements.
ITEM 1. BUSINESS
GENERAL
Kofax Image Products, Inc. ("Kofax" or the "Company") develops and markets
products designed to manage the conversion of paper documents into electronic
information. Kofax's business is focused on the process of scanning large
volumes of documents, extracting both image and textual information from them,
and then introducing the electronic information into workflow systems, document
management systems and storage and retrieval systems. 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, workflow and document management solution providers including
value-added resellers, system integrators, independent software vendors and
computer companies.
RECENT DEVELOPMENTS
Pursuant to a tender offer commenced on August 3, 1999, Imaging Components
Corporation, a Delaware corporation (the "Purchaser") offered to purchase for
cash, at a price of $12.75 per share, all outstanding shares of Common Stock of
the Company. The tender offer was made pursuant to an Agreement and Plan of
Merger, dated as of July 27, 1999 (the "Merger Agreement"), among the Company,
the Purchaser and Imaging Acquisition Corporation, a Delaware corporation and
wholly-owned subsidiary of the Purchaser ("Merger Sub"). The tender offer
expired at 12:00 midnight, New York Time, on September 8, 1999. Purchaser
accepted for payment and purchased 4,414,409 shares of the Company's Common
Stock, or approximately 84% of the Company's outstanding shares of Common Stock,
pursuant to the tender offer.
Upon Purchaser's acceptance and purchase of the tendered shares, each of the
Company's incumbent directors (other than David S. Silver) resigned and two of
the vacancies created by such resignations were filled by the appointment of
Arnold von Buren and Alexander P. Coleman, who were designated by the Purchaser
for election to the Company's Board of Directors.
The Merger Agreement provides that as soon as practicable after Purchaser's
purchase of the shares tendered into the tender offer, Merger Sub will be merged
with and into the Company, the separate corporate existence of the Merger Sub
will cease and the Company will continue as the surviving corporation and will
be a wholly-owned subsidiary of the Purchaser (the "Merger").
Purchaser currently owns approximately 84% of the Company's outstanding shares
of Common Stock. Pursuant to the Merger Agreement, the Company has agreed to
call a special meeting of the stockholders of the Company to approve the Merger
Agreement and the Merger. Because the Purchaser will vote all shares it
beneficially owns in favor of the Merger Agreement and the Merger, approval of
the stockholders of the Company is assured.
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INDUSTRY BACKGROUND
The electronic document management (EDM), workflow, and imaging industry--which
addresses the need to organize and manage large volumes of corporate
information--encompasses a wide variety of companies in several different
technology areas.
One of the most persistent problems in installations of document management
systems has been the need to process paper-based documents as well as electronic
documents. An estimated 80%-90% of corporate information still resides in paper
form, including such things as invoices, purchase orders, faxes, contracts, and
so forth, and these documents must be converted into searchable electronic
documents in order to be properly managed by EDM and workflow systems.
The growth of the Internet has made the document capture problem even more
pressing--and has significantly increased the demand for automating the capture
of paper-based information. Commercially available Internet/intranet tools have
made it increasingly common (and easy) for organizations to make corporate
knowledge accessible to their workers, but as they implement Internet-based
solutions they find that they have solved only half the problem. Users of these
systems quickly become accustomed to having electronic information almost
instantly available to them, but they likewise become quickly frustrated when
they are unable to access paper-based information with the same ease and
convenience.
Because of this, the value of converting paper documents into electronic form
has grown. Unlike paper documents, electronic documents can be processed
efficiently, are searchable, and are easy to make accessible through Internet
technologies. Document and data capture is the most popular and efficient method
of converting paper documents into searchable electronic files, and the growth
of the Internet will be a key accelerator of growth in the capture market over
the next five years.
THE KOFAX SOLUTION
Kofax's specialty -- document and data capture -- is a popular and efficient
method of converting paper documents into searchable electronic files. Growth of
the document and data capture market is dependent on the need for five primary
applications of document and data capture:
o DOCUMENT MANAGEMENT applications in which large repositories of active
documents need to be controllable, versionable and accessible for
collaborative use.
o DATA CAPTURE applications in which text and data need to be
automatically read from forms and exported to shared databases,
mainframe systems and workflow processes.
o WEB PUBLISHING applications in which original documents are made
accessible via the Internet or a corporate intranet or extranet.
o WORKFLOW applications in which documents are introduced into a
business process typically initiated by a transaction.
o ARCHIVAL applications in which permanently stored documents of record
need to be accessed easily for viewing or demand printing.
Converting paper documents into electronic files is generally accomplished by
scanning the documents with a production document scanner that is designed to
scan large volumes of paper at speeds from 20 pages per minute up to 200 pages
per minute or more. These five applications have helped drive the growth of the
production scanner market at an annual rate of approximately 20%. The production
scanner market, in turn, is the primary driver of Kofax's growth, and the
Company's business is focused exclusively on software and hardware related to
scanning, enhancing, extracting data from, indexing, and long term storage of
business documents.
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Kofax's products cover the entire range of products required to perform these
tasks, including hardware controllers that reside in high-speed production
scanners (VirtualReScan or VRS), host controllers for PCs (Adrenaline), and
application software that manages the complex document and data capture process
(Ascent Capture).
PRODUCTS
Kofax currently markets three families of products:
o DOCUMENT AND DATA CAPTURE SOFTWARE under the Ascent Capture brand
name.
o OPTICAL STORAGE MANAGEMENT SOFTWARE under the Ascent Storage brand
name.
o SCANNING AND IMAGE PROCESSING HARDWARE under the Adrenaline and VRS
brand names.
All three of these product families are designed to improve either the capture
of paper documents (including scanning, data extraction, and image processing)
or the mass storage of these documents (including optical storage, archiving,
and retrieval).
Document and Data Capture Software - Ascent Capture 3
Ascent Capture 3, introduced in March 1999, scans large volumes of forms and
documents and converts them into images, text and data for introduction into a
variety of document management and workflow systems. It has three primary
benefits for organizations that deal with large volumes of paper as part of
their daily business routine:
o It converts paper documents into electronic images and then indexes
them so that they can be managed by a workflow or document management
system.
o It extracts text and data from forms and writes the data to a backend
database, mainframe, or line of business application.
o It reduces the ongoing labor costs of operating a capture system by
employing advanced technologies in the areas of batch management,
image enhancement, optical character recognition or OCR, data
validation, and integration with leading EDM and workflow systems.
Ascent Capture's unique DDI (Document-Data-Internet) architecture allows it to
address all three of the primary types of production capture in use today:
o Document capture, in which images are scanned and indexed for later
retrieval.
o Data capture, or forms processing, in which information is
automatically read from forms to replace manual data entry.
o Internet-based distributed capture, which allows inexpensive capture
stations to be located around the world and connected to a central
processing site via the Internet.
Since 1995, we have sold over 8,000 Ascent Capture licenses in use at over 2,000
installations worldwide. Integration modules are available for virtually all
leading workflow and document management systems, including:
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o IBM EDMSuite o Eastman Software Imaging for Windows NT
o Documentum 4i o Optika eMedia
o OpenText LiveLink o Keyfile
o PC DOCS, DOCS Open and DOCS Fusion o IMR Alchemy
o Adobe Acrobat Capture o Excalibur RetrievalWare
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Ascent Capture is priced from $895 to $14,000 per license and is sold worldwide
through authorized resellers of the Company.
In July 1999, Kofax acquired exclusive rights to advanced data capture
technologies from RAF Technologies and will use this as the basis for expanding
further into the high end of the data capture market.
Optical Storage Management Software - Ascent Storage 4
Ascent Storage 4 is an optical storage manager for Windows NT networks. It
allows an optical jukebox to be attached to a Windows NT server and manage large
volumes of document images or other data. Ascent Storage solves two problems
associated with using optical jukeboxes on Windows NT networks:
o The jukebox must emulate a magnetic disk perfectly so that it can work
with standard applications.
o The jukebox must provide reasonable performance.
Ascent Storage combines the ease of use of a drive emulator with the high
performance of a custom toolkit. It installs in minutes on any NT network and
provides true NT drive emulation, automatic backup capability, and reliable
disaster recovery. In addition, it allows value-added resellers or VARs and end
users to write simple macros that can link the storage system more tightly to
their back end EDM and workflow systems, thus providing higher performance and
faster retrieval times.
Ascent Storage is priced from $495 to $30,000 per license and is sold worldwide
through authorized distributors and resellers of the Company.
Scanning and Image Processing Hardware - Adrenaline and VRS
The Adrenaline and VRS hardware products are designed to improve the quality of
document images produced by high-speed production scanners:
o Adrenaline controller boards are installed in the PCI slot of any
standard Windows PC and then connected to a high-speed scanner. In
addition to controlling the basic operation of the scanner, Adrenaline
boards perform pixel-intensive image enhancement operations such as
image deskewing and despeckling, line removal, convolution, and more
at speeds up to 400 pages per minute, significantly improving the
quality, readability, and OCR accuracy of scanned images. Adrenaline
boards are available for both video and SCSI interface scanners and
support production scanners from Fujitsu, Bell+Howell, Kodak, Ricoh,
Panasonic, and others.
o VRS is an original equipment manufacturer (OEM) hardware product that
is installed in a scanner and performs image processing on raw
grayscale images before they are delivered to the PC. VRS provides two
unique capabilities: 1) grayscale deskew and adaptive thresholding
(conversion of the image from grayscale to bitonal) that are far
superior to anything performed by software or by an Adrenaline board
by itself, and 2) intelligent monitoring of images as they are
scanned, allowing scanner operators to manually adjust occasional
images that do not meet their quality standards.
Both Adrenaline and VRS are supported by most imaging and document capture
applications on the market, including products from Kofax, IBM, FileNET, Optika,
BancTec, Cardiff, Captiva, Microsystems, Datacap, Keyfile, and others.
Adrenaline controller boards are priced from $1,395 to $3,595 and are available
through Kofax's worldwide network of distributors. VRS is sold on an OEM basis
and VRS-enabled scanners are currently available from Fujitsu.
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TECHNOLOGY/RESEARCH AND DEVELOPMENT
As of June 30, 1999, the Company's research and development group consisted of
70 employees, of which 57 people manage, develop or test the Company's software
products. During the fiscal years ended June 30, 1999, 1998, and 1997, research
and development expenses were $8.6 million, $7.8 million, and $6.7 million,
respectively. The Company anticipates that it will continue to commit
substantial resources to product development in the future. See "Factors That
May Affect Future Operating Results -- Rapid Technological Change."
As is common in the imaging, workflow 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. Currently,
royalties payable under such license arrangements are not significant in
relation to 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, Microsoft 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, the first tier being stocking
distributors while the second tier are solution providers such as system
integrators and value-added resellers (VARs). During fiscal 1999, Kofax had 65
stocking distributors in 38 countries who accounted for 80% 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 1999,
three of these distributors, Law-Cypress Distributing Co., Tech Data
Corporation, and Cranel, Inc. accounted for 18%, 14%, and 11%, respectively, of
the Company's total net sales. See "Factors That May Affect Future Operating
Results -- Dependence Upon Distribution Channels."
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In addition, the Company has a field sales force that works closely with its
distributor and reseller channel. In the Ascent Software Business Unit, Kofax
maintains six sales offices in the U.S. staffed by technical sales managers and
application engineers. The Company's European headquarters in Brussels covers
Western Europe, Eastern Europe, Africa and the Middle East, and two full-time
sales people based in the Irvine, California office cover Asia and South
America. In the Image Processing Business Unit, a separate sales force is used
to cover North America. In fiscal 1999, approximately 69% of net sales were
generated in the United States, 23% in Europe and 8% 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 system integrators
and are responsible for handling credit issues and stocking product 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, workflow 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, banking, insurance, transportation and government. The
Company has selected and trained over 500 Ascent Certified Resellers (ACRs) who
incorporate the Company's Ascent software line into complete imaging, workflow
and document management systems. The ACRs are the primary focus of the Company's
Ascent software sales strategy and, accordingly, the Company is investing
significantly in growing, training and supporting this base of resellers.
END USER CUSTOMERS
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 reseller partners. The list below, which was derived from
the Company's database of warranty registration cards, 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.
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MANUFACTURING FINANCIAL/BANKING SYSTEM INTEGRATORS
Procter & Gamble GE Capital Services EDS Corp.
BMW AG United Bank of Switzerland Lucent Technologies
Dow Corning Chase Manhattan Bank Unisys Corporation
NATIONAL GOVERNMENT OIL AND CHEMICALS STATE AND LOCAL GOVERNMENT
U.S. Customs Service The British Petroleum Co. PLC Wisconsin Dept. of Justice
U.S. Army Chevron Corporation Denver Water Dept.
U.S. Dept. of Treasury The Dow Chemical Co. City of Minneapolis
ELECTRONICS SERVICES/DISTRIBUTION EDUCATION
Digital Equipment Corp. Automobile Club of So. Calif. Cal State University, Hayward
General Electric Avis Rent A Car, Inc. University of Oklahoma
Hewlett-Packard Company SYSCO Corp. University of Wisconsin
PHARMACEUTICAL INSURANCE ENERGY
Merck & Co., Inc. Equitable Life Assurance British Gas Transco
Warner Lambert Co. Blue Cross/Blue Shield Petro-Canada
Glaxo Wellcome PLC Delta Dental Plans Association Consolidated Edison, Inc.
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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
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marketing programs. This process is automated and is designed to ensure that
leads are fulfilled promptly and by the appropriate channel partner.
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.
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 include 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 software vendors in
the document management and workflow 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, and cooperative advertising.
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 12 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 Company's 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
$1,495. 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 toolkit products receive
free software upgrades as part of their subscription to the Company's technical
support program. Customers of the Ascent application software purchase new
versions when they become available (typically every 15-18 months) and are
normally offered these upgrades at a reduced price. Maintenance upgrades of
Ascent software are made available to existing customers at no charge.
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, workflow 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, workflow 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, workflow 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 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. See "Factors That May
Affect Future Operating Results -- Impact of Competition."
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 and other proprietary
technology. Despite these precautions, there can be no assurance that the
Company will be successful in protecting
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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, workflow 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.
Kofax(R), KIPP(R), ImageControls(R), Ascent(R), Ascent Capture(R),
StorageControls(R), and Adrenaline(R) are registered trademarks of the Company.
Ascent Storage(TM), VirtualReScan(TM), VRS(TM), and Ascent Capture Internet
Server(TM) are trademarks of the Company and are the subject of pending
trademark registration applications. Alliance(SM) is a servicemark of the
Company and is the subject of a pending servicemark registration application.
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 several risks, including the
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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. See
"Factors That May Affect Future Operating Results -- Dependence on Suppliers and
Subcontractors."
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 June 30, 1999, the Company employed 173 individuals, including 70 in
research and development, 65 in sales, marketing and customer support, 14 in
manufacturing and 24 in administration, finance and information systems. 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.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), regarding the Company, its business, prospects and
results of operations that are subject to certain risks and uncertainties posed
by many factors and events that could cause the Company's actual results to
differ from those that may be anticipated by such forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed below as well as those discussed elsewhere in this
Annual Report. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this Annual
Report. The Company undertakes no obligation to revise any forward-looking
statements in order to reflect events or circumstances that may subsequently
arise. Readers are urged to carefully review and consider the various
disclosures made by the Company in this Annual Report and in the Company's other
reports filed with the Securities and Exchange Commission that attempt to advise
interested parties of the risks and factors that may affect the Company's
business.
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 imaging, workflow and document management market; dependence upon
capital spending budgets; dependence on suppliers of scanners and their ability
to supply scanners to the marketplace;
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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."
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."
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 the
Company's net sales for the foreseeable future. The Company believes that as its
family of accelerator boards and related products continues to mature, sales of
these products will grow at slower than 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. 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 products. The Company believes that its
Ascent 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
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 products, achieving market
acceptance of its new products under development or developing additional
products. Failure to increase sales of the Company's Ascent 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."
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Dependence on Imaging, Workflow and Document Management 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 imaging, workflow
and document management market is a rapidly evolving market. If this 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, 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 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 imaging, workflow and document management 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 this developing 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
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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."
Dependence on Scanner Manufacturers
The Company's accelerator boards and Ascent Capture software are used in
conjunction with high-end production scanners which are manufactured and
supplied by several domestic and Japanese scanner manufacturers and vendors. The
Company's sales of these products are dependent on the number of scanners that
are produced and distributed by these scanner manufacturers and vendors. Any
decrease in the number of scanners in the marketplace may decrease the number of
accelerator boards sold by the Company. Manufacturers and distributors of
scanners may encounter a variety of difficulties that may reduce the number of
scanners produced and shipped to consumers during the period of such difficulty,
all of which are beyond the Company's control. There can be no assurance that
manufacturers and distributors will not experience difficulties in producing or
shipping scanners or, if such difficulties arise, that they will be resolved in
a timely manner, resulting in a lower than expected number of scanners in the
marketplace. Any decrease in the number of scanners produced and shipped to
consumers could materially adversely effect the Company's business, operating
results, cash flows and financial condition.
Dependence Upon Distribution Channels
The Company relies heavily on its distributors and resellers for the marketing
and distribution of its products. In fiscal 1999, three of the Company's
distributors, Law-Cypress Distributing Co., Tech Data Corporation, and Cranel,
Inc. accounted for 18%, 14%, and 11%, 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 imaging, workflow and
document management systems. As such, sales of the Company's products depend, in
significant part, upon purchases of imaging, workflow and document management
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
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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."
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
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such reduction, constraint or unavailability could result in shipment delays 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. 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. The Company's ability
to compete effectively and to manage future anticipated growth will also require
the Company to recruit additional qualified personnel. 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".
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 imaging, workflow and document
management systems purchased by end users such as large corporations and
domestic and foreign governmental agencies. The decision to purchase an imaging,
workflow and document management 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 imaging, workflow and document management systems. Certain
industries that utilize imaging, workflow and document management 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.
Risks Associated with International Sales
In fiscal 1999, 1998, and 1997, international sales represented approximately
31%, 33%, 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
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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.
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.
Risks Associated with Acquisitions
From time to time, the Company expects to make acquisitions of, or significant
investments in, businesses that offer complementary products and technologies.
Such future acquisitions or investments would expose the Company to the risks
commonly encountered in acquisitions of businesses. Such risks include, among
others, difficulty of assimilating the operations, information systems and
personnel of the acquired businesses; the potential disruption of the Company's
ongoing business; the inability of management to maximize the financial and
strategic position of the Company through the successful incorporation of
acquired employees and customers; the maintenance of uniform standards,
controls, procedures and policies; and the impairment of relationships with
employees and customers as a result of any integration of new management
personnel. There can be no assurance that any potential acquisition will be
consummated or, if consummated, that it will not have a material adverse effect
on the Company's business, financial condition and results of operations.
Possible Volatility of Stock Price
The trading price of the Company's Common Stock is subject to significant
fluctuations in response to variations in quarterly operating results, the gain
or loss of significant orders, changes in earning estimates by analysts,
announcements of technological innovations or new products by the Company or its
competitors, general conditions in the software and computer industries and
other events or factors. In addition, the stock market in general has
experienced extreme price and volume fluctuations which have affected the market
price for many companies in industries similar or related to that of the Company
and which have been unrelated to the operating performance of these companies.
These market fluctuations may adversely affect the market price of the Company's
Common Stock. See "Market for Registrant's Common Stock and Related Stockholder
Matters".
Year 2000 Issues
It is possible that the currently installed computer systems, software products
or other business systems of the Company's distributors, resellers, suppliers,
manufacturers or customers, working either alone or in conjunction with other
software systems, will not accept input of, store, manipulate and output dates
in the Year 2000 or thereafter without error or interruption (the "Year 2000
Problem"). The Company has tested its software products and is unaware of any
material Year 2000 Problems. In addition, the Company has completed a review of
its business systems, including its computer systems, and based on information
gathered to date, believes that such systems are also not subject to any
material Year 2000 Problems. The Company has queried its distributors,
resellers, suppliers, manufacturers and customers as to their progress in
identifying and addressing Year 2000 Problems. Substantially all of the
Company's primary distributors, resellers, suppliers, manufacturers, and
customers have indicated that they
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are Year 2000 compliant. Based on the Company's review of its products and
business systems and responses from its significant third party vendors, the
Company believes that total costs due to the Year 2000 Problem will not exceed
$100,000. The Company believes under a worse case scenario, it could continue
the majority of its normal business activities on a manual basis. The Company
has not developed a contingency plan to address the Year 2000 Problem in the
event that the Company or its distributors, resellers, suppliers, manufacturers
or customers fail to become Year 2000 compliant. The failure of the Company or
its distributors, resellers, suppliers, manufacturers and customers to complete
the conversions or upgrades necessary to fully address the Year 2000 Problem in
a timely manner could have material adverse effect on the Company's business,
results of operations, cash flows and financial condition.
ITEM 2. PROPERTIES
The Company currently leases approximately 59,000 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 March, 2004, and has two
three-year options to extend the lease. Rent expense will increase annually
during the term of this lease. 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.
ITEM 3. LEGAL PROCEEDINGS
On September 26, 1997, VisionShape, Inc. ("VisionShape") filed suit against the
Company in the Superior Court of Orange County, California. VisionShape claims
that the Company's Adrenaline accelerator boards prevent the use of software
other than the Company's software, which, the complaint alleges, creates a
monopoly or otherwise constitutes a tying arrangement in violation of state and
federal antitrust laws. VisionShape seeks unspecified monetary damages and costs
as well as equitable remedies, including an order enjoining the Company from
selling its Adrenaline accelerator boards. VisionShape also seeks treble damages
and attorneys' fees. On May 27, 1998, the Superior Court held that VisionShape
failed to state a cause of action against the Company and ordered the suit
dismissed on July 15, 1998. VisionShape filed an appeal on March 31, 1999. Based
upon information currently available to the Company, the Company believes
VisionShape's claims are without merit and intends to contest vigorously any
action against the Company. However, it is too early to determine the outcome of
such appeal and there can be no assurance as to the eventual outcome of such
actions. Any determination against the Company in the litigation or the
settlement of such claims could have a material adverse effect on the Company's
business, results of operation, cash flows and financial condition. The Company
is not a party to any other material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended June 30, 1999.
19
<PAGE> 20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "KOFX". The Company completed its initial public offering of its Common
Stock on October 10, 1997 at an offering price of $11.00 per share. The
following table sets forth, for the periods indicated, the high and low sale
prices for the Common Stock as reported by the Nasdaq National Market.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal 1998:
Second Quarter (from October 10, 1997) $11.75 $4.00
Third Quarter $ 8.00 $5.00
Fourth Quarter $ 8.25 $6.125
Fiscal 1999:
First Quarter $ 7.625 $6.25
Second Quarter $ 8.75 $5.875
Third Quarter $10.50 $7.375
Fourth Quarter $10.00 $7.875
</TABLE>
As of September 17, 1999, the number of stockholders of record was 57. This
number does not account for Common Stock registered in street name. Accordingly,
the actual number of holders of record of the Company's Common Stock may be
significantly greater than the number indicated above.
The Company has never declared or paid any cash dividends on shares of its
Common Stock. The Company currently intends to retain all available funds for
use in the operation of its business, or to acquire or invest in complementary
businesses or products or obtain the right to use complementary technologies,
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.
On April 27, 1998, the Company announced that its board of directors had
authorized a program for repurchase of up to 500,000 shares, or approximately
9.5%, of the Company's outstanding Common Stock, to be used to fund stock option
exercises, employer equity compensation plans, and an employee stock purchase
plan. The Company repurchased 274,000 and 100,000 shares of its common stock
during fiscal 1999 and 1998 for approximately $2.1 million and $0.6 million,
respectively.
20
<PAGE> 21
ITEM 6. SELECTED 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, 1999, 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, 1999 and 1998 and for each of the
three years in the period ended June 30, 1999 are included elsewhere in this
Annual Report on Form 10-K. 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 Annual Report on Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEARS ENDED JUNE 30,
-----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales $ 38,095 $ 33,375 $ 29,266 $ 24,964 $ 21,085
Cost of sales 8,794 7,819 7,720 7,926 7,218
-------- -------- -------- -------- --------
Gross profit 29,301 25,556 21,546 17,038 13,867
Operating expenses:
Sales and marketing 11,389 10,706 9,565 7,456 5,977
Research and development 8,642 7,826 6,653 5,090 3,693
General and administrative 3,112 2,672 1,936 1,748 1,554
Acquired in-process research and development costs -- -- -- 4,177 --
-------- -------- -------- -------- --------
Total operating expenses 23,143 21,204 18,154 18,471 11,224
-------- -------- -------- -------- --------
Income (loss) from operations 6,158 4,352 3,392 (1,433) 2,643
Other income, net 1,050 759 69 200 264
-------- -------- -------- -------- --------
Income (loss) before provision (benefit) for income taxes 7,208 5,111 3,461 (1,233) 2,907
Provision (benefit) for income taxes 2,514 1,968 1,326 (500) 1,096
-------- -------- -------- -------- --------
Net income (loss) $ 4,694 $ 3,143 $ 2,135 $ (733) $ 1,811
======== ======== ======== ======== ========
Basic net income (loss) per share $ 0.89 $ 0.75 $ 1.37 $ (0.82)
======== ======== ======== ========
Diluted net income (loss) per share $ 0.87 $ 0.62 $ 0.52 $ (0.82)
======== ======== ======== ========
Basic weighted average common shares(1) 5,282 4,197 1,319 1,305
======== ======== ======== ========
Diluted weighted average common shares(1) 5,421 5,073 4,126 1,305
======== ======== ======== ========
Net income (loss) applicable to common stockholders $ 4,694 $ 3,143 $ 1,801 $ (1,067)
======== ======== ======== ========
BALANCE SHEET DATA:
Cash, cash equivalents, and investments $ 25,279 $ 20,865 $ 5,404 $ 3,514 $ 6,759
Working capital 27,542 24,149 8,676 6,949 9,382
Total assets 37,085 32,115 16,327 14,141 13,018
Long-term notes payable -- -- 427 799 --
Total stockholders' equity(1) 31,131 27,625 12,254 10,106 10,832
</TABLE>
- ----------
(1) Includes amounts attributable to the outstanding shares of the Company's
Redeemable Convertible Preferred Stock, which was converted into common
stock at the time of the Company's initial public offering.
21
<PAGE> 22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements regarding the
Company, its business, prospects and results of operations that are subject to
certain risks and uncertainties posed by many factors and events that could
cause the Company's actual business, prospects and results of operations to
differ materially from those that may be anticipated by such forward-looking
statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed herein as well as those discussed under
the caption "Factors That May Affect Future Operating Results". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date of this Annual Report on Form 10-K. The Company
undertakes no obligation to revise any forward-looking statements in order to
reflect events or circumstances that may subsequently arise. Readers are urged
to carefully review and consider the various disclosures made by the Company in
this Annual Report and in the Company's other reports filed with the Securities
and Exchange Commission that attempt to advise interested parties of the risks
and factors that may affect the Company's business.
OVERVIEW
Kofax Image Products was founded in 1985 to develop image processing accelerator
boards that could be added to PCs and other desktop workstations to facilitate
high-speed scanning, compression, manipulation and printing of document images.
The products were targeted at the emerging market of document image processing.
Today, Kofax develops, markets, and supports three product lines for imaging,
workflow, and document management applications. The fastest growing products are
software applications that manage the capture and long-term storage of documents
for production level workflow and document management systems. The original
image processing hardware and development tools business, which is in its fourth
generation, currently generates gross margins of approximately 70% and continues
to generate significant profit for investment into the faster growing software
businesses.
Fiscal year 1999 total software revenue was $12.7 million, or about 33% of
revenue. This was a 25% increase over fiscal 1998 software revenue.
Substantially all of this increased software revenue was generated from the
Company's Ascent software business. During fiscal 1999, the Company signed and
trained over 130 new Ascent resellers focused on document management and
workflow solutions. Revenue from the Company's family of image processing boards
and development tools has grown modestly over the past three years, and the
Company expects that to continue for the foreseeable future. The Company
believes that the accelerator board and development tools business will continue
to account for a majority of the Company's net sales for the next two to three
years. The Company also expects that its Ascent software 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 $38.1 million in
fiscal 1999. 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 image processing
products amounted to 70.0% of fiscal 1999 revenue. Net sales of Ascent component
software products amounted to 30.0% of fiscal 1999 revenue compared to 25.5% in
fiscal 1998 and 17.7% in fiscal 1997.
International sales (primarily to western European countries) accounted for
approximately 31%, 33%, and 34% of net sales during fiscal 1999, 1998, and 1997,
respectively. Approximately 3%, 4%, and 5% of international sales during fiscal
1999, 1998, and 1997, respectively, were attributable to countries in Asia and
the Pacific Rim. Sales to Asia and Pacific Rim countries declined in absolute
dollars from fiscal 1998 to fiscal 1999. Some of this decrease is attributable
to not having local language versions of Ascent Capture available for the
Japanese, Korean, and other Asian markets. The Company is currently working on
providing a version of Ascent Capture in Japanese which may improve sales in
this region. The Company has not had any sales from Russia or China to date, and
the Company
22
<PAGE> 23
has no current sales or marketing plans for Russia or China. Management expects
that the Company's international operations will continue to provide a
significant portion of total net sales; however, international sales could be
adversely affected if the U.S. dollar continues to strengthen against
international currencies. To date the Company has not yet had any foreign
currency translation adjustments. The adoption of the "Euro" by the European
community in 1999 may lead the Company to transact its European sales in
"Euros," which may result in the realization of foreign exchange gains or losses
in the future.
The Company sells its products primarily through a two-tier channel of stocking
distributors and solution providers, such as system integrators and value-added
resellers (VARs). Net sales through stocking distributors amounted to 80% of
fiscal 1999 revenue. The Company has six domestic and three European sales
offices to support its distributors and resellers. Revenue from hardware and
software sales is recognized at the time of shipment in accordance with AICPA
Statement of Position 97-2, "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, workflow, 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.
The Company has been profitable for the last 32 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").
Cost of sales primarily consists 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 high content of proprietary firmware in the
Company's hardware accelerator boards as well as the increasing percentage of
total software revenue in 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. 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
Adrenaline family of image processing 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, 1999, the Company did not have any
capitalized software development expenses. See Note 2 of Notes to Consolidated
Financial Statements.
23
<PAGE> 24
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 YEARS ENDED JUNE 30,
----------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of sales 23.1 23.4 26.4
------ ------ ------
Gross profit 76.9 76.6 73.6
Operating expenses:
Sales and marketing 29.9 32.1 32.7
Research and development 22.7 23.5 22.7
General and administrative 8.2 8.0 6.6
------ ------ ------
Total operating expenses 60.8 63.6 62.0
------ ------ ------
Income from operations 16.1 13.0 11.6
Other income, net 2.8 2.3 0.2
------ ------ ------
Income before provision for income taxes 18.9 15.3 11.8
Provision for income taxes 6.6 5.9 4.5
------ ------ ------
Net income 12.3% 9.4% 7.3%
====== ====== ======
</TABLE>
Net Sales. Net sales were $38.1 million, $33.4 million and $29.3 million in
fiscal 1999, 1998, and 1997, respectively. Net sales increased 14.1%, 14.0%, and
17.2% in fiscal 1999, 1998, and 1997, respectively. The increases in fiscal 1999
and 1998 net sales were primarily attributable to increases in sales of the
Company's Ascent software products. Revenues from the Ascent software business
were $11.4 million, $8.5 million, and $5.1 million in fiscal 1999, 1998, and
1997, respectively.
Gross Profit. As a percentage of net sales, gross profit represented 76.9%,
76.6% and 73.6% in fiscal 1999, 1998 and 1997, respectively. The increases in
the gross profit percentage in fiscal 1999 and 1998 were primarily attributable
to increasing sales of Ascent software products which have higher gross profit
rates.
Sales and Marketing. Sales and marketing expenses were $11.4 million, $10.7
million, and $9.6 million in fiscal 1999, 1998, and 1997, respectively. As a
percentage of net sales, sales and marketing expenses represented 29.9%, 32.1%,
and 32.7% in fiscal 1999, 1998, and 1997, respectively. The increase in absolute
dollars in fiscal 1999 was primarily attributable to approximately $0.3 million
for additional marketing personnel, and approximately $0.4 million for increased
marketing related expenses related to the launch of Ascent Storage 4.0 and
Ascent Capture 3.0 products. The increase in fiscal 1998 was primarily
attributable to approximately $0.7 million for additional marketing personnel
and increased costs of compensation. 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 $8.6 million,
$7.8 million, and $6.7 million in fiscal 1999, 1998, and 1997, respectively. As
a percentage of net sales, research and development expenses represented 22.7%,
23.5%, and 22.7% in fiscal 1999, 1998, and 1997, respectively. Approximately
$0.6 million and $1.2 million, respectively, of the fiscal 1999 and fiscal 1998
increases in research and development expenditures were primarily due to
increased compensation costs for personnel, consultants, and contract labor
working on Ascent Capture, Ascent Storage, Adrenaline and ImageControls product
development. 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 $3.1
million, $2.7 million, and $1.9 million in fiscal 1999, 1998, and 1997,
respectively. As a percentage of net sales, general and administrative expenses
were 8.2%, 8.0%, and 6.6% in fiscal 1999, 1998, and 1997, respectively. The
increase in fiscal 1999 was primarily attributable to increased compensation
expenses. The increase in fiscal 1998 was primarily attributable to increased
information systems expenses for compensation and infrastructure additions, and
the increased accounting, legal, and other expenses related to the Company
becoming a public company. The Company anticipates that it will incur increased
general and administrative costs in the future.
24
<PAGE> 25
Other Income, Net. Other Income, net is primarily interest income earned on
short-term investments and investments held to maturity, less interest expense
on long-term notes payable. Other Income, net was $1.1 million, $0.8 million,
and $0.1 million in fiscal 1999, 1998, and 1997, respectively. As a percentage
of net sales, other income, net was 2.8%, 2.3%, and 0.2% in fiscal 1999, 1998,
and 1997, respectively. The increase in fiscal 1999 was due to interest income
on the increase in cash and short-term investments provided by operating
activities. The increase in fiscal 1998 was due to interest income from the
$11.9 million increase in short-term investments from the proceeds of the
Company's initial public offering and a reduction in interest expense from
repayment of long-term notes payable.
Provision for Income Taxes. The Company's effective tax rate was 35%, 38%, and
38% in fiscal 1999, 1998, and 1997, respectively. The decline in the effective
tax rate in fiscal 1999 is a result of increased research and development
expenditures in fiscal 1999, resulting in a larger federal and state R&D tax
credit. The Company expects the effective tax rate to increase in fiscal year
2000, if the federal R&D tax credit is not extended in its current form.
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. In October 1997, the Company
completed its initial public offering selling 1,300,000 shares of its common
stock, and received net proceeds, after subtracting expenses incurred in the
offering, of approximately $12.6 million. The Company's primary sources of funds
at June 30, 1999 consisted of approximately $25.3 million of cash, cash
equivalents and investments.
As of June 30, 1999 cash and cash equivalents totaled $25.3 million, an increase
of $8.7 million from June 30, 1998. Net cash provided by operating activities
during fiscal 1999 was approximately $7.2 million, and was generated primarily
from net income, depreciation, and amortization and an increase in other accrued
liabilities and deferred revenue. Net cash provided by investing activities
during fiscal 1999 was approximately $2.8 million, and was generated primarily
from the classification of the Company's investments to cash equivalents in
anticipation of their liquidation as required by the Merger Agreement with
Purchaser. Net cash used in financing activities during fiscal 1999 of
approximately $1.3 million was primarily for the repurchase of 274,000 shares of
Common stock for use in the employee stock option and stock purchase plans.
The Company had an unsecured $2.0 million revolving credit line with Silicon
Valley Bank (the "Bank") with no outstanding balance at June 30, 1999. The
revolving line of credit was terminated September 9, 1999 in connection with the
closing of the tender offer. To obtain the funds required to purchase the shares
tendered in the tender offer and complete the merger, the Purchaser incurred
borrowings of $50.0 million under a Credit Agreement for senior secured
facilities and $10.0 million under Senior Subordinated Notes. As a condition to
these financings, the Company entered into guarantee and collateral agreements
pursuant to which the lenders under the Credit Agreement and Senior Subordinated
Notes obtained a security interest in the Company's assets, including its cash
balances, and the Company guaranteed the obligations of Purchaser. Upon
consummation of the Merger, the Company will assume the obligations of Purchaser
and become the borrower under the Credit Agreement and Senior Subordinated
Notes.
On April 24, 1998, the Company's board of directors authorized a program for
repurchase of up to 500,000 shares, or approximately 9.5%, of the Company's
outstanding Common Stock, to be used to fund stock option exercises, employer
equity compensation plans, and an employee stock purchase plan. The Company
repurchased 274,000 shares and 100,000 shares of its common stock during fiscal
1999 and 1998 for approximately $2.1 million and $0.6 million, respectively.
Aside from this program, the Company currently has no significant capital
spending or purchase commitments other than normal purchase commitments and
commitments under facilities leases. It is expected that a portion of the
Company's cash balances will be used to repay debt incurred in connection with
its assumption of Purchaser's obligations under the Credit Agreement and Senior
Subordinated Notes.
The Company believes that its existing cash balances, available bank financing
and the cash flows generated from operations, if any, will be sufficient to meet
its anticipated cash needs for working capital and capital expenditures for at
least the next 12 months. A portion of the Company's cash could be used to
acquire or invest in
25
<PAGE> 26
complementary businesses or products or obtain the right to use complementary
technologies. The Company is currently evaluating, in the ordinary course of
business, potential investments such as businesses, products or technologies.
See "Factors That May Affect Future Operating Results -- Risks Associated with
Acquisitions."
Quantitative and Qualitative Disclosures about Market Risk
At June 30, 1999, the Company had an investment portfolio of fixed income
securities, including those classified as cash equivalents, of approximately
$25.3 million. These securities are subject to interest rate fluctuations. An
increase in interest rates could adversely affect the market value of the
Company's fixed income securities.
As of June 30, 1999, the weighted average maturity of the Company's portfolio
was 17 days. The market value changes for increases in short-term treasury
security yields are not material due to the overall short-term maturity of the
Company's portfolio.
The Company limits its exposure to interest rate and credit risk by establishing
and strictly monitoring clear policies and guidelines for its fixed income
portfolios. At the present time, the maximum average maturity of the Company's
overall investment portfolio is limited by policy to 36 months. The guidelines
also establish credit quality standards, limits on exposure to one issue or
issuer, as well as the type of instrument. Due to the limited duration and
credit risk criteria established in the Company's guidelines, the exposure to
market and credit risk is not expected to be material. The Company does not use
derivative financial instruments in its investment portfolio to manage interest
rate risk.
EUROPEAN MONETARY UNION
Within Europe, the European Economic and Monetary Union introduced a new
currency, the Euro, on January 1, 1999. The new currency is in response to the
European Union's policy of economic convergence to harmonize trade policy,
eliminate business costs associated with currency exchange and to promote the
free flow of capital, goods and services.
On January 1, 1999, the participating countries adopted the Euro as their local
currency, initially available for currency trading on currency exchanges and
non-cash transactions such as banking. The existing local currencies, or legacy
currencies, will remain legal tender through January 1, 2002. Beginning on
January 1, 2002, Euro-denominated bills and coins will be issued for cash
transactions. For a period of up to six months from this date, both legacy
currencies and the Euro will be legal tender. On or before July 1, 2002, the
participating countries will withdraw all legacy currencies and exclusively use
the Euro.
Our transactions are currently recorded in U.S. Dollars only. Future
transactions may be recorded in the Euro. We have not incurred and do not expect
to incur any significant costs from the continued implementation of the Euro.
However, the currency risk of the Euro could harm our business.
RECENT ACCOUNTING PRONOUNCEMENTS
For the year ended June 30, 1999, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". There was no difference between the net income and the
comprehensive net income for the years ended June 30, 1999, 1998 and 1997.
For the year ended June 30, 1999, the Company also adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information". This
statement establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosure about products and services, geographic areas and major
customers. (See Note 9)
In February 1998, the Financial Accounting Standard Board (FASB) issued SFAS No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits".
This statement revises and standardizes employers' disclosure requirements about
pension and other postretirement benefit plans, requires additional information
on changes in the
26
<PAGE> 27
benefit obligations and fair values of plan assets that will facilitate
financial analysis and eliminates certain disclosures that are no longer useful.
The Company does not maintain an employee pension plan or any other
postretirement benefit plans.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which the Company is required to adopt
effective in its fiscal year 2000. SFAS No. 133 will require the Company to
record all derivatives on the Balance Sheet at fair market value. The Company
does not currently engage in hedging activities but will continue to evaluate
the effect of adopting SFAS No. 133.
YEAR 2000 ISSUES
It is possible that the currently installed computer systems, software products
or other business systems of the Company's distributors, resellers, suppliers,
manufacturers or customers, working either alone or in conjunction with other
software systems, will not accept input of, store, manipulate and output dates
in the Year 2000 or thereafter without error or interruption (the "Year 2000
Problem"). The Company has tested its software products and is unaware of any
material Year 2000 Problems. In addition, the Company has completed a review of
its business systems, including its computer systems, and based on information
gathered to date, believes that such systems are also not subject to any
material Year 2000 Problems. The Company has queried its distributors,
resellers, suppliers, manufacturers and customers as to their progress in
identifying and addressing Year 2000 Problems. Substantially all of the
Company's primary distributors, resellers, suppliers, manufacturers, and
customers have indicated that they are Year 2000 compliant. Based on the
Company's review of its products and business systems and responses from its
significant third party vendors, the Company believes that total costs due to
the Year 2000 Problem will not exceed $100,000. The Company believes under a
worse case scenario, it could continue the majority of its normal business
activities on a manual basis. The Company has not developed a contingency plan
to address the Year 2000 Problem in the event that the Company or its
distributors, resellers, suppliers, manufacturers or customers fail to become
Year 2000 compliant. The failure of the Company or its distributors, resellers,
suppliers, manufacturers and customers to complete the conversions or upgrades
necessary to fully address the Year 2000 Problem in a timely manner could have
material adverse effect on the Company's business, results of operations, cash
flows and financial condition.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is included in Part IV Item 14.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None
27
<PAGE> 28
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company, and their ages as of
September 17, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
David S. Silver 41 Chief Executive Officer, President and Chairman of the Board
Richard M. Murphy 52 Vice President and General Manager - Image Processing
Business Unit
Ronald J. Fikert 51 Vice President, Finance, Chief Financial Officer and Secretary
Kevin Drum 40 Vice President, Marketing - Ascent Software Business Unit
Arnold von Buren 47 Director
Alexander P. Coleman 32 Director
</TABLE>
- ----------
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.
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.
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.
Arnold von Buren was appointed to the Board of Directors concurrently with
Purchaser's purchase of shares accepted in the tender offer. Mr. Von Buren is
Secretary of Purchaser and served as Deputy Chief Executive of DICOM GROUP plc
since November 1996. He joined ACU Informatick AG in Switzerland in 1983,
working in sales and administration, and co-founded and became general manager
of Computerway in 1989. Mr. Von Buren is a Swiss citizen with a degree in
Economics and Business Administration. He has worked in the computer industry
since 1978, including three years in the USA.
28
<PAGE> 29
Alexander P. Coleman was appointed to the Board of Directors concurrently
with Purchaser's purchase of shares accepted in the tender offer. Mr. Coleman is
Vice President of Purchaser. He is also an Investment Partner of Dresdner
Kleinwort Benson Private Equity LLC and a Vice President of Dresdner Kleinwort
Benson North America LLC. Mr. Coleman joined Dresdner Kleinwort Benson in
January 1996, and has been involved in management buyouts, cross-border
equities, expansion financings and venture capital since joining Citicorp
originally in 1989. Mr. Coleman is an active board member with a number of
companies. Mr. Coleman holds an MBA from the University of Cambridge and a BA in
economics from the University of Vermont. Mr. Coleman is a United States
citizen.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES ACT OF 1934
Based upon its review of the copies of reporting forms furnished to the Company,
the Company believes that all filing requirements under Section 16(a) of the
Securities Exchange Act of 1934 applicable to its directors, officers, and any
persons holding ten percent or more of the Company's Common Stock during the
Company's fiscal year ended June 30, 1999, were satisfied.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth compensation received for the fiscal years ended
June 30, 1999, 1998 and 1997 by the Company's Chief Executive Officer and its
other most highly compensated executive officers (collectively, the "Named
Executive Officers") whose aggregate salary and bonus exceeded $100,000 for the
fiscal year ended June 30, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- ---------------------
NAME AND FISCAL YEAR SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION ENDING JUNE 30 SALARY($) BONUS($)(1) OPTIONS/SARS COMPENSATION($)(1)
------------------ -------------- --------- ----------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
David S. Silver........ 1999 $ 160,008 $ 69,300 60,000 $ 750
President and Chief 1998 145,000 59,458 - 750
Executive Officer 1997 135,000 64,893 - 750
Dean A. Hough(2)....... 1999 $ 125,004 23,520 20,000 750
Vice President - 1998 118,000 19,806 - 750
Engineering 1997 114,078 21,083 - 750
Ronald J. Fikert....... 1999 118,004 24,990 20,000 750
Vice President - 1998 109,000 23,250 - 750
Finance, Chief 1997 103,843 23,908 - 750
Financial
Officer and Secretary
Richard Murphy(3)...... 1999 109,008 80,161 20,000 750
Vice President - 1998 104,000 60,405 - 750
Sales 1997 100,000 76,761 - 750
Kevin Drum............. 1999 115,008 25,137 20,000 750
Vice President - 1998 109,000 21,528 - 750
Marketing 1997 102,290 22,295 - 750
</TABLE>
- --------------------
(1) Consists of matching payments made under the Company's 401(k) Plan.
(2) Mr. Hough resigned as Vice President of Engineering as of September 3,
1999.
(3) Bonus amounts for Mr. Murphy include $59,948, $43,547 and $59,895 in sales
commissions earned by Mr. Murphy during fiscal years 1999, 1998 and 1997,
respectively.
29
<PAGE> 30
STOCK OPTIONS
The following table sets forth certain information concerning grants of options
to each of the Named Executive Officers during the year ended June 30, 1999. In
addition, in accordance with the rules and regulations of the Commission, the
following table sets forth the hypothetical gains or "option spreads" that would
exist for the options. Such gains are based on assumed rates of annual compound
stock appreciation of 5% and 10% from the date on which the options were granted
over the full term of the options. The rates do not represent the Company's
estimate or projection of future Common Stock prices, and no assurance can be
given that any appreciation will occur or that the rates of annual compound
stock appreciation assumed for the purposes of the following table will be
achieved.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------- POTENTIAL REALIZED VALUE
NUMBER OF PERCENTAGE OF AT ASSUMED ANNUAL RATES
SECURITIES TOTAL OPTIONS OF STOCK PRICE
UNDERLYING GRANTED TO EXERCISE OR APPRECIATION
OPTIONS EMPLOYEES IN BASE EXPIRATION -----------------------
NAME GRANTED(#)(1) FISCAL YEAR(2) PRICE($/SH) DATE 5% 10%
- ------------------ ------------- -------------- ----------- --------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
David S. Silver... 60,000 20.9% $6.94 August 25, 2003 $ 115,010 $ 254,143
Dean A. Hough..... 20,000 7.0 $6.94 August 25, 2003 38,337 84,714
Ronald J. Fikert.. 20,000 7.0 $6.94 August 25, 2003 38,337 84,714
Richard Murphy.... 20,000 7.0 $6.94 August 25, 2003 38,337 84,714
Kevin Drum........ 20,000 7.0 $6.94 August 25, 2003 38,337 84,714
</TABLE>
- ------------------
(1) The options vest over a four year period with 25% becoming exercisable on
each anniversary of the grant date such that the options are 100% vested
four years after the grant date.
(2) Options to purchase an aggregate of 286,900 shares of Common Stock were
granted to employees, including the Named Executive Officers, during the
fiscal year ended June 30, 1999.
OPTION EXERCISES AND FISCAL YEAR-ENDED VALUES
The following table sets forth certain information concerning all option
exercises, and the number of shares covered by both exercisable and
unexercisable stock options for the Named Executive Officers as of June 30,
1999. Also reported are the values for "in the money" options that represent the
positive spread between the exercise prices of any of such existing stock
options and the closing sale price of the Company's Common Stock on June 30,
1999.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AT JUNE 30, 1999 OPTIONS AT JUNE 30, 1999(1)
ACQUIRED ON VALUE ------------------------------- ----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE
- ------------------ ----------- ----------- ----------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David S. Silver... -- -- -- 60,000 -- $168,750
Dean A. Hough..... -- -- -- 20,000 -- 56,250
Ronald J. Fikert.. -- -- 3,750 21,250 $27,188 65,313
Richard M. Murphy. -- -- -- 20,000 -- 56,250
Kevin Drum........ 32,500 $141,634 -- 22,500 -- 74,375
</TABLE>
- ------------------
(1) Calculated based on a fair market value equal to the reported closing price
of the Company's Common Stock on The Nasdaq National Market at June 30,
1999, of $9.75 per share, less the applicable exercise price, and does not
take into account the tender offer or any grants of options made after June
30, 1999.
(2) Options that are not exercisable as of June 30, 1999 became fully
exercisable upon consummation of the tender offer on September 9, 1999.
30
<PAGE> 31
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended June 30, 1999, the Company's Board of Directors,
based upon recommendations of the Compensation Committee, established the levels
of compensation for the Company's executive officers. David S. Silver, the
Chairman of the Board, President and Chief Executive Officer of the Company
participated in the deliberations of the Board regarding executive compensation,
but did not participate in the process or decisions of the Board of Directors
regarding his compensation.
COMPENSATION OF DIRECTORS
1997 Stock Option Plan for Non-Employee Directors. Pursuant to the Company's
1997 Stock Option Plan for Non-Employee Directors, as amended, each non-employee
director receives an initial grant of options to purchase 10,000 shares of the
Company's Common Stock upon commencement of service as a director which option
vests and becomes exercisable at a rate of twenty five percent per year over the
four year period following the grant date. In addition, upon each anniversary of
the initial grant of options during a non-employee director's term of office,
such non-employee director shall receive an additional option covering 2,500
shares of the Company's Common Stock, with the same vesting schedule as the
initial grant. The exercise price of options granted under this plan is 100% of
the fair market value on the date of grant. During the fiscal year ended June
30, 1999, options were granted to each of William E. Drobish, David C. Seigle,
B. Allen Lay and Alexander P. Cilento to purchase an aggregate of 10,000 shares
of the Company's Common Stock.
Director Fees. The Company's Board of Directors has approved the payment of the
following fees to non-employee directors for attendance at meetings of the Board
of Directors, the Annual Meeting of Stockholders and committee meetings: $1,250
for each scheduled meeting of the Board of Directors attended, $1,000 for the
Annual Meeting of Stockholders and $750 plus travel expenses for each committee
meeting that is not scheduled on the same day as a meeting of the Board of
Directors.
31
<PAGE> 32
REPORT OF THE COMPENSATION COMMITTEE
The following report is submitted by the Compensation Committee of the Board of
Directors with respect to the executive compensation policies established by the
Compensation Committee and recommended to the Board of Directors and
compensation paid or awarded to executive officers for the fiscal year ended
June 30, 1999.
The Compensation Committee determines the annual salary, bonus and other
benefits, including incentive compensation awards, of the Company's senior
management and recommends new employee benefit plans and changes to existing
plans to the Company's Board of Directors. The Compensation Committee met one
(1) time in the fiscal year ended June 30, 1999 and, during the fiscal year
ended June 30, 1999, was comprised of B. Allen Lay, William E. Drobish and David
C. Seigle, none of which was, and was not formerly, an officer or employee of
the Company. Each of Messrs. Lay, Drobish and Seigle resigned as directors of
the Company upon Purchaser's acceptance and purchase of the tendered shares. The
Company has not yet designated new members of the Compensation Committee.
COMPENSATION POLICIES AND FISCAL 1999 COMPENSATION
In establishing and evaluating the effectiveness of compensation programs for
executive officers, as well as other employees of the Company, the Compensation
Committee is guided by three basic principles:
o The Company must offer competitive salaries to be able to attract and
retain highly-qualified and experienced executives and other
management personnel.
o Annual executive compensation in excess of base salaries should be
tied to individual and Company performance.
o The financial interests of the Company's executive officers should be
aligned with the financial interest of the stockholders, primarily
through stock option grants which reward executives for improvements
in the market performance of the Company's Common Stock.
The salaries of the Named Executive Officers increased slightly over the
salaries paid in the fiscal year ended June 30, 1998 as a result of cost of
living increases.
The Company is required to disclose its policy regarding qualifying executive
compensation deductibility under Section 162(m) of the Internal Revenue Code of
1986, as amended, which provides that, for purposes of the regular income tax
and the alternative minimum tax, the otherwise allowable deduction for
compensation paid or accrued with respect to a covered employee of a public
corporation is limited to no more than $1 million per year. The compensation
paid to the Company's executive officers for the fiscal year June 30, 1999 does
not exceed the $1 million limit per officer. The Company's 1992 Amended and
Restated Stock Option, Nonqualified Stock Option and Restricted Stock Purchase
Plan and the Company's 1996 Incentive Stock Option, Nonqualified Stock Option
and Restricted Stock Purchase Plan are structured so that any compensation
deemed paid to an executive officer when he exercises an outstanding option
under the plan, with an exercise price equal to the fair market value of the
option shares on the grant date, will qualify as performance-based compensation
that will not be subject to the $1 million limitation.
Salaries and Employee Benefit Programs. In order to retain executives and other
key employees, and to be able to attract additional well-qualified executives
when the need arises, the Company strives to offer salaries, and health care and
other employee benefit programs, to its executives and other key employees that
are comparable to those offered to persons with similar skills and
responsibilities by competing businesses in the local geographic area.
In recommending salaries for executive officers, the Compensation Committee (i)
reviews the historical performance of the executives and (ii) informally reviews
available information, including information published in secondary sources,
regarding prevailing salaries and compensation programs offered by competing
businesses that are comparable to the Company in terms of size, revenue,
financial performance and industry group. Some, though not all, of these
competing
32
<PAGE> 33
businesses, that have securities which are publicly traded, are included in the
Peer Group Index used in the Stock Performance Graph on page 34. Another factor
which is considered in recommending salaries of executive officers is the cost
of living in Southern California where the Company is headquartered, as such
cost generally is higher than in other parts of the country.
Performance-Based Compensation. The Board of Directors believes that the
motivation of executives and key employees increases as the market value of the
Company's Common Stock increases. Nevertheless, the Company provides a merit
bonus in cash or stock options to executives and key employees which is
dependent on the Company's achievements and the direct contributions made by
each executive and other key employees. Accordingly, at the beginning of each
fiscal year, the Company establishes short term and long term plans, and at the
end of the fiscal year, the collective and individual contributions of the
executives to the Company's achievements are evaluated. Cash bonuses are awarded
based on revenue and earnings performance for the fiscal year, and achievement
of management's business objectives.
The earnings goal is established on the basis of the annual operating plan
developed by management and approved by the Board of Directors. The annual
operating plan, which is designed to maximize profitability within the
constraints of economic and competitive conditions, some of which are outside
the control of the Company, is developed on the basis of (i) the Company's
performance for the prior fiscal year; (ii) estimates of sales revenue for the
plan year based upon recent market conditions, trends and competition and other
factors which, based on historical experience, are expected to affect the level
of sales that can be achieved; (iii) historical operating costs and cost savings
that management believes can be realized; (iv) competitive conditions faced by
the Company; and (v) additional expenditures beyond prior fiscal years in
expansion or research and development toward growth of the Company's business in
future fiscal years. By taking all of these factors into account, including
market conditions, the revenue and earnings goals in the annual operating plan
are determined.
In certain instances, bonuses are awarded not only on the basis of the Company's
overall profitability, but also on the achievement by an executive of specific
objectives within his or her area of responsibility. For example, a bonus may be
awarded for any executive's efforts in achieving greater than anticipated cost
savings, or completing a new product on target.
As a result of this performance-based merit bonus program, executive
compensation, and the proportion of each executive's total cash compensation
that is represented by incentive or bonus income, may increase in those years in
which the Company's profitability increases.
Stock Options and Equity-Based Programs. In order to align the financial
interests of executive officers and other key employees with those of the
stockholders, the Company grants stock options to its executive officers and
other key employees on a periodic basis, taking into account the size and terms
of previous grants of equity-based compensation and stock holdings in
determining awards. Stock option grants, in particular, reward executive
officers and other key employees for performance that results in increases in
the market price of the Company's Common Stock, which directly benefit all
stockholders. Moreover, the Compensation Committee generally has followed the
practice of granting options on terms which provide that the options become
exercisable in cumulative annual installments, generally over a three to
five-year period. The Compensation Committee believes that this feature of the
option grants not only provides an incentive for executive officers to remain in
the employ of the Company, but also makes longer term growth in share prices
important for the executives who receive stock options.
The Board of Directors
David S. Silver
Arnold von Buren
Alexander P. Coleman
33
<PAGE> 34
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative stockholder return on
the Company's Common Stock with the cumulative total return of the Russell 2000
Index and an industry peer group index for the period commencing October 10,
1997, the date on which the Company's Common Stock first began trading and was
first registered under the Securities and Exchange Act of 1934, as amended, and
ended on June 30, 1999.
COMPARISON OF CUMULATIVE TOTAL RETURN*
AMONG KOFAX IMAGE PRODUCTS, INC.,
THE RUSSELL 2000 INDEX
AND AN INDUSTRY PEER GROUP INDEX
<TABLE>
<CAPTION>
Cumulative Total Return
--------------------------------
10/10/97 6/30/98 6/30/99
-------- ------- -------
<S> <C> <C> <C>
KOFAX IMAGE PRODUCTS, INC. 100.00 58.53 88.64
PEER GROUP 100.00 147.12 116.25
RUSSELL 2000 100.00 103.38 103.36
</TABLE>
- ------------
* $100 INVESTED ON 10/10/97 IN STOCK OR ON 9/30/97
IN INDEX - INCLUDING REINVESTMENT OF DIVIDENDS,
FISCAL YEAR ENDING JUNE 30.
34
<PAGE> 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common Stock of the Company as of September 15, 1999, as to (a) all
directors, (b) the Named Executive Officers identified in the Summary
Compensation Table located at page 29, (c) all directors and executive officers
as a group, and (d) each person known to the Company to be the beneficial owner
of more than 5% of the Company's voting securities. Except as otherwise
indicated, the Company believes, based on information furnished by such owners,
that the beneficial owners of the Common Stock have sole investment and voting
power with respect to such shares, subject to applicable community property
laws.
<TABLE>
<CAPTION>
Amount and Nature of Beneficial
Name and Address of Beneficial Owners Ownership(1) Percent
- ------------------------------------------------- ------------------------------- -------
<S> <C> <C>
David S. Silver(2)............................... 99,216 1.9%
Dean A. Hough(3)................................. 43,530 *
Ronald J. Fikert(3).............................. 30,000 *
Kevin Drum(4).................................... 30,343 *
Richard Murphy(3)................................ 35,686 *
Arnold von Buren................................. - *
Business Building Forren West
Grundstrasse 14
CH-6343 Rotkreuz (zug)
Switzerland
Alexander P. Coleman............................. - *
75 Wall Street, 24th Floor
New York, New York 10005
Imaging Components Corporation................... 4,414,409 84.0
751 Wall Street
New York, New York 10005-2889
All Named Executive Officers and directors as a 238,775 4.4
group (7 persons) (2) (3) (4)...............
</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
beneficially owned include all stock options held by each beneficial owner,
including those that will become or have become exercisable in connection
with the tender offer and the Merger.
(2) Includes 60,000 Shares issuable upon the exercise of the stock options as
described in footnote (1).
(3) Includes 20,000 Shares issuable upon the exercise of the stock options as
described in footnote (1).
(4) Includes 22,500 Shares issuable upon the exercise of the stock options as
described in footnote (1).
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company did not enter into any transactions with its executive officers,
directors and principal stockholders during the period from July 1, 1998 to the
date of this Annual Report on Form 10-K.
35
<PAGE> 36
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL
STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form:
<TABLE>
<CAPTION>
1. Consolidated Financial Statements
PAGE
----
<S> <C>
Independent Auditors' Report F-1
Consolidated Balance Sheets as of June 30, 1999 and 1998 F-2
Consolidated Statements of Operations for the years ended June 30, 1999, 1998 and 1997 F-3
Consolidated Statements of Stockholders' Equity for the years ended June 30, 1999, 1998 and 1997 F-4
Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
2. Financial Statement Schedule for the three years ended June 30, 1999
Schedule II - Valuation and Qualifying Accounts
All schedules not listed above have been omitted because they are either not applicable or the
required information is shown in the financial statements or the notes thereto.
3. Exhibits: See accompanying Index to Exhibits. The Exhibits listed in the accompanying Index to
Exhibits are filed or incorporated by reference as part of this Form.
</TABLE>
(b) Reports on Form 8-K
The Company filed no Current Reports on Form 8-K during the last quarter of the
period covered by this Report.
36
<PAGE> 37
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
KOFAX IMAGE PRODUCTS, INC.
Dated: September 27, 1999 /s/ Ronald J. Fikert
------------------------------------
Ronald J. Fikert
Chief Financial Officer
POWER OF ATTORNEY
We, the undersigned directors and officers of Kofax Image Products, Inc., do
hereby constitute and appoint David S. Silver and Ronald J. Fikert, or either of
them, with full power of substitution and resubstitution, our true and lawful
attorneys and agents, to do any and all acts and things in our name and behalf
in our capacities as directors and officers and to execute any and all
instruments for us and in our names in the capacities indicated below, which
said attorneys and agents, or either of them, or their substitutes, may deem
necessary or advisable to enable said corporation to comply with the Securities
Exchange Act of 1934, as amended, and any rules, regulation, and requirements of
the Securities and Exchange Commission in connection with this Annual Report on
Form 10-K, including specifically, but without limitation, power and authority
to sign for us or any of us in our names and in the capacities indicated below,
any and all amendments; and we do hereby ratify and confirm all that the said
attorneys and agents, or either of them, shall do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 27th day of September, 1999.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ David S. Silver Chairman, President, Chief Executive Officer
- ---------------------------------- (principal executive officer)
David S. Silver
/s/ Ronald J. Fikert Vice President, Chief Financial Officer, Treasurer and
- ---------------------------------- Secretary (principal financial and accounting officer)
Ronald J. Fikert
/s/ Alexander P. Coleman Director
- ----------------------------------
Alexander P. Coleman
/s/ Arnold von Buren Director
- ----------------------------------
Arnold von Buren
</TABLE>
37
<PAGE> 38
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, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended June 30, 1999. 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, 1999 and 1998, and the results of their operations and
their cash flows for each of the three years in the period ended June 30, 1999,
in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Costa Mesa, California
August 9, 1999, (except for paragraph 2 of Note 5 and Note 12 as to which the
date is September 9, 1999)
F-1
<PAGE> 39
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF JUNE 30,
-----------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 25,260,500 $ 16,522,200
Investments (Note 3) 18,300 4,342,800
Accounts receivable, net of allowance for doubtful accounts and sales
returns of $642,000 in 1999 and $458,600 in 1998 (Note 5) 5,315,800 5,260,800
Inventories, net (Note 4) 1,562,500 1,565,000
Deferred income taxes (Note 6) 965,700 606,000
Prepaid expenses and other current assets 373,500 342,000
------------ ------------
Total current assets 33,496,300 28,638,800
PROPERTY:
Machinery and equipment 5,418,100 5,343,900
Furniture and fixtures 898,200 905,500
Leasehold improvements 388,600 379,800
------------ ------------
6,704,900 6,629,200
Less accumulated depreciation and amortization (4,586,800) (4,889,000)
------------ ------------
Property, net 2,118,100 1,740,200
NONCURRENT DEFERRED INCOME TAXES (Note 6) 1,285,000 1,342,900
OTHER ASSETS, net 185,700 393,200
------------ ------------
$ 37,085,100 $ 32,115,100
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,200,000 $ 1,207,200
Accrued compensation and related costs 1,651,000 1,237,000
Accrued warranty costs 165,100 148,400
Accrued cooperative marketing (Note 8) 475,300 445,200
Deferred revenue (Note 2) 718,400 588,200
Other accrued liabilities (Note 6) 1,744,600 863,800
------------ ------------
Total current liabilities 5,954,400 4,489,800
COMMITMENTS AND CONTINGENCIES (Notes 8 and 11)
STOCKHOLDERS' EQUITY (Notes 1 and 7):
Preferred stock, $.001 par value; 5,000,000 shares authorized; no shares
issued and outstanding in 1999 and 1998
Common stock, $.001 par value; 40,000,000 shares authorized; 5,243,656
and 5,307,416 shares issued and outstanding in 1999 and 1998 17,236,600 17,125,700
Retained earnings 15,327,400 11,135,900
Treasury stock, 177,085 and 100,000 shares at cost in 1999 and 1998 (1,433,300) (636,300)
------------ ------------
Total stockholders' equity 31,130,700 27,625,300
------------ ------------
$ 37,085,100 $ 32,115,100
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 40
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net sales (Notes 8 and 9) $38,095,200 $33,375,100 $29,265,700
Cost of sales 8,794,100 7,818,700 7,720,100
----------- ----------- -----------
Gross profit 29,301,100 25,556,400 21,545,600
Operating expenses (Note 8 and 10):
Sales and marketing 11,389,000 10,706,400 9,565,300
Research and development 8,641,700 7,825,900 6,652,500
General and administrative 3,112,200 2,672,000 1,935,900
----------- ----------- -----------
Total operating expenses 23,142,900 21,204,300 18,153,700
----------- ----------- -----------
Income from operations 6,158,200 4,352,100 3,391,900
Other income, net 1,050,000 758,800 69,300
----------- ----------- -----------
Income before provision for income taxes 7,208,200 5,110,900 3,461,200
Provision for income taxes (Note 6) 2,514,200 1,967,700 1,325,900
----------- ----------- -----------
Net income $ 4,694,000 $ 3,143,200 $ 2,135,300
=========== =========== ===========
Basic net income per share $ 0.89 $ 0.75 $ 1.37
=========== =========== ===========
Diluted net income per share $ 0.87 $ 0.62 $ 0.52
=========== =========== ===========
Basic weighted average common shares 5,281,900 4,197,100 1,319,100
=========== =========== ===========
Diluted weighted average common shares (Note 2) 5,421,000 5,072,600 4,125,800
=========== =========== ===========
Net income applicable to common
stockholders (Note 2) $ 4,694,000 $ 3,143,200 $ 1,801,300
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 41
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended June 30, 1999, 1998, and 1997
<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK
------------------------- ----------------------- RETAINED
SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL
--------- ------------ ------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, July 1, 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
Issuance of common stock for
stock option plan 81,100 92,500 -- -- -- 92,500
Issuance of common stock for
employee stock purchase plan 32,058 153,900 -- -- -- 153,900
Issuance of common stock for
initial public offering 1,300,000 12,617,700 -- -- -- 12,617,700
Repurchase of common stock (100,000) -- 100,000 (636,300) -- (636,300)
Accretion to current liquidation
or redemption value of
preferred stock -- -- -- -- (83,500) (83,500)
Conversion of redeemable
convertible preferred stock
to common stock 2,667,002 4,089,600 -- -- 3,140,100 7,229,700
Net income -- -- -- -- 3,143,200 3,143,200
--------- ------------ ------- ------------ ------------ ------------
BALANCES, June 30, 1998 5,307,416 17,125,700 100,000 (636,300) 11,135,900 27,625,300
Issuance of common stock for
stock option plan 98,051 34,100 (84,726) 553,600 (375,300) 212,400
Issuance of common stock for
employee stock purchase plan 112,189 -- (112,189) 722,600 (127,200) 595,400
Repurchase of common stock (274,000) -- 274,000 (2,073,200) -- (2,073,200)
Tax benefit related to stock
option exercises and the sale
of shares purchased under the
employee stock purchase plan -- 76,800 -- -- -- 76,800
Net income -- -- -- -- 4,694,000 4,694,000
--------- ------------ ------- ------------ ------------ ------------
BALANCES AT JUNE 30, 1999 5,243,656 $ 17,236,600 177,085 $ (1,433,300) $ 15,327,400 $ 31,130,700
========= ============ ======= ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 42
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,694,000 $ 3,143,200 $ 2,135,300
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 1,313,500 1,511,400 1,496,500
Provision for doubtful accounts and sales returns, net 183,400 35,700 41,400
Provision for inventory reserves, net 441,300 (74,600) 189,600
Loss on disposal of property 33,300 97,500 900
Deferred income taxes (301,800) 81,500 (130,000)
Changes in operating assets and liabilities:
Accounts receivable (238,400) (1,162,700) (82,300)
Inventories (438,800) 521,300 (331,800)
Prepaid expenses and other current assets (31,500) (137,500) (14,200)
Accounts payable (7,200) 435,300 58,700
Accrued compensation and related costs 414,000 192,900 325,900
Accrued warranty costs 16,700 (37,000) 30,700
Accrued cooperative marketing 30,100 109,700 82,200
Other accrued liabilities and deferred revenue 1,087,800 537,700 (131,100)
------------ ------------ ------------
Net cash provided by operating activities 7,196,400 5,254,400 3,671,800
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease (increase) in investments 4,324,500 260,100 (1,829,800)
Acquisition of property, net (1,609,900) (1,156,100) (1,532,200)
Decrease (increase) in other assets 92,700 (44,100) 66,400
------------ ------------ ------------
Net cash provided by (used in) investing activities 2,807,300 (940,100) (3,295,600)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable -- (821,400) (328,600)
Net proceeds from issuance of common stock 807,800 12,864,100 12,600
Repurchase of common stock (2,073,200) (636,300) --
------------ ------------ ------------
Net cash (used in) provided by financing activities (1,265,400) 11,406,400 (316,000)
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 8,738,300 15,720,700 60,200
CASH AND CASH EQUIVALENTS, beginning of year 16,522,200 801,500 741,300
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 25,260,500 $ 16,522,200 $ 801,500
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid $ -- $ 27,100 $ 108,800
============ ============ ============
Income taxes paid $ 2,098,700 $ 1,396,000 $ 1,427,800
============ ============ ============
</TABLE>
NONCASH ACTIVITY -- During the years ended June 30, 1998 and 1997, the Company
recorded accretion of $83,500 and $334,000, respectively, for the increase in
the liquidation or redemption value of the redeemable convertible preferred
stock (Note 7).
During the year ended June 30, 1999, the Company recorded a tax benefit of
$76,800, related to stock option exercises and the sale of shares purchased
under the employee stock purchase plan.
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 43
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 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 imaging, workflow 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).
NOTE 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,
1999, 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, 1999 and
1998, 35.1% and 32.3%, respectively, 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 intangible assets and prepaid license and
royalty fees. Intangible assets represent the estimated value of developed
technology acquired in fiscal year 1996. Such intangibles are amortized on a
straight-line basis over three years, the estimated useful life. 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.
Software Development Costs -- Software development costs incurred subsequent to
establishing the technological feasibility of a product would be capitalized and
amortized over the life of the related product, which typically ranges from 12
to 24 months in accordance with SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or otherwise Marketed." Because the Company
F-6
<PAGE> 44
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, 1999 and 1998.
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, 1999.
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 which is in accordance with Statement of Position 97-2,
"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 recorded as deferred revenue and recognized ratably over the term of the
contract. Revenues from software upgrades are recognized upon shipment of the
related product.
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.
Net Income per Share -- Effective December 15, 1997, the Company adopted SFAS
No. 128, "Earnings per Share," which changed the method used to calculate
earnings per share and required restatement of all prior periods. The new
requirements include a calculation of basic earnings per share, from which the
dilutive effect of stock options is excluded, and a calculation of diluted
earnings per share.
Diluted net income per share amounts are based upon the weighted average number
of common shares and dilutive common equivalent shares using the treasury stock
method for each period presented. The Company believes that diluted net income
per share provides the most meaningful comparison between periods.
F-7
<PAGE> 45
The following table reconciles the weighted average shares outstanding for basic
and diluted earnings per share for the periods presented.
<TABLE>
<CAPTION>
Year ended June 30,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Net income $ 4,694,000 $ 3,143,200 $ 2,135,300
Accretion to current redemption value of preferred stock -- -- (334,000)
----------- ----------- -----------
Net income applicable to common stockholders $ 4,694,000 $ 3,143,200 $ 1,801,300
=========== =========== ===========
Basic net income per common share:
Weighted average of actual common shares outstanding 5,281,900 4,197,100 1,319,100
=========== =========== ===========
Basic net income per common share $ 0.89 $ 0.75 $ 1.37
=========== =========== ===========
Diluted net income per common share:
Net income $ 4,694,000 $ 3,143,200 $ 2,135,300
=========== =========== ===========
Weighted average of actual common shares outstanding 5,281,900 4,197,100 1,319,100
Conversion of preferred stock into common stock -- 745,300 2,667,000
----------- ----------- -----------
Weighted average of common shares outstanding 5,281,900 4,942,400 3,986,100
Weighted average of common shares equivalents:
Weighted average options outstanding 139,100 343,800 383,800
Shares assumed to be repurchased using the treasury stock method -- (213,600) (244,100)
----------- ----------- -----------
Weighted average number of common and common equivalent shares 5,421,000 5,072,600 4,125,800
=========== =========== ===========
Diluted net income per common share $ 0.87 $ 0.62 $ 0.52
=========== =========== ===========
</TABLE>
Net Income Applicable to Common Stockholders -- Net income applicable to common
stockholders represents net income less the accretion attributable to the
preferred stock redemption value (Note 7).
Use of Estimates -- The preparation of the consolidated 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.
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 7).
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
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
F-8
<PAGE> 46
to meet its production obligations and result in increased prices for affected
parts. Any such reduction or constraint could result in shipment delays 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.
Recently Issued Accounting Standards -- For the year ended June 30, 1999, the
Company adopted SFAS No. 130, "Reporting Comprehensive Income". There was no
difference between the net income and the comprehensive net income for the years
ended June 30, 1999, 1998 and 1997.
For the year ended June 30, 1999, the Company also adopted SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information". This
statement establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosure about products and services, geographic areas and major
customers. (See Note 9)
In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits". This statement revises and standardizes employers' disclosure
requirements about pension and other postretirement benefit plans, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis and eliminates certain
disclosures that are no longer useful. The Company does not maintain an employee
pension plan or any other postretirement benefit plans.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which the Company is required to adopt
effective in its fiscal year 2000. SFAS No. 133 will require the Company to
record all derivatives on the Balance Sheet at fair market value. The Company
does not currently engage in hedging activities but will continue to evaluate
the effect of adopting SFAS No. 133.
NOTE 3. 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, 1999
Mortgage-backed securities Five years
through ten years $ 18,300 $ -- $ 1,300 $ 17,000
------------ ----- --------- -----------
$ 18,300 $ -- $ 1,300 $ 17,000
============ ===== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
GROSS UNREALIZED
MATURITY AMORTIZED ----------------- ESTIMATED
DESCRIPTION DATES COST GAINS LOSSES FAIR VALUE
- --------------------------- ---------------- ------------ ----- -------- ------------
<S> <C> <C> <C> <C> <C>
June 30, 1998
U.S. Treasury securities and
obligations of U.S. government
authorities and agencies Within one year $ 4,313,400 $ 600 $ 7,200 $ 4,306,800
Mortgage-backed securities Five years
through ten years 29,400 -- 1,100 28,300
------------ ----- -------- ------------
$ 4,342,800 $ 600 $ 8,300 $ 4,335,100
============ ===== ======== ============
</TABLE>
NOTE 4. INVENTORIES
Inventories, which include material, labor and manufacturing overhead, are
stated at the lower of cost (first-in, first-out) or market net of inventory
reserves of $729,800 and $288,500 in 1999 and 1998, respectively:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Raw materials $ 751,700 $ 826,600
Work-in-process 535,300 511,200
Finished goods 275,500 227,200
----------- -----------
$ 1,562,500 $ 1,565,000
=========== ===========
</TABLE>
F-9
<PAGE> 47
NOTE 5. LINE OF CREDIT
The Company has a financing agreement with a bank expiring in January 2000,
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
(7.75% at June 30, 1999).
Borrowings under the line of credit are unsecured. There were no borrowings
outstanding under the financing agreement at June 30, 1999 and 1998. 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, 1999. The revolving line of credit was terminated
September 9, 1999, as a condition of the merger agreement with Imaging
Components Corporation (Note 12).
NOTE 6. INCOME TAXES
The components of the Company's income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current $ 2,816,000 $ 1,886,200 $ 1,455,900
Deferred (301,800) 81,500 (130,000)
----------- ----------- -----------
Total $ 2,514,200 $ 1,967,700 $ 1,325,900
=========== =========== ===========
</TABLE>
Reconciliations between the provision for income taxes for fiscal 1999, 1998,
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>
1999 1998 1997
-------------------- ------------------- --------------------
AMOUNT % AMOUNT % AMOUNT %
----------- --- ----------- --- ----------- ---
<S> <C> <C> <C> <C> <C> <C>
Provision for income taxes at
statutory rate $ 2,522,900 35% $ 1,788,800 35% $ 1,211,400 35%
State income taxes, net of
federal income tax benefit 193,600 3 163,400 3 140,100 4
Benefit of foreign sales
corporation subsidiary (178,100) (2) (108,900) (2) (97,500) (3)
Federal and state R&D tax
credit and other (24,200) (1) 124,400 2 71,900 2
----------- --- ----------- --- ----------- ---
Provision for income taxes $ 2,514,200 35% $ 1,967,700 38% $ 1,325,900 38%
=========== === =========== === =========== ===
</TABLE>
F-10
<PAGE> 48
At June 30, the Company's net deferred tax assets consisted of the following:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Bad debt and sales return reserves $ 261,100 $ 188,000
Inventory reserves 299,200 118,300
Uniform capitalization of inventories 53,300 57,700
Accrued vacation and bonus 175,800 95,900
Warranty reserves 67,700 60,800
State taxes 55,900 14,800
Other reserves 52,700 70,500
----------- -----------
Current deferred tax asset 965,700 606,000
State taxes (93,200) (97,600)
Depreciation 161,800 166,600
Difference between book and tax basis of
acquired in-process research and
development and other intangible assets 1,171,400 1,226,200
Credit carryforward 45,000 47,700
----------- -----------
Long-term deferred tax asset 1,285,000 1,342,900
----------- -----------
Net deferred tax assets $ 2,250,700 $ 1,948,900
=========== ===========
</TABLE>
NOTE 7. STOCKHOLDERS' EQUITY
On October 16, 1997, the Company completed its initial public offering of
2,000,000 shares of common stock at $11.00 per share. 1,300,000 shares were sold
by the Company resulting in net proceeds of approximately $12.6 million. The
remaining 700,000 shares were sold by certain selling stockholders.
The Company has authorized 5,000,000 shares of $.001 par value preferred stock,
2,667,002 shares of which have been designated as Series A, B or C preferred
stock. The Company 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 had preference in liquidation and was 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 had voting rights and entitled 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. The preferred stock was converted into 2,667,002 shares of common
stock at the completion of the Company's initial public offering and the amount
previously accreted was credited to stockholders' equity.
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 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.
F-11
<PAGE> 49
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, 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 (110% 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).
The following is a summary of stock option activity and weighted average
exercise prices for each of the three years in the period ended June 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
NUMBER OF SHARES PROVIDED FOR PRICE RANGE PER SHARE EXERCISE PRICE
----------------------------- -------------------------- --------------------
NONQUALIFIED NONQUALIFIED NONQUALIFIED
OPTIONS OPTIONS OPTIONS OPTIONS OPTIONS OPTIONS
------- ------------ ------------- ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, July 1, 1996 304,750 13,000 $0.50 - 5.00 $ 5.00 $ 2.27 $ 5.00
Granted (weighted average
fair value of $1.10) 123,400 -- 5.00 - 5.00 -- 5.00 --
Exercised (15,837) -- 0.50 - 5.00 -- 0.80 --
Canceled (40,500) -- 0.50 - 5.00 -- 3.22 --
------- -------
BALANCES, June 30, 1997 371,813 13,000 $0.50 - $5.00 $ 5.00 $ 3.13 $ 5.00
Granted (weighted average
fair value of $2.85) 111,350 -- 5.00 - $7.50 -- 6.59 --
Exercised (81,100) -- 0.50 - $5.00 -- 1.81 --
Canceled (48,563) -- 0.60 - $7.50 -- 6.18 --
------- -------
BALANCES, June 30, 1998 353,500 13,000 $0.50 - $7.50 $ 5.00 $ 4.19 $ 5.00
Granted (weighted average
fair value of $3.32) 284,500 2,400 6.38 - 9.63 6.94 7.50 6.94
Exercised (94,920) (3,131) 0.50 - 7.50 5.00 2.09 5.00
Canceled (24,000) (7,994) 1.20 - 7.50 5.00 5.63 5.00
------- -------
BALANCES, June 30, 1999 519,080 4,275 $0.50 - 9.63 $ 5.00 $ 6.32 $ 5.53
======= =======
Exercisable as of
June 30, 1999 126,847 1,875
======= =====
</TABLE>
At June 30, 1999, 857,430 shares of common stock were available for issuance
under the Company's stock option and purchase plan.
Additional information regarding options outstanding as of June 30, 1999, is as
follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
EXERCISE PRICES JUNE 30,1999 LIFE IN YEARS PRICE JUNE 30,1999 PRICE
--------------- ------------ ------------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C>
$1.20 - 2.50 27,730 0.98 $ 2.27 20,185 $ 2.20
$5.00 - 5.00 155,225 2.37 $ 5.00 85,337 $ 5.00
$5.50 - 6.38 49,075 3.59 $ 5.64 12,275 $ 5.58
$6.44 - 6.44 26,700 4.00 $ 6.44 6,675 $ 6.44
$6.94 - 6.94 141,500 4.15 $ 6.94 -- --
$7.00 - 8.50 68,625 4.37 $ 7.72 4,250 $ 7.32
$8.81 - 9.31 21,000 4.74 $ 9.10 -- --
$9.50 - 9.50 31,500 4.69 $ 9.50 -- --
$9.63 - 9.63 2,000 4.99 $ 9.63 -- --
------- -------
$1.20 - 9.63 523,355 3.48 $ 6.32 128,722 $ 4.77
======= =======
</TABLE>
F-12
<PAGE> 50
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, at each anniversary during such non-employee director's term of office
such non-employee director shall receive an additional option covering 2,500
shares of common stock, with the same vesting schedule, subject to the
limitations set forth in the Director Plan. The following is a summary of stock
option activity and weighted average exercise prices for the Non-Employee
Directors for the period ended June 30, 1999:
<TABLE>
<CAPTION>
Number of Shares Weighted Average
Provided For Price Range Per Shares Exercise Price
Nonqualified Nonqualified Nonqualified
Options Options Options
---------------- ---------------------- ----------------
<S> <C> <C> <C>
BALANCES, July 1, 1998 50,000 $11.00 - 11.00 $11.00
Granted (weighted average
fair value of $2.48) 10,000 $ 6.13 - 6.13 $6.13
Canceled (10,000) $11.00 - 11.00 $11.00
--------
BALANCES, June 30, 1999 50,000 $ 6.13 - 11.00 $10.03
======
Exercisable as of
June 30, 1999 10,000
======
</TABLE>
At June 30, 1999, 100,000 shares of common stock were available for issuance
under the Company's Director Plan.
Additional information regarding Non-Employee Directors options outstanding as
of June 30, 1999, is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Remaining Weighted Number Weighted
Range of Number Outstanding contractual Average Exercisable Average
Exercise Prices as of June 30, 1999 life Exercise Price as of June 30, 1999 Exercise Price
- --------------- ------------------- ----------- -------------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
$ 6.13 - 6.13 10,000 9.28 $ 6.13 -- --
$11.00 - 11.00 40,000 8.28 $11.00 10,000 $11.00
------ ------
$ 6.13 - 11.00 50,000 8.48 $10.03 10,000 $11.00
====== ==== ====== ====== ======
</TABLE>
The Company has adopted an Employee Stock Purchase Plan (the "Purchase Plan"),
which was amended during fiscal 1999 to cover an aggregate of 350,000 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 calendar year offerings with purchases occurring at three-month
intervals commencing on the date of the Company's initial public offering. 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 calendar year
offering period or on the applicable purchase date. During the year ended June
30, 1999, 112,189 shares of treasury stock were reissued under the Purchase Plan
with a weighted average price per share of $5.31 and weighted average fair value
per share of $1.88. During the year ended June 30, 1998, 32,058 shares of common
stock were issued under the Purchase Plan with a weighted average price per
share of $4.80 and weighted average fair value per share of $1.64. At June 30,
1999, 205,753 shares were reserved for issuances under the Purchase Plan.
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,
and its related interpretations. No compensation expense has been recognized in
the financial statements for employee stock arrangements.
F-13
<PAGE> 51
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; stock volatility of 0.47 in fiscal 1999, 0.40 in fiscal 1998
and 0.00 in fiscal 1997; risk-free interest rates, 4.91% in fiscal 1999, 5.69%
in fiscal 1998, 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 1999, 1998, and 1997 awards had been amortized to expense over the
vesting period of the awards, net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Pro forma net income $ 4,200,872 $ 2,970,650 $ 2,091,393
Pro forma basic net income per share $ 0.80 $ 0.71 $ 1.33
Pro forma diluted net income per share $ 0.77 $ 0.59 $ 0.51
</TABLE>
On April 24, 1998 the Company's Board of Directors authorized a program for
repurchase of up to 500,000 shares, or approximately 9.5%, of Kofax's
outstanding common stock, to be used to fund stock option exercises, employer
equity compensation plans, and an employee stock purchase plan. Repurchases may
be made from time to time by the Company in the open market or in block
purchases in compliance with Securities and Exchange Commission guidelines. The
Company repurchased 274,000 and 100,000 shares of its common stock during fiscal
1999 and 1998 for approximately $2.1 million and $0.6 million, respectively.
NOTE 8. COMMITMENTS
The Company leases its production and office facilities under operating leases,
expiring on various dates through fiscal 2004. 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 $1,017,600,
$887,500, and $744,300 during fiscal 1999, 1998 and 1997, respectively. Future
minimum annual lease commitments at June 30, 1999 under noncancelable facility
and other operating leases that have initial or remaining terms in excess of one
year are as follows:
<TABLE>
<S> <C>
Fiscal year ending June 30:
2000 $1,049,100
2001 889,700
2002 903,900
2003 926,300
2004 688,100
----------
Total minimum payments required $4,457,100
==========
</TABLE>
The Company has also entered into various licensing agreements which require per
unit fees or royalties between 3.5% and 8.0% of net sales of certain products.
The agreements are generally in effect over the life of the products. Royalty
expense for fiscal 1999, 1998 and 1997 was $856,600, $671,900, and $390,400,
respectively. Royalty fees of $236,500, and $146,900 were accrued for as of June
30, 1999 and 1998.
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.
F-14
<PAGE> 52
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 $606,800, $434,100, and $372,900 in fiscal
1999, 1998 and 1997, respectively.
NOTE 9. SEGMENT REPORTING, CONCENTRATION OF REVENUE AND CREDIT RISK
Operating segments is defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision maker, or decision making group, in deciding
how to allocate resources and in assessing performance. The Company's reportable
revenue segments include Image Processing (scanning and image processing
hardware and software) and Ascent Software (document and data capture software
and optical storage management software).
The Company does not allocate cost of goods sold or operating expenses to these
segments, nor does it allocate specific assets to these segments. Therefore,
segment information reported includes only revenues from external customers.
Operating segment data for the fiscal years ended June 30, 1999, 1998, and 1997
was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Image Processing $ 26,685,000 $ 24,903,000 $ 24,122,000
Ascent Software 11,410,000 8,472,000 5,144,000
------------ ------------ ------------
Total Revenues $ 38,095,000 $ 33,375,000 $ 29,266,000
============ ============ ============
</TABLE>
The Company had export sales as a percentage of net sales for each of the three
years ended June 30, as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Europe:
United Kingdom 10% 10% 9%
Germany 5 5 5
Other 8 9 11
Asia 3 4 5
Other 5 5 4
--- --- ---
31% 33% 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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Law-Cypress Distributing Co. 18% 17% 14%
Tech Data Corporation 14% 13% 14%
Cranel, Inc. 11% -- 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.
NOTE 10. 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 $10,000 for 1999. 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. Employer contributions of $94,600, $90,000, and $67,500 were made
to the Plan in fiscal 1999, 1998, and 1997 respectively.
F-15
<PAGE> 53
NOTE 11. CONTINGENCIES
On September 26, 1997, VisionShape, Inc. ("VisionShape") filed suit against the
Company in the Superior Court of Orange County, California. VisionShape claims
that the Company's Adrenaline accelerator boards prevent the use of software
other than the Company's software, which, the complaint alleges, creates a
monopoly or otherwise constitutes a tying arrangement in violation of state and
federal antitrust laws. VisionShape seeks unspecified monetary damages and costs
as well as equitable remedies, including an order enjoining the Company from
selling its Adrenaline accelerator boards. VisionShape also seeks treble damages
and attorneys' fees. On May 27, 1998, the Superior Court held that VisionShape
failed to state a cause of action against the Company and ordered the suit
dismissed on July 15, 1998. VisionShape filed an appeal on March 31, 1999. Based
upon information currently available to the Company, the Company believes
VisionShape's claims are without merit and intends to contest vigorously any
action against the Company. However, it is too early to determine the outcome of
such appeal and there can be no assurance as to the eventual outcome of such
actions. Any determination against the Company in the litigation or the
settlement of such claims could have a material adverse effect on the Company's
business, results of operation, cash flows and financial condition.
The Company is also 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 Company
believes that the resolution of these matters will not likely have a material
adverse effect on the Company's financial statements.
NOTE 12. SUBSEQUENT EVENT
In July 1999, the Company acquired exclusive rights to advanced data capture
technologies from RAF Technologies (for $2.4 million) and will use this as the
basis for expanding further into the high end of the data capture market. This
technology will be integrated into the Company's Ascent Capture product. The
Company will begin to amortize this cost over three years when the new product
starts shipping.
A tender offer commenced on August 3, 1999, by Imaging Components Corporation, a
Delaware corporation (the "Purchaser") offered to purchase for cash, at a price
of $12.75 per share, all outstanding shares of the common stock, par value
$0.001 per share, of the Company. The tender offer was made pursuant to an
Agreement and Plan of Merger, dated as of July 27, 1999 (the "Merger
Agreement"), among the Company, the Purchaser and Imaging Acquisition
Corporation, a Delaware corporation and wholly-owned subsidiary of the Purchaser
("Merger Sub"). The tender offer expired at 12:00 midnight, New York Time, on
September 8, 1999. On September 9, 1999, the Purchaser accepted for payment and
purchased 4,414,409 shares of the Company's common stock, or approximately 84%
of the Company's outstanding shares of common stock.
The Merger Agreement provides that as soon as practicable after Purchaser's
purchase of the shares tendered into the tender offer, Merger Sub will be merged
with and into the Company, the separate corporate existence of the Merger Sub
will cease and the Company will continue as the surviving corporation and will
be a wholly-owned subsidiary of the Purchaser. At the effective time of such
merger, each outstanding share of the Company's common stock (other than shares
held by the Company, Purchaser, Merger Sub or any of their respective
subsidiaries, the 140,608 shares retained by management to be exchanged for
shares of capital stock of the Purchaser and any shares with respect to which
appraisal rights are available under the Delaware General Corporation law) will
be canceled and converted into and shall become the right to receive a cash
payment of $12.75, without interest. As a result, Purchaser will own all of the
outstanding shares of common stock of the Company.
NOTE 13. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following table sets forth certain unaudited quarterly consolidated
financial information for the fiscal years ended June 30, 1999 and 1998. In the
opinion of management, this information has been presented on the same basis as
the audited Consolidated Financial Statements appearing elsewhere in this
report, 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
F-16
<PAGE> 54
future period. The unaudited quarterly information should be read in conjunction
with the audited Consolidated Financial Statements and Notes thereto appearing
elsewhere in this document.
Quarterly net income per share has been restated to comply with SFAS No. 128.
The Company believes that diluted net income per share provides the most
meaningful comparison between periods.
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
------------- ------------ --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Fiscal 1999
Net sales $ 8,653 $ 9,615 $ 9,824 $10,003
Gross profit 6,697 7,359 7,651 7,594
Income from operations 1,119 1,580 1,660 1,799
Net income 866 1,222 1,259 1,347
Basic net income per share $ 0.16 $ 0.23 $ 0.24 $ 0.26
Diluted net income per share $ 0.16 $ 0.23 $ 0.23 $ 0.25
Fiscal 1998
Net sales $ 7,851 $ 8,074 $ 8,509 $ 8,941
Gross profit 5,990 6,099 6,564 6,903
Income from operations 1,018 1,041 1,124 1,169
Net income 657 760 834 892
Basic net income per share $ 0.43 $ 0.15 $ 0.16 $ 0.17
Diluted net income per share $ 0.16 $ 0.14 $ 0.15 $ 0.16
</TABLE>
F-17
<PAGE> 55
KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
Balance at charged to
beginning costs and Balance at
of year expenses Deductions end of year
--------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
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
Year ended June 30, 1998:
Allowance for doubtful accounts and sales
returns $422,900 124,400 (88,700) $458,600
Obsolete inventory reserve $363,200 369,200 (443,900) $288,500
Year ended June 30, 1999:
Allowance for doubtful accounts and sales
returns $458,600 252,400 (69,000) $642,000
Obsolete inventory reserve $288,500 645,500 (204,200) $729,800
</TABLE>
<PAGE> 56
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Company, as amended (1)
3.3 Certificate of Amendment of Certificate of Incorporation of the Company (1)
4.1 Specimen Certificate of Common Stock (1)
10.1 Amended and Restated Incentive Stock Option, Nonqualified Stock Option and (1)
Restricted Stock Purchase Plan (the "1992 Plan"), as amended on September 11,
1992
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 (1)
Purchase Plan (the "1996 Plan")
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 (1)
(the "Director Plan")
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 (1)
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
10.13 First Restated Registration Rights Agreement, dated as of March 6, 1989, by (1)
and among the Company and the Purchasers identified therein
10.14 Lease, dated March 31, 1988, between The Irvine Company, as Landlord, and the (1)
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
10.15 Net Lease, dated February 24, 1989, between LaserData, Inc. and Vesper (1)
Properties I Trust; Amendment 1, dated September11, 1991; Amendment No. 2,
dated August 31, 1994; and Amendment No. 3, dated July 24, 1997
10.16 Asset Purchase Agreement, dated December 30, 1995, between the Company and (1)
LaserData, Inc.
10.17 Distributor Agreement, dated August 16, 1990, between the Company and (1)
Law-Cypress Distributing
10.18 Distributor Agreement, dated March 1, 1993, between the Company and Tech Data (1)
Corporation; Modification Agreement, dated September 24, 1996; Letter
Amendment, dated October16, 1996; Addendum, dated October 23, 1996 (6)
10.19 Distributor Agreement, dated July 25, 1990, between the Company and Cranel (1)
Inc.
</TABLE>
<PAGE> 57
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION LOCATION
----------- ----------- --------
<S> <C> <C>
10.20 License Agreement, dated September 10, 1996, between the Company and CAERE (1)
Corporation (6)
10.21 Software License Agreement, dated October 1, 1993, between the Company and (1)
Softbridge Inc. (6)
10.22 Software License Agreement, dated June 1, 1993, between the Company and Pixel (1)
Translations, Inc.; Modification to Software License Agreement, dated July 1,
1995; and Modification to Software License Agreement, dated June 1, 1996 (6)
10.23 Services Contract, dated September 25, 1995, between the Company and (1)
Midcontinent Business Systems, Inc. (6)
10.24 License Contract, dated July 1, 1996, between the Company and Midcontinent (1)
Business Systems, Inc. (6)
10.25 NEST SDK Developer Product Distribution License Exhibit, dated July 31, 1996, (1)
between the Company and Novell, Inc.
10.26 Temporary Distribution License, dated October 17, 1996, between the Company (1)
and Novell, Inc.
10.27 Silicon Valley Bank Amendment to Loan and Security Agreement dated September (2)
18, 1997
10.28 Silicon Valley Bank Amendment to Loan and Security Agreement dated January 6, (3)
1998
10.29 Technology Agreement, dated February 25, 1998, between the Company and (4)
Eastman Kodak Company (6)
10.30 Amendment to Software License Agreement between the Company and Pixel (4)
Translations, Inc., dated June 1, 1998
10.31 Lease, dated June __, 1998, between Magellan Irvine Oaks Limited Partnership, (4)
as Landlord, and the Company, as Tenant
10.32 Silicon Valley Bank Amendment to Loan and Security Agreement dated January 6, (5)
1999
10.33 OEM Purchase Agreement between the Company and Fujitsu Computer Products of (5)
America, Inc., dated January 27, 1999
23.1 Consent of Deloitte & Touche LLP *
24.1 Power of Attorney (included on the Signature Page of this Annual Report on *
Form 10-K)
27.1 Financial Data Schedule *
</TABLE>
- -------------
* Filed herewith
(1) Incorporated by reference to the referenced exhibit number to the Company's
Registration Statement on Form S-1, Reg. No. 333-34531.
(2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1997.
(3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended June 30, 1998
(5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1999.
(6) Registrant has sought confidential treatment pursuant to Rule 24b-2 for
portions of the referenced exhibit.
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
Kofax Image Products, Inc.
We consent to the incorporation by reference in Registration Statement No.
333-40325 on Form S-8 of our report dated August 9, 1999, (except for paragraph
2 of Note 5 and Note 12, as to which the date is September 9, 1999) appearing in
this Annual Report on Form 10-K of Kofax Image Products, Inc. for year ended
June 30, 1999.
Our audits of the financial statements referred to in our aforementioned report
also included the financial statement schedule of Kofax Image Products, Inc.,
listed in Item 14(a). This financial statement schedule is the responsibility of
the Company's management. Our responsibility is to express an opinion based on
our audits. In our opinion, such financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
Costa Mesa, California
September 27, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 25,261
<SECURITIES> 18
<RECEIVABLES> 5,958
<ALLOWANCES> 642
<INVENTORY> 1,563
<CURRENT-ASSETS> 33,496
<PP&E> 6,705
<DEPRECIATION> 4,587
<TOTAL-ASSETS> 37,085
<CURRENT-LIABILITIES> 5,954
<BONDS> 0
0
0
<COMMON> 15,803
<OTHER-SE> 15,327
<TOTAL-LIABILITY-AND-EQUITY> 37,085
<SALES> 0
<TOTAL-REVENUES> 38,095
<CGS> 0
<TOTAL-COSTS> 8,794
<OTHER-EXPENSES> 23,143
<LOSS-PROVISION> 120
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,208
<INCOME-TAX> 2,514
<INCOME-CONTINUING> 4,694
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,694
<EPS-BASIC> 0.89
<EPS-DILUTED> 0.87
</TABLE>
