-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T9mA2o/o/eqIERR0T9dnE9z7bscXnVctpYPh/MGJxnKBark2flMn/qT50qtJcCW5 3xH3WjqLzlipSzT9kasJqw== 0000950008-99-000106.txt : 19990406 0000950008-99-000106.hdr.sgml : 19990406 ACCESSION NUMBER: 0000950008-99-000106 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19990103 FILED AS OF DATE: 19990405 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SCANSOFT INC CENTRAL INDEX KEY: 0001002517 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 943156479 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27038 FILM NUMBER: 99587250 BUSINESS ADDRESS: STREET 1: 9 CENTENNIAL DRIVE CITY: PEABODY STATE: MA ZIP: 01960 BUSINESS PHONE: 9789772000 MAIL ADDRESS: STREET 1: 2560 W BAYSHORE RD CITY: PALO ALTO STATE: CA ZIP: 94303 FORMER COMPANY: FORMER CONFORMED NAME: VISIONEER INC DATE OF NAME CHANGE: 19951020 10-K 1 ANNUAL REPORT ON FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 3, 1999 COMMISSION FILE NUMBER 0-27038 SCANSOFT, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-3156479 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 9 CENTENNIAL DRIVE PEABODY, MASSACHUSETTS 01960 (978) 977-2000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Common Stock, $0.001 par value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [] The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $23,752,027 as of March 26, 1999, based on $1.625 per share, the last reported sales price on the Nasdaq National Market for such date. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The number of shares of the registrant's Common Stock, $0.001 par value, outstanding as of March 26, 1999 was 26,355,780. =============================================================================== SCANSOFT, INC. TABLE OF CONTENTS Page ---- PART I.........................................................................1 ITEM 1. Business.........................................................1 ITEM 2. Properties......................................................17 ITEM 3. Legal Proceedings...............................................17 ITEM 4. Submission of Matters to a Vote of Security Holders.............17 PART II.......................................................................18 ITEM 5. Market for the Registrant's Common Equity and Related Stockholder Matters.............................................18 ITEM 6. Selected Financial Data.........................................19 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............................20 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk.....31 ITEM 8. Financial Statements and Supplementary Data.....................32 ITEM 9. Changes in and Disagreements with Accounts on Accounting and Financial Disclosure........................................51 PART III......................................................................52 ITEM 10. Directors and Executive Officers of the Registrant.............52 ITEM 11. Executive Compensation.........................................54 ITEM 12. Security Ownership of Certain Beneficial Owners and Management.59 ITEM 13. Certain Relationships and Related Transactions.................60 PART IV.......................................................................63 ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................................................63 -i- PART I WHEN USED IN THIS REPORT, THE WORDS "EXPECTS," "INTENDS," "BELIEVES," "PROJECTS," "PLANS," "ANTICIPATES," "ESTIMATES," AND SIMILAR WORDS AND EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS, WHICH INCLUDE STATEMENTS AS TO THE TIMING OF PRODUCT RELEASES, THE PERFORMANCE AND UTILITY OF THE COMPANY'S PRODUCTS AND EARNINGS AND PROFITABILITY, ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, THOSE RISKS DISCUSSED BELOW AND UNDER ITEM 7--"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND OTHER RISKS DETAILED FROM TIME TO TIME IN OUR PERIODIC REPORTS AND OTHER INFORMATION FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS THE DATE HEREOF. THE COMPANY EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR REVISION TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED. ITEM 1. BUSINESS GENERAL On January 6, 1999, we sold our hardware business to a newly formed subsidiary of Primax Electronics, Ltd. for approximately $7 million. On March 2, 1999, Visioneer acquired ScanSoft, Inc., an indirect wholly owned subsidiary of Xerox Corporation, in a cash election merger. The corporate entity "Visioneer" survived the merger, but changed its name to "ScanSoft, Inc." In addition, we changed the ticker symbol for our common stock, that trades on the Nasdaq, to "SSFT." In this Report, the "Company," the "Registrant," "ScanSoft," "We," "Our" and "Visioneer" refer to the surviving company unless the context otherwise requires. Under our agreement with Primax, Primax's subsidiary acquired our hardware business, including all of our hardware assets, liabilities and related intellectual property, and the name "Visioneer," and assumed our Fremont, California lease. In addition, we entered into a multi-year licensing agreement with Primax's subsidiary (now called Visioneer) to bundle PaperPort software products with the Visioneer line of hardware imaging products. Pursuant to the terms of the agreement with Xerox, we acquired ScanSoft for approximately 6.8 million shares of common stock, a warrant to purchase up to an additional 1.7 million shares of common stock exercisable upon certain events, approximately 3.6 million shares of non-voting Series B Preferred Stock and the assumption of 1.7 million ScanSoft stock options. In connection with the merger, approximately 5.1 million shares of our outstanding stock, which shares are now owned by Xerox, were cashed out at $2.06 per share with consideration from Xerox. Additionally, approximately 330,000 shares were cashed out at $2.06 per share with consideration from the Company. Xerox owns approximately 45% of the outstanding shares of our common stock and has two designees on the Board, including Paul A. Ricci, the new Chairman of the Board. PRODUCTS Our PaperPort products provide an integrated hardware and software solution at the desktop through compact sheetfed scanners and larger flatbed scanners. Our PaperPort sheetfed scanners and PaperPort flatbed scanners and their associated intellectual property were sold as part of the sale of our hardware business to Primax in January 1999. After the merger with ScanSoft in March 1999, we acquired additional software products based on patented optical character recognition ("OCR") and image processing technologies. The Software products acquired in the merger with ScanSoft include TextBridge Pro, Pagis Pro, ProOCR 100 and ScanWorks. We provide digital imaging software products for retail, OEM and corporate markets. Our products capture and convert paper documents and photos into digital documents and images and enhance a user's ability to organize and share digital documents and images in the office, at home and on the Internet. Our products are based on patented optical character recognition ("OCR") and image processing technologies, designed to address the 1 needs of a broad group of users ranging from consumers and small office to medium sized businesses and large corporations. Our software products include OCR, personal document management and software suites that offer various combinations of these products and often third party offerings. We believe that our ability to achieve broad market acceptance of our products will depend on several factors, including, but not limited to, ease-of-use, OCR accuracy, speed, and overall functionality. In addition, the ability of our software to integrate with desktop operating systems, word processing applications, email software, fax applications, image editing products and Internet publishing tools will affect our ability to achieve market acceptance for our products. In that regard, our strategy is to maintain and enhance our technological position by investing in OCR and image processing technology and strategic business and technology partnerships with other leading companies. We also provide software in two other emerging markets: enterprise imaging and Internet imaging software. The enterprise imaging software market includes high-end OCR products and software targeted at the emerging network scanning market. The network scanning and multifunction market includes devices from Xerox, Canon, Ricoh, and Hewlett Packard. Several network multifunction devices offer scanning options that use client software to convert, edit, organize and distribute digital documents via fax, email and the Internet. Currently, we bundle client software with Xerox network multifunction devices. The Internet imaging software market includes products that make it easier to publish and share paper documents and photos via the Internet. Currently, our products allow users to capture and convert paper-based documents to Joint Photographic Experts Group ("JPEG"), Hypertext Mark-up Language ("HTML") and Portable Document Files ("PDF") files and share photos and documents via email or as part of an Internet site. During 1998, we provided an integrated hardware and software solution at the desktop through compact sheetfed scanners and larger flatbed scanners. PaperPort's high-performance scanners intelligently automated the paper input process by performing multiple operating functions without user intervention and provided advantages in scanning speed, image quality and image orientation. Since we sold our hardware assets, liabilities and intellectual property to Primax on January 6, 1999, our products have been entirely focused on software as described above. PRODUCT DESCRIPTION The following is a description of our PaperPort Deluxe, PaperPort Scanner Suite and Visual Explorer software products, as well as the TextBridge Pro, Pagis Pro, ProOCR 100 and ScanWorks software products which were acquired in the merger with ScanSoft in March 1999. PRODUCTS FOR BUSINESSES AND PROFESSIONAL USERS PAPERPORT DELUXE -- PaperPort Deluxe is paper management software designed for small office and home office users. It turns a scanner or multi-function-peripheral into a versatile solution for filing, copying, finding and sharing paper and photographs. PaperPort Deluxe provides a visual desktop with thumbnail file representations that allow users to quickly browse and locate images, Web pages and electronic files. Other key features include SimpleSearch, which enables users to find scanned images, electronic documents and Web pages by searching file names, content or keywords, and ScanDirect, which enables direct scanning into linked applications. PaperPort Deluxe is compatible with the Windows 95, Windows 98 and Windows NT 4.0 operating systems. PAPERPORT SCANNER SUITE -- PaperPort Scanner Suite combines all the features of PaperPort Deluxe and TextBridge Pro to provide a easy way scan, organize, edit and share paper documents, photos, Web pages and electronic files. PaperPort Scanner Suite is compatible with the Windows 95, Windows 98 and Windows NT 4.0 operating systems. TEXTBRIDGE PRO -- TextBridge Pro is a very accurate and versatile OCR software that allows users to easily edit paper documents, turn price lists into spreadsheets, or brochures into Web pages. TextBridge Pro combines 2 OCR with page layout comprehension to recreate electronic files that are similar to the paper originals in terms of page layout, font characteristics and graphics. For flexibility, TextBridge Pro provides text, table and picture zoning tools that allow users to choose what sections of a document they want to recognize. In addition, TextBridge Pro offers built-in post-recognition editing, which enables users to conveniently proofread converted documents against the original scanned image. TextBridge Pro is a Windows 95, Windows 98 and Windows NT compliant application. There are also versions available for Windows 3.x and Macintosh System 8.x. TextBridge Pro supports recognition for twelve languages and is localized for European distribution. PAGIS PRO -- Pagis Pro is a comprehensive scanning suite that combines the Pagis digital imaging desktop with TextBridge Pro and MGI PhotoSuite to transform an office personal computer into a paper-to-digital solution for electronically filing, copying, editing and sharing documents and photos. Pagis Pro intelligently scans color documents and photos and creates color images that are easy to view, share, and print. Its folders provide visual image thumbnails to quickly browse and locate scanned images, and Pagis Pro provides powerful full-text and keyword indexing to help users retrieve document images, photos and electronic files. Using the Extended Image File Format ("XIFF"), Pagis Pro can store and send high-quality color document image files that are a fraction of the size of images saved in a standard image file format, such as Tagged Image File Format ("TIFF"). An image viewer provides image editing, selection and annotation tools. These tools help users enhance an image, select a portion of the image they want to work with, and add highlights or notes to an image. TextBridge Pro is integrated into the Pagis desktop, so users can easily convert paper documents and bring the recognized pages into a word processor or spreadsheet. For photo editing and photo projects, Pagis Pro integrates a third party photo editor. Pagis Pro is compatible with Windows 95, Windows 98 and Windows NT 4.0 operating systems. PRODUCTS FOR CONSUMERS VISUAL EXPLORER -- Visual Explorer enables users to visually manage all their electronic files and Web pages. Visual thumbnails of documents and Web pages enable users to quickly identify their files. In addition, the software includes SimpleSearch, which enables users to find documents and Web pages by searching file names, URLs, content or keywords. A MiniViewer allows users to easily open and view any email attachments (documents) sent to them. Visual Explorer is compatible with the Windows 95 and Windows 98 operating systems. PROOCR 100 -- ProOCR100 is OCR software that is designed for simplicity and ease-of-use. Users can simply click on the Auto-OCR button to automatically walk through the text recognition process. Designed to handle real documents, ProOCR100 can recognize pages with degraded text (like faxes and photocopies) and complex documents with multiple columns and tables. ProOCR100 is compatible with the Windows 95, Windows 98 and Windows NT 4.0 operating systems. SCANWORKS -- ScanWorks combines the Pagis digital imaging desktop with MGI PhotoSuite to provide an easy to use, consumer oriented scanning software suite that enables users to edit and share photos, keep track of important documents and conveniently make color copies at home. ScanWorks intelligently scans color photos and documents and creates color images that are easy to view, share, and print. ScanWorks folders provide visual image thumbnails to quickly browse and locate scanned images, and ScanWorks provides powerful full-text and keyword indexing to help users retrieve document images, photos and electronic files. Using the XIFF file format, ScanWorks can store and send high-quality color document image files that are a fraction of the size of image files saved in an uncompressed image format. ScanWorks also has a image viewer with image editing, selection, and annotation tools. For more advanced image editing and photo projects, ScanWorks integrates a third party photo editor. ScanWorks is compatible with the Windows 95, Windows 98 and Windows NT 4.0 operating systems. OEM PRODUCTS We bundle various versions of Pagis, PaperPort, Visual Explorer and TextBridge with leading scanner, multifunction device and storage device manufacturers and leading independent software vendors. OEM customers often require us to integrate products with other applications or customize existing products to meet specific requirements. Therefore, we offer OEM customers both packaged products to bundle and a software developer's toolkit to facilitate the integration of OCR functionality with other applications. 3 PRODUCTS SOLD TO PRIMAX Our sheetfed and flatbed scanners and their associated intellectual property were sold to Primax Electronics, Ltd. on January 6, 1999. These products are described below: PAPERPORT SHEETFED SCANNERS -- The PaperPort sheetfed scanners are integrated hardware and software solutions for paper input and digitized document and image management that are easy to use, fast and cost-effective. The PaperPort Vx and mx grayscale scanners are small in size (12" x 2.5" x 3.75") and are designed to operate on the desktop between the keyboard and monitor. The PaperPort Vx is compatible with Macintosh personal computers, while the PaperPort mx is compatible with Windows 3.1, Windows 95, Windows 98 and Windows NT. The PaperPort ix, a scanning keyboard, is a grayscale scanner fully integrated into a keyboard and is compatible with the aforementioned Windows releases. The PaperPort Strobe is a color scanner that was smaller (11" x 2.5" x 2") and faster than our grayscale predecessors. It is available in both Macintosh and Windows versions, Windows 3.1, Windows 95 and Windows 98. The Windows versions are also available in either a parallel or serial interface, and the Macintosh version incorporates a SCSI interface. PaperPort sheetfed scanners are designed to handle multiple sizes, shapes and textures of paper, including business cards, newspaper articles, business memos, receipts and photographs, and a broad range of paper types. In 1998, we recognized the end of life of our grayscale sheetfed scanners and produced only the color PaperPort Strobe. This scanner features 24-bit, 600 dpi color images, offering high quality and high-resolution. PAPERPORT FLATBED SCANNERS -- Our product line included three distinct groups of flatbed scanners. The first group, the 30-bit line, scans 30-bit color images in either 300 x 600 dpi optical resolution or 600 x 1200 dpi optical resolution. In addition, we sold the 3100USB, a scanner with the above characteristics that utilizes the Universal Serial Bus (USB) port on newer personal computers that run Windows 98. The second group, the 36-bit line, scans 36-bit color images in 600 x 1200 dpi. The third group, the OneTouch line, scans 36-bit color images in either 300 x 600 dpi optical resolution or 600 x 1200 dpi optical resolution with the press of a single button. This scanner features five-button functionality that was automatically linked with the software. All three groups of scanners are compatible with Windows 95 and Windows 98 and featured a pass-through parallel port design, as well as USB compatibility for the 3100USB, that allows them to easily connect to a Windows PC. In addition to the base version of our document management and image editing software, these flatbed scanners were bundled with Visioneer's Web Publishing Kit, a collection of Internet tools and utilities, which simplify the creation of Web sites. NEW PRODUCTS We intend to design and develop products to extend the life and usability of our products for our installed base through the development of software upgrades and add-on accessory products. We also intend to offer these upgrades to our OEM partners. We also plan to incorporate new software features into our software, and to expand our software product lines in 1999 through the development of alternative form factors comprising enhanced imaging capabilities, and other features and functionality. We believe that the development of these and other products and features is essential to our success. Accordingly, we will continue to make significant investments in the research and development of new products. Such expenses may fluctuate from quarter to quarter depending on a wide range of factors, including the status of various development projects. ENABLING TECHNOLOGY We have devoted substantial resources to develop software technologies to create comprehensive, easy-to-use, and versatile products for users of image capture devices, such as scanners, multifunction peripherals and digital cameras. Our software is developed using OCR and image processing technologies, Application Programming Interfaces (APIs), object-oriented development tools, and modern graphical user interface designs. In addition, our products employ commercial text retrieval database systems, electronic document format conversion toolkits, and standard scanner device interfaces. 4 API -- Our TextBridge and PerfectScan APIs are the foundation for products in both the TextBridge product-line and Pagis product-line. These APIs provide an interface to the OCR and image processing technologies and provide image text conversion, image processing and cleanup, scanner and digital camera control, image file format read and write with image compression, and image printing. For PaperPort and Visual Explorer products, software applications on the hard drive are recognized, and linking icons to applications supported by the PaperPort API are placed on the PaperPort or Visual Explorer desktop. In addition, "AutoLaunch" technology allows users to launch input with digitized documents directly into third-party software applications and peripherals already installed on the user's personal computer. The PaperPort software locates these paper-enabled third-party software applications and peripherals and builds drag and drop buttons for one-button distribution of these digitized documents. Using the PaperPort API, developers can create PaperPort links to expedite the intelligent transfer of documents between the PaperPort software and their applications. These functions allow developers to automate certain tasks such as user interface management, file conversion, software initialization, object control and OCR. OCR -- Our OCR technology provides image-to-text document conversion. This technology provides high quality character recognition accuracy with page layout retention, including the ability to reconstruct headers, footers, columns, paragraphs, embedded images, captions, inverted text and character font attributes. Additionally, the OCR engine provides document export directly to Rich Text Format ("RTF"), PDF, HTML and ASCII text, and many other industry standard electronic document formats via third-party conversion technology. The OCR engine employs a number of technologies to improve document recognition accuracy. These technologies are described below: CHARACTER/WORD ACCURACY -- Character accuracy refers specifically to correctly identifying the actual characters in a page image. Traditional OCR contains basic capabilities for identifying the shapes of the characters through pattern recognition techniques. The TextBridge OCR engine employs a variety of different recognition "experts," which work cooperatively in the OCR process. SEGMENTATION -- Segmentation is the process of differentiating between the text and picture components of a given page image. The segmentation in TextBridge performs that function as well as identifies the appropriate lexicographical ordering of the regions of text on the page, so that the final output will appear in correct read order. OUTPUT FORMATTING -- TextBridge's formatting capabilities make it possible to reconstruct most compound document formats, including multiple columns, cell tables, pictures, captions, headers and footers, thereby saving the end-user reformatting time and effort. The most recent additions to TextBridge's reformatting abilities include reverse video (white-black) text output and insets. IMAGE PROCESSING -- Our image processing technology provides capture, enhancement and compression techniques. The heart of the image processing core engine is page segmentation capabilities which provide the ability to decompose a page image into its components, including text, pictures, background tints, and text color. The image processing core engine also provides efficient page enhancement technologies such as auto-crop, auto-straighten, automatic picture enhancement, high-speed rendering, line removal, speck removal, tint removal and forms field detection. Our advanced image compression technologies employ wavelet, JPEG, symbol-based and Huffman compression techniques to facilitate the process of capturing high-quality compound color documents and store them in the compact XIFF image format. XIFF images are a fraction of the size of images saved in a standard image file format, such as TIFF. Moreover, the text is clean and suitable for OCR, faxing or printing. MARKETING, SALES AND DISTRIBUTION The primary market for our products is comprised of computer users who required access to both paper and electronic information. The SOHO (Small Office, Home Office) market, which represented a significant majority of our branded business, has been targeted by us because mobile and home-based professionals require office-like 5 productivity without access to copiers, fax machines and scanners. This market, within the last 18 months, has been increasingly attracted to scanners offering color imaging capability. With the advent of color sheetfed and flatbed scanners, the grayscale sheetfed scanner market continued its decline in 1998. In 1998 we derived substantially all of our branded revenues from sales through our independent distributors, retailers and resellers. Although we have established strategic software OEM partnerships, we expect that sales through our independent distributors and resellers will continue to account for a substantial portion of our revenues for the foreseeable future. Our top four retail customers for 1998 were Sam's Club (owned by "Wal-Mart"), Office Depot, Inc., Best Buy Company, Inc. and CompUSA, Inc. for distribution of our products in North America. Sales to these top four independent distributors and resellers accounted for 46% of our total net revenues in 1998 in the aggregate, or 18%, 12%, 9% and 7%, respectively, as compared to 38% of our total revenues in 1997. With the transition to a software only business, we expect to derive the majority of our revenue through our independent distributors, including Ingram Micro, Tech Data and Merisel. These distributors in turn sell to computer superstores, such as Comp USA and Fry's Electronics; consumer electronic stores, such as Best Buy and Circuit City; mail order houses, such as PC Connection and MicroWarehouse; and office superstores, such as Office Max, Office Depot and Staples. Our agreements with our distributors and resellers are not exclusive, and each of our distributors and resellers can cease marketing our products with limited notice and with little or no penalty. There can be no assurance that our independent distributors and resellers will continue to offer our products or that we will be able to recruit additional or replacement distributors. The loss of one or more of our major distributors or resellers would have a material adverse effect on our business, operating results and financial condition. Many of our distributors and resellers offer competitive products. There can be no assurance that our distributors and resellers will give priority to the marketing of our products as compared to competitor's products. Any reduction or delay in sales of our products by our distributors and resellers would have a material adverse effect on our business, operating results and financial condition. We grant our distributors and resellers price protection and certain rights of return with respect to products purchased by them. In addition, we offered various end-user rebate programs for our products. We accrue for expected returns, anticipated price reductions, and anticipated rebate redemption in amounts that the Company believes are reasonable. However, there can be no assurance that these accruals will be sufficient or that any future returns, price protection charges, or rebate redemption will not have a material adverse effect on our business and operating results, especially in light of the rapid product obsolescence which often occurs during product transitions. The short product life cycles of our products and the difficulty in predicting future sales increase, the risk of new product introductions, price reductions by our competitors, or other factors affecting the paper input market could result in significant product returns. In addition, there can be no assurance that new product introductions by competitors or other market factors will not require us to reduce prices in a manner or at a time or rate which gives rise to significant price protection charges and which would have a material adverse effect on our operating results. Any product returns, price protection charges, or rebate redemption in excess of recorded allowances would have a material adverse effect on our business, operating results and financial condition. Net revenues from resellers and distributors outside North America represented approximately 7% of net revenues in 1998 as compared to 10% in 1997. Prior to the acquisition of ScanSoft, we had limited experience in developing international versions of our products and marketing, distributing, servicing and supporting such products. However, ScanSoft derived 19% of its revenues in 1998 from international sales and has a subsidiary in the United Kingdom. We expect our combined revenues from international sales to account for approximately 13% of revenues in 1999. Domestically, full-featured software product customers who register with us currently receive limited hotline technical support and product information at no cost. Additional technical support services are available on a "fee for support" basis. We currently offer several technical support options to customers of packaged products. These include telephone, fax or email support by a customer support representative or self help by accessing our technical information bulletins or frequently asked questions on the Internet. Outside of the U.S., full-featured software product customers receive technical support from a third party company on both a fee and non-fee basis. 6 OEM RELATIONSHIPS Prior to the merger with ScanSoft, we had software OEM agreements with several companies including Western Digital Corporation, Brother Industries, Ltd., Minolta Co. Ltd., Omron Software Company, Ltd., Agfa-Gevaert N.V. and Epson America, Inc. These OEM agreements remained with us after the merger. ScanSoft, as an indirect wholly owned subsidiary of Xerox Corporation, had software OEM agreements with several companies including: Mustek Systems, Inc., Microtek International, Inc., Seiko-Epson Corporation, Canon Computer Systems, Inc., IBM, Plustek USA, Inc., Primax Electronics, Inc., Avision Labs, Inc., Compaq Computer Corporation, Acer Peripherals, Inc. and Symantec Corporation. Additionally, ScanSoft also entered into multiple non-exclusive agreements with Xerox Corporation (a significant stockholder) in which ScanSoft agreed to license Xerox the royalty-bearing right to copy and distribute certain versions of Pagis and TextBridge software programs with Xerox's multi-function peripherals. We are pursuing and may enter into additional OEM agreements to distribute our software products. However, there are certain risks associated with such relationships, including whether sufficient priority will be given by such OEM partners to market our products and whether such OEM partners will continue to offer our products. Such risks have been experienced by us in regards to our agreements with Hewlett-Packard and Compaq. The loss of any OEM partnership or our inability to enter into additional OEM partnerships could have a material adverse effect on our business, operating results and financial condition. See "Item 7--Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." RESEARCH AND DEVELOPMENT Our research and development team, after the merger on March 2, 1999, is located at our headquarters in Peabody, Massachusetts. As of December 31, 1998, we employed 21 full-time and 4 contract software design and quality assurance engineers, technicians and support staff in Fremont, California. The primary activities of these employees during 1998 were the design and development of the sheetfed and flatbed scanner lines, the development of the PaperPort flatbed line of products, the development of a new release of PaperPort Deluxe Software, the development of other new software products (ProOCR 100, Visual Explorer, Scanner Suite and ScannerWorks), enhancements of existing products, product testing, and technical documentation development. In 1998, the research and development team in Fremont, California was restructured into a smaller group. Our strategy was to concentrate our efforts on software development, and leverage the hardware and mechanical engineering capabilities of our manufacturing partners to design and build our future hardware products. The 30 bit, 36-bit, and One Touch flatbed scanners, introduced in 1998, were designed in cooperation with our manufacturing partners, Avision, Inc and Primax Electronic, Ltd. However, all flatbed and sheetfed scanners and their associated intellectual property were part of the sale of hardware assets, liabilities and intellectual property sold to Primax Electronics, Ltd. on January 6, 1999. Since the completion of the merger, we are consolidating the research and development organization to the new corporate headquarters. We expect to complete the transition by the end of June 1999. Our growth and future financial performance will depend in part upon our ability to enhance existing applications, and develop and introduce new applications that keep pace with technological advances, meet changing customer requirements, respond to competitive products and achieve market acceptance. As a result, we expect that we will continue to commit substantial resources to product research and development in the future. MANUFACTURING In the past, we contracted nearly all materials procurement, manufacturing, assembly, testing and quality assurance to third party manufacturers. Purchase orders were placed on our manufacturing partners for final assemblies or subassemblies, which in turn were delivered to other manufacturing partners who perform final assembly, pack-out and shipment to our customers. This outsourcing strategy allowed us to leverage off of the manufacturing 7 and engineering expertise and economies of scale of our manufacturing partners, while allowing our manufacturing and operations team to concentrate on value added activities, such as vendor management, product price negotiations and cost reduction efforts. However, all flatbed and sheetfed scanners and their associated intellectual property were part of the sale of our hardware business in January 1999. We had six significant independent manufacturing partners in 1998. Primax Electronics, Ltd., Orient SemiConductor Ltd, Flextronics International Marketing (L) Ltd., NMB Technologies, Inc., Avision, Inc. and DisCopyLabs. Flextronics manufactured our standalone grayscale product lines, the PaperPort Vx for Macintosh, and the PaperPort mx for Windows. NMB manufactured our scanning keyboard product, the PaperPort ix, and our color sheetfed scanners, the PaperPort Strobe. On January 19, 1998, we notified NMB that we wished to terminate the manufacturing agreement for the PaperPort Strobe, based on NMB's inability to comply with certain cost reduction stipulations as specified. As of March 16, 1998, we had qualified two manufacturers for the PaperPort Strobe products, Orient SemiConductors, Ltd. and Flextronics. In 1999, following the sale of our hardware business to Primax, we have reduced our key supplier list to one supplier on the west coast, DCL and one supplier on the east coast, Omnet Technology Corporation, for our software products. Unforeseen factors with our suppliers may result in production delays. Any performance problems or production delays could have a material adverse effect on our business, operating results and financial condition. In addition, there can be no assurance that current or future manufacturing partners will be able to meet our requirements for manufactured products. Any inability to increase manufacturing capacity as required could have a material adverse effect on our business, operating results and financial condition. In addition, the current purchase order arrangements with our manufacturing partners would allow them to terminate the arrangements by not accepting our purchase orders. The unanticipated loss of any of our manufacturing partners could cause delays in our ability to ship orders while the Company identifies a replacement manufacturer. Such an event would have a material adverse effect on our business, operating results and financial condition. In addition, we are continually exploring alternative manufacturing sources, including potential sources for new products. However, there can be no assurance that such alternative sources can be successfully developed. Our manufacturing policies were designed to reduce our investment in inventories, yet still respond to rapid changes in customer demand, but may in certain instances result in excess or insufficient inventory, or inappropriate mix of component inventory, if orders do not match forecasts. To the extent we have excess inventories, we may experience inventory write-downs or may have to lower prices of our products which would result in substantial price protection charges and a negative impact on gross margins. To the extent we have insufficient inventory, we may be materially adversely impacted by the loss of one or more of our distribution and reseller relationships and the inability to obtain market acceptance of our products. COMPETITION The digital imaging market is highly competitive. It is subject to rapid change along with frequent new product introductions and enhancements, as well as constant pressure to reduce prices. We believe that the principal competitive factors in this market include OCR accuracy, ease of understanding and use, product reliability, tolerance for poor media, product features and functions, price/performance characteristics, brand recognition, and quality of product support. Our competition within the digital imaging software market ranges from large corporations to small independent software vendors. We also expect to encounter continued competition, both from established companies and from new companies that are now developing, or may develop, competing products. The TextBridge family of OCR products face competition in two markets: the market for packaged OCR application programs and OEM bundled OCR products. Several companies offer packaged OCR application programs through the channel, including companies such as Caere Corporation and Adobe Corporation and several small independent software vendors. We face significant price pressure in the retail channel. In the OEM market in which companies "bundle" the OCR technology with related hardware products, such as scanners or multifunction peripherals, or incorporate OCR technology into third party application software products, competitors include 8 Caere Corporation and several small independent software vendors. We have experienced significant price competition in the OEM market and expect this to continue. In addition, the "bundled" OCR products themselves present competition to our fully featured shrinkwrap products. The Pagis and PaperPort family of products compete with various products in the digital imaging software marketplace. In the personal document management segment there are several competitors, including DocuMagix, Inc. (a division of JetFax Corporation), Caere Corporation, Newsoft (a subsidiary of UMAX Corporation), and Eastman Software (a subsidiary of Kodak Corporation). With decreasing prices driving affordable scanning solutions into the mainstream, we expect to face increasing competition in this product category from a variety of software developers. In the scanning software suite segment, our products include various combinations of the products mentioned above and often include photo-editing capabilities. Competitors include Adobe Corporation. Caere Corporation has also announced plans to enter this market segment. Microsoft and MGI Software offer photo-editing products and could offer products in this market segment in the future. We expect that some consolidation in the digital imaging software industry will occur over the next few years through strategic acquisitions or alliances, and we expect increased competition from new entrants, including the possibility that Microsoft will add digital imaging components to its Windows operating system. In addition, according to PC Data, Inc., the average retail price of scanners dropped by 47% for the nine months ending September 30, 1998, as compared to the same period in 1997. Based on this historical trend, we expect that scanner prices will continue to decline in the future. We believe that the downward price trend of scanners may reduce prices for digital imaging software products. These changes in the market could result in price erosion, reduced gross margins or loss of market share, any of which could have a material adverse effect on our business, operating results and financial condition. There can be no assurance that we will be able to compete successfully against current and future competitors, especially those with greater financial, marketing, recruiting, technical and other resources, or that competitive pressures will not materially adversely affect our business, operating results and financial condition. PROPRIETARY TECHNOLOGY We rely on certain technology which we license from third parties, including software which is integrated with internally developed software and used in our products to perform key functions and software which is bundled with our software to provide additional functionality. There can be no assurance that these third-party technology licenses will continue to be available to us on commercially reasonable terms or at all. The loss of or inability to maintain any of these technology licenses could result in delays or reductions in product shipments until equivalent technology is identified, licensed and integrated or bundled. Any such delays or reductions in product shipments would materially adversely affect our business, operating results and financial condition. We generally enter into confidentiality or license agreements with our employees, consultants and vendors, and generally control access to and distribution of our software, documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization, or to develop similar technology independently. To license our products, we primarily rely on "shrink wrap" licenses that are not signed by the end-user customer and, therefore, may not be enforceable under the laws of certain jurisdictions. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult. There can be no assurance that we will be able to protect our technology, or that our competitors will not independently develop technologies that are substantially equivalent or superior our technology. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Furthermore, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial 9 costs and diversion of resources and could have a material adverse effect on our business, operating results or financial condition. We currently have two pending U.S. patent applications and one pending Canadian patent application. As a result of the merger, we have entered into a license agreement with Xerox that includes limited licenses and the assignment of certain patents and trademarks. In addition, we have filed counterpart applications in several European countries, Canada, Japan and Australia. We may file additional U.S. and foreign patent applications in the future. On January 6, 1999 we sold all assets, liabilities and intellectual property associated with our hardware business. There can be no assurance that patents will issue from any application filed by the Company or that, if patents do issue, the claims allowed will be sufficiently broad to protect our technology. The source code for our proprietary software is protected both as a trade secret and as a copyrighted work. EMPLOYEES As of December 31, 1998, we had a total of 54 full-time salaried employees, 21 of which were in research and development, 19 of which were in sales, marketing, and customer support, 4 of which were in operations and 10 of which were in administration and finance. Prior to our merger with ScanSoft, we implemented a restructuring plan to reduce operating expenses. This restructuring plan included a decrease of approximately 20% of total employee and consultant headcount. Following the sale of our hardware business to Primax and upon the completion of the merger with ScanSoft, we had a total of 138 full time employees, all of whom are based in the United States and the United Kingdom. Of the total, 46 are engaged in sales, marketing and support, 67 in research and development, 20 in administration, MIS and finance and six in operations and manufacturing. Following the consolidation of research and development on the east coast, the research and development staff will be reduced to 58 people. Our future performance depends in significant part on the continued service of our key technical and senior management personnel. None of our employees are represented by a labor union. We have not experienced any work stoppages and consider our relations with our employees to be good. FACTORS AFFECTING RESULTS DIFFICULTIES OF INTEGRATING TWO COMPANIES. The anticipated benefits merging with ScanSoft will depend in part on whether we can integrate our operations and products in an efficient and effective manner. We cannot guarantee that this will occur. Successful integration will require integration of each company's products and coordination of each company's operating procedures, financial controls, development efforts and sales and marketing efforts. This integration may be difficult to accomplish smoothly or successfully, and may take longer than we expect. If serious difficulties are encountered during integration, management will have to divert its attention from normal business operations to address these issues, which could have an adverse effect on the surviving corporation's business. In addition, the merger may cause potential customers to cancel or delay orders as the result of uncertainty over the successful integration of the two companies. Furthermore, there could be an adverse effect on employee morale and on the ability of the surviving corporation to retain key personnel. Failure to effectively accomplish the integration of the two companies' operations could have a material adverse effect on the surviving corporation's business, operating results and financial condition. SUBSTANTIAL EXPENSES RESULTING FROM THE MERGER. We expect to incur certain costs in connection with the integration of Visioneer and ScanSoft's operations. Such costs cannot now be reasonably estimated, because they depend on future decisions to be made by our management, but they could be material. Such costs could relate to the elimination of duplicate facilities and operations, integration of internal and customer-related activities, and cancellation and/or overlap of contractual obligations. These costs and expenses will affect results of operations in the first quarter of 1999, the quarter in which the merger is consummated. FAILURE TO ACHIEVE SYNERGIES COULD LEAD TO DECLINE IN STOCK PRICE. The market price of our common stock may decline significantly if: 10 o the integration of the combined companies is not successful; o we do not experience business synergies as quickly or to the extent expected by financial analysts; or o the effect of the merger on earnings per share and operating results is not in line with the expectations of financial analysts. DEPENDENCE ON DEVELOPING MARKET; RAPID TECHNOLOGICAL CHANGE. The market for digital imaging software and, in particular, for our products, is new and rapidly evolving. It is dependent on market demand for color sheetfed and flatbed scanners, as well as for other paper input systems. It is characterized by transforming technology and frequent new product introductions. Developing new products and product enhancements is a complex and uncertain process requiring high levels of innovation, as well as the accurate anticipation of technological and market trends. Our PaperPort, Pagis and TextBridge software products account for most of our revenues. We expect that these products will continue to account for most of our revenues for the foreseeable future. Broad market acceptance of these products is therefore critical to our future success and will depend in part on the following: o Our ability and that of our distributors and other industry suppliers to convince end users to adopt paper input systems and digital imaging software for the desktop. o Our ability to educate end users about the benefits of digital imaging products generally and the specific benefits of our products. o Our ability to adapt to emerging industry standards and respond to our competitors' product announcements. o Our ability to develop, introduce, upgrade and support competitive, new products and product enhancements that meet changing customer requirements and emerging industry standards. o Our ability to maintain current market share for our products and increase brand-name recognition. If we are not successful in meeting the goals listed above, we may not be able to gain broad market acceptance for our products. Further, a decline in demand for digital imaging products generally, or for PaperPort, Pagis or TextBridge products, in particular, could occur as a result of competitive technological change or other factors and would have a material adverse effect on our business, operating results and financial condition. DIFFICULTIES ASSOCIATED WITH TIMING OF NEW PRODUCT INTRODUCTION. The digital imaging software market is characterized by rapid technological change, evolving customer needs, frequent new product introductions and evolving industry standards. Rapid product advancements could erode the market position of our products or render those products obsolete. Our success depends on how well we are able to manage the transition to new products and new versions of existing products. The life cycles of our products are difficult to estimate. Further, it is not unusual in personal computer software life cycles for the sales volume of new products to increase in the first few months after their introduction because distributors and resellers purchase initial inventory during that time. As a product reaches the end of its life cycle, however, demand for that product tends to fall in anticipation of new replacement products. Consequently, announcements about new products at the end of a product life cycle may cause our customers to defer purchasing existing products, and we may be forced to lower the prices of older products in anticipation of new releases. This may result in distributors claiming price protection credits or returning older products to us, and as a result, our revenues may decline. We cannot accurately predict the exact timing in which a new product or version will be ready to ship. Moreover, in order to maintain competitiveness, we must make substantial investments in product development and testing. We cannot guarantee that we will have sufficient resources to make the necessary investments or that we will be able to develop new products or new product features quickly enough to meet market demand. Any delay in the scheduled release of new products or features, or lack of market acceptance for such new products or features, may have a material adverse impact on our business, results of operations and financial condition. 11 DISPOSITION OF HARDWARE BUSINESS; NEED FOR REBRANDING OF PRODUCTS; NEED FOR SERVICES AGREEMENT WITH PRIMAX. In January 1999, we sold our hardware business to Primax, which was a principal manufacturer of our flatbed and sheetfed scanners and other hardware products. In this transaction, Primax purchased substantially all of our hardware business (including the "Visioneer" brand and company name), and it assumed all known liabilities associated with the hardware business. We intend to take steps to rebrand all software products carrying the Visioneer name so that in the future all such products will be identified with a new software brand name, such as ScanSoft or PaperPort. In the same way, Primax will rebrand any hardware products that carry the PaperPort name so that in the future such products will be identified with a different name. This rebranding may create confusion for our customers, including OEM distributors and end-users, and there will necessarily be an adjustment period during which time new brands will need to be established. DEPENDENCE ON RELATIONSHIPS WITH XEROX, PRIMAX AND OTHER OEMS. ScanSoft and Visioneer each had OEM relationships with Xerox prior to the merger, which relationships remain in effect following the merger. In connection with the sale of the hardware business to Primax, Visioneer entered into a software license agreement granting Primax certain rights to "bundle" and sell Visioneer's software products with certain Primax hardware products. Under the license, Primax must pay us certain minimum annual royalties during the license term. Primax, however, is not obligated to bundle or sell our software products with its hardware products. Other risks include whether Primax will give sufficient priority to marketing our products, whether Primax will continue to offer our products at all, and whether Primax will elect instead to bundle software products of our competitors with its hardware products. Any of the foregoing actions could adversely impact our future business, results of operations and financial condition since we expect Primax to become an important OEM partner. We also rely on other OEM partners to bundle, market and sell our products with their products. However, there are certain risks associated with such relationships, including whether sufficient priority will be given by such OEM partners to marketing our products. In addition, our OEM partners may not continue to offer our products. If we do not maintain and build our OEM relationships, our business, operating results and financial condition may suffer. COMPETITION. The digital imaging market is highly competitive and subject to rapid change, with frequent new product introductions and enhancements, and constant pressure to reduce prices. We believe that the principal competitive factors in the digital imaging software market include: o OCR accuracy; o ease of understanding and use, o product reliability; o tolerance for poor media; o product features and functions; o price/performance characteristics; o brand recognition; and o quality of product support. Our current competitors include developers of digital image processing software (including photo-editing software), personal document management software and scanning software suites and manufacturers of scanners and multi-function peripheral devices. We also face competition in the market for packaged OCR application programs and bundled OCR products, both in the retail channel and in the OEM market. We experience significant price competition in both the retail channel and the OEM market and expect this to continue. In addition, our "bundled" OCR products themselves compete with our fully featured shrinkwrap products. In addition to our 12 current competitors, Microsoft Corporation and MGI Software offer photo-editing products and could offer products in this market segment in the future. Increased competition may force us to lower our prices, experience decreased gross margins or lose market acceptance. We face the following challenges from our competitors: o Certain of our competitors offer products comparable to ours at retail prices that are lower than ours. o Many of our current and potential competitors have longer operating histories and significantly greater financial, technical, support, sales, marketing, recruiting and other resources. o Certain of our competitors have greater name recognition and larger customer bases than we do. o Certain of our competitors may be better able to withstand significant price decreases or devote greater resources to the development, promotion, sale and support of their products than we can. o Certain of our competitors may be able to develop digital image processing software with superior OCR accuracy, ease of understanding and use, product reliability, tolerance for poor media, product features and functions and price/performance characteristics. We may not be able to compete successfully against current and future competitors, especially those with greater financial, technical, support, sales, marketing, recruiting and other resources. If we are not successful in meeting the challenges listed above, we may not be able to gain broad market acceptance for our products and our business, financial condition and operating results may suffer. Competitive pressures may materially affect our business, operating results, and financial condition. Further, we expect that some consolidation in the digital imaging software industry will occur over the next few years through strategic acquisitions or alliances. We expect increased competition from new entrants, including the possibility that Microsoft will add digital imaging components to the Windows operating system. In addition, according to PC Data, Inc., the average retail price of scanners dropped by 47% for the nine months ending September 30, 1998, as compared to the same period in 1997. Based on this historical trend, we expect that scanner prices will continue to decline in the future. We believe that the downward price trend of scanners may reduce prices for digital imaging software products. These changes in the market could result in price erosion, reduced gross margins or loss of market share, any of which could have a material adverse effect on our business, operating results and financial condition. PRESSURE ON GROSS MARGIN. We may suffer adverse operating results if our gross margin fluctuates. Retail prices on software products drop quickly. In addition, our competitors will attempt to offer products which meet or exceed our products' performance and capabilities. We intend to introduce new software products, software upgrades and software features in response to anticipated competitive price pressures and new product introductions. If prices fall faster than we expect or if we must reduce our prices for any reason, we may experience pressure on our gross margin. In addition, our gross margin will depend in part on certain factors listed below: o Our success in introducing new products to the market and easing out old ones. o Our competitors prices, products and market share. o The amount of royalties we receive under our OEM arrangements. o General economic conditions. If we are not successful in meeting these challenges, our business, operating results and financial condition may suffer. DEPENDENCE ON DISTRIBUTORS AND RESELLERS. We expect to continue to receive a substantial portion of our revenues from sales through our independent distributors and resellers, but we anticipate that our dependence on 13 any one independent distributor or reseller will decrease in the future as we expand distribution channels. Our agreements with distributors and resellers are not exclusive; many of our distributors and resellers offer competitive products and are not required to give our products priority. Each of our distributors and resellers can cease marketing our products with limited notice and with little or no penalty. If we lose any one of our independent distributors or resellers, we may not be able to recruit replacements. If our distributors or resellers reduce or cease their marketing and sales efforts on our behalf, our business, operating results and financial condition may suffer. INTERNATIONAL SALES RISKS. We plan to expand our international sales by establishing a more extensive network of international distributors and resellers. We also plan to develop versions of our products suitable to the market requirements of particular foreign countries, such as different languages. We have limited experience in developing international versions of our products and marketing, distributing, servicing and supporting such products. We may not be able to develop new or additional versions of our existing products or successfully market, sell, deliver, service or support our products in international markets. In conducting business outside of the United States, we are exposed to the risks listed below: o Unexpected changes in regulatory requirements. o Import and export duties and restrictions. o Tariffs and other trade barriers. o Difficulties in staffing and managing foreign operations. o Longer payment cycles. o Uncertainties in connection with collecting accounts receivable. o Political instability. o Fluctuations in currency exchange rates. o Logistical difficulties in managing multinational operations. o Seasonal reductions in business activity during summer months in Europe and certain other parts of the world. o Potentially adverse tax consequences, including our inability to recover withholding taxes. If we are not successful in managing the risks listed above, our business, operating results and financial condition may suffer. One or more of these factors could have a material adverse effect on our international operations and, consequently, on our business, operating results and financial condition. QUALITY CONTROL RISKS. Our products are complex and may contain certain software errors or failures which are detected only after we begin to ship a product, especially when first introduced as new versions or when enhancements are released. Although we conduct testing during product development, we have at times been forced to delay commercial release of software until problems were corrected and, in some cases, have provided enhancements to correct errors in released software. If we do detect any errors before we ship a product, we might have to limit product shipment for an extended period of time while we address the problem. Delay in commercial release, correction of errors or limiting product shipment could lead to loss of revenues, credibility with customers and market acceptance of our products. We would also be exposed to additional warranty and engineering expenses. Despite our testing and testing by current and potential customers, errors may be found in software or releases after commencement of commercial shipments, resulting in loss or delay of revenue or delay in market acceptance, diversion of development resources, damage to our reputation, or increased service and warranty costs. If we do not successfully manage our quality control, our business, operating results and financial condition may suffer. 14 DEPENDENCE ON THIRD-PARTY LICENSES. We rely on certain technology which we license from third parties, including software which is integrated with our own software and used in our products to perform key functions and provide additional functionality. Because our products incorporate software developed and maintained by third parties, we are, to a certain extent, dependent upon such third parties' ability to maintain or enhance their current products, to develop new products on a timely and cost-effective basis, and to respond to emerging industry standards and other technological changes. Further, these third-party technology licenses may not always be available to us on commercially reasonable terms or at all. In the event that our agreements with third-party vendors should fail to be renewed or the products licensed from such vendors should fail to address the requirements of our software products, we would be required to find alternative software products or technologies of equal performance or functionality. There can be no assurance that we would be able to replace such functionality provided by software that we currently license from third parties in the event that we lose the license to such software, such software becomes obsolete or incompatible with future versions of our products or is otherwise not adequately maintained or updated. The absence of or any significant delay in the replacement of that functionality could have a material adverse effect on our business, operating results and financial condition. Moreover, if we were to lose any of these technology licenses we might experience product shipment delays or reductions until equivalent technology were identified, licensed and used. If we do experience product shipping delays and reductions due to licensing problems, our business, operating results and financial condition would suffer. RISKS ASSOCIATED WITH PROTECTION OF CONFIDENTIAL INFORMATION AND PROPRIETARY RIGHTS. We generally enter into confidentiality or license agreements with our employees, consultants and vendors. We also generally control access to and distribution of our software, documentation and other proprietary information. We primarily rely on "shrink wrap" licenses that are not signed by the end-user customer and, therefore, may not be enforceable under the laws of certain jurisdictions. Unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our products is difficult and we may not be able to protect our technology from unauthorized use. Additionally, our competitors may independently develop technologies that are substantially the same or superior to ours. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the United States. Although the source code for our proprietary software is protected both as a trade secret and as a copyrighted work, litigation may be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Litigation, regardless of the outcome, can be very expensive and can divert management efforts. These risks, if not managed successfully, could have a material adverse effect on our business, operating results or financial condition. DEPENDENCE ON KEY PERSONNEL; RISKS ASSOCIATED WITH HIRING AND RETENTION OF EMPLOYEES. We rely to a significant extent upon our senior management team and other key employees. Competition for such employees is intense. We cannot guarantee that we will be able to retain our key employees following the merger. Our operations could be materially and adversely affected if we were unable to retain such key employees, or attract new ones. From time to time, we will need to hire additional or replacement employees. We may not be successful in hiring, integrating or retaining new employees. If we are not successful in attracting or retaining qualified personnel, our business, financial condition and operating results could suffer. HISTORY OF LOSSES; FLUCTUATIONS IN OPERATING RESULTS. ScanSoft had net losses for 1996, 1997 and 1998. Visioneer also had net losses for its fiscal 1996, 1997 and 1998, although a substantial portion of those losses were attributable to the hardware business that was sold to Primax. On a pro forma basis, the combined companies had a net loss for 1997 and 1998. We may never become profitable or sustain profitability. Our revenues frequently fluctuate from quarter to quarter due, to a large extent, on the following: o volume, timing and filling of customer orders; o reduction in prices in response to competition; 15 o increased expenditures to pursue new product or market opportunities; o fluctuation in sales orders, juxtaposed with a significant portion of our operating expenses being fixed in advance, based in large part on forecasts of future sales; o inability to adjust operating expenses to compensate for shortfalls in sales orders against forecast; o price protection charges in excess of recorded allowances; o demand for products; o seasonality; o customer deferrals in anticipation of new versions of products; o introduction of new products by us or our competitors; o timing of new product acquisitions; and o timing of significant marketing and sales promotions. Further, backlog early in a quarter is generally not large enough to assure than we will meet our revenue target for any particular quarter. A shortfall in shipments at the end of any quarter may cause operating results for that quarter to fall significantly short of anticipated levels. In addition, if we need to reduce our prices in response to price competition, we will therefore be at a significant disadvantage with respect to our competitors that have substantially greater resources. Such competitors may more readily withstand an extended period of downward pricing pressure. In such event, we may also incur price protection charges from our distributors and resellers. Any price protection charges in excess of recorded allowances would have a material adverse effect on our business, operating results and financial condition. Due to the foregoing factors, among others, our revenues are difficult to forecast. We intend to base our expense levels in significant part on our expectations of future revenue. As a result, we expect our expense levels to be relatively fixed in the short term. Our failure to meet revenue expectations would have a material adverse affect on our business, operating results and financial condition. Further, an unanticipated decline in revenue for a particular quarter may disproportionately affect our net income because a relatively small amount of our expenses are intended to vary with our revenue in the short term. As a result, we believe that period-to-period comparisons of our results of operations are not and will not necessarily be meaningful, and you should not rely upon them as an indication of future performance. XEROX AS A SIGNIFICANT STOCKHOLDER. Xerox Imaging Systems, Inc., a wholly owned subsidiary of Xerox, owns approximately 45% of our outstanding common stock and all of our outstanding Series B Preferred Stock. In addition, Xerox has the opportunity to acquire additional shares of our common stock pursuant to a warrant. Xerox is currently our largest stockholder. Although Xerox does not control us and is restricted for at least two years after the merger from holding more than 50% of the voting power of our capital stock, Xerox will have a strong influence over matters requiring approval by our stockholders. In addition, Xerox has two designees on the board of directors, including Paul A. Ricci, the new Chairman of the Board. Xerox has advised us that its current intent is to hold all of its shares of common stock. However, there can be no assurance concerning the periods of time during which Xerox will maintain its ownership of our common stock. YEAR 2000 RISKS. We have a number of installed computer systems and software products that are coded to accept only two digit entries in the date code field. These date code fields will need to distinguish 21st century 16 dates from 20th century dates (the "Year 2000 bug"). The Year 2000 bug could lead to system failures or miscalculations causing disruptions of operations including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. We are currently in the process of establishing procedures for evaluating and managing the risks and costs associated with this problem. See, "Management's Discussion and Analysis of Financial Condition and Results of Operations--Year 2000." Finally, many of our customers' and suppliers' operations may be affected by Year 2000 complications. As such, the failure of these customers and suppliers to ensure that their systems are Year 2000 compliant could have a material adverse effect on our customers and suppliers, resulting in a material adverse effect on our business, operating results and financial condition. ITEM 2. PROPERTIES On January 6, 1999, Primax assumed the lease on our former headquarters in Fremont, California. Following the completion of the merger with ScanSoft, Inc., the combined company relocated its headquarters, administrative, sales, marketing and support functions to our leased headquarters facility in Peabody, Massachusetts. We currently occupy 37,636 square feet of space at this facility, and the lease will expire in July 2001. We also lease warehouse space in Topsfield, Massachusetts and research and development space at a Xerox facility in Palo Alto, California. In addition, our subsidiary, ScanSoft Europe Ltd., leases a sales and support office in Reading, England. ITEM 3. LEGAL PROCEEDINGS From time to time, we are parties to various legal proceedings or claims, either asserted or unasserted, which arise in the ordinary course of business. In addition, during 1998, we were involved in separate legal matters with Caere Corporation, Flashpix, Incorporated and Storm Technology, Inc. (1) We were named as the defendant in a complaint filed by Caere Corporation on August 10, 1998, in the United States District Court for the Northern District of California. Caere Corporation alleged that we engaged in false and misleading advertising concerning our software product, ProOCR100. Pursuant to a settlement agreement, we agreed to pay Caere the sum of $75,000, and the lawsuit was dismissed with prejudice. (2) We were named as a defendant as part of the Digital Imaging Group, in a complaint filed by Flashpix, Incorporated on July 16, 1998, in the United States District Court for the Eastern District of Louisiana. The complaint alleged, among other things, trademark infringement, unfair competition, unfair trade practices, and dilution of trademark. Subsequent to December 31, 1998, we have, along with the Digital Imaging Group, settled this matter. (3) We were named as the defendant in a complaint filed by Storm Technology, Inc. on June 2, 1998, in the United States District Court for the Northern District of California, alleging patent infringement of specified scanner technology. Subsequently, the parties settled the matter and executed an updated Patent Cross License Agreement. Primax assumed this matter when it purchased our hardware business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET FOR COMMON STOCK Our Common Stock commenced trading on the Nasdaq National Market on December 11, 1995 under the symbol "VSNR," and traded under that symbol until March 3, 1999. Our Common Stock is now traded under the symbol "SSFT." The following table sets forth for the periods indicated the high and low sale prices for our common stock as reported on the Nasdaq National Market.
High Low ---- --- Fiscal 1997: 1st quarter........................ $6 $ 3-1/8 2nd quarter........................ 4-3/8 2-1/2 3rd quarter........................ 4-3/4 2-13/16 4th quarter........................ 5-3/4 1-5/8 Fiscal 1998: 1st quarter........................ 3-1/2 1-5/8 2nd quarter........................ 4-1/8 2-1/16 3rd quarter........................ 2-1/4 11/16 4th quarter........................ 2-7/8 11/16
HOLDERS OF RECORD As of March 26, 1999, there were approximately 244 holders of record of our common stock. DIVIDENDS To date, we have not paid any cash dividends on shares of our common stock. We presently intend to retain all future earnings for our business and do not anticipate paying cash dividends on our common stock in the foreseeable future. 18 ITEM 6. SELECTED FINANCIAL DATA The information set forth below is not necessarily indicative of the results of future operations and should be read in conjunction with the information contained in Item 7--"Management's Discussion and Analysis of Financial Condition" and Results of Operations and the Financial Statements and Notes to Financial Statements contained in Item 8 of this Report.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ----------- ----------- ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA(1): Product revenues............................ $74,674 $50,523 $44,233 $34,734 $ 3,903 Royalty and development revenues............ 4,396 7,100 11,848 2,605 -- ------------ ----------- ----------- ------------ ------------ Total net revenues........................ 79,070 57,623 56,081 37,339 3,903 ------------ ----------- ----------- ------------ ------------ Cost of revenues: Cost of product revenues.................... 58,486 49,838 42,164 25,664 4,481 Cost of royalty and development revenues.... 884 887 3,303 1,274 -- ------------ ----------- ----------- ------------ ------------ Total cost of revenues.................... 59,370 50,725 45,467 26,938 4,481 ------------ ----------- ----------- ------------ ------------ Gross profit (loss)............................ 19,700 6,898 10,614 10,401 (578) ------------ ----------- ----------- ------------ ------------ Operating expenses: Research and development.................... 4,408 8,115 10,938 8,975 4,532 Selling, general and administrative......... 19,150 22,428 26,342 11,805 6,482 Non-recurring items(2)...................... -- 675 -- 1,600 -- ------------ ----------- ----------- ------------ ------------ Total operating expenses.................. 23,558 31,218 37,280 22,380 11,014 ------------ ----------- ----------- ------------ ------------ Operating loss................................. (3,858) (24,320) (26,666) (11,979) (11,592) Net interest income............................ 53 940 2,274 426 137 ------------ ----------- ----------- ------------ ------------ Net loss....................................... $(3,805) $(23,380) $(24,392) $(11,553) $(11,455) ============ =========== =========== ============ ============ Net loss per share: basic and diluted......... (0.19) (1.20) (1.34) (4.28) (6.76) ============ =========== =========== ============ ============ Weighted average common shares outstanding: basic and diluted........................... 19,728 19,450 18,255 2,669 1,694 ============ =========== =========== ============ ============
19
DECEMBER 31, ------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ----------- ----------- ------------ ------------ (IN THOUSANDS) BALANCE SHEET DATA(1): Cash, cash equivalents and short-term investments............................... $ 8,123 $14,452 $31,200 $46,166 $ 4,032 Working capital............................. 6,569 8,389 28,807 46,677 3,376 Total assets................................ 28,445 33,550 51,785 65,793 7,378 Long-term liability......................... 91 125 -- -- -- Capital lease obligations, less current -- -- -- -- 248 portion..................................... Total stockholders' equity (deficit) ....... 7,582 10,930 33,193 49,860 4,053 - ----------- (1) See Note 1 of Notes to Financial Statements for an explanation of the Company's fiscal year ends. (2) See Note 10 of Notes to Financial Statements. Also, the charge in 1995 related to the fair value of securities issued and cash paid in connection with the settlement of a patent matter.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL STATEMENTS AND THE NOTES THERETO CONTAINED IN ITEM 8 OF THIS REPORT. EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE DISCUSSED IN THIS REPORT AND OTHER RISKS DETAILED FROM TIME TO TIME IN OUR PERIODIC REPORTS. OVERVIEW ScanSoft, Inc. was incorporated as Visioneer, Inc. in California in March 1992, and commenced shipment of our initial product in the first quarter of 1994. Through September 1995, we financed our operations primarily through private placements of equity securities, from which we raised an aggregate of approximately $33 million, net of issuance costs. In December 1995, we reincorporated in Delaware in conjunction with our initial public offering and raised $43.5 million, net of issuance costs. In January 1996, the over allotment option granted to the underwriters in the initial public offering was exercised, resulting in additional net proceeds of approximately $6.4 million. We have experienced sequential growth in annual net revenues since the first year of product shipments. The annual growth rates between 1994 and 1996 were directly attributable to the growth of the sheetfed scanner and document management software markets, the development of OEM relationships and new product introductions. In contrast, the single digit growth rate from 1996 to 1997 was attributed to several factors. First, the grayscale sheetfed scanner market declined sharply with the advent of color sheetfed scanners. The transition of the market from grayscale to color occurred at a much faster rate than we had anticipated, and as a result, we recorded significant charges relating to grayscale inventory reserves, purchase order commitments and price protection charges in the first half of 1997. Second, we were late in introducing a color scanner product, and as a result, did not capture planned market share. Third, increased competition caused overall sheetfed scanner average selling prices to drop significantly. Finally, the growth of the sheetfed scanner market has leveled off, and, in fact, may be decreasing in size. A key component of our business strategy in 1997 and 1998 was to penetrate the much larger and growing flatbed market by leveraging off of our software. Historically, we have bundled our PaperPort software with our scanner products, which has provided significant product differentiation. The PaperPort flatbed scanner line was introduced in September 1997. This line was enhanced with the introduction of additional 30-bit products as well as the entire 36-bit and One Touch line of flatbed scanners in 1998. In addition, our focus over time has shifted from the hardware business to the software business. During 1997 we implemented a strategy to focus our research and 20 development efforts on software development rather than hardware development and to leverage the engineering resources of our manufacturing partners to design future hardware products. In furtherance of this strategy, on December 3, 1998, we entered into an agreement to sell our hardware business and the Visioneer brand name to Primax, and to merge with ScanSoft. Following the sale to Primax and the merger with ScanSoft, our business will focus on software products in the PaperPort line, and the TextBridge and Pagis line of software products. Our success in the future will depend on our ability to maintain software gross margins and increase sales of our software products. This will depend in part on our ability and the ability of our distributors, resellers and OEM partners to convince end-users to adopt paper and image input systems for the desktop and to educate end-users about the benefits of our products. There can be no assurance that the market for our products will develop or that we will achieve market acceptance of our products. Despite experiencing several quarters of minor levels of profitability throughout our history, we have incurred annual net losses since inception. There can be no assurance that we will be able to reach quarterly profitability or attain annual profitability in the near future. As of December 31, 1998, we had an accumulated deficit of $80.4 million. As a result of the sale of our hardware business in January, our revenues will decline significantly in the first quarter of 1999. We expect our revenues to start improving gradually from the quarter ended June 1999, as revenues from ScanSoft start impacting our operating results. RESULTS OF OPERATIONS The following table presents, as a percentage of total net revenues, certain selected financial data for each of the three years in the period ended December 31, 1998:
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 1998 1997 1996 ----------------- ----------------- ----------------- Revenues: Product revenues................................ 94.4% 87.7% 78.9% Royalty and development revenues................ 5.6% 12.3% 21.1% ----------------- ----------------- ----------------- Total net revenues............................ 100.0% 100.0% 100.0% Cost of revenues: Cost of product revenues........................ 74.0% 86.5% 75.2% Cost of royalty and development revenues........ 1.1% 1.5% 5.9% ----------------- ----------------- ----------------- Total cost of revenues........................ 75.1% 88.0% 81.1% ----------------- ----------------- ----------------- Gross profit....................................... 24.9% 12.0% 18.9% ----------------- ----------------- ----------------- Operating expenses: Research and development........................ 5.6% 14.1% 19.5% Selling, general and administrative............. 24.2% 38.9% 47.0% Non-recurring item(1) .......................... 0.0% 1.2% 0.0% ----------------- ----------------- ----------------- Total operating expenses...................... 29.8% 54.2% 66.5% ----------------- ----------------- ----------------- Operating loss..................................... (4.9%) (42.2%) (47.5%) Interest income.................................... 0.6% 1.7% 4.2% Interest expense................................... (0.6%) (0.1%) (0.1%) ----------------- ----------------- ----------------- Net loss........................................... (4.8%) (40.6%) (43.5%) ----------------- ----------------- ----------------- - ---------- (1) See Note 10 of Notes to Financial Statements
21 TOTAL NET REVENUES We derived our revenue primarily from three sources, the sale of PaperPort hardware products, PaperPort software products, and royalties and custom software development revenue earned pursuant to arrangements with certain OEM customers. Through the end of 1998, approximately 86% of our product revenues have been derived from sales of our PaperPort products to authorized resellers and independent distributors in North America and, to a lesser extent, in Europe and the Asia-Pacific regions. Revenues from all sales to distributors and authorized resellers are subject to agreements allowing price protection and certain rights of return. Under the price protection rights granted by us, if we lower our selling price, we are then obligated to issue credit to our distributors and resellers equal to the difference between the new selling price and the price paid for all unsold inventory held by the distributor and reseller. Accordingly, reserves for estimated future returns, exchanges and price protection are provided upon revenue recognition. Total net revenues increased 37% to $79.1 million in 1998 from $57.6 million in 1997, despite a 38% reduction in royalty and development revenues from $7.1 million in 1997 to $4.4 million in 1998. The decline in royalty revenues in 1998 was due to the termination, in the third quarter of 1996, of royalties under an OEM agreement with Hewlett-Packard and the termination of royalties under our OEM agreement with Compaq in the first quarter of 1997. In regards to another OEM agreement with Hewlett-Packard, which involved the licensing of our software for Hewlett-Packard scanners, Hewlett-Packard informed us, in the fourth quarter of 1997, that commencing January 1, 1998, it would no longer be building new scanner products incorporating our software. We experienced declining royalties from this agreement in 1998 as Hewlett-Packard sold existing inventory of products incorporating our software which it held at December 31, 1997. Net revenues from hardware product sales increased to $66.0 million in 1998 compared to $41.5 million in 1997. As a result of the addition of the PaperPort 36-bit and OneTouch flatbed color scanner lines in 1998, overall scanner unit sales in 1998 increased by approximately 248% over 1997, despite a 79% decrease in grayscale scanner unit sales. Revenues did not increase at the same rate as unit increases because of the sharp decline in average retail prices offset the net revenue from the increased hardware unit sales from 1997 to 1998. Software revenues increased 4.3% to $8.7 million in 1998 from $8.3 million in 1997. The increase was primarily attributable to the commencement of sales of new PaperPort software products that included ProOCR 100, PaperPort ScannerSuite, Visual Explorer, and PaperPort Deluxe 5.3 released in the second quarter of 1998. Total net revenues increased 3% to $57.6 million in 1997 from $56.1 million in 1996, despite a 40% reduction in royalty and development revenues from $11.8 million in 1996 to $7.1 million in 1997. The decline in royalty revenue in 1997 was due to the termination of the royalties associated with our OEM agreement with Hewlett-Packard and our OEM agreement with Compaq Computers. Our second OEM agreement with Hewlett-Packard, which related to the licensing of our software for Hewlett-Packard scanners, was terminated in the fourth quarter of 1997. Our ability to increase our revenues will depend upon our ability to attain wider market acceptance for our software products and our ability to introduce new products with enhanced end-user features on a timely basis. As a result of the sale of our hardware assets, liabilities and intellectual property to Primax Electronics, Ltd., our revenues will be substantially reduced in 1999, even taking into consideration the addition of revenues from the merger with ScanSoft. Our four largest resellers for 1998 were Sam's Club, Office Depot, Inc., Best Buy Company, Inc. and CompUSA, Inc. for distribution of our products in North America. Sales to these top four independent resellers accounted for 46% of our total net revenues in 1998 in the aggregate, or 18%, 12%, 9% and 7%, respectively. Our four largest resellers and distributors of our products in 1997 were Ingram, Best Buy, Office Depot and Micro Warehouse. Sales to these independent distributors and resellers, in the aggregate, accounted for approximately 38% of total net revenues in 1997. The four largest distributors and resellers in 1996 were Ingram, Best Buy, Tech Data and Merisel. Sales to these independent distributors, in the aggregate, accounted for approximately 52% of our total net revenues in 1996. In 1998, all four of our top customers were resellers compared to 1997, when three out of four of our largest customers, excluding OEMs, were resellers. In contrast in 1996, three out of four of our customers were distributors. We have focused on establishing direct relationships with major resellers, thus 22 bypassing distributors. This strategy, to a limited extent, reduces a layer of our inventory in the retail channel, thereby reducing inventory risk and increasing channel inventory visibility. Total net revenues from independent distributors outside North America, primarily in Europe and the Asia-Pacific regions, were approximately 7%, 10% and 13% of total net revenues in 1998, 1997 and 1996, respectively. Net revenues from international sales increased from $5.6 million in 1997 to $5.9 million in 1998, whereas sales decreased from $7.1 million in 1996 to $5.6 million in 1997. The reduction in international revenues from 1996 to 1997 was primarily due to the delayed introduction of Japanese localized PaperPort Strobe products, the first of which were shipped in February 1998, and our decision to restructure our international sales and marketing operations in May 1997. Although our international sales are all denominated in U.S. dollars, these sales are subject to a number of risks inherent in doing business on an international level, such as unexpected changes in regulatory requirements, import and export duties and restrictions, fluctuations in currency exchange rates, and the logistical difficulties of managing multinational operations, any of which could adversely impact the success of our international operations. The growth of our international business will depend, in part, on our ability to increase awareness of our products in international markets. See "Item 1--Business-- Marketing, Sales and Distribution." The introduction of major new software products and enhancements of existing products, such as PaperPort Deluxe, as well as potential OEM agreements, are expected to have a significant impact on our quarterly and annual revenues. As is characteristic of the initial stages of personal computer product life cycles, we expect that sales volumes of any new software product may increase in the first few months following introduction due to the purchase of initial inventory by our distribution channel. Thereafter, revenues may stabilize or decline until the end of a product life cycle, at which time revenues are likely to decline significantly, as a result of unit sales and price reductions. At the end of a product life cycle we may experience higher rates of return and/or increased price protection charges as a result of price reductions. This could have a material adverse impact on our total net revenues and operating results. Although we have sought to mitigate the effect of such transition by controlling inventory levels of our distributors and resellers, channel inventory levels are very difficult to quantify accurately, and we may experience higher than normal rates of return on our older version products and may incur significant price protection charges in connection with our planned release of new PaperPort products and price reductions in 1999. In this regard, receivable allowances were $4.2 million and $5.3 million at December 31, 1998 and 1997, respectively. A substantial portion of these reserves related to the hardware business and were eliminated as part of the sale to Primax on January 6, 1999. Due to the inherent uncertainties of product development and new product introductions, we cannot accurately predict the exact quarter in which a new product or version will be ready to ship. Any delay in the scheduled release of major new products would have a material adverse impact on our total net revenues and operating results. We have experienced and may continue to experience significant fluctuations in revenues and operating results from quarter to quarter and from year to year due to a combination of factors, many of which are outside of our direct control. After taking into consideration the sale of our hardware business in January 1999, and the merger with ScanSoft in March 1999, these factors include the integration of the Visioneer and ScanSoft businesses, development of the paper input systems market, demand for our products, our success in developing, introducing and shipping new products and product enhancements, the market acceptance of such products, our ability to respond to new product introductions and price reductions by our competitors, the timing, cancellation or rescheduling of significant orders, the purchasing patterns and potential product returns from our distribution channels, our relationships with our OEM partners and distributors, our ability to attract, retain and motivate qualified personnel, the timing and amount of research and development and selling, general and administrative expenditures, and general economic conditions. Revenues and operating results in any quarter depend, to a large extent, on the volume, timing and ability to fulfill customer orders, which is difficult to forecast. A significant portion of our operating expenses are relatively fixed, based in large part on our forecasts of future sales. If sales are below expectations in any given period, the adverse effect of a shortfall in sales on our operating results may be magnified by our inability to adjust operating expenses to compensate for such shortfall. Accordingly, any significant shortfall in revenues relative to our expectations would have an immediate material adverse impact on our business, operating results and financial condition. We may also be required to reduce prices in response to competition or to increase our spending to 23 pursue new product or market opportunities. In the event of significant price competition in the market for our products, which is anticipated, we will be required to decrease costs at least proportionately and we will be at a significant disadvantage with respect to our competitors that have substantially greater resources. Such competitors may more readily withstand an extended period of downward pricing pressure. In such event, we will also incur price protection charges from our distributors. Any price protection charges in excess of recorded allowances would have a material adverse effect on our business, operating results and financial condition. Due to all of the foregoing factors, it is likely that at some point in the future our operating results will be below the expectations of public market analysts and investors. In such event, the price of our common stock would likely be materially adversely affected. Accordingly, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies participating in new and rapidly evolving markets. There can be no assurance that we will be successful in addressing such risks. TOTAL COST OF REVENUES Total cost of revenues consists primarily of the costs associated with the purchase of PaperPort products and related costs of freight, inventory rework, inventory obsolescence and warranty. For 1998, our PaperPort hardware products were manufactured, assembled and tested by five manufacturing partners, Avision, Primax, Flextronics, NMB and Orient SemiConductor. Grayscale sheetfed scanners were manufactured by Flextronics. Our scanning keyboard, PaperPort ix, and the color sheetfed scanner, the PaperPort Strobe, were manufactured by NMB and Orient SemiConductor; and the PaperPort flatbed scanners were manufactured by Primax and Avision. We sold our hardware business to Primax in January 1999. Our software products are manufactured by DCL, which also package and ships the majority of our hardware and software products to our customers. See "Item 1--Business--Manufacturing." Total cost of revenues, as a percentage of total net revenues, decreased in 1998 to 75% as compared to 88% in 1997. The decrease was primarily a result of approximately $9.5 million of charges taken in the first quarter of 1997 for write-offs and increased reserves relating to excess and obsolete grayscale inventory and cancellation charges relating to adverse purchase commitments for grayscale products. Total cost of revenues as a percentage of total net revenues was 88% in 1997 as compared to 81% in 1996. The increase was primarily a result of the charges taken in 1997 as described above. As a result of the sale of our hardware business, we expect our total cost of revenues, as a percentage of revenue, to decline significantly from the historical levels reported in the statement of operations. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses consist principally of personnel costs, costs of contractors and outside consultants, supplies and material expenses, equipment depreciation and overhead costs relating to occupancy. As of December 31, 1998, we employed 21 full-time and 3 contract software design engineers, technicians and support staff. Upon the completion of the merger on March 2, 1999, we employed 67 full-time technicians and support staff. Research and development expenses were 6%, 14% and 20% of total net revenues for 1998, 1997 and 1996, respectively. Research and development expenses decreased 46% in absolute dollars to $4.4 million in 1998 from $8.1 million in 1997. Due to our strategy to concentrate our engineering efforts on software development, all of our flatbed scanner lines that were introduced in 1997 and 1998 were designed in cooperation with our manufacturing partners, Primax and Avision. Research and development expenses decreased 26% in absolute dollars to $8.19 million in 1997 from $10.6 million in 1996. The decrease was primarily the result of the restructuring of the engineering group in May 1997. 24 We believe that the development of new products and the enhancement of existing products are essential to our success. Accordingly, we will continue to invest in research and development activities. However, such expenses may fluctuate from quarter to quarter depending on a wide range of factors including the status of various development projects. To date, we have not capitalized any development costs and do not anticipate capitalizing any such costs in the foreseeable future. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses include personnel and related overhead costs for sales, marketing, customer support, finance, human resources and general management. Such costs also include advertising, commissions to manufacturers' representative organizations, co-op paid to our distributors and resellers, trade shows and other marketing and promotional expenses. Selling, general and administrative expenses decreased 14% in absolute dollars to $19.2 million in 1998 from $22.4 million in 1997, and also declined as a percentage of total net revenues, to 24% in 1998 from 39% in 1997. The decrease was the direct result of a Company-wide restructuring plan implemented in May 1997, in which we reduced overall headcount and spending by approximately 40% of first quarter 1997 levels, as well as an additional restructuring in August 1998 which cut existing headcount by an additional 20%. We believe that these spending reductions were necessary in order to reduce our cost structure to allow us to compete more effectively. As noted below, the May 1997 restructuring resulted in a $675,000 one-time charge. The restructuring in August 1998 did not result in a significant one-time charge. Selling, general and administrative expenses decreased 15% in absolute dollars to $22.4 million in 1997 from $26.3 million in 1996. As a percentage of total net revenues, selling, general and administrative expenses decreased to 39% in 1997 from 47% in 1996. The decrease in spending was primarily attributed to the restructuring plan implemented in May 1997, described above. We will continue to attempt to control selling, general and administrative expenses. However, if net revenues continue to grow, in order to support our growing operations, selling, general and administrative expenses may increase in absolute terms. Such expenses may fluctuate from quarter to quarter depending on a variety of factors, including the timing of the introduction of any new products, expansion of our distribution channels, general advertising not related to product introductions and expansion into international markets. NON-RECURRING ITEM The non-recurring item in 1997 represents expenses incurred for severance and other charges related to the termination of approximately 40 employees and 20 contract employees in connection with the Company-wide restructuring plan implemented in May 1997. The restructuring actions were fully completed as of December 1997. OTHER INCOME, NET Other income, net, consists primarily of interest earned on cash equivalents and short-term investments. Other income, net, was $53,000, $940,000, and $2.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. The decrease in other income, net from 1997 to 1998, and 1996 to 1997 was a result of decreased interest income from significantly lower cash, cash equivalents and short-term investments, which were used primarily to fund our operating losses. TAXATION At December 31, 1998, we had federal net operating loss carryforwards of approximately $61 million, of which approximately $900,000 related to tax deductions from stock compensation. The tax benefit related to the stock compensation benefit, when realized, will be accounted for as an addition to additional paid in capital rather than as a reduction of the provision for income tax. Research and development credit carryforwards as of December 31, 1998 were approximately $2.0 million. The net operating loss and credit carryforwards will expire at 25 various dates beginning in 2007, if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. As a result of the new stock issued in conjunction with the merger with ScanSoft, we are not certain whether we will be able to utilize our net operating loss and credit carryforwards without limitations. (See Note 6 of Notes to Financial Statements). LIQUIDITY AND CAPITAL RESOURCES Through September 30, 1995, we financed our operations primarily through private placements of equity securities, from which it raised an aggregate of approximately $33 million, net of issuance costs. In December 1995, we completed our initial public offering, and raised approximately $43.5 million, net of issuance costs. In January 1996, the over allotment option granted to the underwriters in the initial public offering was exercised, resulting in proceeds of approximately $6.4 million, net of issuance costs. As of December 31, 1998, we had cash, cash equivalents and short-term investments of $7.9 million and working capital of $6.6 million, as compared to $14.5 million in cash, cash equivalents and short-term investments and $8.4 million of working capital at December 31, 1997. We used $9.5 million of cash for our operating activities for 1998, as compared to $20.0 million for 1997 and $18.9 million for 1996. Negative cash flows from operating activities for these periods were attributed primarily to net losses incurred of $3.8 million, $23.4 million and $24.4 million for 1998, 1997 and 1996, respectively, offset by non-cash charges and changes in working capital. Cash provided by investing activities during 1998 was $2.3 million as we decreased short-term investments by $2.6 million and made capital expenditures of $0.3 million. Capital expenditures for 1998 consisted primarily of purchases of manufacturing tools and molds, computer equipment and software tools. Cash provided by financing activities was $3.5 million during 1998. At December 31, 1998, we had short-term bank borrowings of $3.2 million, and $0.3 million was provided by proceeds from the issuance of Common Stock in connection with our employee stock purchase plan and the exercises of stock options. On March 19, 1998, we amended our $7.5 million line of credit, increasing the line to $12.5 million and extending the expiration date to March 1999. The line bore an interest rate of 0.25% over the Prime Rate, and was collateralized by a security interest in our assets. As of December 31, 1998, we had $6.0 million of short-term borrowings and $0.3 million of letters of credit outstanding under the line of credit, and we were not in compliance with all financial covenants under the agreement. As a result of the sale of our hardware business to Primax, we paid all amounts owed on the line, cancelled the line and obtained a waiver of covenant default for the period ended December 31, 1998. Our principal sources of liquidity as of December 31, 1998 consisted of approximately $7.9 million of cash, cash equivalents and short-term investments. Subsequent to our year end, we sold our hardware business to Primax for $7 million. In addition, the merger with ScanSoft provided additional cash of $0.8 million with no associated long- or short-term debt. Based upon these events and existing cash balances, we believe that our existing sources of liquidity will provide adequate cash to fund our operations for at least the next twelve months. Thereafter, if cash generated by operations is insufficient to satisfy our liquidity requirements, we may be required to sell additional equity or debt securities, or increase or obtain additional lines of credit. The sale of additional equity or convertible debt securities may result in additional dilution to our stockholders. PRO FORMA RESULTS AND RELATED MANAGEMENT DISCUSSION AND ANALYSIS The following two tables present, as dollar amounts and as a percentage of total net revenues, the condensed unaudited pro forma total net revenues, and certain selected financial data for each of the two years in the period ended December 31, 1998, assuming the sale of the hardware business and the merger with ScanSoft 26 occurred at the beginning of the periods presented and after excluding the impact of non-recurring charges resulting from the merger, such as in process research and development: SCANSOFT, INC. UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
1998 Pro Forma 1997 Pro Forma Combined Combined ------------------- ----------------- Total net revenues....................... $ 34,791 $ 33,924 Total cost of revenues................... 9,669 8,444 ------------------- ----------------- Gross profit............................. 25,122 25,480 ------------------- ----------------- Operating expenses: Research and development............... 9,812 11,256 Selling, general and administrative.... 15,006 15,763 Other operating expenses............... 2,276 2,276 ------------------- ----------------- Total operating expenses............ 27,094 29,295 ------------------- ----------------- Operating loss........................... (1,972) (3,815) Other income (expense) .................. 28 198 ------------------- ----------------- Net loss................................. $ (1,944) $ (3,617) =================== ================= Net loss per share: basic and diluted... (0.07) (0.14) =================== =================
27
1998 Pro Forma 1997 Pro Forma Combined Combined ------------------- ----------------- Total net revenues....................... 100.0% 100.0% Total cost of revenues................... 27.8% 24.9% ------------------- ----------------- Gross profit............................. 72.2% 75.1% ------------------- ----------------- Operating expenses: Research and development............... 28.2% 33.2% Selling, general and administrative.... 43.1% 46.4% Other operating expenses............... 6.6% 6.7% ------------------- ----------------- Total operating expenses............ 77.9% 86.3% ------------------- ----------------- Operating loss........................... (5.7%) (11.2%) Other income (expense) .................. 0.1% 0.5% ------------------- ----------------- Net loss................................. (5.6%) (10.7%) ------------------- -----------------
UNAUDITED PRO FORMA TOTAL NET REVENUES The pro forma net revenues represent revenues from the combination of our software business with that of ScanSoft's and comes primarily from two sources, the sale of PaperPort, TextBridge, and Pagis software products, and royalties and custom software development revenue earned pursuant to arrangements with certain OEM customers. To date, a vast majority of our product revenues have been derived from sales of our software products to authorized resellers and independent distributors. Total net revenues increased in 1998 from 1997, due primarily to the increase in unit shipments of products offset partially by a decline in royalty revenues. The decline in royalty revenues in 1998 was due to the termination, in the third quarter of 1996, of royalties under our OEM agreement with Hewlett-Packard. The introduction of major new software products and enhancements of existing products, as well as potential OEM agreements, are expected to have a significant impact on our quarterly and annual revenues. UNAUDITED PRO FORMA TOTAL COST OF REVENUES The pro forma cost of revenues consists primarily of the costs associated with the purchase of software products and related costs of freight, inventory obsolescence and warranty. The pro forma cost of revenues, as a percentage of total net revenues, increased in 1998 to 28% as compared to 25% in 1997. The increase was attributable primarily to the reduction in royalty revenues, which carry minimal or no cost of revenues. UNAUDITED PRO FORMA RESEARCH AND DEVELOPMENT EXPENSES Pro forma research and development expenses consist principally of personnel costs, costs of contractors and outside consultants, supplies and material expenses, equipment depreciation and overhead costs relating to occupancy. 28 Pro forma research and development expenses decreased 13% in absolute dollars to $9.8 million in 1998 from $11.3 million in 1997. The decrease was primarily the result of the restructuring of the engineering group in May 1997 and the focus on software development rather than hardware development. UNAUDITED PRO FORMA SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Pro forma selling, general and administrative expenses include personnel and related overhead costs for sales, marketing, customer support, finance, human resources and general management. Such costs also include advertising, commissions to manufacturers' representative organizations, co-op paid to our distributors and resellers, trade shows and other marketing and promotional expenses. Pro forma selling, general and administrative expenses decreased 5% in absolute dollars to $15.0 million in 1998 from $15.7 million in 1997, and also declined as a percentage of total net revenues, to 43% in 1998 from 46% in 1997. The decrease was the direct result of a Company-wide restructuring plan implemented in May 1997, in which we reduced overall headcount and spending, as well as an additional restructuring in August 1998 which cut existing headcount. We anticipate that selling, general and administrative expenses as a percentage of net revenues, and absolute dollars will decrease in the future due to the merger. UNAUDITED PRO FORMA OTHER OPERATING EXPENSES Pro forma other operating expense contains the amortization of goodwill and other identified intangible assets arising from the merger that have estimated useful lives ranging from three to seven years. UNAUDITED PRO FORMA OTHER INCOME, NET Pro forma other income, net, consists primarily of interest earned on cash equivalents and short-term investments. Other income, net, was $28,000 and $198,000 for the years ended December 31, 1998 and 1997, respectively. The decrease from 1997 to 1998 was a result of decreased interest income from significantly lower cash, cash equivalents and short-term investments, which were used primarily to fund our operating losses. YEAR 2000 COMPLIANCE We are aware of the potential business risks associated with the "Year 2000" millennium issue. Based upon this potential business risk, we have developed a strategy to examine the potential effect of this issue. The following strategy outlines the process by which we are trying to minimize the potential risk associated with the "Year 2000" millennium issue. We are in the process of assessing the potential effects of the "Year 2000" millennium change on our business systems and processes, including facilities, software and components used by our employees, as well as our outsourcing vendors and critical suppliers. Our Year 2000 project is proceeding on schedule. The project goal is to ensure that our business is not impacted by the date transitions associated with the Year 2000. Our Year 2000 project plan is coordinated by a team that reports to senior management. The project team is evaluating the Year 2000 compliance of our business systems and processes, including facilities, software and components used by our employees, as well as our outsourcing vendors and critical suppliers who provide services relating to our business. Our Year 2000 project is comprised of the following phases: o Phase 1 - Inventory all business systems and processes, including facilities, software and components used by our employees, in order to assign priorities to potentially impacted systems and services. This phase was completed by January 31, 1999 and a complete inventory was compiled. 29 o Phase 2 - Assess the Year 2000 compliance of all inventoried business systems and processes, including facilities, software and components used by our employees, and determine whether to renovate or replace any non-Year 2000 compliant systems and services. This phase was completed by March 31, 1999. o Phase 3 - Complete remediation, if any is required, of any non-compliant business systems and processes, including facilities, software and components used by our employees and outsourcing vendors. Conduct procurements to replace any other non-Year 2000 compliance business systems and processes, including facilities, software and components used by our employees and outsourcing vendors that won't be remediated. We expect to complete all remediation efforts, if any are required, by June 30, 1999. o Phase 4 - Test and validate remediated and replacement systems, if any such remediation or replacement is required, to ensure inter-system compliance and mission critical system functionality. We expect to complete testing and validation efforts, if any are required, by July 31, 1999. o Phase 5 - Deploy and implement remediated and replacement systems, if any deployment or implementation is required, after the completion of successful testing and validation. We expect to complete the deployment and implementation of the remediated or replacement systems, if any is required, by September 30, 1999. o Phase 6 - Design contingency plan and business continuation plans in the event of the failure of business systems and processes, facilities, data networking infrastructure, software and components used by our employees due to the Year 2000 millennium change. We expect that the initial contingency and business continuation plan will be in place by November 30, 1999. Based on our inventory and assessment to date, we believe that our internal mission critical systems are Year 2000 compliant and that our facilities can be Year 2000 compliant. In addition, we are seeking assurances from our facilities' landlords and equipment vendors and data circuit providers regarding the Year 2000 compliance of their facilities and equipment. At this time, we believe that our incremental remediation costs, if any, needed to make our current business systems and processes, including facilities, software and components used by our employees and outsourcing vendors, are not material. While we are incurring some incremental costs, our incurred costs through December 31, 1998 were less than $60,000. Our expected total costs, including remediation and replacement costs, if any, are estimated to be between $100,000 and $200,000 over the life of the Year 2000 project. We are contacting our hardware and software vendors, other significant suppliers, manufacturers, outsourcing service providers and other contracting parties to determine the extent to which we are vulnerable to any one of their failures to achieve Year 2000 compliance for their own systems. At the present time, we do not expect Year 2000 issues of any such third parties to materially affect our business. Should we fail to solve a Year 2000 compliance problem to our critical business systems and processes, the result could be a failure or interruption to normal business operations. Despite the assurances of our third-party suppliers, hardware and software vendors, and outsourcing service providers regarding Year 2000 compliance of their products and services, the potential exists that a Year 2000 problem relating to such third-party suppliers, vendors and outsourcing service providers products and services could have a material impact on our business. We are conducting monthly discussions with our critical outsourcing service providers to determine the progress of their Year 2000 compliance programs. Despite extensive preparation and effort to ensure Year 2000 compliance, implementation of our business continuation contingency plan for a very short time may be required while we remediate the Year 2000 problem. 30 Despite our belief that our mission critical computer software applications and systems are Year 2000 compliant and our expectation that our enhancement effort will result in Year 2000 compliant systems, we are currently developing a business continuation contingency plan. We expect to finalize our initial contingency plan to complete the testing of all existing systems by November 30, 1999. The Foregoing Year 2000 discussion contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, including without limitation, anticipated costs and the dates by which certain actions are expected to be completed, are based on management's best current estimates, which were derived utilizing numerous assumptions about future events, including the continued availability of certain resources, representations received from third parties and other factors. However, there can be no guarantee that these estimates will be achieved, and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the ability to identify and remediate all relevant systems, results of Year 2000 testing, adequate resolution of Year 2000 issues by governmental agencies, businesses and other third parties who are outsourcing service providers suppliers and vendors, unanticipated system costs, the adequacy of and ability to implement contingency plans and similar uncertainties. The "forward-looking statements" made in the foregoing Year 2000 discussion speak only as of the date on which such statements are made, and management does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK INVESTMENT RISK As of December 31, 1998, our investment portfolio consisted of fixed income securities. These securities, like all fixed income instruments, carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS Page ---- Financial Statements: Report of Independent Accountants...................................... 33 Balance Sheets......................................................... 34 Statements of Operations .............................................. 35 Statements of Cash Flows............................................... 36 Statements of Stockholders' Equity..................................... 37 Notes to Financial Statements.......................................... 38 Financial Statement Schedules: Report of Independent Accountants on Financial Statement Schedules..... 50 Schedule II -Valuation and Qualifying Accounts and Reserves............ 51 32 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of ScanSoft, Inc. In our opinion, the accompanying balance sheets and the related statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of ScanSoft, Inc. (formerly Visioneer, Inc.) at December 31, 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP San Jose, California January 27, 1999, except for Note 3, which is as of March 2, 1999 33 SCANSOFT, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, ----------------------------- 1998 1997 -------------- ------------- ASSETS Current assets: Cash and cash equivalents...................................................... $ 7,659 $11,361 Short-term investments......................................................... 202 3,029 Restricted cash................................................................ 262 62 Accounts receivable, less allowances of $4,171 and $5,315...................... 13,512 12,295 Inventory...................................................................... 4,777 3,078 Prepaid expenses and other current assets...................................... 929 1,059 -------------- ------------- Total current assets......................................................... 27,341 30,884 Property and equipment, net....................................................... 1,039 2,454 Other assets...................................................................... 65 212 -------------- ------------- Total Assets................................................................. $28,445 $33,550 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term bank borrowings..................................................... $ 6,000 $2,821 Accounts payable............................................................... 11,053 12,837 Accrued sales and marketing incentives......................................... 1,165 1,460 Accrued payable to sub-contractors............................................. 625 1,500 Other accrued liabilities...................................................... 1,929 3,877 -------------- ------------- Total current liabilities.................................................... 20,772 22,495 -------------- ------------- Long-term liability............................................................... 91 125 Commitments and contingencies (Note 9)............................................ -- -- Stockholders' equity: Common stock, $0.001 par value; 50,000,000 shares authorized; 19,852,952 and 19,563,854 shares issued and outstanding..................................... 20 20 Additional paid-in capital..................................................... 87,995 87,682 Deferred compensation relating to stock options................................ (50) (150) Notes receivable from stockholders............................................. -- (44) Accumulated deficit............................................................ (80,383) (76,578) -------------- ------------- Total stockholders' equity................................................... 7,582 10,930 -------------- ------------- Total Liabilities and Stockholders' Equity................................... $28,445 $33,550 ============== ============= The accompanying notes are an integral part of these financial statements.
34 SCANSOFT, INC. STATEMENT OF OPERATIONS (IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ----------------------------------------------------------- 1998 1997 1996 ----------------- ------------------ ------------------ Revenues: Product revenues.................................. $74,674 $50,523 $44,233 Royalty and development revenues.................. 4,396 7,100 11,848 ----------------- ------------------ ------------------ Total net revenues.............................. 79,070 57,623 56,081 ----------------- ------------------ ------------------ Cost of revenues: Cost of product revenues.......................... 58,486 49,838 42,164 Cost of royalty and development revenues.......... 884 887 3,303 ----------------- ------------------ ------------------ Total cost of revenues.......................... 59,370 50,725 45,467 ----------------- ------------------ ------------------ Gross profit......................................... 19,700 6,898 10,614 ----------------- ------------------ ------------------ Operating expenses: Research and development.......................... 4,408 8,115 10,938 Selling, general and administrative............... 19,150 22,428 26,342 Non-recurring item (Note 10)...................... -- 675 -- ----------------- ------------------ ------------------ Total operating expenses........................ 23,558 31,218 37,280 ----------------- ------------------ ------------------ Operating loss....................................... (3,858) (24,320) (26,666) Interest income...................................... 507 984 2,344 Interest expense..................................... (454) (44) (70) ----------------- ------------------ ------------------ Net loss............................................. $(3,805) $(23,380) $(24,392) ================= ================== ================== Net loss per share: basic and diluted............... (0.19) (1.20) (1.34) ================= ================== ================== Weighted average common shares outstanding: basic and diluted (Note 1).............................. 19,728 19,450 18,255 ================= ================== ================== The accompanying notes are an integral part of these financial statements.
35 SCANSOFT, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss...................................................... $(3,805) $(23,380) $(24,392) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............................ 1,720 2,052 1,982 Accounts receivable allowances........................... (1,144) 1,384 1,400 Other.................................................... 144 385 493 Changes in assets and liabilities: Accounts receivable.................................... (73) (2,899) (1,042) Inventory.............................................. (1,699) 1,430 (744) Prepaid expenses and other current assets.............. 130 (148) 631 Other assets........................................... 147 16 (99) Accounts payable....................................... (1,784) 1,388 1,237 Accrued sales and marketing incentives................. (295) (1,014) 321 Accrued payable to sub-contractors..................... (875) 400 775 Other accrued liabilities.............................. (1,982) 433 574 -------------- -------------- -------------- Net cash used in operating activities......................... (9,516) (19,953) (18,864) -------------- -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net sales (purchases) of short--term investments............ 2,827 5,718 (3,852) Transfer from (to) restricted cash......................... (200) -- 1,300 Capital expenditures for property and equipment............ (305) (348) (3,086) -------------- -------------- -------------- Net cash provided by (used in) investing activities........... 2,322 5,370 (5,638) -------------- -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Short-term bank borrowings, net............................ 3,179 2,821 -- Proceeds from issuance of common stock, net................ 313 732 7,232 Payments on capitalized lease obligations.................. -- -- (248) -------------- -------------- -------------- Net cash provided by financing activities..................... 3,492 3,553 6,984 -------------- -------------- -------------- Net decrease in cash and cash equivalents..................... (3,702) (11,030) (17,518) Cash and cash equivalents at beginning of year................ 11,361 22,391 39,909 -------------- -------------- -------------- Cash and cash equivalents at end of year...................... $7,659 $11,361 $22,391 ============== ============== ============== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid.............................................. 444 44 71 The accompanying notes are an integral part of these financial statements.
36 SCANSOFT, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except for share amounts)
Notes Common Stock Additional Receivable ------------------ Paid In Deferred from Accumulated Shares Amount Capital Compensation Stockholders Deficit Total ---------- ------ --------- ----------- ----------- ----------- --------- Balance at December 31, 1995............. 18,371,047 $ 18 $ 79,444 $ (350) $ (446) $ (28,806) $ 49,860 Issuance of common stock pursuant to exercise of the over-allotment option granted to underwriters......... 600,000 1 6,415 - - - 6,416 Deferred compensation expense related to stock options............... - - - 100 - - 100 Issuance of common stock pursuant to stock option exercises.............. 278,066 - 513 - - - 513 Issuance of common stock pursuant employee stock purchase plan........... 110,996 - 637 - - - 637 Repurchase of restricted stock........... (157,500) - (58) - 117 - 59 Net loss................................. - - - - - (24,392) (24,392) ---------- ------ --------- ---------- ------- ---------- --------- Balance on December 31, 1996............. 19,202,609 19 86,951 (250) (329) (53,198) 33,193 Deferred compensation expense related to stock options............... - - - 100 - - 100 Issuance of common stock pursuant to stock option exercises.............. 402,865 1 196 - - - 197 Issuance of common stock pursuant employee stock purchase plan........... 188,797 - 627 - - - 627 Repurchase of restricted stock........... (230,417) - (92) - 285 - 193 Net loss................................. - - - - - (23,380) (23,380) ---------- ------ --------- ---------- ------- ---------- --------- Balance on December 31, 1997............. 19,563,854 20 87,682 (150) (44) (76,578) 10,930 Deferred compensation expense related to stock options............... - - - 100 - - 100 Issuance of common stock pursuant to stock option exercises.............. 172,129 - 126 - - - 126 Issuance of common stock pursuant employee stock purchase plan........... 116,969 - 187 - - - - Repayment of notes receivable from stockholder............................ - - - - 44 - 231 Net loss................................. - - - - - (3,805) (3,805) ---------- ------ --------- ---------- ------- ---------- --------- Balance on December 31, 1998............. 19,852,952 $ 20 $ 87,995 $ (50) $ - $ (80,383) $ 7,582 ---------- ------ --------- ---------- ------- ---------- --------- ---------- ------ --------- ---------- ------- ---------- --------- The accompanying notes are an integral part of these financial statements.
37 SCANSOFT, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: ORGANIZATION AND PRESENTATION ScanSoft, Inc. (the "Company") was incorporated as Visioneer, Inc. in the state of California on March 10, 1992 and was reincorporated in the state of Delaware on December 5, 1995. The Company develops and markets scanner hardware and software for sale primarily through retail distributors or directly to retailers. The Company began primarily as a scanner hardware company and spent most of its research and development time on the development of scanner products and related bundled software for this market. In 1997, the Company decided to leverage off the merits of its software in an attempt to penetrate the flatbed scanner market and to introduce stand alone software products. The Company's focus over time has shifted from the hardware business to the software business and during 1997, the Company implemented a strategy to focus its research and development efforts on software development rather than hardware development and to leverage the engineering resources of its manufacturing partners to design future hardware products. As a follow on to this strategy, the Company negotiated an agreement with Primax Electronics, Ltd. ("Primax") to sell the hardware business of the Company which was completed on January 6, 1999. (See Note 2). As part of the sale to Primax, the name "Visioneer" was also sold and a majority of the Company's employees, including its president and selected vice presidents, became employees of Primax. As a result of the change in business strategy, the Company also entered into an agreement to purchase the business of ScanSoft, Inc., an indirect wholly owned subsidiary of Xerox. This transaction was consummated on March 2, 1999. (See Note 3). In connection with this acquisition, the Company changed its name to ScanSoft, Inc. The Company's fiscal year ends on the Sunday closest to December 31. Accordingly, fiscal 1998 ended January 3, 1999 and contained 53 weeks. Fiscal years 1997 and 1996 each had 52 weeks. The Company reports quarterly results generally on thirteen-week quarterly periods, each ending on the Sunday closest to month-end. For purposes of presentation, the Company has indicated its accounting year as ending on December 31 or our interim quarterly periods as ending on the respective calendar month-end. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities on the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION Revenue from product sales to customers is generally recognized when the product is shipped, provided no significant obligations remain and collectibility is probable. Revenues from sales to distributors and authorized resellers are subject to agreements allowing price protection and certain rights of return. Accordingly, reserves for estimated future returns, exchanges and credits for price protection are provided for upon revenue recognition. The Company has limited control over the extent to which products sold to distributors and resellers are sold through to end users. Accordingly, a portion of the Company's sales may from time to time result in increased inventory at its distributors and resellers. The Company provides sales returns reserves for distributor and reseller inventories. These reserves are based on the Company's estimates of inventory held by its distributors and resellers and the expected sell through of its products by its distributors and resellers. Actual results could differ from these estimates. 38 The Company earns royalty and custom software development revenue pursuant to certain license agreements and records revenue when earned. Payments received from customers prior to revenue recognition and gross profits on shipments to customers prior to related revenue recognition are reported as "deferred revenues" and are included in other accrued liabilities in the balance sheet. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash equivalents are short-term, highly liquid instruments with original maturities of 90 days or less. The Company has classified all its securities as "available for sale." These securities are comprised primarily of commercial paper with maturities within one year. At December 31, 1998 and 1997 the fair market value of these securities approximated cost. INVENTORY Inventory is stated at the lower of cost or market, cost being determined on a first-in, first-out basis. PROPERTY AND EQUIPMENT Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which is generally one to five years. Leasehold improvements are amortized over the term of the related lease or the useful life, if shorter. SOFTWARE DEVELOPMENT COSTS Software development costs incurred prior to establishment of technological feasibility are expensed as incurred. The Company defines establishment of technological feasibility as the completion of a working model. Software development costs incurred subsequent to the establishment of technological feasibility through the period of general market availability of products will be capitalized, if material. To date, all software development costs have been expensed. WARRANTY COSTS The Company provides for the estimated cost which may be incurred under its product warranties upon product shipment. INCOME TAXES The Company accounts for income taxes utilizing an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company's Financial Statements or income tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax laws or rates. COMPREHENSIVE INCOME (LOSS) In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income is defined as the change in equity of a company during a period from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. The Company's comprehensive loss for 1996, 1997 and 1998 is the same as its reported net loss. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash equivalents, short-term investments and trade accounts receivable. The Company invests 39 in a wide variety of financial instruments, such as certificates of deposits, commercial paper, municipal debt and U.S. government agency debt. The Company, by policy, limits the amount of credit exposure to any one financial institution. The Company performs ongoing credit evaluations of its customers' financial condition and maintains an allowance for uncollectible receivables based upon expected collectibility of accounts receivable. At December 31, 1998, 1997 and 1996 the Company's top two customers in aggregate accounted for 30%, 42% and 40% respectively, of accounts receivable. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS The estimated fair value of financial instruments at December 31, 1998 and 1997 was not significantly different than the values presented in the balance sheets. NET LOSS PER SHARE Basic loss per share is based on the weighted average number of common shares outstanding, and diluted loss per share is based on the weighted average number of common shares outstanding and dilutive potential common shares outstanding. However, because the Company has been in a net loss position on an annual basis since 1995, the effects of potential common shares outstanding have been excluded as they would be anti-dilutive in the loss per share calculation. All options outstanding during 1998, 1997 and 1996 were excluded from diluted loss per share calculations because they were anti-dilutive in view of the losses incurred by the Company. EMPLOYEE STOCK PLANS In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock Compensation." SFAS 123 establishes an accounting method based on the fair value of equity instruments awarded to employees as compensation. The Company has elected to retain its current application of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has adopted, as required, the disclosure provisions of SFAS No. 123. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 requires that all derivatives be recognized at fair value in the statement of financial position, and that corresponding gains or losses be reported either in the statement of operations or as a component of comprehensive income, depending on the type of hedging relationship that exists. The Company is currently assessing the disclosure effects of adopting SFAS 133, which will be effective for the Company's fiscal 2000 financial statements. NOTE 2. SALE OF HARDWARE BUSINESS: On December 3, 1998, the Company entered into an agreement to sell its hardware assets, liabilities and intellectual property to Primax for approximately $7 million in cash. The terms of the agreement also grant to Primax a software license agreement that allows them to "bundle," market and sell the Company's PaperPort software with Primax hardware products. The agreement requires the payment of certain royalties by Primax to the Company. On January 6, 1999 the agreement with Primax was consummated. Accordingly, in the quarter ending March 31, 1999, the Company will report a non-operating gain related to the sale of the hardware business, less costs and expenses of disposing of the business. The most significant assets and liabilities at December 31, 1998 of the hardware business were receivables, inventories and accounts payable in the approximate amounts of $12.7 million, $4.4 million and $10.7 million, respectively. In addition, Primax assumed the lease of the Company's current corporate facilities. The Company entered into an agreement with Primax to pay Primax rent for their use of this facility until the move of the corporate offices to Peabody, Massachusetts after the acquisition of ScanSoft in March 1999. 40 HARDWARE BUSINESS PRO FORMA INFORMATION (UNAUDITED) As a result of the sale of the hardware business on January 6, 1999, the revenues and other operating expenses related to the hardware business will not continue. The following summarizes the unaudited pro forma operating information for the hardware business and the remaining software business for the year ended December 31, 1998:
Hardware Software Business Business Combined ------------- ------------- ------------- Total net revenues......................... $66,015 $13,055 $79,070 Total cost of revenues..................... 55,474 3,896 59,370 ------------- ------------- ------------- Gross profit............................... 10,541 9,159 19,700 ------------- ------------- ------------- Operating expenses: Research and development................... 734 3,674 4,408 Selling, general and administrative........ 15,887 3,263 19,150 ------------- ------------- ------------- Total operating expenses.............. 16,621 6,937 23,558 ------------- ------------- ------------- Operating income (loss) ................... (6,080) 2,222 (3,858) Other income (expense) .................... 26 27 53 ------------- ------------- ------------- Net income (loss) ......................... $(6,054) $2,249 $(3,805) ============= ============= =============
NOTE 3. ACQUISITION OF SCANSOFT: The Company acquired ScanSoft, a company that develops, markets, distributes and supports systems and software that capture, communicate and print documents at the desktop, effective March 2, 1999 for approximately 6.8 million shares of Common Stock of the Company, 3.6 million shares of non-voting Preferred Stock of the Company and exchange of 1.7 million employee stock options to purchase Common Stock of the Company in exchange for outstanding employee stock options of ScanSoft. Additionally, in conjunction with the acquisition, the Company incurred approximately $1.5 million of acquisition related costs. This acquisition is being accounted for under the purchase method of accounting. Based on a preliminary appraisal, the Company expects to record a one time write-off of approximately $4 million in the quarter ending March 31, 1999 related to the estimated value of in-process research and development acquired as part of the purchase. For its year ended December 31, 1998, ScanSoft had net revenues of $21.7 million (unaudited) and a net loss of $1.9 million (unaudited). Also at December 31, 1998 ScanSoft had total assets of approximately $6.8 million (unaudited). 41 NOTE 4. BALANCE SHEET COMPONENTS: The following table summarizes key balance sheet components:
December 31, ----------------------- 1998 1997 -------- -------- (In Thousands) Inventory: Raw materials.............................. $ 429 $ 1,536 Work-in-process............................ 2,261 329 Finished goods............................. 2,087 1,213 -------- -------- $ 4,777 $ 3,078 ======== ======== Property and equipment: Machinery and equipment.................... $ 3,029 $ 3,672 Software................................... 1,522 1,377 Leasehold improvements..................... 308 289 Furniture and fixtures..................... 701 688 -------- -------- 5,560 6,026 Accumulated depreciation and amortization.. (4,521) (3,572) -------- -------- 1,039 2,454 ======== ========
NOTE 5. BANK LINE OF CREDIT: At December 31, 1998, the Company had a $12.5 million line of credit with a bank with an expiration date in March 1999. The line of credit was collateralized by a security interest in the Company's assets and carried an interest rate of 8.25%. At December 31, 1998, the Company had bank borrowings of $6.0 million under this line of credit and the Company was not in compliance with certain covenants, for which the bank issued a waiver. In connection with the sale of the hardware business in January 1999 (see Note 2), the outstanding borrowings were paid and the line of credit was terminated. 42 NOTE 6. INCOME TAXES: No provision for federal or state income taxes has been recorded as the Company has incurred net operating losses through December 31, 1998. Deferred tax assets (liabilities) consist of the following:
1998 1997 ---------- ---------- (In Thousands) Deferred Tax Assets: Federal and state loss and credit carryforwards......... $ 24,414 $ 21,774 Capitalized start-up and development costs.............. 882 1,255 Other asset valuation reserves.......................... 2,669 3,473 Other................................................... 1,961 1,849 ---------- ---------- Gross deferred tax assets............................... 29,926 28,351 Deferred tax liabilities................................ (255) (119) Valuation allowance..................................... (29,671) (28,232) ---------- ---------- Net deferred tax assets............................ $ - $ - ========== ==========
Management believes that based on a number of factors, the available objective evidence creates sufficient uncertainty regarding the realizability of the deferred tax assets such that full valuation allowance has been recorded. These factors include the lack of significant history of profits, the fact that the market in which the Company competes is intensely competitive and characterized by rapidly changing technology, and lack of carryback capacity to realize these assets. At December 31, 1998, the Company had federal net operating loss carryforwards of approximately $61 million, of which approximately $900,000 related to tax deductions from stock compensation. The tax benefit related to the stock compensation benefit, when realized, will be accounted for as an addition to additional paid in capital rather than as a reduction of the provision for income tax. Research and development credit carryforwards as of December 31, 1998 were approximately $2.0 million. The net operating loss and credit carryforwards will expire at various dates beginning in 2007, if not utilized. Utilization of the net operating losses and credits may be subject to a substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code of 1986 and similar state provisions. The annual limitation may result in the expiration of net operating losses and credits before utilization. At December 31, 1998 the federal net operating loss and credit carryforwards of the Company were not subject to any material limitations. The federal net operating loss carryforwards differ from the accumulated deficit principally due to temporary differences in the recognition of certain expense items for financial statement and federal tax reporting purposes, consisting primarily of certain reserves and allowances not currently deductible for tax and start-up and development costs capitalized for tax purposes. NOTE 7. STOCKHOLDERS' EQUITY: RESTRICTED COMMON STOCK In February 1993, the Company's board of directors adopted the 1993 Restricted Stock Purchase Plan (the "Purchase Plan") which provided for the sale of Common Stock to employees and consultants. Restricted shares purchased under the Purchase Plan are subject to a repurchase right by the Company. This repurchase right generally lapses over a 48-month period. This plan was terminated on October 16, 1995. As of December 31, 1998, no shares were subject to repurchase under the Purchase Plan. 43 COMMON STOCK WARRANTS At December 31, 1994, the Company had 101,500 Series C Convertible Preferred Stock warrants outstanding which were exercisable at $4 per share. In conjunction with its initial public offering, 85,000 of these warrants were exercised on a net issuance basis for 65,000 Common shares. The remaining 16,500 warrants automatically converted into Common Stock warrants upon the completion of the Company's initial public offering. These warrants will expire on June 30, 2004. During the quarter ended December 31, 1995 the Company issued a warrant to purchase 110,000 shares of its Series C Convertible Preferred Stock in connection with a technology licensing arrangement. The warrant expires on November 1, 1999 and is exercisable at $9 per share. The Company assigned a value of $300,000 to this warrant. The warrant automatically converted into a Common Stock warrant upon the completion of the Company's initial public offering. DEFERRED COMPENSATION RELATING TO STOCK OPTIONS Based on an independent consultant's valuation report, management believes that the exercise price for certain options granted during 1995 was below the estimated fair value of the Company's Common Stock at the dates of the grants. The Company recorded deferred compensation expense of $400,000 related to these grants which is being amortized over related vesting periods of the options. As of December 31, 1998, the Company has recorded an expense of $350,000 related to this compensation. NOTES RECEIVABLE FROM STOCKHOLDERS In exchange for the issuance of Common Stock in fiscal 1995 and 1994 under the 1993 Restricted Stock Purchase Plan, the Company received notes receivable from certain stockholders that bore interest at rates varying from 4.86% to 7.2% per annum. During 1998, all loan balances were fully settled. NOTE 8. STOCK COMPENSATION PLANS: 1993 INCENTIVE STOCK OPTION PLAN In February 1993, the Company's board of directors adopted the 1993 Incentive Stock Option Plan (the "Option Plan"). Under the Option Plan, the Board of Directors are authorized to issue options for up to 3,870,000 shares of Common Stock to employees and consultants of the Company at grant prices determined by the Board of Directors on the date of grant. The Option Plan allows for incentive stock options to be granted to employees and non-statutory stock options to be granted to employees and consultants. Options granted under the Option Plan expire no later than ten years from the date of grant (no later than five years for 10% shareholders). The exercise price will be at least 100% and 85% of the fair value of the stock subject to the option on the date the option is granted as determined by the Board of Directors for incentive stock options and non-statutory stock options, respectively (110% of the fair value for 10% shareholders). The options generally become exercisable in increments over a period of four years from the date of grant, with the first increment vesting after one year. At the discretion of the Board of Directors, options may be granted with different vesting terms. 1995 DIRECTORS' STOCK OPTION PLAN In October 1995, the Company instituted a directors' stock option plan and reserved a total of 200,000 shares of the Company's Common Stock for issuance of stock options thereunder. On October 3, 1997, at the Company's Annual Meeting of Stockholders, an amendment was approved to increase the options available in this plan by 120,000 to an aggregate of 320,000. The Plan allows for granting of stock options to members of the Board of Directors who are not employees of the Company. The options generally become exercisable in increments over 44 a period of four years from the date of grant, with the first increment vesting after one year. The price of the options are equal to the fair market value of the Company's Stock on the date of the grant. 1997 EMPLOYEE STOCK OPTION PLAN In February 1997, the Board of Directors adopted the 1997 Employee Stock Option Plan (the "1997 Option Plan") to provide for the granting of non-statutory stock options only to eligible employees and consultants who are not officers or directors of the Company, with the exception of officers who were not previously employed by the Company and for whom an option grant is an inducement essential to such officers' entering into an employment relationship or contract with the Company. The 1997 Option Plan was adopted in response to the non-availability of options for future grant under the Option Plan. The Company has reserved a total of 1,300,000 shares under this plan. Options granted under the 1997 Option Plan expire no later than ten years from the date of grant (no later than five years for 10% shareholders). The exercise price will be at least 100% and 85% of the fair value of the stock subject to the option on the date the option is granted as determined by the Board of Directors for incentive and non-statutory stock options, respectively (110% of the fair value for 10% shareholders). The options generally become exercisable in increments over a period of four years from the date of grant. At the discretion of the Board of Directors, options may be granted with different vesting terms. NON-STATUTORY OPTION GRANT TO A DIRECTOR On April 9, 1997, the Company's Board of Directors granted non-statutory stock options for 30,000 shares of Common Stock to Mr. Jeffrey Heimbuck, in conjunction of him becoming a member of the Company's Board of Directors. The option grants were made outside of the 1995 Directors' Stock Option Plan at an exercise price of $3.50 per share. All such options become exercisable in annual installments of 25% of the total number of shares subject to each option on each anniversary of the date of grant. On October 15, 1998, Mr. Heimbuck resigned as a member of the Company's Board of Directors and the Non-Statutory Option Grant was canceled. REPRICING OF STOCK OPTIONS In January 1998, the Company allowed all holders of outstanding options to exchange higher priced options for new options at $1.75 per share, the fair market value at the time of the exchange. The repricing terms provided that for each seven shares of options exchanged, six new options would be granted. The repriced options maintained the same vesting schedule. Options for 2,656,449 shares were exchanged for new options for 2,276,956 shares and are included in the summary stock option table in the options cancelled and options granted categories. 45 The following table summarizes activity under all stock option plans:
Options Outstanding Shares -------------------------- Available Number Price per for Grant of Shares Share --------- --------- ----- ----- Balance at December 31, 1995................. 1,016,329 1,759,017 $0.15 - $7.00 Options granted.............................. (1,825,600) 1,825,600 $0.40 - $10.75 Options exercised............................ - (278,066) $0.15 - $10.75 Options canceled............................. 1,187,841 (1,187,841) $0.15 - $10.75 ---------- ---------- Balance at December 31, 1996................. 378,570 2,118,710 $0.15 - $10.75 Additional shares authorized................. 2,450,000 - Options granted.............................. (2,671,200) 2,671,200 $2.63 - $4.50 Options exercised............................ - (402,865) $0.15 - $3.50 Options canceled............................. 1,244,135 (1,244,135) $0.15 - $10.75 ---------- ---------- Balance at December 31, 1997................. 1,401,505 3,142,910 $0.15 - $10.75 Options granted.............................. (3,147,801) 3,147,801 $0.91 - $3.00 Options exercised............................ - (172,129) $0.15 - $1.75 Options canceled............................. 3,536,679 (3,566,679) $0.15 - $7.00 ---------- ---------- Balance at December 31, 1998................. 1,790,383 2,551,903 $0.15 - $10.75 ========== ==========
1995 EMPLOYEE STOCK PURCHASE PLAN In October 1995, the Company instituted an employee stock purchase plan (the "1995 Purchase Plan") and reserved a total of 300,000 shares of the Company's Common Stock for issuance thereunder. On October 3, 1997, at the Company's Annual Meeting of Stockholders, an amendment was approved to increase the shares available in this plan by 400,000 to an aggregate of 700,000. The 1995 Purchase Plan permits employees to acquire shares of the Company's Common Stock through payroll deductions. During 1996, 1997, and 1998 shares issued under this plan aggregated 110,996, 188,797, and 116,969 respectively. PRO FORMA INFORMATION As of December 31, 1998, the Company had five stock-based compensation plans as described above. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for these stock option plans. Had compensation cost for options granted in 1998, 1997 and 1996 under the Company's option plans been determined based on fair market value at the grant dates, as prescribed by SFAS No. 123, the Company's net loss and pro forma net loss (in thousands) and the Company's net loss and pro forma net loss per share would have been as follows: 46
Year Ended December 31, ----------------------------------- 1998 1997 1996 --------- ---------- ---------- (In Thousands, except for per share amounts) Net loss -as reported: basic and diluted............ $ (3,805) $ (23,380) $ (24,392) Net loss per share -pro forma: basic and diluted.... $ (6,483) $ (25,247) $ (26,172) Met loss per share -as reported: basic and diluted.. $ (0.19) $ (1.20) $ (1.34)
The weighted average fair market value of options granted was $ 1.16 per share, $3.87 per share and $3.80 per share for the years ended December 31, 1998, 1997 and 1996, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants during the applicable period: expected volatility of 70% for all periods, risk-free interest rate of 5.12% for options granted in 1998, 5.71% for options granted in 1997 and 6.19% for options granted in 1996, and a weighted average expected option term of 5.0 years for all periods. The Company has not paid dividends and assumed no dividend yield. The following table summarizes information about stock options outstanding under the 1993 Incentive Stock Option Plan, the 1997 Employee Stock Option Plan, the 1995 Directors' Stock Option Plan and the Non-Statutory Option Grant to Director at December 31, 1998:
Options Outstanding Options Exercisable -------------------------------------------- --------------------------- Weighted Average Weighted Weighted Shares Remaining Average Shares Average Exercise Price Range Outstanding Life in Years Exercise Price Exercisable Exercise Price - -------------------- ----------- ------------- -------------- ----------- -------------- $ 0.15 -- $ 1.06 203,414 8.79 $0.85 46,076 $0.38 $ 1.75 -- $ 1.75 1,809,239 8.36 $1.75 929,587 $1.75 $ 2.25 -- $ 2.31 387,250 9.45 $2.30 43,498 $2.31 $ 2.63 -- $ 10.75 152,000 8.15 $6.82 73,133 $8.88 --------- ---- ----- --------- ----- $ 0.15 -- $ 10.75 2.551,903 8.55 $2.06 1,092,294 $2.19 --------- ---- ----- --------- -----
For the Employee Stock Purchase Plan, the fair value of each purchase right is estimated at the beginning of the offering period using the Black-Scholes option-pricing model with the following weighted-average assumptions used in 1998, 1997 and 1996: expected volatility of 70% for all three years; risk-free interest rate of 5.12%, 5.71% and 5.17% for 1998, 1997 and 1996, respectively; and expected lives of six months for all three years. The Company has not paid dividends and assumed no dividend yield. The weighted-average fair value of all purchase rights granted in 1998, 1997 and 1996, were $0.70, $2.14 and $2.89, respectively. 47 NOTE 9. COMMITMENTS AND CONTINGENCIES: OPERATING AND CAPITAL LEASES The Company leases its facility in California and certain equipment under noncancelable operating leases. Total rent expense under these operating leases for the years ended December 31, 1998, 1997 and 1996 was $339,000, $657,000, and $546,000, respectively. In August 1997, the Company entered into an agreement with a third party to sublease 17,928 square feet within the Company's leased facility in Fremont, California. The term of the sublease is forty-six months. The income is used to offset the Company's rent expense. As indicated in Note 2, as part of the sale of its hardware business, the Company's leases were included in the sale and therefore the Company's lease and sublease commitments outstanding at December 31, 1998, were assumed by Primax. LETTERS OF CREDIT As of December 31, 1998, the Company had two letters of credit outstanding totaling $0.3 million. The letters of credit were secured by the Company's line of credit. The letters of credit are secured by certificates of deposit which are presented as restricted cash at December 31, 1998. As indicated in Note 2, as part of the sale of its hardware business all of the Company's commitments associated with the letters of credit were included in the sale. LITIGATION AND OTHER CLAIMS The Company is a party to litigation and patent infringement matters and claims which arose in the course of the Company's operations. While the results of such litigation and claims cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a significant adverse effect on the Company's financial position and results of operations. However, should the Company not prevail in any such litigation, its operating results and financial position could be adversely impacted. NOTE 10. NON-RECURRING ITEM: The Company implemented a restructuring plan of all its organizations in May 1997 which included a decrease of approximately 40% of total employee and consultant headcount. A one-time restructuring charge of $675,000 was recorded in the three month period ended June 30, 1997, representing severance paid to terminated employees. NOTE 11. SEGMENT, GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION In 1998, the Company adopted Statement of Financial Accounting Standards (FAS) 131, "Disclosures about Segments of an Enterprise and Related Information." FAS 131 supersedes FAS 14, "Financial Reporting for Segments of a Business Enterprise," replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. FAS 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of FAS 131 did not affect results of operations or financial position or the segment information reported in 1997. Based on its management structure, the Company has one reporting segment. 48 The following is net sales information by geographic area:
Year Ended December 31, ----------------------------------- 1998 1997 1996 ---------- --------- --------- (In Thousands) United States............ $ 73,219 $ 52,023 $ 48,981 Foreign.................. 5,851 5,600 7,100 ---------- --------- --------- Total.................... $ 79,070 $ 57,623 $ 56,081 ---------- --------- ---------
During 1998, two customers accounted for 18% and 12% of total net revenues, respectively. One customer accounted for 21% of total net revenues in 1997. In 1996, one customer accounted for 37% of total net revenues. 49 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors and Stockholders of ScanSoft, Inc. Our audits of the financial statements referred to in our report dated January 27, 1999, except for Note 3, which is as of March 2, 1999, appearing on page 33 in the 1998 Annual Report on Form 10-K also included an audit of the Financial Statement Schedule listed in Item 14(a) of this Form 10-K. In our opinion, the Financial Statement Schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related financial statements. PricewaterhouseCoopers LLP San Jose, California January 27, 1999 50 Schedule II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES (IN THOUSANDS) ACCOUNTS RECEIVABLE
1998 1997 1996 ---------------- ---------------- ---------------- Balance at beginning of period..................... $ 5,315 $ 3,931 $ 2,531 Additions charged to costs and expenses............ 19,480 7,122 4,469 Deductions and write-offs.......................... (20,624) (5,738) (3,069) ---------------- ---------------- ---------------- Balance at end of period........................... $ 4,171 $ 5,315 $ 3,931 ================ ================ ================
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. 51 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information regarding our executive officers and directors as of March 26, 1999. Name Age Position ---- --- -------- Michael K. Tivnan 46 President, Chief Executive Officer, and Director Paul A. Ricci(1)(2) 42 Chairman of the Board of Directors Wayne S. Crandall 40 Vice President Sales and Channel Marketing Steven C. Ricketts 36 Vice President Marketing Stanley E. Swiniarski 41 Vice President Development J. Larry Smart(1) 51 Director William J. Harding(1)(2) 51 Director David F. Marquardt(2) 50 Director Mark B. Myers 59 Director - ---------- (1) Member of the Audit Committee of the Board of Directors. (2) Member of the Compensation Committee of the Board of Directors. Mr. Tivnan has served as the President and Chief Executive Officer of the Company since March 2, 1999. From February 1998 until March 2, 1999, Mr. Tivnan served as the President of ScanSoft, Inc., which was then operating as an indirect wholly owned subsidiary of Xerox. From November 1993 until February 1998, Mr. Tivnan served as General Manager and Vice President of ScanSoft. From January 1991 until November 1993, Mr. Tivnan served as Chief Financial Officer of ScanSoft. Mr. Ricci has served as the Chairman of the Board of Directors since March 2, 1999. Mr. Ricci joined Xerox in 1992 and is currently the Vice President, Corporate Business Development, a position he has held since January 1998. Prior to assuming his current position, Mr. Ricci has held several positions within Xerox, including serving as President, Software Solutions, in Xerox's Document Services Group, and as President of the Desktop Document Systems Division. Mr. Ricci has served as Chairman of the Board of Directors of ScanSoft since June 1997 and has served as the sole director of ScanSoft since September 1996. From September 1996 until February 1998, Mr. Ricci served as President of ScanSoft. Mr. Crandall has served as the Vice President Sales and Channel Marketing of the Company since March 2, 1999. From December 1989 until March 2, 1999, Mr. Crandall oversaw all domestic and international sales activity of ScanSoft, Inc., which was then operating as an indirect wholly owned subsidiary of Xerox. Mr. Crandall originally joined ScanSoft in November 1988 as the Director of North America Sales. Mr. Ricketts has served as Vice President Marketing of the Company since March 2, 1999. Mr. Ricketts joined ScanSoft, Inc., which was then oeprating as an indirect wholly owned subsidiary of Xerox, in December 1992 as the Manager of OEM Marketing and held roles that include leadership over the program management teams and worldwide product marketing function. Mr. Ricketts served as Director of Marketing of ScanSoft for three years before being promoted to Vice President in August 1998. Mr. Swiniarski has served as Vice President Development of the Company since March 2, 1999. From November 1991 until March 2, 1999, Mr. Swiniarski served as the Director of Product Development. From 1988 until 1991, Mr. Swiniarski served as the Director of Technology Development and Marketing for Siemens Nixdorf Information Systems, Inc. and held a number of engineering positions with software companies that include Apollo Computer, High Order Software, Inc. and Systems Architects, Inc. 52 Mr. Smart has served as a director of the Company since March 2, 1999. From April 1997 until March 2, 1999, Mr. Smart served as President and Chief Executive Officer of Visioneer. Mr. Smart served as Chairman of the Board of Directors of Visioneer from February 1997 until April 1997. From April 1996 to March 1997, Mr. Smart was Chairman, President and Chief Executive Officer of StreamLogic Corporation, a network storage company. From July 1995 to March 1996, Mr. Smart was President and CEO of Micropolis Corporation, a disk drive design and manufacturing company. From March 1994 to February 1995, Mr. Smart was President and Chief Executive Officer of Maxtor Corporation, a disk drive development and manufacturing company. Mr. Smart currently serves as Chairman of the Board of Southwall Technologies Inc., a thin film technology company, and is a director of Savoir Technology Group, Inc., a distributor of electronic components and systems, and Midisoft Corp., a developer of music and sound software for personal computers. Dr. Harding has served as a director of the Company since May 1995. Since 1994, Dr. Harding has been a general partner of Morgan Stanley Venture Partners II, L.P., which manages the Morgan Stanley Venture Capital Funds. During 1994, Dr. Harding was a private investor. From 1985 through 1993, Dr. Harding was a general partner of J.H. Whitney & Co., a venture capital firm. Mr. Marquardt has served as a director of the Company since November 1992. Since August 1980, Mr. Marquardt has been a general partner of Technology Venture Investors, a venture capital firm. Mr. Marquardt currently serves as a director of Auspex Systems, Inc., a provider of network server hardware and software. Dr. Myers has served as a director of the Company since March 2, 1999. Since February 1992, Dr. Myers has served as Senior Vice President, Xerox Research and Technology, responsible for worldwide research and technology. Dr. Myers earned an A.B. degree from Earlham College, Richmond, Indiana in 1960, and a Ph.D. in material sciences from Pennsylvania State University in 1964. 53 ITEM 11.EXECUTIVE COMPENSATION The following table provides certain summary information for the fiscal years 1996, 1997 and 1998 concerning compensation paid to the Company's Chief Executive Officer and to the Company's four other named executive officers whose compensation exceeded $100,000 in 1998 (the "Named Executive Officers").
ANNUAL COMPENSATION LONG-TERM COMPENSATION ------------------------------------------------ ------------------------ OTHER ANNUAL SECURITIES UNDERLYING NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION OPTIONS(#) - -------------------------------------- ------ ---------- ----------- -------------- ------------------------ J. Larry Smart(2) ................. 1998 $314,357 $154,500 $ -- 698,574 President and Chief Executive 1997 190,500 98,429 21,500 815,000 Officer 1996 -- -- -- -- Rudolph E. Burger.................. 1998 193,269 25,000 -- 215,128 Senior Vice President of Business 1997 173,077 27,424 -- 205,000 Development 1996 137,307 -- -- 40,006 Geoffrey C. Darby(3) .............. 1998 117,944 10,000 -- 71,430 Vice President of Finance and 1997 159,346 17,498 -- 10,000 Chief Financial Officer 1996 156,000 20,000 -- 30,000 Murray Dennis(4) .................. 1998 193,817 86,550 -- 222,577 Vice President of Sales and 1997 175,000 80,045 -- 75,000 Marketing 1996 87,500 51,023 -- 150,000 Michael T. Burt(5) ................ 1998 136,254 20,000 -- 130,715 Vice President of Operations 1997 83,077 21,522 -- 100,000 1996 -- -- -- -- - ---------- (1) Includes amounts paid in the subsequent year for bonuses earned in the indicated year. (2) Mr. Smart joined the Company in April 1997. (3) Mr. Darby left the Company in August 1998. (4) Mr. Dennis joined the Company in May 1996. (5) Mr. Burt joined the Company in April 1997.
54 RECENT OPTION GRANTS The following table sets forth certain information regarding options granted during the fiscal year ended January 3, 1999 to the Named Executive Officers.
Percent of Potential Realizable Value at Total Options Assumed Annual Rates of Stock Securities Granted to Exercise Price Appreciation for Option Underlying Employees in or Base Term ($)(2) Options Fiscal Price Expiration ----------------------------------- Name Granted(#) Year(%)(1) ($/Share) Date 5% 10% - -------------------- ------------- ---------------- ------------ ----------- --------------- ------------------ J. Larry Smart 115,715 3.68% $1.75 4/1/07 $114,980 $ 284,938 154,287 4.90 1.75 7/1/07 158,831 396,591 428,572 13.61 1.75 10/1/07 455,772 1,146,159 Rudolph E. Burges 34,286 1.09 1.75 9/27/05 27,389 65,072 156,556 4.97 1.75 5/20/07 158,384 393,998 4,286 0.14 1.75 10/6/07 4,558 11,462 20,000 0.64 2.31 6/23/08 29,055 73,631 Geoffrey C. Darby 17,143 0.54 1.75 12/9/08 21,085 54,860 25,715 0.82 1.75 7/25/06 23,233 56,476 8,572 0.27 1.75 10/6/07 9,116 22,925 20,000 0.64 2.31 6/23/08 29,055 73,631 Murray Dennis 2,111 0.07 1.75 7/24/06 1,906 4,634 126,461 4.02 1.75 7/25/06 114,254 277,735 52,576 1.67 1.75 2/4/07 51,166 126,249 21,429 0.68 1.75 10/6/07 22,789 57,309 20,000 0.64 2.31 6/23/08 29,055 73,631 Michael T. Burt 85,715 2.72 1.75 5/8/07 86,336 214,571 25,000 0.79 3.00 3/30/08 47,167 119,531 20,000 0.64 2.31 6/23/08 29,055 73,631 - ---------- (1) Based on options to purchase an aggregate of 3,147,801 shares of common stock granted during fiscal 1998. (2) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock appreciation of five percent (5%) and ten percent (10%) compounded annually from the date the respective options were granted to their expiration date and are not presented to forecast possible future appreciation, if any, in the price of our common stock. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise of the options or the sale of the underlying shares of common stock. The actual gains, if any, on the stock option exercises will depend on the future performance of our common stock, the optionee's continued employment through applicable vesting periods and the date on which the options are exercised.
55 The following table shows the number of shares of common stock represented by outstanding stock options held by each of the Named Executive Officers as of January 3, 1999. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES(1)
Number of Securities Underlying Value of Unexercised In-the-Money Unexercised Options at Fiscal Options at Fiscal Year-End Name Year-End Exercisable/Unexercisable ($) Exercisable/Unexercisable - ----------------------------- ----------------------------------------- --------------------------------------- J. Larry Smart 395,001/303,573 $--/-- Rudolph E. Burges 86,825/138,303 863/6,038 Geoffrey C. Darby --/-- --/-- Murray Dennis 91,136/121,723 --/-- Michael T. Burt 42,901/87,814 --/-- - ---------- (1) Based on a per share price of $1.1875, the closing price of our common stock as reported by The Nasdaq National Market on December 31, 1998, the last trading day of the fiscal year.
In January 1998, the Company allowed all holders of outstanding options to exchange higher priced options for new options at $1.75 per share, the fair market value at the time of the exchange. The repricing terms provided that for each seven shares of options exchanged, six new options would be granted. The repriced options maintained the same vesting schedule. Options for 2,656,449 shares were exchanged for new options for 2,276,956 shares. TEN-YEAR OPTION/SAR REPRICINGS (as of March 26, 1999)
LENGTH OF ORIGINAL OPTION TERM NUMBER OF REMAINING SECURITIES NUMBER OF MARKET PRICE EXERCISE AT DATE OF UNDERLYING SHARES OF STOCK AT PRICE AT TIME NEW REPRICING OPTIONS/SARS REISSUED TIME OF OF REPRICING EXERCISE OR DATE OF REPRICED OR 7:6 RATIO REPRICING OR OR AMENDMENT PRICE AMENDMENT EXECUTIVE OFFICER REPRICING AMENDED (#) (#) AMENDMENT ($) ($) ($) (YEARS) - ---------------------- ---------- -------------- ----------- --------------- --------------- -------- ------------- J. Larry Smart...... 1/12/98 135,000 115,715 $1.75 $3.75 $1.75 9.25 President and 1/12/98 180,000 154,287 1.75 3.44 1.75 9.50 Chief Executive 1/12/98 500,000 428,572 1.75 3.88 1.75 9.75 Officer Jay Hanson.......... 7/25/96 5,000 5,000 6.50 10.75 6.50 9.83 Vice President, 1/12/98 10,000 8,572 1.75 4.25 1.75 7.67 Engineering 1/12/98 5,000 3,750 1.75 4.25 1.75 7.67 1/12/98 5,000 4,286 1.75 6.50 1.75 8.58 1/12/98 5,000 4,286 1.75 6.50 1.75 8.58 1/12/98 10,000 8,572 1.75 3.50 1.75 9.08 1/12/98 8,000 6,858 1.75 2.63 1.75 9.42 1/12/98 3,300 2,829 1.75 3.63 1.75 9.67 1/12/98 30,000 25,715 1.75 3.88 1.75 9.75 Bruce S. Mowery..... 7/25/96 150,000 150,000 6.50 10.75 6.50 9.83 Vice President Marketing
56 BOARD MEETINGS AND COMMITTEES The Board of Directors held a total of 15 meetings during the fiscal year ended January 3, 1999. Each director attended at least 75% of the aggregate number of meetings of (i) the Board of Directors and (ii) the committees of the Board of Directors on which he served, except David F. Marquardt, who attended 66.6% of the meetings. The Board of Directors has an Audit Committee and a Compensation Committee. It does not have a nominating committee or a committee performing the functions of a nominating committee. The Audit Committee of the Board of Directors, which currently consists of directors Paul A. Ricci, J. Larry Smart and William J. Harding, held one meeting during 1998. The Audit Committee, which meets periodically with management and our independent public accountants, recommends engagement of our independent public accountants and is primarily responsible for approving the service performed by our independent public accountants and reviewing and evaluating our accounting principles and the adequacy of our internal auditing procedures and controls. The Compensation Committee of the Board of Directors, which currently consists of directors Paul A. Ricci, William J. Harding and David F. Marquardt, held three meetings during 1998. The Compensation Committee, in conjunction with the Board of Directors, establishes salaries, incentives and other forms of compensation for directors, officers and other employees, administers the various incentive compensation and benefit plans (including our stock purchase and stock option plans) and recommends policies relating to such plans. COMPENSATION OF DIRECTORS Nonemployee directors of the Company are automatically granted options to purchase shares of the Company's Common Stock pursuant to the terms of the Company's 1995 Directors' Stock Option Plan (the "Directors' Option Plan"). Under such plan, each person who was a nonemployee director of the Company on the date of the Company's initial public offering, which was December 11, 1995, was granted an option to purchase 20,000 shares of Common Stock on the date of such offering and each person who thereafter first becomes a nonemployee director will be granted an option to purchase 20,000 shares of Common Stock on the date on which he or she first becomes a nonemployee director (the "First Option"). Thereafter, on January 1 of each year, commencing January 1, 1997, each nonemployee director shall be automatically granted an additional option to purchase 5,000 shares of Common Stock (a "Subsequent Option") if, on such date, he or she shall have served on the Company's Board of Directors for at least six (6) months. The Directors' Plan provides that the First Option shall become exercisable in installments as to twenty-five percent (25%) of the total number of shares subject to the First Option on each anniversary of the date of grant of the First Option and each Subsequent Option shall become exercisable in full on the first anniversary of the date of grant of that Subsequent Option. Options granted under the Directors' Option Plan have an exercise price equal to the fair market value of the Company's Common Stock on the date of grant, and a term of ten (10) years. Pursuant to the Directors' Option Plan, on January 1, 1998, each nonemployee director was granted an option to purchase 5,000 shares of Common Stock. The terms of such options, including vesting terms, are substantially similar to the terms of the First Option. CHANGE IN CONTROL AND EMPLOYMENT AGREEMENTS AGREEMENTS WITH VISIONEER'S EXECUTIVE OFFICERS Two executive officers of Visioneer prior to the merger, J. Larry Smart, President and Chief Executive Officer and a director, and Murray Dennis, Vice President of Sales and Marketing, executed employment and non-compete agreements with Primax V Acquisition Corp., a wholly owned subsidiary of Primax Electronics Ltd. After the sale of the hardware business to Primax in January 1999, Mr. Dennis became employed by Primax, and received a signing bonus paid by Primax equal to six months of his Visioneer salary as part of his new employment compensation package. He also released Visioneer from its obligations under his existing employment agreement with Visioneer. Mr. Smart is entitled to receive payment of six months additional salary by Visioneer since his termina- 57 tion of employment. Michael T. Burt, Vice President of Operations, received a payment of four months additional salary upon termination of employment. Pursuant to an engagement letter dated August 11, 1998 between Visioneer and The Brenner Group LLC, Richard Brenner serves as the Company's Chief Financial Officer. Visioneer paid The Brenner Group hourly fees for Mr. Brenner's services and paid a success fee of 90,000 for completion of the hardware sale and the merger with ScanSoft. The total amount of payments to Messrs. Smart and Brenner will be approximately 325,000. In November 1998, Visioneer's Board of Directors approved the acceleration of vesting of 50% of unvested options held by Messrs. Dennis and Burt upon each individual's termination of employment with Visioneer. Visioneer also accelerated the vesting of certain options held by Mr. Smart in accordance with the vesting schedules set forth in letter agreements between Visioneer and Mr. Smart dated April 9, 1997, July 7, 1997 and October 6, 1997. Options to purchase a total of approximately 151,787 shares held by Mr. Smart have also been accelerated. In November 1998, Visioneer's Board of Directors also approved offering to employees, including executive officers, whose employment was terminated by Visioneer prior to the effective time of the merger the right to receive 0.20 per share for each option share held by such employee that is or would have vested as of the effective time of the merger (including options that will be accelerated prior to such time), provided that the employee agreed to terminate all additional outstanding unvested options held by such employee. Accordingly, Mr. Dennis received approximately 30,500 for options exercisable as of the date of the hardware sale to Primax and options accelerated as a result of their termination of employment. Similarly, Messrs. Smart and Burt received approximately 134,000 and 17,400, respectively, for options that would be exercisable as of the closing of the merger and for options accelerated in connection with the closing of the merger or their termination of employment. 58 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information with respect to the beneficial ownership of our common stock as of March 26, 1999, as to (1) each person (or group of affiliated persons) who is known by us to own beneficially more than 5% of our common stock; (2) each of our directors; (3) each of our executive officers; and (4) all directors and executive offices as a group.
SHARES BENEFICIALLY OWNED(2) --------------------------------------- NAME AND ADDRESS OF BENEFICIAL OWNER(1) NUMBER PERCENT - -------------------------------------------------------------------- ------------------ ----------------- Xerox Imaging Systems, Inc.(3).................................... 11,853,602 45.0% 800 Long Ridge Road Stamford, CT 06904 Technology Venture Investors - IV................................. 917,001 3.5 2480 Sand Hill Road Menlo Park, CA 94025 Morgan Stanley Venture Capital Fund II, L.P.(4)................... 734,036 2.8 3000 Sand Hill Road Building 4, Suite 250 Menlo Park, CA 94025 Michael K. Tivnan(5).............................................. 80,938 * Paul A. Ricci(6).................................................. 130,000 * Wayne S. Crandall(7).............................................. 46,275 * Steven C. Ricketts(8)............................................. 21,765 * Stanley E. Swiniarski(9).......................................... 28,214 * William J. Harding(10)............................................ 759,036 2.9 David F. Marquardt(11)............................................ 945,451 3.6 Mark B. Myers..................................................... -- -- J. Larry Smart(12)................................................ 8,346 * All directors and executive officers as a group (9 persons)(13).............................................. 2,020,026 7.6% - ---------- * Less than 1%. (1) Unless otherwise indicated, the address for the following stockholders is c/o ScanSoft, Inc., 9 Centennial Drive, Peabody, Massachusetts 01960. (2) Applicable percentage ownership is based on 26,355,780 shares of common stock outstanding as of March 26, 1999. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of March 26, 1999 are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage of ownership of any other person. The persons named in the table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to the community property laws where applicable and except as indicated in the other footnotes to this table. (3) Excludes a warrant to purchase up to 1,738,552 shares of common stock. (4) Includes 486,544 shares owned by Morgan Stanley Venture Capital Fund II, L.P., 126,276 shares owned by Morgan Stanley Venture Investors, L.P., 121,216 shares owned by Morgan Stanley Venture Capital Fund II, C.V. 59 (5) Includes 70,938 shares subject to options exercisable within 60 days of March 26, 1999. (6) Excludes 11,853,602 shares of common stock held by Xerox Imaging Systems, Inc. (7) Includes 36,275 shares subject to options exercisable within 60 days of March 26, 1999. (8) Includes 21,765 shares subject to options exercisable within 60 days of March 26, 1999. (9) Includes 28,214 shares subject to options exercisable within 60 days of March 26, 1999. (10) Includes 486,544 shares owned by Morgan Stanley Venture Capital Fund II, L.P., 126,276 shares owned by Morgan Stanley Venture Investors, L.P., 121,216 shares owned by Morgan Stanley Venture Capital Fund II, C.V., and 25,000 shares subject to options exercisable within 60 days of March 26, 1999 held by William J. Harding, a director of ScanSoft. Dr. Harding is a general partner of Morgan Stanley Venture Partners II, L.P., the general partner of Morgan Stanley Venture Capital II, L.P., Morgan Stanley Venture Investors, L.P., and Morgan Stanley Venture Capital Fund II, C.V., and, as such, may be deemed to share voting and investment power with respect to such shares. Dr. Harding disclaims beneficial ownership with respect to such shares except to the extent of his pecuniary interest in such shares. (11) Includes 917,001 shares owned by Technology Venture Investors IV, L.P., and 25,000 shares subject to options exercisable within 60 days of March 26, 1999, held by David F. Marquardt, a director of ScanSoft. Mr. Marquardt is a general partner of TVI Management IV, L.P., which is the sole general partner of Technology Venture Investors IV, L.P., and, as such, Mr. Marquardt may be deemed to share voting and investment power with respect to such shares. Mr. Marquardt disclaims beneficial ownership of such shares except to the extent of his pecuniary interest in such shares. Also includes 3,450 shares held directly by Mr. Marquardt. (12) Includes 6,250 shares subject to options exercisable within 60 days of March 26, 1999. (13) Includes 213,442 shares subject to options exercisable within 60 days of March 26, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) Transactions with Management and Others The following is a summary of certain agreements we have entered into with Xerox, which currently owns approximately 45% of our outstanding common stock. The following summaries of these agreements are qualified in their entirety by reference to each of the agreements, copies of which are included as exhibits to this Report. VOTING AGREEMENT. Xerox, Xerox Imaging Systems, Inc., Visioneer and several holders of Visioneer common stock entered into a voting agreement effective at the close of the merger with ScanSoft, pursuant to which they agreed to vote to elect certain nominees to the Board of Directors, including up to two persons designated by Xerox (the "Voting Agreement"). At each annual meeting of stockholders during the term of the Voting Agreement, or at any special meeting of stockholders at which board members are to be elected, the parties to the Voting Agreement will vote their shares so as to elect the following directors: (i) so long as Xerox owns at least 20% of our outstanding voting stock: two persons designated by Xerox, two individuals designated by the four members of the Board of Directors who were not nominated by Xerox and who are not our Chief Executive Officer or our then-current Chief Executive Officer, and two independent members with relevant industry experience who are to be designated by at least four out of the five directors who are not considered to be independent directors; or 60 (ii) so long as Xerox owns at least 10% of our outstanding voting stock: one person designated by Xerox, two individuals designated by the five members of the board who were not nominated by Xerox and who are not our Chief Executive Officer or our then-current Chief Executive Officer, and three independent members with relevant industry experience who are designated by at least three out of the four directors who are not considered to be independent directors. The Voting Agreement will terminate upon the earliest to occur of: (1) the sale of all or substantially all of our property or business or our merger into or consolidation with any other corporation or if we effect any other transaction(s) in which more than 50% of our voting power is disposed of; (2) such time as Xerox owns less than 10% of our outstanding voting stock; or (3) such time as the non-reporting person parties to the Voting Agreement own, in the aggregate, less than 7% of our outstanding voting stock; provided, however, that if such time occurs prior to March 2, 2001 and Xerox holds at such time shares of our Series B Preferred Stock, the Voting Agreement will not terminate until the earlier of (x) March 2, 2001 or (y) the date on which Xerox (together with its affiliates) no longer holds any shares of our Preferred Stock. THE SERIES B PREFERRED STOCK. In connection with the merger, Xerox Imaging Systems, Inc. was issued 3,562,238 shares of our nonvoting Series B Preferred Stock. The Series B Preferred Stock is convertible into shares of common stock on a share-for-share basis at the option of Xerox Imaging Systems, Inc. at any time after March 2, 2001; provided, however, that the Series B Preferred Stock becomes convertible immediately if Xerox Imaging Systems, Inc.'s ownership of our outstanding common stock is less than 30%, unless such conversion would result in Xerox Imaging Systems, Inc. owning more than 50% of our outstanding common stock. The Series B Preferred Stock is entitled to noncumulative dividends at the rate of 0.065 per annum only if and to the extent declared by our Board of Directors. The Series B Preferred Stock has a liquidation preference of 1.30 per share plus all declared but unpaid dividends. The Series B Preferred Stock does not have any voting rights, except for such rights as are provided under Delaware law. COMMON STOCK WARRANT. At the closing of the merger, we issued to Xerox Imaging Systems, Inc. a ten-year warrant (the "Warrant") that allows Xerox Imaging Systems, Inc. to acquire a number of shares of common stock equal to the number of options to purchase common stock (whether vested or unvested) that remain unexercised at the termination of any ScanSoft option assumed by us in the merger. The exercise price for each warrant share is the same as the exercise price of each assumed ScanSoft option, as adjusted by the exchange ratio in the merger. If all of the assumed ScanSoft options terminate without being exercised, Xerox Imaging Systems, Inc. would be entitled to purchase approximately 1,738,552 additional shares of our common stock. The Warrant is exercisable at any time that shares are available for acquisition under the Warrant; provided, however, Xerox Imaging Systems, Inc. may not exercise the Warrant prior to two years from the date of its initial issuance unless, immediately after such exercise, Xerox Imaging Systems, Inc. owns directly or indirectly a number of outstanding shares of our common stock that represents less than 45% of the total number of shares of our common stock outstanding immediately after such exercise. REGISTRATION RIGHTS AGREEMENT. We have entered into a registration rights agreement (the "Registration Rights Agreement") with Xerox and Xerox Imaging Systems, Inc. in connection with the merger with ScanSoft. Pursuant to the Registration Rights Agreement, Xerox may demand registration under the Securities Act of some or all of the shares of common stock owned by Xerox (including upon conversion of the Series B Preferred Stock or pursuant to the exercise of the Warrant). Each such registration will be at our expense. We may postpone such a demand under certain circumstances. In addition, Xerox may request that we include shares of common stock held by Xerox in any registration proposed by us of our common stock. (b) Certain Business Relationships Not applicable. 61 (c) Indebtedness of Management Not applicable. 62 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following documents are filed as a part of this Report: (1) Financial Statements - See Index to Financial Statements in Item 8 of this Report. (2) Financial Statement Schedule - The following financial statement schedule for our fiscal years ended December 31, 1998, 1997 and 1996 is contained in Item 8 of this Report: II - Valuation and Qualifying Accounts and Reserves Report of PricewaterhouseCoopers LLP, Independent Accountants. Refer to Item 8 above. All other schedules have been omitted as the requested information is inapplicable or the information is presented in the financial statements or related notes included as part of this Report. (3) Exhibits -Refer to Item 14(c) below. (b) Reports on Form 8-K. (1) On December 8, 1998, the Registrant filed a current report on Form 8-K, dated December 3, 1998, to report under Item 5 the signing of the agreement to acquire ScanSoft and to sell its hardware business to Primax Electronics, Ltd., and to file, under Item 7, the press releases associated therewith. (c) Exhibits. Exhibits (numbered in accordance with Item 601 of Regulation S-K) Exhibit No. Description of Exhibits ----------- ----------------------- 2.1(1) Agreement and Plan of Merger dated December 2, 1998, between Visioneer, Inc., a Delaware corporation, and ScanSoft, Inc., a Delaware corporation. 3.1(2) Bylaws of Registrant. 3.2(3) Amended and Restated Certificate of Incorporation of Registrant. 4.1(3) Specimen Common Stock Certificate. 4.2(4) Preferred Shares Rights Agreement, dated as of October 23, 1996, between the Registrant and U.S. Stock Transfer Corporation, including the Certificate of Designation of Rights, Preferences and Privileges of Series A Participating Preferred Stock, the form of Rights Certificate and Summary of Rights attached thereto as Exhibits A, B and C, respectively. 4.3 Voting Agreement dated March 2, 1999 between Xerox, Xerox Imaging Systems, Inc., Visioneer, Inc. and several holders of Visioneer common stock. 63 Exhibit No. Description of Exhibits ----------- ----------------------- 10.1(2) Form of Indemnification Agreement. 10.2(2)** 1993 Incentive Stock Option Plan and form of Option Agreement. 10.3(2)** 1995 Employee Stock Purchase Plan and form of Subscription Agreement. 10.4(2)** 1995 Directors' Option Plan and form of Option Agreement. 10.5(5)** 1997 Employee Stock Option Plan. 10.6(5)** Director 1997 Compensation Plan. 10.7(2) LZW Paper Input System Patent License Agreement dated October 20, 1995 between the Registrant and Unisys Corporation. 10.8(2) Patent License agreement dated November 13, 1995 between the Registrant and Wang Laboratories, Inc. 10.9(2) Building Lease dated May 21, 1996 between the Registrant and John Arrillaga, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Arrillaga Family Trust) as amended, and Richard T. Peery, Trustee, or his Successor Trustee, UTA dated 7/20/77 (Richard T. Peery, Separate Property Trust) as amended. 10.10(2) Software License Agreement dated August 14, 1996 between the Registrant and Hewlett-Packard Company. 10.11(6) Form of Employment Agreement between the Registrant and each individual who was an executive officer prior to the merger with ScanSoft and the sale of the hardware business. 10.12+ Software Distribution Agreement dated April 26, 1995 between Xerox Imaging Systems, Inc. and Tech Data Corporation. 10.13 Assignment, Assumption, Renewal and Modification Agreement dated June 18, 1997 between Xerox Imaging Systems, Inc., ScanSoft, Inc. and Tech Data Product Management, Inc. 10.14+ Distribution Agreement dated September 22, 1993 between Ingram Micro, Inc. and Xerox Imaging Systems, Inc., as amended. 10.15+ Gold Disk Bundling Agreement: Pagis SE & Pagis Pro, dated June 29, 1998 between Xerox Corporation, through its Channels Group and ScanSoft, Inc., as amended. 10.16+ Gold Disk Bundling Agreement dated March 25, 1998 between Xerox Corporation, Office Document Products Group and ScanSoft, Inc. 23.1 Consent of PricewaterhouseCoopers LLP. 24.1 Power of Attorney. (See page 66) 27.1 Financial Data Schedule. 64 - ---------- ** Denotes Management compensatory plan or arrangement. + Confidential Treatment requested pursuant to a request for confidential treatment filed with the Commission on April 2, 1999. The portions of the exhibit for which confidential treatment has been requested have been omitted from the exhibit. The omitted information has been filed separately with the Commission as part of the confidential treatment request. (1) Incorporated by reference from the Registrant's Registration Statement on From S-4 (No. 333-70603) filed with the Commission on January 14, 1999. (2) Incorporated by reference from the Registrant's Registration Statement on Form S-1 (No. 333-98356) filed with the Commission on October 19, 1995. (3) Incorporated by reference from the Registrant's Registration Statement on Form S-8 (No. 333-74343) filed with the Commission on March 12, 1999. (4) Incorporated by reference from the Registrant's current Report on Form 8-K dated October 30, 1996. (5) Incorporated by reference from the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. (6) Incorporated by reference from the Registrant's Annual Report on Form 10-K/A-2 for the fiscal year ended December 31, 1996. 65 SIGNATURES Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Peabody, State of Massachusetts, on March 29th, 1999. SCANSOFT, INC. By: /s/ MICHAEL K. TIVNAN --------------------------------------- Michael K. Tivnan President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Michael K. Tivnan and Richard M. Brenner, and each of them, his attorneys-in-fact and agents, each with the power of substitution, for him in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therein, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his substitute or substitutes may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Amendment to Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /S/ MICHAEL K. TIVNAN President, Chief Executive Officer and March 29, 1999 - ------------------------------ Director (Principal Executive Officer) Michael K. Tivnan /S/ RICHARD M. BRENNER Chief Financial Officer (Principal March 29, 1999 - ------------------------------ Accounting Officer) Richard M. Brenner /S/ PAUL RICCI Director March 29, 1999 - ------------------------------ Paul Ricci /S/ J. LARRY SMART Director March 29, 1999 - ------------------------------ J. Larry Smart /S/ DAVID F. MARQUARDT Director March 29, 1999 - ------------------------------ David F. Marquardt /S/ WILLIAM HARDING Director March 29, 1999 - ------------------------------ William Harding /S/ MARK MYERS Director March 29, 1999 - ------------------------------ Mark Myers
66 EX-4.3 2 VOTING AGREEMENT VISIONEER, INC. VOTING AGREEMENT ---------------- This Voting Agreement (the "AGREEMENT") is made as of the 2nd day of March 1999, by and among Visioneer, Inc., a Delaware corporation (the "COMPANY"), Xerox Imaging Systems, Inc. a Delaware Corporation, and Xerox Corporation, a New York corporation (together "XEROX"), and the current holders of shares of the Company's Common Stock listed on EXHIBIT A (collectively, the "CURRENT HOLDERS"). RECITALS -------- The Company and ScanSoft, Inc., a Delaware corporation ("SCANSOFT") and a wholly-owned subsidiary of Xerox, are concurrently with the execution of this Agreement entering into an Agreement and Plan of Merger dated as of the date hereof (the "MERGER AGREEMENT"). Section 6.12 of the Merger Agreement provides that the Company, Xerox and the Current Holders enter into this Agreement to provide for the nomination and election of the Company's Board of Directors. Capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Merger Agreement. AGREEMENT --------- The parties agree as follows: 1. ELECTION OF DIRECTORS. 1.1 BOARD REPRESENTATION. As of the Effective Time of the Merger Agreement, the Company's Bylaws shall provide for a Board of Directors comprised of seven (7) members. At the first meeting of the Board of Directors after the Effective Time, the current directors of the Company shall vote to appoint to the Board two (2) new directors based on nominations received from Xerox and the Company's new Chief Executive Officer (the "CEO"). Thereafter, at each annual meeting of the stockholders of the Company, or at any meeting of the stockholders of the Company at which members of the Board of Directors of the Company are to be elected, or whenever members of the Board of Directors are to be elected by written consent, Xerox and the Current Holders agree to vote or act with respect to their shares so as to elect the following directors: (a) so long as Xerox owns at least twenty percent (20%) of the Company's outstanding voting stock: (i) two (2) members of the Company's Board of Directors designated by Xerox; (ii) two (2) members of the Company's Board of Directors designated by the four members of the Board who were not nominated by Xerox and who are not the CEO (the "NON-XEROX/NON-CEO DIRECTORS"); (iii) the Company's then current CEO; and (iv) two (2) independent members of the Company's Board of Directors with relevant industry experience who are designated by at least four out of the five directors who are not considered independent directors; or (b) so long as Xerox owns at least ten percent (10%) of the Company's outstanding voting stock: (i) one (1) member of the Company's Board of Directors designated by Xerox; (ii) two (2) members of the Company's Board of Directors designated by the Non-Xerox/Non-CEO Directors; (iii) the Company's then current CEO; and (iv) three (3) independent members of the Company's Board of Directors with relevant industry experience who are designated by at least three out of the four directors who are not considered independent directors; 1.2 APPOINTMENT OF DIRECTORS. In the event of the resignation, death, removal or disqualification of a director designated pursuant to Section 1.1 above, the party or parties who were authorized to nominate such director pursuant to Section 1.1 above shall promptly nominate a new director, and, after written notice of the nomination has been given by such nominating party or parties to the Company's Board of Directors, then each party hereto shall vote its shares of capital stock of the Company to elect such nominee to the Board of Directors. 1.3 REMOVAL. Any director may be removed hereunder only in accordance with the Bylaws of the Company and Delaware General Corporation Law; PROVIDED, HOWEVER, that Xerox may remove its designated directors at any time and from time to time, with or without cause (subject to the Bylaws of the Company as in effect from time to time and any requirements of law), in its sole discretion, and after written notice to each of the parties hereto of the new nominee to replace such director, each party hereto shall promptly vote its shares of capital stock of the Company to elect such nominee to the Board of Directors. 2. ADDITIONAL REPRESENTATIONS AND COVENANTS. 2.1 NO REVOCATION; GRANT OF PROXY. The voting agreements contained herein are coupled with an interest and may not be revoked during the term of this Agreement. Should the provisions of this Agreement be construed to constitute the granting of proxies, such proxies shall be deemed to be coupled with an interest and are irrevocable for the term of this Agreement. 2.2 CHANGE IN NUMBER OF DIRECTORS. The parties hereto will not vote for any amendment or change to the Certificate of Incorporation or Bylaws providing for the election of more or less than seven (7) directors, or any other amendment or change to the Certificate of Incorporation or Bylaws inconsistent with the terms of this Agreement. 3. TERMINATION. 3.1 TERMINATION EVENTS. This Agreement shall terminate upon the earlier of: (a) The sale, conveyance, disposal, or encumbrance of all or substantially all of the Company's property or business or the Company's merger into or consolidation with any other corporation (other than a wholly-owned subsidiary corporation) or if the Company effects any other transaction or series of related transactions in which more than fifty percent (50%) of the voting power of the Company is disposed of, PROVIDED that this Section -2- 3.1(a) shall not apply to a merger effected exclusively for the purpose of changing the domicile of the Company; (b) Such time as Xerox owns less than twenty percent (10%) of the outstanding voting stock of the Company; or (c) Such time as the Current Holders own, in the aggregate, less than seven percent (7%) of the outstanding voting stock of the Company; provided, however, that if such time occurs prior to the second anniversary of the Effective Time and Xerox (or an affiliate thereof) holds at such time shares of the Company's Series B Preferred Stock, this Agreement shall not terminate pursuant to this Section 3.1(c) until the earlier of (X) the second anniversary of the Effective Time and (Y) the date on which Xerox (together with its affiliates) no longer hold any shares of the Company's Series B Preferred Stock. 4. MISCELLANEOUS. 4.1 SUCCESSORS AND ASSIGNS. The terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 4.2 AMENDMENTS AND WAIVERS. Any term hereof may be amended or waived only with the written consent of the Company, Xerox and each of the Current Holders. Any amendment or waiver effected in accordance with this Section 4.2 shall be binding upon the Company, Xerox and each of the Current Holders, and each of their respective successors and assigns. 4.3 NOTICES. Any notice required or permitted by this Agreement shall be in writing and shall be deemed sufficient on the date of delivery, when delivered personally or by overnight courier or sent by telegram or fax (with confirmation of successful transmission), or forty-eight (48) hours after being deposited in the U.S. mail, as certified or registered mail, with postage prepaid, and addressed to the party to be notified at such party's address or fax number as set forth on the signature page or on EXHIBIT A hereto, or as subsequently modified by written notice. 4.4 SEVERABILITY. If one or more provisions of this Agreement are held to be unenforceable under applicable law, the parties agree to renegotiate such provision in good faith. In the event that the parties cannot reach a mutually agreeable and enforceable replacement for such provision, then (a) such provision shall be excluded from this Agreement, (b) the balance of the Agreement shall be interpreted as if such provision were so excluded and (c) the balance of the Agreement shall be enforceable in accordance with its terms. 4.5 GOVERNING LAW. This Agreement and all acts and transactions pursuant hereto and the rights and obligations of the parties hereto shall be governed, construed and -3- interpreted in accordance with the laws of the State of Delaware, without giving effect to principles of conflicts of law. 4.6 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and all of which together shall constitute one instrument. 4.7 TITLES AND SUBTITLES. The titles and subtitles used in this Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 4.8 SPECIFIC ENFORCEMENT. It is agreed and understood that monetary damages would not adequately compensate an injured party for the breach of this Agreement by any party hereto, that this Agreement shall be specifically enforceable, and that any breach or threatened breach of this Agreement shall be the proper subject of a temporary or permanent injunction or restraining order. Further, each party hereto waives any claim or defense that there is an adequate remedy at law for such breach or threatened breach. [Signature Page Follows] -4- The parties hereto have executed this Voting Agreement as of the date first written above. COMPANY: VISIONEER, INC. By: /s/ Larry Smart ------------------------------------- Larry Smart, President Address: 9 Centennial Drive Peabody, MA 01960 Fax Number: (510-608-0300) XEROX CORPORATION By: /s/ Paul A. Ricci ------------------------------------- Name: ----------------------------------- (print) Title: ---------------------------------- Address: 800 Long Ridge Road Stamford, CT 06904-1600 Fax Number: (203) 968-4566 XEROX IMAGING SYSTEMS, INC. By: /s/ Paul A. Ricci ------------------------------------- Name:___________________________________ Title:__________________________________ (print) Address: 800 Longe Ridge Road Stamford, CT 06904-1600 Fax Number: (203) 968-4301 SIGNATURE PAGE TO VOTING AGREEMENT CURRENT HOLDERS: TECHNOLOGY VENTURE INVESTORS-IV AS NOMINEE FOR TECHNOLOGY VENTURE INVESTORS-4 L.P. TVI PARTNERS-4, L.P. AND TVI AFFILIATES-4, L.P. BY: TVI MANAGEMENT-4, L.P., GENERAL PARTNER BY: /s/ David Marquardt ------------------------------------ GENERAL PARTNER MORGAN STANLEY VENTURE CAPITAL FUND II, L.P. By: /s/ William J. Harding ------------------------------------ Name: ---------------------------------- (print) Title: --------------------------------- PARVEST U.S. PARTNERS II, C.V. By: /s/ Vincent Worms ------------------------------------ Name: Vincent Worms ---------------------------------- (print) Title: General Partner --------------------------------- EXHIBIT A --------- CURRENT HOLDERS Name/Address/Fax No. -------------------- Technology Venture Investors - IV 2480 Sand Hill Road Suite 101 Menlo Park, CA 94025 Fax Number: 650-854-4187 Morgan Stanley Venture Capital Fund II, LP 3000 Sand Hill Road Building 4, Suite 250 Menlo Park, CA 94025 Fax Number: 650-233-2626 Parvest U.S. Partners II, C.V. Partech International Ventures VOF U.S. Growth Fund Partners C.V. Double Black Diamond I LLC Almanori Limited Multinvest LLC Vencent Worms Thomas G. McKinley BVI Venture Managers 101 California Street, Suite 3150 San Francisco, CA 94111 Fax Number: 415-788-6763 EX-10.12 3 TECH DATA SOFTWARE DIST AGT CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED --------------------------------------------------------- AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION -------------------------------------------------- SOFTWARE DISTRIBUTION AGREEMENT BETWEEN TECH DATA CORPORATION AND XEROX IMAGING SYSTEMS, INC. TECH DATA: PKC XEROX IMAGING: WSC ----- ----- SOFTWARE DISTRIBUTION AGREEMENT THIS SOFTWARE DISTRIBUTION AGREEMENT, (Agreement) dated this 26th day of April, 1995 (the "Effective Date"), between TECH DATA CORPORATION, a Florida corporation ("Tech Data"), with its principle place of business at 5350 Tech Data Drive, Clearwater, FL 34668 and XEROX IMAGING SYSTEMS INC., a Delaware corporation ("XEROX IMAGING") with its principle place of business at 9 Centennial Drive, Peabody, MA 01960. WITNESSETH: WHEREAS, Tech Data desires to purchase certain Products from XEROX IMAGING from time to time; and WHEREAS, XEROX IMAGING desires to sell certain Products to Tech Data in accordance with the terms and conditions set forth in this Agreement; and WHEREAS, XEROX IMAGING desires to appoint Tech Data as its non-exclusive distributor to market Products within the territory defined below; NOW, THEREFORE, in consideration of the mutual premises herein contained and other good and valuable consideration, Tech Data and XEROX IMAGING hereby agree as follows: ARTICLE I. TERM OF AGREEMENT ---------------------------- 1.1 TERM OF AGREEMENT. During the term of this Agreement, XEROX IMAGING will provide to Tech Data the Products set forth in Purchase Orders (as defined herein) in accordance with the terms and conditions set forth in this Agreement. The term of this Agreement shall commence on the Effective Date and, unless terminated by either party as set forth in this Agreement, shall remain in full force and effect for a term of one (1) year, and may be renewed for successive one (1) year terms upon written confirmation of both parties. 1.2 DEFINITIONS. The following definitions shall apply to this Agreement. (a) "Applicable Specification" shall mean the functional performance, operational and compatibility characteristics of a Product agreed upon in writing by the parties or, in the absence of an agreement, as described in applicable Documentation. (b) "Documentation" shall mean user manuals, training materials, product descriptions and specifications, technical manuals, license agreements, supporting materials and other printed information relating to the Products, whether distributed in print, electronic, or video format, in effect as of the date of the applicable Purchase Order and incorporated therein by reference. (c) "Products" shall mean, individually or collectively the sealed software packages comprised of the computer programs encoded on software diskettes in form generally released by XEROX IMAGING, listed in and more fully described in Exhibit A attached and other computers or materials that may be developed and/or licensed and sold by XEROX IMAGING for use in connection with computer programs. TECH DATA: PKC XEROX IMAGING: WSC ----- ----- (d) "Update" shall mean revised versions of the Product which include any alterations, changes, enhancements, error corrections, modifications or other revisions to the Product which alter or improve the Products or revisions thereof, provided that the term "Update" shall be deemed to include only new version of the Products which are marketed with a change to the number or letter to the right of the decimal in the version number (for example Version 2.1, 2.2A or 2.25) (e) "New Release" shall mean Products marketed with a change to the number or letter to the left of the decimal in the version number (for example 3.0 or 4.0) or Products which have terms appended to their name such as "II" "Plus" or the like. (f) "Territory shall mean the United States of America and its territories and possessions, Canada and Latin America. (g) "Customers" of Tech Data shall include dealers, resellers, commercial customers, value added resellers and other similar customers, but shall not include End Users unless specifically set forth. (h) "End Users" shall mean final retail purchasers or licensees who have acquired Products for their own use and not for resale, remarketing or redistribution, unless specifically set forth in a separate agreement. (i) "Services" means any warranty, maintenance, advertising, marketing or technical support and any other services performed or to be performed by XEROX IMAGING. 1.3 LICENSE. XEROX IMAGING hereby grants to Tech Data and Tech Data accepts a non-exclusive right and license to distribute XEROX IMAGING software products and third party software products licensed to XEROX IMAGING for re-distribution within the territory as herein defined, together with any Updates and enhancements thereto (collectively referred to as "Software"). This license includes the right to (i) order, use, posses and distribute quantities of Software, (ii) grant a sublicense to resellers to license Software directly to End Users; and (iii) sublicense Software to resellers solely for the resellers use on a demonstration unit. XEROX IMAGING reserves the right to appoint other authorized distributors and grant other licenses. Tech Data will use its best efforts to promote sales of the Products. ARTICLE II. PURCHASE ORDERS --------------------------- 2.1 PRODUCT AVAILABILITY. From time to time or at Tech Data's request, XEROX IMAGING shall inform Tech Data of Products available from XEROX IMAGING including, but not limited to, replacement Products, New Releases, enhancements or versions of existing Products. XEROX IMAGING shall notify Tech Data at least thirty (30) days prior to the date any new Product is to be introduced and shall make such Product available to Tech Data for distribution no later than the date it is first introduced in the market place. If for any reason XEROX IMAGING Imagining's production is not on schedule, XEROX IMAGING agrees to allocate Product to Tech Data's orders based upon a percentage equal to the same percentage as XEROX IMAGING Imagining's like customers purchasing like volume of same Products. 2.2 PURCHASE ORDERS. Tech Data may purchase and XEROX IMAGING shall sell to Tech Data as follows: TECH DATA: PKC XEROX IMAGING: WSC ----- ----- (a) Purchase Orders for Product shall be placed by Tech Data either in writing, by fax or electronically transferred or if placed orally, shall be confirmed in writing within ten (10) business days. (b) Each Purchase Order may include other terms and conditions which are consistent with the terms and conditions of this Agreement or which are necessary to place a Purchase Order, such as billing and shipping information, required delivery dates, delivery locations, and the purchase price or charges for Products, including any discounts or adjustments for special marketing programs. (c) A Purchase Order shall be deemed accepted by XEROX IMAGING unless XEROX IMAGING notifies Tech Data in writing within five (5) business days after receiving the Purchase Order that XEROX IMAGING does not accept the Purchase Order. (d) XEROX IMAGING shall accept Purchase Orders on C.O.D. basis from Tech Data for additional Products which Tech Data is contractually obligated to furnish to its customers and does not have in its inventory upon the termination of this Agreement; provided Tech Data notifies XEROX IMAGING of any and all such transactions in writing within sixty (60) days of the termination date. (e) This agreement shall not obligate Tech Data to purchase any Products or services except as specifically set forth in a written Purchase Order. 2.3 PURCHASE ORDER ALTERATIONS OR CANCELLATIONS. Prior to shipment of Products, XEROX IMAGING shall accept an alteration or cancellation of a Purchase Order in order to: (i) change a location for delivery, (ii) modify the quantity or type of Products to be delivered or (iii) correct typographical or clerical errors. 2.4 EVALUATION OR DEMONSTRATION PURCHASE ORDERS. Tech Data may issue Purchase Orders in order to evaluate a reasonable quantity of Products or for use as demonstration Products at no charge. After evaluation or when such Products are no longer needed for demonstration, Tech Data shall have the option to purchase the Products or to return such Products to XEROX IMAGING at Tech Data's expense. ARTICLE ILL. DELIVERY AND ------------------------- ACCEPTANCE OF PRODUCTS ---------------------- 3.1 SUBSIDIARIES. XEROX IMAGING understands and acknowledges that Tech Data may obtain Products in accordance with this Agreement for the benefit of subsidiaries of Tech Data. Subsidiaries of Tech Data shall be entitled to obtain Products directly from XEROX IMAGING pursuant to this Agreement. 3.2 ACCEPTANCE OF PRODUCTS. Tech Data shall, after a reasonable time to inspect each shipment, accept each Product on the date (the "Acceptance Date") when such Products and all necessary documentation are delivered to Tech Data in accordance with the Purchase Order and the Product specifications. Any Products not ordered or not otherwise in accordance with the Purchase Order, such as mis-shipments or overshipments will be returned to XEROX IMAGING at XEROX IMAGING Imagining's expense (including without limitation costs of shipment or storage) and shall promptly refund to Tech Data all monies paid in respect to such Products. Tech Data shall not be required to accept partial shipment unless Tech Data agrees prior to shipment. TECH DATA: PKC XEROX IMAGING: WSC ----- ----- Tech Data shall have the ability to return for credit products which have boxes that are or become damaged, unless such damage was caused by Tech Data or for which Tech Data can be reimbursed by their insurance carrier. An offsetting Purchase Order will be placed for all bad box returns. In addition, XEROX IMAGING will supply to Tech Data, at no charge, any and all missing material(s). 3.3 DEFECTIVE PRODUCTS. In the event any Products are received in a defective condition or not in accordance with XEROX IMAGING Imagining's applicable Specifications or the Documentation relating to such Products, Tech Data may return the Products for full credit. Products shall be deemed defective if the Product, or any portion of the Product, fails to operate properly on initial "burn in", boot, or use as applicable. Tech Data shall have the right to return any such Products that are returned to Tech Data from its customers or End Users within sixty (60) days of the Products' initial delivery date to the End User. 3.4 TRANSPORTATION OF PRODUCTS. FOB Destination. XEROX IMAGING shall deliver the Products to Tech Data at the location shown and on the delivery date set forth in the applicable Purchase Order or as otherwise agreed upon by the parties. Charges for transportation of the Products shall be paid by Tech Data . XEROX IMAGING shall use only those common carriers preapproved by Tech Data or listed in Tech Data's published routing instructions, unless prior written approval of Tech Data is received. Title to Products remains with XEROX IMAGING at all times. All risk of loss or damage to the Products shall be borne by XEROX IMAGING until delivery of such Products to the Tech Data warehouse or the location specified in the appropriate Purchase Order. XEROX IMAGING shall bear all costs of shipping and risk of loss of in-warranty Products to XEROX IMAGING's location and back to Tech Data or Tech Data's customer. 3.5 RESALE OF PRODUCTS BY TECH DATA. During the term of this Agreement, Tech Data may market, promote, distribute and resell Products to customers of Tech Data, either directly or through its subsidiaries, in accordance with the following terms and conditions: (a) XEROX IMAGING shall extend to Tech Data and each customer of Tech Data the same warranties and indemnifications, with respect to Products purchased and resold hereunder as XEROX IMAGING extends to its End User customers. The term of warranties and indemnities extended by XEROX IMAGING to an End User shall commence upon delivery of the Product to the End User. (b) XEROX IMAGING shall make available at no charge to Tech Data and the customers of Tech Data all technical and sales training, technical support, marketing support, advertising material and other services related to the Products that are currently offered or that may be offered by XEROX IMAGING. XEROX IMAGING also agrees to provide Tech Data a telephone support representative at no charge during Tech Data's normal business hours. (c) Tech Data is hereby authorized to use trademarks and trade names of XEROX IMAGING and third parties used in connection with the Products, advertising, promoting or distributing the Products. Tech Data recognizes XEROX IMAGING or other third parties may have rights or ownership of certain trademarks, trade names and patents associated with the Products. Tech Data will act consistently with such rights, and Tech Data shall comply with any reasonable, written guidelines when provided by XEROX IMAGING or third parties relating to such trademark or trade name usage. Tech Data TECH DATA: PKC XEROX IMAGING: WSC ----- ----- will notify XEROX IMAGING of any infringement of which Tech Data has actual knowledge. Tech Data shall discontinue use of XEROX IMAGING Imagines' trademarks or trade names upon termination of this agreement, except as may be needed to sell or liquidate any final inventories of Product. (d) Tech Data is free to determine its own resales prices for the Products. Although Vendor may publish suggested list prices, these are suggestions only and Tech Data shall be free to determine the actual resale prices at which Products will be distributed to its resellers. No employee or representative of XEROX IMAGING or anyone else associated or affiliated with XEROX IMAGING has any authority to dictate to Tech Data what its resale prices for Products must be or to inhibit in any way Tech Data's pricing discretion with respect to such Products. (e) XEROX IMAGING shall clearly mark each unit package with the serial number, product description and machine readable bar code (employing UPC or ABCD industry standard bar code). Failure to do so shall result in Tech Data **** percent (****%) from invoice to offset the resultant administrative costs to Tech Data. 3.6 INVENTORY ADIUSTMENT. Open ended inventory adjustment will be accepted during the initial six (6) months of the Agreement. After the initial six (6) month period XEROX IMAGING agrees to accept, on a monthly basis, a shipment of Product in sealed cartons returned by Tech Data and to credit Tech Data's account in the amount of the net price paid by Tech Data therefore (the "Return Credit"), provided that Tech Data places an offsetting Purchase Order. In addition, Tech Data shall have the right to return for full credit, without limitation as to the dollar amount, all Products that become obsolete, that XEROX IMAGING discontinues or are removed from XEROX IMAGING Imagining's current price list or are upgraded; provided Tech Data returns such Products within sixty (60) days after Tech Data receives written notice that such Products are obsolete, discontinued or are removed from XEROX IMAGING Imagining's price list. 3.7 TIME OF PERFORMANCE. Time is hereby expressly made of the essence with respect to each and every term and provision of this agreement. ARTICLE IV. WARRANTIES. ----------------------- INDEMNITIES AND LIABILITIES --------------------------- 4.1 Warranty. XEROX IMAGING hereby represents and warrants that it has not entered into any agreements or commitments which are inconsistent with or in conflict with the rights granted to Tech Data herein; the Products shall be free and clear of all liens and encumbrances; Tech Data and its customers and End Users shall be entitled to use the Products without disturbance; XEROX IMAGING warrants that all Software media shall be free from defects in material and workmanship for a period of ninety (90) days from the date of first use or installation by an End-User. XEROX IMAGING sole obligation to the END-User shall be to replace any Software media that proves defective during the warranty period. If such Product is returned directly to Tech Data by a Customer or End-User, Tech Data may then return it to XEROX IMAGING for credit (the actual price paid, minus any price protection adjustments). XEROX IMAGING shall supply Tech Data, at no additional charge, all services, parts or replacement Products necessary for XEROX IMAGING to comply with its Product warranties. XEROX IMAGING agrees that Tech Data shall be entitled to pass through to customers of Tech Data and End Users of the Products all warranties granted by XEROX IMAGING. XEROX IMAGING *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. TECH DATA: PKC XEROX IMAGING: WSC ----- ----- represents that the Product warranties shall also include those set forth in literature, applicable specifications, documentation, advertising and printed material distributed by XEROX IMAGING. XEROX IMAGING shall indemnify and hold Tech Data, its subsidiaries, customers and their respective successors, officers, directors, employees and agents harmless from and against all third party actions, claims, losses, damages, liabilities, awards, costs and expenses (including a reasonable attorney's fee) resulting from or arising out of any breach or claimed breach of the foregoing warranties. The express warranties set forth above specifically exclude and do not apply to defects caused: (i) through no fault of XEROX IMAGING during shipment from Tech Data to Customer; (ii) by the use or operation of the Software in an application or environment other than that intended or recommended by XEROX IMAGING, (iii) by modifications or alterations made to the Software by Distributor or any third party. EXCEPT AS EXPRESSLY SET FORTH ABOVE, XEROX IMAGING MAKES NO OTHER WARRANTIES TO DISTRIBUTOR AND DISCLAIMS ALL WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE. 4.2 PROPRIETARY RIGHTS INDEMNIFICATION. XEROX IMAGING hereby represents and warrants that XEROX IMAGING has all right, title, ownership interest and/or marketing rights necessary to provide the Products to Tech Data, and Products and their sale and use hereunder do not infringe upon any copyright, patent, trade secret or other proprietary or intellectual property right of any third party, and that there are no suits or proceeding, pending or threatened alleging any such infringement. XEROX IMAGING shall indemnify and hold Tech Data, Tech Data's related and/or subsidiary companies, Tech Data's customers and their respective successors, officers, directors, employees and agents harmless from and against any and all actions, claims, losses, damages, liabilities, awards, costs and expenses, including but not limited to XEROX IMAGING Imagining's manufacture, sale, offering for sale, distribution, promotion or advertising of the Products supplied under this Agreement (including attorney's fees) which they or any of them incur or become obligated to pay resulting from or arising out of any breach or claimed breach of the foregoing warranty, or by reason of any acts that may be committed suffered or permitted by XEROX IMAGING. XEROX IMAGING shall defend and settle, at its expense, all suits or proceedings arising therefrom. Tech Data shall inform XEROX IMAGING of any such suit or proceeding against Tech Data and shall have the right to participate in the defense of any such suit or proceeding at Tech Data's expense and through counsel of Tech Data's choosing. In the event an injunction is sought or obtained against the use of a Product , XEROX IMAGING shall within ninety (90) days of receipt of notice, at its option and expense, either (i) procure for Tech Data, its customers and Product End Users the right to continue to use the infringing Product as set forth in this Agreement, or (ii) replace, to the extent Products are available, or modify the infringing Product to make its use non-infringing while being capable of performing the same function without degradation of performance. XEROX IMAGING shall have no liability under this Section for any infringement based on the use of any equipment or software with any other equipment or software reasonably intended to be used with the Product, if the equipment or software is used in a manner for which it was not designed, or if the equipment or software is used in an infringing process. XEROX IMAGING Imagines obligations hereunder shall survive termination of this Agreement. 4.3 CROSS INDEMNIFICATION. In the event any act or omission of either party or its employees, servants, agents or representatives causes or results in (i) loss, damage to or destruction of property of the other party or third parties, and/or (ii) death or injury to persons including, but not limited to, employees or invitees of either party, then such party shall indemnify, defend and hold TECH DATA: PKC XEROX IMAGING: WSC ----- ----- the other party harmless from and against any and all claims, actions, damages, demands, liabilities, costs and expenses, including reasonable attorneys' fees and expenses, resulting therefrom. The indemnifying party shall pay or reimburse the other party promptly for all such loss, damage, destruction, death or injury. 4.4 INSURANCE. (a) The parties shall be responsible for providing Workman's Compensation insurance in the statutory amounts required by the applicable state laws. (b) Without in any way limiting XEROX IMAGING Imagining's indemnification obligation as set forth in this Agreement, XEROX IMAGING shall maintain Commercial General Liability and/or Comprehensive General Liability Insurance in such amounts as is reasonably satisfactory to Tech Data. Either policy form should contain the following coverage's: Personal and Advertising Injury, Broad Form Property Damage, Products and Completed Operations, Contractual Liability, employees as Insured and Fire Legal Liability. (c) XEROX IMAGING will provide evidence of the existence of insurance coverage's referred to in this Section by certificates of insurance which should also provide for at least thirty (30) days notice of cancellation, non-renewal or material change of coverage to Tech Data. 4.5 LIMITATION OF LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER PURSUANT TO THIS AGREEMENT FOR AMOUNTS REPRESENTING LOSS OF PROFITS, LOSS OF BUSINESS OR INDIRECT, CONSEQUENTIAL, OR PUNITIVE DAMAGES OF THE OTHER PARTY. 4.6 UNAUTHORIZED REPRESENTATIONS. Tech Data shall have no authority to alter or extend any of the warranties of XEROX IMAGING expressly contained or referred to in this Agreement without prior approval of XEROX IMAGING. 4.7 XEROX IMAGING agrees to provide Tech Data, upon signing this Agreement and at any time thereafter that XEROX IMAGING modifies or adds products distributed by Tech Data, with the Export Control Classification Number (ECCN) for each of XEROX IMAGING Imagining's Products, and information as to whether or not any of such Products are classified under the U.S. Munitions List. 4.8 DISCLAIMER OF WARRANTIES. XEROX IMAGING has made expressed warranties in this Agreement and in documentation, promotional and advertising materials. EXCEPT AS SET FORTH HEREIN OR THEREIN, XEROX IMAGING DISCLAIMS ALL WARRANTIES WITH REGARD TO THE PRODUCTS. ARTICLE V. PAYMENT TO XEROX IMAGING ----------------------------------- 5.1 CHARGES. PRICES AND FEES FOR PRODUCTS. Charges, prices, quantities and discounts, if any, for Products shall be determined as set forth in Exhibit A, or as otherwise agreed upon by the parties, and may be confirmed at the time or order. In no event shall charges exceed XEROX IMAGING Imagining's then current established Charges. XEROX IMAGING shall have the right to increase prices from time to time, upon written notice to Tech Data not less than sixty (60) days prior to the effective date of such increase. All orders placed prior to the effective date of the increase, for shipment within sixty (60) days after the effective date, shall be at the old price. Tech Data shall not be bound by any of XEROX IMAGING Imagining's suggested prices. TECH DATA: PKC XEROX IMAGING: WSC ----- ----- 5.2 MOST FAVORED PRICING AND TERMS. XEROX IMAGING represents that the prices charged and the terms offered to Tech Data are and will be at least as low as those charged or offered by XEROX IMAGING to any of its other like distributors. If XEROX IMAGING offers price discounts, promotional discounts or other special prices to its other like distributors, Tech Data shall also be entitled to participate and receive notice of the same no later than other like distributors. 5.3 PAYMENT. Except as otherwise set forth herein, any undisputed sum due to XEROX IMAGING pursuant to this Agreement shall be payable as follows: ****% prepay, ****%-**** (****) days after the invoice receipt. XEROX IMAGING shall invoice Tech Data no earlier than the applicable shipping date for the Products covered by such invoice. The due date for payment shall be extended during any time the parties have a bona tide dispute concerning such payment. Notwithstanding anything herein to the contrary, for the initial order only, payment terms shall be net 90 days and Tech Data may return any of the initial order for credit. 5.4 TAXES. Tech Data shall be responsible for franchise taxes, sales or use taxes or shall provide XEROX IMAGING with an appropriate exemption certificate. XEROX IMAGING shall be responsible for all other taxes, assessments, permits and fees, however designated which are levied upon this Agreement or the Products, except for taxes based upon Tech Data's income. No taxes of any type shall be added to invoices without the prior written approval of Tech Data. 5.5 PRICE PROTECTION. XEROX IMAGING shall grant to Tech Data a retroactive price credit for the full amount of any XEROX IMAGING price decrease on all Products on order, in transit and in its inventory on the effective date of such price decrease. Tech Data shall, within thirty (30) days after receiving written notice of the effective date of the price decrease, provide a list of all Products for which it claims a credit. XEROX IMAGING shall have the right to a reasonable audit at XEROX IMAGING Imagining's expense. All orders scheduled for shipment or in transit to Tech Data at the time of notice of the price decrease shall be adjusted to the decreased price. 5.6 INVOICES. A "correct" invoice shall contain (i) XEROX IMAGING Imagining's name and invoice date, (ii) the Purchase Order or other authorizing document, (iii) separate descriptions, unit prices and quantities of the Products actually delivered, (iv) credits (if applicable), (v) shipping charges (vi) name (where applicable), title, phone number and complete mailing address of responsible official to whom payment is to be sent, and (vii) other substantiating documentation or information as may reasonably be required by Tech Data from time to time 5.7 ADVERTISING CREDIT. XEROX IMAGING shall offer a **** percent (****%) co-op program and advertising credits and other promotional programs or incentives to Tech Data as it offers its other distributors or customers. Tech Data shall have the right at Tech Data's option, to participate in such programs. XEROX IMAGING shall attach a copy of its co-op program hereto. Tech Data shall provide XEROX IMAGING invoices for the costs actually incurred by Tech Data for advertising and other activities. Invoices provided hereunder shall be paid by XEROX IMAGING within thirty (30) days after receipt or, at Tech Data's option, Tech Data may deduct such amounts from any amounts due XEROX IMAGING hereunder. 5.8 VENDOR REPORTS. XEROX IMAGING shall, if requested, render monthly reports to Tech Data setting forth the separate Products, dollars invoiced for each Product, and total dollars invoiced to Tech Data for the month, and such other information as Tech Data may reasonably request. S.9 TECH DATA REPORTS. Tech Data shall, if requested, render monthly sales out reports on diskette, in ASCII Comma Delimited Format. Information provided will include: month and year sales activity occurred, internal product number (assigned by Tech Data), written description, country, *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. TECH DATA: PKC XEROX IMAGING: WSC ----- ----- State and zip code of resellers location, unit cost (distributors cost at quantity 1), quantity and extended cost (cost times quantity). A monthly inventory report, will be provided on a paper format once a month. The reports will be delivered to the XEROX IMAGING at different times in the month. 5.10 XEROX IMAGING agrees that for the term of this Agreement, XEROX IMAGING shall provide upon Tech Data's request an annual report ARTICLE VI. TERMINATION ----------------------- 6.1 TERMINATION. Either party may terminate this agreement, with or without cause, upon giving the other party sixty (60) days prior written notice. In the event that either party materially or repeatedly defaults in the performance of any of its duties or obligations set forth in this Agreement, and such default is not substantially cured within thirty (30) days after written notice is given to the defaulting party specifying the default, then the party not in default may, by giving written notice thereof to the defaulting party, terminate this Agreement or the applicable Purchase Order relating to such default as of the date specified in such notice of termination. 6.2 TERMINATION FOR INSOLVENCY OR BANKRUPTCY. Either party may immediately terminate this Agreement and any Purchase Order by giving written notice to the other party in the event of (i) the liquidation or insolvency of the other party, (ii) the appointment of a receiver or similar officer for the other party, (iii) an assignment by the other party for the benefit of all or substantially all of its creditors, (iv) entry by the other party into an agreement for the composition, extension, or readjustment of all or substantially all of its obligations, or (v) the filing of a meritorious petition in bankruptcy by or against the other party under any bankruptcy or debtors' law for its relief or reorganization 6.3 RIGHTS UPON TERMINATION. Termination of any Purchase Order or this Agreement shall not affect XEROX IMAGING Imagining's right to be paid for undisputed invoices for Products already shipped. The termination of this Agreement shall not affect any of XEROX IMAGING Imagining's warranties, indemnifications or obligations relating to returns, credits or any other matters set forth in this agreement that are to survive termination in order to carry out their intended purpose, all of which shall survive this Agreement. Upon termination of this Agreement, Tech Data shall discontinue holding itself out as a distributor of XEROX IMAGING Imagining's Products. The expiration of the term of this Agreement shall not affect the obligations of either party to the other party pursuant to any Purchase Order previously forwarded to XEROX IMAGING. 6.4 REPURCHASE OF PRODUCTS UPON TERMINATION. Upon the effective date of termination of this Agreement for any reason, XEROX IMAGING agrees to repurchase the Products in Tech Data's inventory which have been purchased within the previous 150 days. XEROX IMAGING will repurchase the Products at the original net purchase price; provided that the Products have been unopened and are in their original factory sealed packages. Tech Data shall submit to XEROX IMAGING, within sixty (60) days after termination, the quantity of Product that Tech Data wishes XEROX IMAGING to repurchase. In such event XEROX IMAGING shall issue a Return Material Authorization to Tech Data for all such Products; provided, however, that XEROX IMAGING shall accept returned Products in accordance with this Section absent a Return Material Authorization if XEROX IMAGING fails to issue said Return Material Authorization within two (2) business days of Tech Data's request. XEROX IMAGING shall credit any outstanding balances owed to Tech Data and remit in the form of a check to Tech Data the remaining dollar amount of the Product returned within thirty (30) days of receipt of the Product. TECH DATA: PKC XEROX IMAGING: WSC ----- ----- ARTICLE VII. MISCELLANEOUS -------------------------- 7.1 BINDING NATURE, ASSIGNMENT, AND SUBCONTRACTING. This Agreement shall be binding on the parties and their respective successors and assigns, but neither party shall have the power to assign this Agreement without the prior written consent of the other party. 7.2 COUNTERPARTS. This Agreement may be executed in several counterparts, all of which taken together shall constitute one single agreement between the parties. 7.3 HEADINGS. The Article and Section headings used in this Agreement are for reference and convenience only and shall not enter into the interpretation hereof. 7.4 RELATIONSHIP OF PARTIES. Tech Data is performing pursuant to this Agreement only as an independent contractor. Nothing set forth in this Agreement shall be construed to create the relationship of principal and agent between Tech Data and XEROX IMAGING. Neither party shall act or represent itself, directly or by implication, as an agent of the other party. 7.5 CONFIDENTIALITY. Each party acknowledges that in the course of performance of its obligations pursuant to this Agreement, it may obtain certain confidential and/or proprietary information. Each party hereby agrees that all such information communicated to it by the other party, and identified as confidential, whether before or after the effective date, shall be and was received in strict confidence, shall be used only for purposes of this Agreement, and shall not be disclosed without the prior written consent of the other party, except as may be necessary by reason of legal, accounting or regulatory requirements beyond either party's reasonable control. The provisions of this Section shall survive the term or termination of this Agreement for any reason. 7.6 ARBITRATION. Any disputes arising under this Agreement shall be submitted to arbitration in accordance with such rules as the parties jointly agree. If the parties are unable to agree on arbitration procedures, arbitration shall be conducted where the respondent party is headquartered, in accordance with the rules of the American Arbitration Association. Any such award shall be final and binding upon both parties. 7.7 NOTICES. Wherever one party is required or permitted to give notice to the other pursuant to this Agreement, such notice shall be deemed given when delivered in hand, by telex or cable, or when mailed by registered or certified mail, return receipt requested, postage prepaid, and addressed as follows: IN THE CASE OF XEROX IMAGING: IN THE CASE OF TECH DATA: ---------------------------- ------------------------ Xerox Corporation Tech Data Corporation 9 Centennial Drive 5350 Tech Data Drive Peabody, MA 01960 Clearwater, FL 34620 Attn: Tom D'Errico Attn: Tamra Muir Contracts Administrator Director of Operations cc: Debi A. Schwatka Lead Contracts Administrator Either party may from time to time change its address for notification purposes by giving the other party written notice of the new address and the date upon which it will become effective. 7.8 FORCE MAJEURE. The term "Force Majeure" shall be defined to include fires or other casualties or accidents, acts of God, severe weather conditions, strikes or labor disputes, war or other violence, or any law, order, proclamation, regulation, ordinance, demand or requirement of any governmental agency. TECH DATA: PKC XEROX IMAGING: WSC ----- ----- (a) A party whose performance is prevented, restricted or interfered with by reason of a Force Majeure condition shall be excused from such performance to the extent of such Force Majeure condition so long as such party provides the other party with prompt written notice describing the Force Majeure condition and takes causes of nonperformance and immediately continues performance whenever and to the extent such causes are removed. (b) If, due to a Force Majeure condition, the scheduled time of delivery or performance is or will be delayed for more than thirty (30) days after the scheduled date, the party not relying upon the Force Majeure condition may terminate, without liability to the other party, any Purchase Order or portion thereof covering the delayed Products. 7.9 RETURN MATERIAL AUTHORIZATION NUMBERS. XEROX IMAGING is required to issue a Return Material Authorization Number (RMA) to Tech Data within forty-eight (48) hours of Tech Data's request; however, if the Return Material Authorization is not received within two (2) business days, XEROX IMAGING shall accept retumed Products absent a Return Material Authorization Number. The net purchase price, minus any adjustments of such Products returned to XEROX IMAGING shall be credited to Tech Data's account. 7.10 CREDITS TO TECH DATA. In the event any provisions of this Agreement or any other agreement between Tech Data and XEROX IMAGING require that XEROX IMAGING grant credits to Tech Data's account, and such credits are not received within thirty (30) days then, all such credits shall become effective immediately upon notice to XEROX IMAGING. In such event, Tech Data shall be entitled to deduct any such credits from the next monies owed to XEROX IMAGING. In the event credits exceed any balances owed by Tech Data to XEROX IMAGING, then, upon Tech Data's request, XEROX IMAGING shall issue a check payable to Tech Data within thirty (30) days of such notice. 7.11 SEVERABILITY. If, but only to the extent that, any provision of this Agreement is declared or found to be illegal, unenforceable or void, then both parties shall be relieved of all obligations arising under such provision, it being the intent and agreement of the parties that this Agreement shall be deemed amended by modifying such provision, to the extent necessary to make it legal and enforceable while preserving its intent. 7.12 WAIVER. A waiver by either of the parties of any covenants, conditions or agreements to be performed by the other or any breach thereof shall not be construed to be a waiver of any succeeding breach thereof or of any other covenant, condition or agreement herein contained. 7.13 REMEDIES. All remedies set forth in this Agreement shall be cumulative and in addition to and not in lieu of any other remedies available to either party at law, in equity or otherwise, and may be enforced concurrently or from time to time. 7.14 SURVIVAL OF TERMS. Termination or expiration of this Agreement for any reason shall not release either party from any liabilities or obligations set forth in this Agreement which (i) the parties have expressly agreed shall survive any such termination or expiration, or (ii) remain to be performed or by their nature would be intended to be applicable following any such termination or expiration. 7.15 NONEXCLUSIVE MARKET AND PURCHASE RIGHTS. It is expressly understood and agreed that this Agreement does not grant to XEROX IMAGING or Tech Data an exclusive right to purchase or sell Products and shall not prevent either party from developing or acquiring other vendors or customers or competing Products. TECH DATA: PKC XEROX IMAGING: WSC ----- ----- 7.16 SPECIFICATIONS AND DRAWING. XEROX IMAGING agrees to provide upon Tech Data's request, at no charge to Tech Data, reasonable quantities as requested by Tech Data of the following: (1) the specifications, (2) published user instructions, manuals and other training materials, and (3) current manuals covering installation, operation and complete maintenance of the Products. Tech Data shall have the right to copy or reproduce the foregoing materials for use in connection with Tech Data's use or sale of the Products. 7.17 ENTIRE AGREEMENT. This Agreement, including any Exhibits and documents referred to in this Agreement or attached hereto, constitutes the entire and exclusive statement of Agreement between the parties with respect to its subject matter and there are no oral or written representations, understandings or agreements relating to this Agreement which are not fully expressed herein. 7.18 GOVERNING LAW. This Agreement shall have Florida as its situs and shall be governed by and construed in accordance with the laws of the State of Florida. 7.19 INTERNATIONAL BUSINESS. XEROX IMAGING acknowledges that Tech Data may desire to obtain Products or Systems for use in countries outside the United States and its territories. The parties acknowledge that in such case it may be necessary to enter into additional agreements between XEROX IMAGING and Tech Data and/or the respective subsidiaries, agents, distributors or subsidiaries authorized to conduct business in such countries or to negotiate further terms and conditions to provide for such right. The parties intend that any further agreements or terms and conditions will be consistent with and based upon the applicable terms and conditions of this Agreement, subject, however, to requirements of local law and local business practice. All Products obtained pursuant to this Section shall be deemed for purposes of calculating accumulated purchases and any discounts set forth in this Agreement, to have been obtained pursuant to this Agreement. IN WITNESS WHEREOF, the parties have each caused this Agreement to be signed and delivered by its duly authorized officer or representative as of the Effective Date. XEROX IMAGING SYSTEMS, INC. TECH DATA CORPORATION By: /S/ WAYNE CRANDALL By: /S/ PEGGY K. CALDWELL ------------------------------- -------------------------------- Printed Name: Wayne Crandall Printed Name: Peggy K. Caldwell Title: Vice President, Sales Title: Senior Vice President Product Marketing Date: April 26, 1995 Date: May 11, 1995 TECH DATA: PKC XEROX IMAGING: WSC ----- ----- CO-OP GUIDELINES XEROX IMAGING SOFTWARE, INC. To increase the effectiveness of advertising and sales promotions Tech Data has developed the following advertising requirements: HOW CO-OP IS EARNED: - - Co-op dollars will be at least ****% of the purchases made by Tech Data, net of returns. - - Co-op dollars will be accrued on a monthly basis. HOW CO-OP IS SPENT: - - Tech Data will be reimbursed for 100% of the cost for ads or promotions that feature vendor products. - - Co-op dollars will be used within the 12 months immediately following the month in which they are earned. HOW CO-OP IS CLAIMED: - - Claims for co-op will be submitted to vendor within 60 days of the event date. - - Claims for co-op will be submitted with a copy of vendor prior approval and proof of performance. - Payment must be remitted within 30 days of the claim date, or Tech Data reserves the right to deduct from the next invoice. CO-OP REPORTING: - - Vendor will submit a monthly co-op statement outlining (i) co-op earned, (ii) co-op used and (iii) co-op claims paid. Accepted: /S/ WAYNE CRANDALL ------------------------- Name: Wayne Crandall Title: Vice President, Sales Date: April 26, 1995 *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT A PRODUCT PRICE LIST ------------------ UNITED STATES AND CANADA ONLY - ENGLISH
- ----------------------------------------------------------------------------------------------------------------- Product Part Number List **** Order Price **** from Net price **** payment - ----------------------------------------------------------------------------------------------------------------- TextBridge for Windows 31-08205-00 $**** ****% $**** ****% $**** TextBridge for Mac and PowerMac 31-08094-00 $**** ****% $**** ****% $**** TextBridge Professional Edition 31-08135-00 $**** ****% $**** ****% $**** for Windows TextBridge Professional Ed. 31-08204-00 $**** ****% $**** ****% $**** Competitive Upgrade
CANADA - FRENCH SOFTWARE AND DOCUMENTATION ARE LOCALISED
- ----------------------------------------------------------------------------------------------------------------- Product Part Number List **** Order Price **** from Net price **** payment - ----------------------------------------------------------------------------------------------------------------- TextBridge for Windows* 31-08205-01 $**** ****% $**** ****% $**** TextBridge for Mac and 31-08094-01 $**** ****% $**** ****% $**** PowerMac * TextBridge Professional 31-08135-01 $**** ****% $**** ****% $**** Edition for Windows* TextBridge Professional Ed. 31-08204-01 $**** ****% $**** ****% $**** Competitive Upgrade
lATIN AMERICA - ENGLISH
- ----------------------------------------------------------------------------------------------------------------- Product Part Number List **** Order Price **** from Net price **** payment - ----------------------------------------------------------------------------------------------------------------- TextBridge for Windows* 31-08205-05 $**** ****% $**** ****% $**** TextBridge for Mac and 31-08094-05 $**** ****% $**** ****% $**** PowerMac* TextBridge Professional 31-08135-05 $**** ****% $**** ****% $**** Edition for Windows* TextBridge Professional Ed. 31-08204-05 $**** ****% $**** ****% $**** Competitive Upgrade
LATIN AMERICA - SPANISH SOFTWARE AND DOCUMENTATION ARE LOCALISED
- ----------------------------------------------------------------------------------------------------------------- Product Part Number List **** Order Price **** from Net price **** payment - ----------------------------------------------------------------------------------------------------------------- TextBridge for Windows* 31-08205-04 $**** ****% $**** ****% $**** TextBridge for Mac and 31-08094-04 $**** ****% $**** ****% $**** PowerMac * TextBridge Professional 31-08135-04 $**** ****% $**** ****% $**** Edition for Windows* TextBridge Professional Ed. 31-08204-04 $**** ****% $**** ****% $**** Competitive Upgrade
NOTES: * These packages contain language packages for Spanish, Portuguese, French, German, Italian, Dutch, Danish, Swedish, Norwegian, and Finnish. *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-10.13 4 ASSIGNMENT ASSUMPTION ASSIGNMENT, ASSUMPTION, RENEWAL, AND MODIFICATION AGREEMENT BETWEEN XEROX IMAGING SYSTEMS, INC., SCANSOFT, INC., AND TECH DATA PRODUCT MANAGEMENT, INC. THIS ASSIGNMENT. ASSUMPTION, RENEWAL AND MODIFICATION AGREEMENT (hereinafter the "Assignment) by and between XEROX IMAGING SYSTEMS, INC., a Delaware corporation, (hereinafter the "Xerox") with its principal corporate address at 9 Centennial Drive, Peabody, Massachusetts 01960, SCANSOFT, INC., a DELAWARE corporation. (hereinafter the "ScanSoft") with its principal corporation, address at 9 Centennial Drive, Peabody, Massachusetts 01960 and TECH DATA PRODUCT MANAGEMENT, INC., a Florida corporation (hereinafter the Distributor) with its principal corporate address at 5350 Tech Data Drive, Clearwater, Florida 34620. RECITALS A. Xerox and Tech Data Corporation entered into a Software Distribution Agreement on August 26, 1995, a copy of which is attached as Exhibit A, which was assigned to Distributor an January 1, 1997 (the "Distribution Agreement"). B. ScanSoft is a wholly owned subsidiary of Xerox. C. Xerox desires to assign all of its rights, title, interest and obligations In the Distribution Agreement to ScanSoft and ScanSoft desires to assume all of the rights, title, interest and obligations from Xerox and to modify the Distribution Agreement at provided in this Assignment. D. As consideration for Distributor's agreeing to assign the Distribution Agreement. Distributor is requiring Xerox to guarantee the performance of ScanSoft under the Distribution Agreement, and Xerox has agreed to guarantee said performance. E. Distributor is willing to consent to the Assignment by Xerox and the assumption by ScanSoft and modify the Distribution Agreement pursuant to the terms this Assignment. AGREEMENT NOW, THEREFORE, in consideration of the Recitals, the mutual convenants contained herein and other good and valuable consideration, the parties agree as follows: 1. RECITALS: -------- The Recitals are true and correct and are hereby incorporated into this Assignment. 2. ASSIGNMENT: ---------- Xerox does hereby sell, assign, and transfer to ScanSoft all of Xerox's rights, title, interest and obligations In and to the Distribution Agreement and ScanSoft hereby assumes all of the rights, title, interest and obligations under the Distribution Agreement. 3. PAYABLE: ------- Xerox and ScanSoft hereby direct Distributor to make payment of all outstanding amounts due to ScanSoft, Inc., g Centennial Drive. Peabody. MA 01960 subject to any offsets, credits or other amounts due to Distributor from Xerox or ScanSoft. 4. RENEWAL: ------- This Assignment renews and brings current the Distribution Agreement dated August 26. 1995 which shall remain in full force and effect as amended and modified herein. 5. MODIFICATION: ------------ Pursuant to this Assignment, the Distribution Agreement is hereby amended and modified as follows: a. All references to Xerox Imaging Systems, Inc. ("XEROX IMAGING) in the Distribution Agreement shall be construed to be a reference to ScanSoft, Inc. ("ScanSoft"); b. Section 1.1 of the Distribution Agreement Is hereby revised in its entirety to read as follows: TERM OF THE AGREEMENT The term of this Agreement shall commence on August 26, 1995 and, unless terminated by either party as set forth in this Agreement, shall remain in full force and effect for a term of one (1) year from Effective Date, and will automatically renew for successive one (1) year terms unless prior written notification of termination Is delivered by one of the parties to the other in accordance with the notice provision of this Agreement. c. Section 1.4 Is hereby added to read as follows: 1.4 APPOINTMENT AS DISTRIBUTOR. ScanSoft hereby grants to Tech Data the non-exclusive right to distribute Products within the Territory during the term of this Agreement. This Agreement does not grant ScanSoft or Tech Data an exclusive right to purchase or sell Products and shall not prevent either party from developing or acquiring other vendors or customers or competing Products. Tech Data will use commercially reasonable efforts to promote sales of the Products. ScanSoft agrees that Tech Date may obtain Products in accordance with this Agreement for the benefit of its parent, affiliates and subsidiaries of Tech Data. Said parent, affiliates and subsidiaries of Tech Data shall be entitled to order Products directly from ScanSoft pursuant to this Agreement. d. The second paragraph of Section 3.8 of the Distribution Agreement is hereby revised in its entirety to read as follows: In addition. Tech Data shall have the right to return for Return Credit, without limitation as to the dollar amount, all Products that become obsolete or ScanSoft discontinues or are removed from ScanSoft's current price list; provided Tech Data returns such Products within sixty (60) days after Tech Data receives written notice from ScanSoft that such Products are obsolete, superseded by a newer version, discontinued or are removed from ScanSoft's price list. Tech Data shall also be entitled to return any such obsolete or discontinued Products to ScanSoft which are returned to Tech Data by its Customers within one-hundred-eighty (180) days of receipt of ScanSoft's written notice. e. Section 5.5 of the Distribution Agreement is hereby revised in its entirety to read as follows: PRICE DECREASES ScanSoft shell have the right to decrease prices from time to time, upon prior written notice to Tech Data. ScanSoft shall grant to Tech Data, its parent, affiliates and subsidiaries and Tech Data's Customers s price credit for the full amount of any ScanSoft price decrease on all Products on order. In transit and In their Inventory on the effective date of such price decrease. Tech Data shall, within sixty (60) days after receiving written notice of the effective date of the price decrease, provide a list of all Products for which they claim a credit, and within one-hundred-twenty (120) days, will provide a list of all Products which its Customer, claim price protection credits. ScanSoft shall have the right to a reasonable audit at ScanSoft's expense. f. Section 6.4 of the Distribution Agreement is hereby revised in its entirety to read as follows; REPURCHASE OF PRODUCTS UPON TERMINATION OR EXPIRATION. Upon the effective date of termination or expiration of this Agreement for any reason, ScanSoft agrees to repurchase all Products in Tech Data's inventory (the value of which may not exceed the dollar volume of purchases during the previous one-hundred-eighty (180) days) and Products which are returned to Tech Data by its Customers within one hundred eighty (180) days following the effective date of termination or expiration. ScanSoft will repurchase such Products at the original purchase price, less any deductions for price protection. The repurchase price shall not be reduced by any deductions or offsets for early pay or prepay discounts. Such returns shall not reduce or offset any co-op payments or obligations owed to Tech Data. Within sixty (60) days following the effective date of termination or expiration, Tech Data shall return to ScanSoft for repurchase all Product held in Tech Data's inventory as of the effective date of termination or expiration. Additional returns shall be sent at reasonable intervals thereafter, provided all returns of Product by Tech Data under this Section 7.3 shall be shipped within one hundred eighty five (185) days following the effective date of termination or expiration. ScanSoft will issue an RMA to Tech Data for all such Products; provided, however, that ScanSoft shall accept returned Products in accordance with this Section absent an RMA if ScanSoft fails to issue said RMA within five (5) business days of Tech Data's request. ScanSoft shall credit any outstanding balances owed to Tech Data. If such credit exceeds amounts due from Tech Data, ScanSoft shall remit in the form of a check to Tech Data the excess within ten (10) business days of receipt of the Product. Customized Products shall not be eligible for repurchase pursuant to this Section. g. Section 7.7 of the Distribution Agreement is hereby revised in its entirety to read as follows: 7.7 Notices. Wherever one party is required or permitted to give notice to the other pursuant to this Agreement, such notice shall be deemed given when actually delivered by hand, by telecopier, via overnight courier or when mailed by registered or certified mall, return receipt requested, postage prepaid. and addressed as follows: IN THE CASE OF SCANSOFT: IN THE CASE OF TECH DATA: --------------------------------------------------- ScanSoft, Inc. Tech Data Product Management, Inc. 9 Centennial Drive 5350 Tech Data Drive Peabody, MA 01960 Clearwater, FL 34620 Attn: Tom D'Errico Attn: Tamra Muir Contracts Manager Vice President of Marketing Operations cc: Contracts Administration Either party may from time to time change its address for notification purposes by giving the other party written notice of the new address and the date upon which it will become effective. 8. GUARANTEE. --------- Xerox hereby gives Distributor its continuing, absolute and unconditional guaranty of the payment In full when due, by acceleration or otherwise, of all of payment obligations under the Distribution Agreement, and the performance of any and all present or future obligations of ScanSoft to Distributor to the same extent as if Xerox were the principal obilgor of such obligations. Xerox agrees to so pay and perform in accordance with the terms of the Distribution Agreement without requiring Distributor to exercise, pursue or enforce any right or remedy Distributor has against ScanSoft, it being the intention hereof that Xerox pay or perform as a primary obligation directly from Xerox to Distributor all obligations which ScanSoft shall fail to faithfully and properly pay or perform when due. Notwithstanding any implication to the contrary herein. Xerox shall have all of ScanSoft's defenses to, and all of ScanSoft's rights of set-off with respect to, any claim made or action brought by Distributor with respect to the Distribution Agreement and this AssIgnment. Xerox's obligations hereunder are binding upon Xerox and Xerox's successor, and assigns and shall inure to the benefit of Distributor's successors and assigns. All of Distributors rights and remedies hereunder are cumulative and not alternative. Xerox hereby represents and warrants that the modifications to the Distribution Agreement set forth herein will be to the direct benefit of Xerox; and that the person executing this Assignment on behalf of Xerox is duly authorized and has the power and authority to bind Xerox under this Assignment. 7. CONSENT TO ASSIGN: ----------------- Distributor hereby consents to the assignment of the Distribution Agreement pursuant to the terms and conditions of this Assignment. 8. RATIFICATION: ------------ Except as modified by this Assignment. the parties hereby ratify and confirm all terms and conditions of the Distribution Agreement. 9. MISCELLANEOUS: ------------- This Assignment, including any Exhibits and documents referred to in this Assignment or attached hereto, constitutes the entire and exclusive statement of agreement between the parties with respect to its subject matter and there are no oral or written representations, understandings or agreements relating to this Assignment which are not fully expressed herein. IN WITNESS WHEREOF. each party has signed this Assignment on the day and year written below and shall be effective upon signing by Distributor. "ASSIGNOR" "ASSIGNEE" XEROX IMAGING SYSTEMS, INC. SCANSOFT, INC. a Delaware corporation a DELAWARE corporation By: /S/ MICHAEL K. TIVNAN By: /S/ WAYNE CRANDALL ----------------------------------- ----------------------------- Printed Name: Michael K. Tivnan Printed Name: Wayne Crandall Title: General Manager Title: VP Sales Date: 6/18/97 Date: 6/18/97 "DISTRIBUTOR" TECH DATA PRODUCT MANAGEMENT. INC. a Florida corporation By: /S/ PEGGY CALDWELL JULY 1, 1997 ---------------------------------- Printed Name: PEGGY K. CALDWELL Title: SENIOR VICE PRESIDENT MARKETING EX-10.14 5 INGRAM DISTRIBUTION AGT CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED --------------------------------------------------------- AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION -------------------------------------------------- DISTRIBUTION AGREEMENT ---------------------- THIS AGREEMENT (the "Agreement") is made and entered into as of September 22, 1993 by and between INGRAM MICRO INC., a California corporation (hereinafter "Ingram") and XEROX IMAGING SYSTEMS, INC., a Delaware corporation (hereinafter "Vendor"). RECITALS Vendor manufactures, produces, and/or supplies microcomputer products and desires to grant to Ingram the right to sell and distribute certain of those products, as hereinafter defined, upon the terms and conditions set forth below. Ingram is engaged in the sale and distribution of microcomputer products and desires to have the right to sell and distribute Vendor's products upon said terms and conditions. In consideration of the mutual covenants and agreements set forth below, the hereto below agree as follows: 1. GRANT OF DISTRIBUTION RIGHTS. 1.1 Vendor hereby appoints Ingram as a non-exclusive, authorized distributor of the Vendor software products listed in Exhibit A ("the Software") to Ingram's customers within the United States and Canada. Vendor grants to Ingram, and Ingram accepts,. the right to use for demonstration and its own purposes, upon payment of any applicable license fees, the Software under the terms and conditions of the license agreement contained in the packaging thereof. Further, Vendor grants to Ingram the right to distribute as agent on behalf of Vendor the Software to Ingram's customers within the United States and Canada provided that Ingram shall market the Software in the unopened shrink-wrapped package as delivered to Ingram, containing the Vendor Software License Agreement included therein. 1.2 Vendor agrees to make available and to sell to Ingram such Software as Ingram shall order from Vendor at the prices and subject to the terms set forth in this Agreement. 1.3 Vendor may appoint other distributors to distribute its Software. Ingram shall have the right to obtain and/or retain the rights to distribute any other products, including products which may compete with the Software. 1.4 The party's sole relationship with each other shall be that of an independent contractor. Neither party shall make any warranties or representations, or assume or create any obligations, on the other's behalf without that other's written approval. Each party shall be solely responsible for the actions of all their respective employees, agents and representatives. 2. TERM. 2.1 The term of this Agreement shall be for a period of one (1) year, beginning on the date first above written. Thereafter, this Agreement shall be renewed for successive one (1) year terms without further notice, unless terminated sooner as provided under the provisions of this Agreement. 2.2 Either party may terminate this Agreement, with or without cause, by giving ninety (90) days' written notice to the other party. 3. OBLIGATIONS OF VENDOR. 3.1 Vendor shall use its best efforts to fill orders promptly. However, Vendor shall not be liable for any loss occasioned by a delay in delivery. Upon twenty-four (24) hour notification to Ingram, Vendor may make partial shipments of pending orders, each of which shall be separately invoiced and which shall be paid according to the payment terms set forth herein. 3.2 At no charge to Ingram, Vendor shall support the Software and any efforts to sell the Software by Ingram, and provide sales literature, advertising materials and reasonable training and support in the sale and use of the Software to Ingram's employees and customers, if requested by Ingram. 3.3 Vendor shall use reasonable efforts to give Ingram at least thirty (30) days' notice prior to the release of software which is directly associated with the Software listed in Exhibit A and may, in its sole discretion, make such Software available for distribution by Ingram. Addition of software to Exhibit A shall be mutually agreed upon by the parties. 3.4 Vendor agrees to maintain sufficient Software inventory to permit it to fill Ingam's orders as required herein. If a shortage of any Software in Vendor's inventory exists in spite of Vendor's good faith efforts, Vendor agrees to allocate its available inventory of such Software to Ingram in proportion to Ingram's percentage of all of Vendor's customer orders for such Software during the previous sixty (60) days. 3.5 For each Software shipment to Ingram, Vendor shall issue to Ingram an invoice showing lngram's order number and the Software part number, description, price and any discount. At least monthly, Vendor shall provide Ingram with a current statement of account, listing all invoices outstanding and any payments made and credits given since the date of the previous statement, if any. 4. OBLIGATIONS OF INGRAM. 4.1 Ingram will list the Software in one or more of its catalogs and make the Software available to its customers. 4.2 Ingram will advertise and/or promote the Software in a commercially reasonable manner and will transmit Software information and promotional materials to its customers, as reasonably necessary. 4.3 As reasonably necessary, Ingram will make its facilities available for, and will assist Vendor in providing, Software training and support required under Section 3.2 hereof. 4.4 Ingram will provide Software technical assistance to its customers as it is reasonably able to do so, and will refer all other technical matters directly to Vendor. 4.5 On or before the effective date of this Agreement, Ingram shall issue to Vendor a noncancelable initial order for the minimum number of units of Software required in Exhibit A of this Agreement. Any subsequent orders made by Ingram to Vendor will require an order for the minimum number of units stated in Exhibit A. 4.6 Units of Software returned to Ingram by its dealer customers under the Vendor's Money Back Guarantee shall in turn be returned by Ingram to Vendor for credit against future orders not more than once per calendar month, with costs of shipping to be borne by Vendor. Before shipping any Software to Vendor pursuant to this Section, Ingram shall first obtain a return authorization number from Vendor by contacting Vendor's corporate headquarters in Peabody, MA. Once the returned Software has been received by Vendor, Vendor shall credit Ingram's account with such credit to be used by Ingram against future orders. The terms of Vendor's Money Back Guarantee are subject to change by Vendor upon thirty (30) days written notice to Ingram. 4.7 Ingram shall use commercially reasonable efforts to maintain complete customer records for five (5) years after each sale. Ingram shall also provide to Vendor reasonable assistance to investigate any health, safety, or other legitimate concern relating to the Software. This obligations shall survive the termination of this Agreement. 4.8 Ingram shall provide to Vendor, within ten (10) days after the end of each calendar month (i) a detailed report by Software type of sale made during the previous calendar month within territories predefined by Vendor; and (ii) a detailed report of all Software in Ingram's inventory by location as of the end of the previous calendar month. 5. PRICE AND TERMS. 5.1 Thc price and applicable discount, if any, for the Software shall be as set forth in Exhibit A. Ingram shall not be bound to sell Software to its customers at any prices suggested by Vendor. 5.2 Vendor shall have the right to change the list price of any Software upon giving thirty (30) days' prior written notice to Ingram. In the event that Vendor shall raise the list price of a Software, all orders for such Software placed prior to the effective date of the price increase shall be invoiced at the lower price. 5.3 In the event of a decrease in the price of the Software, Vendor shall grant to Ingram a credit with respect to those units of such Software purchased by Ingram within the one hundred eighty (180) day period preceding the effective date of the price decrease and which remain in Ingram's inventory on the effective date of the price decrease. Such credit shall be equal to the difference between the price paid by Ingram and the adjusted price provided that Ingram applies for such price protection credit within thirty (30) days from the date of Vendor's public announcement of the price revision. This price protection credit may only be applied towards future purchases of Vendor Software. 5.4 Payment in full for Ingram's initial order shall be made within ninety (90) days after the date of the Vendor invoice. Payment in full for each subsequent order shipped to Ingram shall be made within sixty (60) days after the date of the Vendor invoice. Should Vendor reasonably determine at any time that it should no longer extend credit to Ingram for orders, then Vendor may require Ingram to pay cash in advance or upon delivery or present an irrevocable letter of credit. If payment in full is made within ten (10) days of the invoice, **** percent (****%) of the invoice amount (not including freight) may be deducted by Ingram from the amount due on that invoice. If payment in full is made prior to shipment, **** percent (****%) of the invoice amount (not including freight) may be deducted by Ingram from the amount due on that invoice. 5.5 Notwithstanding any other provision in this Agreement to the contrary, Ingram shall not be deemed in default under this Agreement if it withholds any payment to Vendor because of a legitimate dispute between the parties. If invoices are not paid in a timely manner, Vendor may refuse further shipments until Ingram's account is paid in full. * 5.6 Ingram shall pay any and all sales, property, use, or excise taxes, duties or similar charges relating to the Software assessed by any government authority or regulatory agency unless Ingram presents Vendor with a valid certificate of exemption.. Personal property taxes assessable on Software after delivery to the carrier are also Ingram's responsibility. 6. SHIPPING. 6.1 Vendor shall ship Software only pursuant to Ingram purchase orders received by Vendor. Delivery shall be effective when Software is placed in the possession of a carrier designated by Ingram on its standard freight routing instructions attached as Exhibit C and as may be amended by Ingram, packed with Vendor's standard commercial packing or other special packing materials requested by Ingram, F.O.B. point of origin. Title to the Software remains with Vendor (or its licensor) at all times, but risk of loss or damage passes to Ingram upon delivery to Ingram's carrier. Ingram shall be responsible for all costs of delivery. * Stopping shipment shall not constitute a termination of this Agreement. *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 7. COOPERATIVE ADVERTISING AND MARKETING FUNDS. 7.1 Ingram may advertise and promote the Software and/or Vendor in a commercially reasonable manner and may use Vendor's trademarks, service marks and trade names in connection therewith; provided that, Ingram shall submit the advertisement or promotion to Vendor for review and approval prior to initial release, which approval shall not be unreasonably withheld or delayed. 7.2 Vendor agrees to cooperate with Ingram in advertising and promoting the Software and/or Vendor and hereby grants Ingram a cooperative advertising allowance of up to **** percent (****%) of invoice amounts for Software purchased by Ingram from Vendor to the extent that Ingram or customer/dealers use the allowance for any advertising and promoting which features Software and/or Vendor. Upon receipt of reasonable evidence of advertising expenditures, Vendor agrees to credit the amount of any such expenditures against future purchases by Ingram. 7.3 Vendor agrees to participate in the **** marketing program currently in effect. The cooperative advertising allowance granted under Section 7.2 above shall be reduced by **** percent (****%) as specified in Exhibit B attached hereto. This program is subject to the terms and conditions set forth on Exhibit B attached hereto and made a part hereof. 7.4 Vendor understands that additional marketing programs may be offered by Ingram to Vendor. Such programs may include a launch program that requires additional funds in addition to the cooperative advertising funds specified in Section 7.2. Participation in such additional marketing programs shall be at the sole discretion of Vendor. 8. DEMONSTRATION UNITS. 8.1 At the request of Ingram, Vendor shall consign to Ingram a reasonable number, as determined by Vendor, of demonstration units of the Software to aid Ingram and its sales staff in the support and promotion of the Software. All units consigned will be returned to Vendor in good condition, reasonable wear and tear excepted, when requested by Vendor at any time eleven (11) months after delivery to Ingram. *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 9. STOCK BALANCING. 9.1 GENERAL STOCK BALANCING. Ingram may return unused, unopened units of Software which are contained in Vendor's then-current price list no more often than once per calendar month, for purposes of stock rebalancing or product exchange. Returns shall be shipped at Ingram's expense and must be accompanied by an order for Software of an equivalent dollar value. 9.2 RETURNS AFTER TERMINATION. Upon termination, Vendor shall, at Ingram's request, repurchase one hundred percent (100%) of Ingram's purchases from Vendor during the calendar quarter preceding such termination. All Software must be new and unopened. Each party shall bear fifty percent (50%) of the cost of returning the Software to Vendor. 9.3 RETURNS AFTER PRODUCT DISCONTINUATION. Vendor shall use its best efforts to provide Ingram with thirty (30) days written notice prior to Vendor's discontinuation of any Software. Upon receipt of such notice, Ingram may return all unused, unopened units of discontinued Software which remain in Ingram's inventory on the date such notice is received. 10. PRODUCT WARRANTIES. 10.1 Vendor provides a warranty to the initial End-User of each unit of Software which covers the media upon which the Software is embedded for a period of ninety (90) days from the date of purchase by such End-User. Vendor expressly excludes any other warranties in relation to the Software, whether express, implied by statute, or otherwise, including, and without limitation, any warranty of merchantability or fitness for a particular purpose. 10.2 Vendor's sole obligation shall be to issue a credit to be used against future purchases to Ingram for any media that proves to be defective during the warranty period. Units of Software returned to Ingram by its dealer customers under this warranty shall in turn be returned by Ingram to Vendor for credit to be used against future purchases, with such returns to take place not more than once per calendar month, with shipping costs to be borne by Vendor. Before shipping any Software to Vendor pursuant to this Section, Ingram shall first obtain a return authorization number from Vendor by contacting Vendor's corporate headquarters in Peabody, MA. Once the returned Software has been received by Vendor, Vendor shall issue a credit to Ingram for use against future purchases. Neither Ingram or its dealer customers may expand or alter this warranty. 10.3 In the event Vendor recalls any or all of the Software due to defects, revisions, or upgrades, Ingram shall provide reasonable assistance in such recall; provided that, Vendor shall pay all of Ingram's expenses in connection with such recall, including handling charges per unit of Software of not less than **** and **** (****%) of the Product's list price. *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 11. INDEMNITY. 11.1 Vendor shall defend Ingram from, and pay any judgment for direct infringement of any United States patent, trademark or copyright by any of the Software if Ingram promptly notifies Vendor in writing of any infringement assertion, and allows and assists Vendor to defend any infringement suit. Vendor shall not be liable for litigation expenses or settlements by other parties unless Vendor agrees in writing. If any infringement is asserted against Vendor or Ingram, Vendor, at its option, may obtain a license at no cost to Ingram, or modify or remove the Software, or substitute software. Vendor is not liable for any infringement due to the Software being made or modified to Ingram specifications or designs, modified other than by Vendor; used or sold in combination with any equipment, software or supplies not provided by Vendor; or used to produce images in violation of the proprietary rights of third parties. The liability of Vendor under this Section shall be limited in all instances to **** dollars ($****.). VENDOR MAKES NO OTHER EXPRESS OR IMPLIED WARRANTY OF NONINFRINGEMENT AND HAS NO OTHER LIABILITY FOR INFRINGEMENT OR ANY DAMAGES THEREON. 11.2 The foregoing indemnity does not apply, and Ingram agrees to indemnify Vendor (including all costs and attorneys' fees), with respect to any claim brought against Vendor concerning patent or copyright infringement allegedly from (1) the combination or utilization by Ingram of any Software with equipment not made or provided by Vendor; (2) the unauthorized modification of any Software by Ingram; (3) any Software manufactured by Vendor to Ingram's specifications; or (4) the production of images by Ingram in violation of the proprietary rights of third parties. If any claim of patent infringement is made under the foregoing circumstances, Vendor may refuse to make further shipments to Ingram. The liability of Ingram under this Section shall be limited in all instances to **** dollars ($****.). INGRAM MAKES NO OTHER EXPRESS OR IMPLIED WARRANTY OF NONINFRINGEMENT AND HAS NO OTHER LIABILITY FOR INFRINGEMENT OR ANY DAMAGES THEREON. 11.3 Vendor is named as a party in any suit commenced on a claim under the circumstances set forth in Section 11.2, Ingram shall defend such suit, and Vendor shall assist Ingram (at Ingram's expense) in any reasonable manner. Ingram shall have sole control over the defense and settlement negotiations. 11.4 Each party (the "indemnifying party") agrees, if promptly notified by the other and given the right to control the defense and approve any settlements thereof, to indemnify and hold harmless the other party hereto (the "indemnified party") from and against all claims or liabilities of third parties arising out of this Agreement and (1) attributable to personal injury (including death) or damage to tangible property and (2) proximately caused by the intentional., reckless, or negligent act or omission of the indemnifying party. Such indemnification shall include the payment of reasonable attorneys' fees and other costs incurred by the indemnified party in defending against such claims. The indemnifying party shall no liability under the foregoing indemnity for incidental, consequential, indirect, or special damages, including but not limited to loss of profits. The indemnifying party shall have no obligation hereunder with respect to any claim or cause of action or portion thereof for damages to persons (including death) or damage to tangible property proximately caused by the fault, culpability or negligence of any person other than the indemnifying party. *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. 11.5 EXCEPT FOR INDEMNIFICATION CLAIMS ARISING UNDER THIS AGREEMENT, THE MAXIMUM LIABILITY OF VENDOR TO INGRAM, ITS EMPLOYEES, DEALERS, AGENTS AND END-USERS, OR ANY OTHER PERSON CLAIMING UNDER INGRAM FOR DIRECT DAMAGES ARISING OUT OF OR RELATING TO THIS AGREEMENT, WHETHER SUCH LIABILITY ARISES FROM ANY CLAIM BASED UPON CONTRACT, WARRANTY, TORT OR OTHERWISE, SHALL IN NO EVENT EXCEED THE TOTAL AMOUNT PAID BY TO VENDOR BY INGRAM FOR THE SOFTWARE GIVING RISE TO THE CLAIM. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR LOST PROFITS, ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES IN ANY WAY ARISING OUT OF OR RELATING TO THIS AGREEMENT, EVEN IN THE EVENT SUCH PARTY HAS BEEN ADVISED AS TO THE POSSIBILITY OF SUCH DAMAGES. 12. PRODUCT MARKINGS. 12.1 Vendor shall clearly mark on the packaging of each unit of Software the Software's name and computer compatibility. Such packaging shall also bear a machine-readable bar code identifier scannable in standard ABCD format which identifies the Software and its serial number and fully complies with all conditions regarding standard product labeling set forth in "Ingram Micro's Guide To Bar Code: The Product Label," as amended from time to time. 13. REPRESENTATIONS AND WARRANTIES. Vendor warrants and represents that: 13.1 The Software or its use does not infringe upon any United States patents, copyrights, trademarks, trade secrets, or other proprietary rights of others, and that there are not any suits or proceedings pending or threatened which allege that any Software or the use thereof infringes upon such proprietary rights; 13.2 The Software prices offered herein are equal to the prices available to any like distributor within the United States to whom Vendor sells the Software. In the future all prices for Software made available to Ingram shall be at least equal to the prices available to any like distributor in the United States of the Software; 13.3 Sales to Ingram of the Software at the listed prices and/or discounts do not in any way constitute violations of federal, state, or local laws, ordinances, rules or regulations, including any antitrust laws or trade regulations; 14. DEFAULTS. 14,1 For purposes of this Agreement, a party shall be in default if (a) it materially breaches a term of this Agreement and such breach continues for a period of ten (10) business days after it has been notified of the breach, or (b) it shall cease conducting business in the normal course, become insolvent, make a general assignment for the benefit of creditors, suffer or permit the appointment of a receiver for its business or assets, or shall avail itself of or become subject to any proceeding under the Federal Bankruptcy Act or any other federal or state statute relating to insolvency or the protection of rights of creditors. 14.2 Upon the occurrence of an event of default as described in Section 14.1, the party not in default may immediately terminate this Agreement by giving written notice to the party in default. 14.3 The rights and remedies provided to the parties in this Section 14 shall not be exclusive and are in addition to any other rights and remedies provided by this Agreement or by law or in equity. 15. INSURANCE. 15.1 Each party shall maintain during the life of this Agreement insurance with an insurance company reasonably acceptable to the other to include liability coverage sufficient to cover its obligations under this Agreement. 16. OTHER PROVISIONS. 16.1 CONSTRUCTION. This Agreement shall be construed and enforced in accordance with the laws of the State of California, except that body of law concerning conflicts of law. 16.2 NOTICES. All notices, requests, demands and other communications called for or contemplated hereunder shall by in writing and shall be deemed to have been duly given when (i) personally delivered; (ii) two (2) days after mailing by U.S. certified or registered first-class mail, prepaid; or (iii) one (1) day after deposit with any nationally recognized overnight courier, with written verification of receipt, and addressed to the parties at the addresses set forth at the end of this Agreement or at such other addresses as the parties may designate by written notice. 16.3 ATTORNEY'S FEES. In the event suit is commenced to enforce this Agreement or otherwise relating to this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees and costs incurred in connection therewith. 16.4 COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument; however, this Agreement shall be of no force or effect until executed by both parties. 16.5 CONFIDENTIAL INFORMATION. Subject to the exceptions listed below, all information of one party ("the disclosing party") which is marked proprietary, confidential or "private date" and is made available to the other ("the receiving party") will be held in confidence by the receiving party and will not be disclosed by it to third parties, or used by it, except to the extent authorized by this Agreement. If the informations is provided orally or visually, the disclosing party will identify the disclosure as being proprietary or confidential at the time of disclosure and, within thirty (30) days thereafter, reduce it to writing and provide it to the receiving party. The receiving party may release such confidential information within its own organization on a need-to-know basis only. The receiving party's obligations under this Section shall survive the termination or expiration of this Agreement. The receiving party's obligation hereof shall terminate with respect to any particular portion of the disclosing party's information, other than software source code, (i) when the receiving party can document that: (a) it was in the public domain at the time of the disclosing party's communication thereof to the receiving party, (b) it entered the public domain through no fault of the receiving party subsequent to the time of the disclosing party's communication thereof to the receiving party, (c) it was in the receiving party's possession free of any obligation of confidence at the time of the disclosing party's communication thereof to the receiving party, or (d) it was rightfully communicated to the receiving party free of any obligation of confidence subsequent to the time of the disclosing party's communication thereof to the receiving party; or (ii) when it is communicated by the disclosing party to a third party free of any obligation of confidence; or (iii) in any event, five (5) years after the disclosing party's communication thereof to the receiving party. All materials furnished to the receiving party by the disclosing party that are designated in writing to be the property of the disclosing party shall remain the property of the disclosing party and shall be returned to the disclosing party promptly at its request or upon termination of this Agreement, with all copies made thereof. 16.6 NO IMPLIED WAIVERS. The failure of either party at any time to require performance by the other party of any provision hereof shall not affect in any way the full rights to require such performance at any time thereafter. The waiver by either party of a breach of any provision hereof shall not be taken, construed, or held to be a waiver of the provision itself or a waiver of any breach thereafter or any other provision hereof. 16.7 CAPTIONS AND SECTION HEADINGS. Captions and section headings used herein are for convenience only, are not a part of This Agreement, and shall not be used in construing it. 16.8 COVENANT OF FURTHER COOPERATION. Each of the parties agrees to execute and deliver such further documents and to cooperate in such manner as may be necessary to implement and give effect to the agreements contained herein. 16.9 BINDING ON HEIRS AND SUCCESSORS. This Agreement shall be binding upon and shall inure to the benefit of each party, its successors and assigns. 16.10 ASSIGNMENT. Neither party may assign, transfer, or sell any of its rights, or delegate any of its responsibilities under this Agreement without the prior written consent of the other. Such consent shall not be unreasonably withheld. 16.11 DISPUTES. The parties agree that, before initiating any litigation involving a dispute, controversy, or claim arising out of or relating to this Agreement (including, but not limited to, any claim concerning the entry into, performance under or termination of this Agreement), they will attempt in good faith to resolve their dispute through nonbinding mediation. Any action under or arising out of this Agreement or the breach, termination or invalidity thereof, must be commenced within one (1) year after the cause of action accrued, except that actions for nonpayment must be commenced within three (3) years after the date the payment was due. 16.12 EXPORT CONTROL. Ingram shall not export any Software obtained from Vendor hereunder to any country for which the United States or any agency thereof requires, at the time of export, an export license or any other governmental approval without first obtaining such license or approval. 16.13 SEVERABILITY. A judicial determination that any provision of this Agreement is invalid in whole or in part shall not affect the enforceability of those provisions found not to be invalid. 16.14 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties hereto pertaining to the subject matter hereof, superseding any and all previous proposals, representations or statements, oral or written. Any previous agreements between the parties pertaining to the subject matter of this Agreement are hereby expressly canceled and terminated. The terms and conditions of each party's purchase orders, invoices, acknowledgments/confirmations or similar documentation shall not apply to any order hereunder, and any such terms and conditions thereon shall be deemed to be objected to without need of further notice or objection. Any modifications of this Agreement must be in writing and signed by authorized representatives of both parties hereto. 16.12 PARTIES EXECUTING. The parties executing this Agreement warrant that they have the requisite authority to do so. IN WITNESS WHEREOF, the parties hereunto have executed this Agreement. "Ingram" "Vendor" Ingram Micro Inc. Xerox Imaging Systems, Inc. 1600 E. St. Andrew Place 9 Centennial Drive Santa Ana, CA 92705 Peabody, MA 01960 By: /S/ SANAT K. DUTTA By: /S/ MICHAEL K. TIVNAN ---------------------------- -------------------------------- Sanat K. Dutta Name: Michael K. Tivnan Senior Vice President (print or type) Operations Title:* General Manager Date: 9/22/93 Date: 9/22/93 *AGREEMENT MUST BE SIGNED BY A DULY AUTHORIZED VICE PRESIDENT OR PARTNER. EXHIBIT A --------- PRODUCT PRICE LIST ------------------ The prices for the Software offered under this Agreement shall be (check one): _____As shown on Vendor's price list dated __________. X As shown below. - ----- Software List Price Discount - -------- ---------- -------- TextBridge $**** ****% AccuText $**** ****% Minimum order quantity is **** units. *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EXHIBIT B --------- **** MARKETING PROGRAM ---------------------- Vendor agrees to participate in the **** marketing program (hereinafter the "Program") subject to the following terms and conditions: 1. Vendor hereby grants to Ingram a Program allowance equal to **** percent (****%) of invoice amounts for Software purchased by Ingram. Upon receipt of reasonable evidence of advertising expenditures, Vendor agrees to credit the amount of any such expenditures against future purchases by Ingram. The cooperative advertising allowance granted under Section 7.2 of the Agreement shall be reduced by an amount equal to the Program allowance granted hereunder, it being the understanding of the parties that the Program allowance is to be a part of the cooperative advertising allowance and not an addition thereto. Ingram agrees to reconcile and adjust the Program allowance quarterly to account for any Software returns. 2. The Program allowance will be used by Ingram to fund Software promotions and advertising, to provide general sales incentives throughout its distribution channels, and to administer the Program. 3. The term of the Program shall end on June 30 following the commencement date of this Agreement, and shall be renewed for successive one (1) year terms without further notice, subject to Ingram's right to terminate the Program, or Vendor's right to terminate its participation therein, at the end of a term by giving the other party at least ninety (90) days' written notice prior to the end of the term. *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. AMENDMENT NO. 1 JANUARY 23, 1995 DISTRIBUTION AGREEMENT PAGE ONE Ingram Micro Inc. ("Ingram") and Xerox Imaging Systems, Inc. ("Vendor") hereby agree to amend their mutual Distribution Agreement, dated September 23, 1993 as follows: 1. Ingram and Vendor agree to incorporate the addition of Software Products listed in the attached Exhibit A-1. 2. This amendment shall remain in effect for the current and any renewal term of the Agreement. Notwithstanding the foregoing, all other provisions of the Agreement remain unchanged. The signer has read this Amendment, agrees hereto, and is an authorized representative of its respective party. INGRAM MICRO INC. XEROX IMAGING SYSTEMS, INC. By: /s/ Sanat K. Dutta By: /s/ Michael K. Tivnan --------------------------------- ----------------------------- Name: Sanat K. Dutta Name: Michael K. Tivnan Title: Executive Vice President Title: General Manager Date: 1/23/95 Date: 1/30/95 EXHIBIT A-1 ----------- PRODUCT PRICE LIST ------------------ The prices for the Products offered under this Agreement shall be (check one): _____ As shown on Vendor's price list dated __________________. X As shown below. - ----- Software List Price Discount - -------- ---------- -------- TabWorks $**** ****% Minimum order quantity is **** units. *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. AMENDMENT NO. 2 MARCH 16, 1995 DISTRIBUTION AGREEMENT PAGE ONE Ingram Micro Inc. ("Ingram") and Xerox Imaging Systems, Inc. ("Vendor") hereby agree to amend their mutual Distribution Agreement, dated September 23, 1993 as follows: 1. Ingram and Vendor agree to incorporate the pricing changes of Software Products listed in the attached Exhibit A-2. 2. This amendment shall remain in effect for the current and any renewal term of the Agreement. Notwithstanding the foregoing, all other provisions of the Agreement remain unchanged. The signer has read this Amendment, agrees hereto, and is an authorized representative of its respective party. INGRAM MICRO INC. XEROX IMAGING SYSTEMS, INC. BY: /S/ SANAT K. DUTTA BY: /S/ WAYNE CRANDALL ----------------------------- ---------------------------- NAME: SANAT K. DUTTA NAME: WAYNE CRANDALL TITLE:EXECUTIVE VICE PRESIDENT TITLE: VP, SALES DATE: 4 APRIL 1995 DATE: 22 MARCH 1995 EXHIBIT A-2 PRODUCT PRICE LIST This Amendment supersedes Exhibit A and A-l Product Price Lists SOFTWARE LIST PRICE **** ON **** FROM **** **** TextBridge for Windows $**** ****% ****% TextBridge for Macintosh $**** ****% ****% TextBridge Professional Edition $**** ****% ****% (Windows) TextBridge Professional Edition $**** ****% ****% (Competitive Upgrade) TabWorks $**** ****% ****% The price after the **** From **** (****) has been taken shall be the price that Ingram Micro will pay Vendor for product. Ingram will only offer the TextBridge Professional Competitive Upgrade software to those resellers that are specified by Vendor. *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. AMENDMENT NO. 3 AUGUST 1, 1996 DISTRIBUTION AGREEMENT PAGE ONE OF ONE Ingram Micro Inc. ("Ingram") and Xerox Imaging Systems, Inc. ("Vendor") hereby agree to amend their mutual Distribution Agreement, dated September 23, 1993 as follows: 1. Vendor authorizes Ingram on a non-exclusive basis to distribute Products in the educational market ("Academic"). Academic Products and prices are specified as listed in the attached Exhibit A-2. 2. This amendment shall remain in effect for the current and any renewal term of the Agreement. Notwithstanding the foregoing, all other provisions of the Agreement remain unchanged. The signer has read this Amendment, agrees hereto, and is an authorized representative of its respective party. INGRAM MICRO INC. XEROX IMAGING SYSTEMS, INC. By: /S/ SANAT K. DUTTA By: ------------------------------- ------------------------------ Name: Sanat K. Dutta Name: Wayne Crandall Title: Executive Vice President Title: Vice President Sales Date: 8/20/96 Date:____________________________ EXHIBIT A-2 ----------- ACADEMIC PRODUCT PRICE LIST --------------------------- The prices for the Products offered under this Agreement shall be (check one): _____As shown on Vendor's price list dated ____________. _____As shown below. Software List Price Discount - -------- ---------- -------- AMENDMENT 4 TO THE DISTRIBUTION AGREEMENT THIS AMENDMENT (the "Amendment") is entered into this 15th day of May, 1997, by and between INGRAM MICRO INC. ("Ingram") and Xerox Imaging Systems, Inc. ("Vendor"). The parties have agreed to amend the Distribution Agreement ("Agreement") between Ingram and Vendor dated September 22, 1993. 1. SECTION 1.1 - GRANT OF DISTRIBUTION RIGHTS Revise the first sentence to read: "Vendor hereby appoints Ingram as a non-exclusive, authorized distributor of the Vendor software products listed in Exhibit A ("the software") to Ingram's customers within the United States, Canada and all of Asia Pacific." 2. This amendment shall remain in effect for the current and any renewal term of the Agreement. Notwithstanding the foregoing, all other provisions of the Agreement remained unchanged. The signed has read this Amendment, agrees hereto, and is an authorized representative of its respective party. INGRAM MICRO INC. XEROX IMAGING SYSTEMS, INC. BY: /S/ V L COTTEN BY: /S/ WAYNE CRANDALL ----------------------------- -------------------------- NAME: VICTORIA L. COTTEN NAME: WAYNE CRANDALL TITLE: SR. VP PURCHASING TITLE: VP SALES DATE: 7-8-97 DATE: 6-26-97 INGRAM MICRO AMENDMENT #5 TO THE DISTRIBUTION AGREEMENT THIS AMENDMENT (the "Amendment") is entered into this 26th day of March, 1998, by and between INGRAM MICRO INC. ("Ingram") and SCANSOFT, INC. ("Vendor") The parties have agreed to amend their Distribution Agreement ("Agreement") dated September 23, 1993. 1. Replace the existing **** percent (****%) **** with "**** pay **** terms of **** percent (****%) **** (****) days net sixty one (61) days and on an ongoing quarterly sales out rebate of **** percent (***%) which includes a reporting feature." 2. This Amendment shall remain in effect for the current term and any renewal term of the Agreement. Notwithstanding the foregoing, all other provisions of the Agreement remain unchanged. The undersigned has read this Amendment, agrees hereto, and is an authorized representative of its respective party. INGRAM MICRO INC. SCANSOFT, INC. 1600 East St. Andrew Place 9 Centennial Drive Santa Ana, CA 92705 Peabody, MA 01960 By: /s/ V L Cotten By: /S/ WAYNE S. CRANDALL --------------------------------- -------------------------------- Name: Victoria L. Cotton Name: Wayne S. Crandall Title: Sr. Vice President Purchasing Title: Vice President *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. EX-10.15 6 GOLD DISK BUNDLING AGT/PAGIS SE & PAGIS PRO CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED --------------------------------------------------------- AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION -------------------------------------------------- SCANSOFT, INC. A XEROX COMPANY GOLD DISK BUNDLING AGREEMENT: PAGIS(TM) SE & PAGIS PRO This Agreement is between XEROX CORPORATION, THROUGH ITS CHANNELS GROUP ("BUYER"), a having its principal offices at East Rochester, New York and SCANSOFT, INC. ("SCANSOFT"), a Delaware corporation, having offices at 9 Centennial Drive, Peabody, MA 01960. 1.0 PREMISES 1.1 This Agreement applies only to the ScanSoft-brand software product(s) listed in Exhibit A (referred to collectively as the "SOFTWARE"). 1.2 Buyer wishes to acquire a master copy of the Software and its documentation on disk (the "GOLD DISK"), produce copies of the Software and its associated documentation, combine such Software with other Products to create Bundled Solutions and to distribute such Bundled Solutions to Resellers and to End-Users. 1.3 DEFINITIONS: (a) "AGREEMENT" means this Gold Disk Bundling Agreement, including any exhibits or schedules attached hereto. (b) "PRODUCTS" means the Buyers products (hardware and/or other software) which are intended to be bundled with the Software as described in Exhibit B. (c) "RESELLER" means a customer who sublicenses the Software from Buyer solely for further sublicense, without modification, to End-User customers as part of one or more of the Bundled Solutions. (d) "END-USER" means a third-party customer to whom Buyer or its Reseller shall sublicense the Software as part of one or more of the Bundled Solutions for use other than further sublicense. (e) "MARKS" means any ScanSoft trademarks, logos, trade names, and identifying slogans which are licensed to Buyer under this Agreement. All Marks whether registered or not, are the exclusive or licensed property of ScanSoft. (f) "BUNDLED SOLUTIONS" means the integrated systems consisting of the Software as combined with Buyer's Products specified in Exhibit B. 1.4 It is a fundamental premise of this Agreement, that Buyer shall use the Software licensed hereunder with the Products to produce one or more of the Bundled Solutions. Buyer reserves the right to sell Products without the Software. Buyer shall not distribute the Software except as part of the Bundled Solutions. 2.0 LIMITATIONS 2.1 Buyer's sole relationship with ScanSoft shall be that of an independent contractor. Buyer shall make no warranties or representations, or assume or create any obligations, on ScanSoft's behalf except as may be Page 1 expressly permitted in writing by ScanSoft. Each party shall be solely responsible for the actions of all their respective employees, agents and representatives. 2.2 Buyer has no distribution or other right to any ScanSoft-brand products, accessories, or supplies, either presently available or that become available, other than the Software listed in Exhibit A. 2.3 ScanSoft' right to sell through other channels. Buyer understands that ScanSoft presently markets its products, including the Software, throughout the world through various channels in addition to other OEM licensors and that ScanSoft may continue to market and license any or all of the Software and any associated services without any restrictions whatsoever. Nothing in this Agreement prohibits ScanSoft from entering into an agreement directly with distributees of the Buyer's Bundled Solutions, including End-Users. 3.0 ADDITIONAL RESPONSIBILITIES OF BUYER 3.1 MARKETING. Buyer shall advertise the Software as used in the Bundled Solutions in a commercially acceptable manner, conforming to all legal requirements and proper trademark usage (specified in Exhibit F). Each party agrees to participate, to the extent such participation is commercially reasonable, in product announcements and introductions sponsored by the other party in connection with the transactions contemplated hereby and in accordance with the joint marketing plan. 3.1.1 "Pagis by ScanSoft" and/or the ScanSoft Software logo must be prominently displayed in all advertising, product literature, and in a conspicuous location on the Bundled Solutions packaging. ScanSoft will provide the artwork for the logo. Buyer will conform to the ScanSoft logo usage guidelines listed in Exhibit E. 3.1.2 ScanSoft shall be included in the review and approval cycles for advertisements and brochures to ensure that Buyer is compliant with the logo and trademark usage guidelines. 3.1.3 ScanSoft reserves the option to include on-screen or Try-n-Buy upgrade offers for other ScanSoft software products. 3.1.4 Buyer agrees to provide ScanSoft with access to all registered customers of Buyers Bundled Solutions at reasonable intervals not to exceed four (4) times per year, for direct mail upgrade purposes. 3.1.5 Buyer will, if commercially practicable, issue a press release to coincide with the Bundled Solutions announcement that announces the inclusion of the ScanSoft Software in the Bundled Solution. 3.1.6 Buyer shall provide ScanSoft, at no charge, at least two (2) units of the Bundled Solutions to be used for promotional activities. 3.1.7 WEB SITES. Cross links between ScanSoft' and Buyer's web pages will, to the extent practicable, be created to further promote our strategic partnership. 3.2 Buyer shall not cause any advertising to be published, or make any representation (oral or written), which might mislead the public or which is detrimental to the goodwill of ScanSoft or the Software. 3.3 Buyer shall ensure that the Software will be sublicensed to a Reseller or End-User only under a written "shrink-wrapped" sublicense provided in Exhibit C. 3.4 ROYALTY FEES AND REPORTS. The Software shall be licensed at the fee(s) set forth in Exhibit A, subject to change by written agreement of the parties from time to time. All payments shall be made in United States dollars. The fee is payable to ScanSoft on each copy of Software made by Buyer regardless of how Buyer uses such copy, except that Buyer may use a reasonable agreed number of copies for demonstration purposes without paying a license fee. Page 2 3.5.1 Buyer shall provide to ScanSoft, as specified in Exhibit A, a detailed statement, certified by an authorized representative of Buyer, setting forth the number of units of the Bundled Solutions on or in which copies of the Software were incorporated (regardless of whether any unit of Bundled Solution is actually placed into use) during the previously completed calendar quarter. The statement shall be accompanied by payment in full of the fees shown in Exhibit A to be payable. 3.5.2 In the event that the Buyer fails to make any payment on or before the payment date, ScanSoft may require the Buyer to pay interest at a rate equal to the lesser of (i) ****% per month, compounded monthly, or (ii) the maximum rate permitted by applicable law. ScanSoft shall be entitled to recover all costs and expenses, including reasonable attorney's fees, incurred by it in connection with the enforcement of the terms of this agreement. 3.5.3 In addition to the fee for any Software used by Buyer, Buyer shall be responsible for the payment of all sales, property, use, or excise taxes, duties or similar charges relating to the Software assessed by any government authority or regulatory agency. Upon execution of this Agreement, Buyer shall provide ScanSoft with copies of its resale exemption certificate(s). Personal property taxes assessable on the Software after delivery to the shipper are Buyer's responsibility. 3.6 AUDIT. ScanSoft shall have the right to inspect the records of Buyer on reasonable notice and during regular business hours to verify the reports and payments required to be made hereunder. Such records shall be maintained for a period of at least three (3) years from the date of creation of such record. The cost of such audit shall be borne by ScanSoft unless such audit reveals an error rate of five percent (5%) or more in favor of ScanSoft. Payment of any amount determined to be due as a result of such audit shall be made within thirty (30) days of receipt of ScanSoft' invoice therefor. 4.0 TECHNICAL SUPPORT 4.1 ScanSoft shall provide Buyer with technical support including, one initial product training session to be administered at ScanSoft facilities. Buyer shall then assume responsibility for such ongoing support and training as it requested by Buyer's customers with respect to the Software. 4.2 ScanSoft will provide technical support to Buyer's Customer Support, as it may be reasonably requested by Buyer, to fulfill its maintenance obligations to its Resellers and End-Users. Technical support shall include telephone support to Buyer's engineering staff on the operation, integration and utilization of the Software, and maintenance modifications and bug corrections for the Software to bring them into conformance with the specifications. There will be no charge to Buyer for this level of support, however for the purposes of providing support, Buyer shall furnish ScanSoft with two (2) units of each Buyer Product listed in Exhibit B. When a customer problem is determined by Buyer's Customer Support to be associated directly with the Software listed in Exhibit A, and resolution of the problem is not within the range of training received or knowledge accrued by Buyers Customer Support, Buyer's Customer Support may either contact ScanSoft's telephone support for assistance or refer the End-User directly to ScanSoft's Customer Support. 4.3 If customer problem is determined to be caused by a defect in media, Buyer shall issue a replacement media to the customer and Buyer agrees to pay for all associated costs incurred by such replacement, and ScanSoft shall have no liability arising out of or related to such customer problem. 5.0 END-USER REFERENCE MATERIALS ScanSoft hereby grants Buyer the right to draft End-User reference materials for its End-Users. Buyer shall have the right to incorporate portions of ScanSoft's copyrighted documentation regarding the Software into Buyer's materials, as long as all ScanSoft copyrights are preserved and ScanSoft copyright notices reproduced. 6.0 TITLE *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 3 Title and all rights of ownership to the Software, and all copies of all or any part thereof, are and remain with ScanSoft at all times. Buyer agrees to place ScanSoft's copyright notice (using the international copyright symbol) on each copy of Software made by Buyer. ScanSoft' copyright notice must be displayed on the packaging of the media containing the Software. 7.0 WARRANTIES 7.1 ScanSoft warrants that title to all Software shall be free and clear of all interests or claims of third parties. 7.2 The Software provided to Buyer herein is licensed "AS IS". ScanSoft shall warrant the Gold Disk to be free from known viruses and defects in materials and workmanship for a period of thirty (30) days from the date of acceptance. ScanSoft agrees to employ reasonable efforts and use commercially available virus checking means in the effort to detect and remove a virus from the Software. Buyer also agrees to employ reasonable efforts and use commercially available virus checking software to detect for a virus. If Buyer detects a virus then, ScanSoft must receive notice of any such known viruses or defects in media within thirty (30) days after delivery to Buyer. Buyer's failure to notify ScanSoft within thirty (30) days after delivery shall constitute final acceptance by Buyer. Under such warranty, ScanSoft' sole obligation shall be to replace the media which is defective or contains a known virus. 7.3 EXCEPT AS EXPRESSLY SET FORTH IN SECTIONS 7.1 -7.2, SCANSOFT MAKES NO OTHER WARRANTIES TO BUYER AND DISCLAIMS ALL WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 7.4 End-User Warranty. At the time of licensing to the first End-User of each unit of the Software, Buyer, or its Reseller customers as Buyer's agreements with them shall require, shall offer as a minimum warranty, the then-current ScanSoft End-User Warranty for the Software set forth in Exhibit C herein (the "Software License Agreement") as the same may be modified by ScanSoft from time to time. 7.4.1 All ScanSoft End-User Warranties are subject to change by ScanSoft upon thirty (30) days written notice to Buyer. Such changes shall only apply to all Software marketed after the expiration of the notice period. 8.0 LICENSE 8.1 LICENSE GRANT. ScanSoft hereby grants to Buyer, under ScanSoft' applicable patents, copyrights and other intellectual property rights, a nonexclusive, worldwide license to use the Software and reproduce copies in object code format only, onto the media form contained within a Bundled Solution and to distribute such copies with the Bundled Solutions sold, leased and/or licensed by Buyer. Each use of any given Software within any Bundled Solution must be identified separately in Exhibit B. 8.2 Buyer shall ensure that each copy of the Software is marketed with (1) the Software's user documentation, (2) the ScanSoft Software License Agreement, and (3) ScanSoft' Warranty Card. Buyer shall adhere to ScanSoft' specifications for the Software's user documentation when manufacturing such documentation. Any deviations from such specifications will require advance written approval from ScanSoft. 8.3 In association with the manufacture of the Bundled Solutions, Buyer may sublicense its right to reproduce copies of the Software and/or related documentation under the same Buyer terms and conditions established in this Agreement. In association with distribution of the Bundled Solutions, Buyer may sublicense its right to distribute copies, to its subsidiaries and Resellers. Buyer shall take appropriate measures to ensure that any software media containing the Software is free from viruses or media defects. 8.4 No other rights to the Software are granted by ScanSoft to Buyer under this Agreement. In particular, but not by way of limitation, Buyer shall have no right to create derivative works of the Software. Page 4 8.5 Buyer shall not modify the Software supplied hereunder in any way without the prior written consent of ScanSoft. 9.0 INFRINGEMENT INDEMNITY 9.1 ScanSoft will defend Buyer from, and pay any judgment for, direct infringement of any United States patent, trademark or copyright by any of the Software if Buyer promptly notifies ScanSoft in writing of any infringement assertion, and allows and assists ScanSoft to defend any infringement suit. ScanSoft shall not be liable for litigation expenses or settlements by other parties unless ScanSoft agrees in writing. If any infringement is asserted against ScanSoft or Buyer, ScanSoft, at its option, may obtain a license at no cost to Buyer, or modify or remove the Software, or substitute software. ScanSoft is not liable for any infringement due to the Software being made or modified to Buyer specifications or designs; modified other than by ScanSoft; used or sold in combination with any equipment, software or supplies not provided by ScanSoft; or used to produce images in violation of the proprietary rights of third parties. The liability of ScanSoft under this Section shall be limited in all instances to the total price of infringing Software acquired by Buyer. SCANSOFT MAKES NO OTHER EXPRESS OR IMPLIED WARRANTY OF NONINFRINGEMENT AND HAS NO OTHER LIABILITY FOR INFRINGEMENT OR ANY DAMAGES THEREON. 9.2 The foregoing indemnity does not apply, and Buyer agrees to indemnify ScanSoft (including all costs and attorneys' fees), with respect to any claim brought against ScanSoft concerning patent or copyright infringement allegedly arising from: (1) the unauthorized combination or utilization by Buyer of any Software or (2) the unauthorized modification of any Software by Buyer; (3) any Software manufactured by ScanSoft to Buyer's specifications; (4) the production of images in violation of the proprietary rights of third parties. 9.2.1 If ScanSoft is named as a party in any suit commenced on a claim under the circumstances set forth in Section 9.2, Buyer shall defend such suit, and ScanSoft shall assist Buyer (at Buyer's expense) in any reasonable manner. Buyer shall have sole control over the defense and all settlement negotiations. 10.0 GENERAL INDEMNITY Each party (the "indemnifying party") agrees, if promptly notified by the other and given the right to control the defense and approve any settlements thereof, to indemnify and hold harmless the other party hereto (the "indemnified party") from and against all claims or liabilities of third parties arising out of this Agreement and (1) attributable to personal injury (including death) or damage to tangible property and (2) proximately caused by the intentional, reckless, or negligent act or omission of the indemnifying party. Such indemnification shall include the payment of reasonable attorneys' fees and other costs incurred by the indemnified party in defending against such claims. The indemnifying party shall have no liability under the foregoing indemnity for incidental, consequential, indirect, or special damages, including but not limited to loss of profits. 11.0 LIMITATION OF REMEDIES THE MAXIMUM LIABILITY OF SCANSOFT TO BUYER, ITS EMPLOYEES, RESELLERS, AGENTS AND END-USERS, OR ANY OTHER PERSON CLAIMING UNDER BUYER FOR DIRECT DAMAGES ARISING OUT OF OR RELATING TO THIS AGREEMENT, WHETHER SUCH LIABILITY ARISES FROM ANY CLAIM BASED UPON CONTRACT, WARRANTY, TORT OR OTHERWISE, SHALL IN NO EVENT EXCEED THE TOTAL AMOUNT PAID TO SCANSOFT BY BUYER FOR THE SOFTWARE GIVING RISE TO THE CLAIM. IN NO EVENT SHALL SCANSOFT BE LIABLE FOR LOST PROFITS, ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES IN ANY WAY ARISING OUT OF OR RELATING TO THIS AGREEMENT, EVEN IN THE EVENT SCANSOFT HAS BEEN ADVISED AS TO THE POSSIBILITY OF SUCH DAMAGES. Page 5 12.0 CONFIDENTIAL INFORMATION 12.1 CONFIDENTIALITY. Subject to Section 12.2 below, all ScanSoft information which is marked proprietary, confidential or "ScanSoft or Xerox private data" and is made available to Buyer will be held in confidence by Buyer and will not be disclosed by it to third parties, or used by it, except to the extent authorized by this Agreement. If the information is provided orally or visually, ScanSoft will identify the disclosure as being proprietary or confidential at the time of disclosure and, within thirty (30) days thereafter, reduce it to writing and provide it to Buyer. Buyer may release such confidential information within its own organization on a need-to-know basis only. Buyer's obligations under this section shall survive the termination or expiration of this Agreement. 12.2 EXCEPTIONS. Buyer's obligation hereof shall terminate with respect to any particular portion of the ScanSoft information, other than software source code, (i) when Buyer can document that: (a) it was in the public domain at the time of ScanSoft' communication thereof to Buyer, (b) it entered the public domain through no fault of Buyer subsequent to the time of ScanSoft communication thereof to Buyer, (c) it was in Buyer's possession free of any obligation of confidence at the time of ScanSoft' communication thereof to Buyer, or (d) it was rightfully communicated to Buyer free of any obligation of confidence subsequent to the time of ScanSoft' communication thereof to Buyer; (e) it was developed by employees or agents of Buyer independently of and without reference to any ScanSoft information or other information that ScanSoft has disclosed in confidence to any third party; or (ii) when it is communicated by ScanSoft to a third party free of any obligation of confidence. 12.3 All materials furnished to Buyer by ScanSoft that are designated in writing to be the property of ScanSoft shall remain the property of ScanSoft and shall be returned to ScanSoft promptly at its request or upon the termination or expiration of this Agreement, with all copies made thereof. 12.4 All software object code delivered under this Agreement, whether marked to indicate confidentiality or not, shall be deemed confidential information. Reverse engineering, disassembly or reverse translation of the object code is not permitted. Further, reverse engineering, disassembly or reverse translation of the object code by Buyer, its employees or agents does not constitute independent development under Section 12.2(e). 13.0 TERM AND TERMINATION 13.1 TERM AND RENEWAL. This Agreement is effective upon the date of execution by ScanSoft and Buyer. Subject to the termination provisions set forth in this Agreement, the initial term shall run through December 31 of the first full calendar year following the Agreement execution date. This Agreement may be renewed for successive one-year periods by mutual consent of the parties. Silence shall be interpreted as consent to renew. 13.2 NONRENEWAL. Either party may decline to renew this Agreement at its sole discretion by written notification to the other party at least ninety (90) days prior to the effective date of expiration. 13.3 TERMINATION FOR BUSINESS REASONS. Either party may terminate this Agreement based upon its own business reasons and objectives notwithstanding that the other party is not then in default of its obligations hereunder. In this circumstance, the termination party shall give the other party written notice of termination at least ninety (90) days in advance. 13.4 TERMINATION FOR BREACH. Either party may terminate this Agreement if a breach (other than one under Section 13.5 below) by the other party remains uncured thirty (30) days after written notice of such breach. Page 6 13.5 BREACHES PROVIDING GROUNDS FOR IMMEDIATE TERMINATION. ScanSoft shall have the right to immediately terminate this Agreement if Buyer breaches the provisions of this Agreement regarding: (1) ScanSoft confidential information; (2) the unauthorized license or marketing of ScanSoft Software, or (3) the assignment by Buyer of any rights under this Agreement. 14.0 EFFECT OF TERMINATION 14.1 Termination or nonrenewal by either party shall not relieve the other party of its obligation to make any and all payments due under this Agreement. All monies due to ScanSoft from Buyer shall become immediately due and payable upon any termination. 14.2 Termination or nonrenewal shall not relieve either party of obligations incurred prior to termination or expiration or of obligations which by their nature or term survive termination or expiration. 14.3 Upon termination or expiration, Buyer shall (1) immediately stop production and distribution of the Software (2) cease using the name "ScanSoft, Inc." or "ScanSoft" and any Marks; (3) inform ScanSoft of all technical, advertising, promotional, and marketing materials, and all confidential ScanSoft information, that were supplied to Buyer by ScanSoft and that then remain in Buyer's possession and return that portion of these materials that is requested by ScanSoft in writing; and (4) take appropriate steps to remove or correct all materials that identify Buyer as a OEM licensor of ScanSoft Software. 14.3.1 Upon termination or expiration, Buyer shall destroy any ScanSoft software contained in all types of computer memory and all relevant materials and shall so warrant in writing to ScanSoft within thirty (30) days of termination or expiration, except that Buyer may retain one (1) copy of the Software only for the purposes of providing its customers with ongoing support. Buyer may distribute any paid-for Software in its possession after termination or expiration. 15.0 GENERAL 15.1 NOTICES. All notices or demands required under this Agreement shall be in writing and made by personal service, sent via certified mail return receipt requested, by electronic mail via the Xerox intranet or by facsimile with confirmation of transmission to the address of the receiving party as set forth in this Agreement (or such different address as either party may designate by notifying the other party in writing). 15.2 ASSIGNMENT. Buyer shall not assign, transfer, or sell any of its rights, or delegate any of its responsibilities under this Agreement without ScanSoft' prior written consent. ScanSoft may assign this Agreement only to a third party in connection with a merger, consolidation or joint venture, or to a third party upon a sale or transfer of substantially all of ScanSoft' business assets or substantially all of the assets of a division or group responsible for the Software. 15.3 GOVERNING LAW. This Agreement shall be interpreted in accordance with the laws of the Commonwealth of Massachusetts. 15.4 DISPUTES. The parties will first endeavor to informally resolve all disputes between them prior to resorting to arbitration under this Section. In any event that the parties are unable to informally resolve any material dispute, it will be submitted to a Senior Xerox Executive who has operational management responsibility for both ScanSoft and Buyer. 15.5 NO IMPLIED WAIVERS. Failure of either party to require strict performance by the other party of any provision shall not affect the first party's right to require strict performance thereafter. Waiver by either party of a breach of any provision shall not waive either the provision itself or any subsequent breach. 15.6 SEVERABILITY. A judicial determination that any provision of this Agreement is invalid in whole or part shall not affect the enforceability of other provisions. Page 7 15.7 EXPORT CONTROL. Buyer shall not export any Software or technical data obtained from ScanSoft hereunder to any country for which the United States of America or any agency thereof requires, at the time of export, an export license or any other governmental approval without first obtaining such license or approval. 15.8 ENTIRE AGREEMENT. This Agreement, along with those documents incorporated by reference, constitute the entire agreement between the parties concerning the subject matter hereof, superseding all previous agreements, proposals, representations, or understandings, whether oral or written. Modifications of this Agreement must be in writing and signed by authorized representatives of both parties. IN WITNESS WHEREOF, the parties have executed this Agreement on the dates shown below. SCANSOFT, INC. BUYER: XEROX CORP. - CHANNELS GROUP By: /S/ WAYNE CRANDALL By: /S/ SUSAN BYRD --------------------------- ------------------------------ Name: WAYNE CRANDALL Name: SUSAN BYRD --------------------------- ------------------------------ Title: V. P. SALES Title: V.P.G.M. --------------------------- ------------------------------ Date: JUNE 29, 1998 Date: JUNE 24, 1998 --------------------------- ------------------------------ Address: 9 CENTENNIAL DRIVE Address: --------------------------- ------------------------------ PEABODY, MA 01960 --------------------------- ------------------------------ USA --------------------------- ------------------------------ Phone: 508-977-2000 Phone: 716-264-2558 --------------------------- ------------------------------ Fax: 508-977-2425 Fax: 716-383-9320 --------------------------- ------------------------------ Page 8 SCANSOFT GOLD DISK BUNDLING AGREEMENT EXHIBIT A SOFTWARE AND PRICING **** ROYALTIES: - -------------- Upon the execution of this Agreement, Buyer shall pay to ScanSoft a **** in the amount of $****, as **** royalties according to the Royalty Schedule set forth below. ROYALTY SCHEDULE: - ---------------- Buyer shall pay a per-copy royalty on each copy of the Software made by Buyer according to the following schedule: - ------------------------------------------------------------------------------ SOFTWARE PLATFORM ANNUAL QUANTITY UNIT FEE ($US) - ------------------------------------------------------------------------------ Pagis SE/ TextBridge Pro 3.0 PC **** units $**** Pagis SE/TextBridge Pro 3.0 PC **** units $**** Pagis PRO N/A $**** - ------------------------------------------------------------------------------ QUARTERLY PAYMENT SCHEDULE: -------------------------- Buyer shall provide to ScanSoft within fifteen (15) days after the end of each calendar quarter a detailed statement setting forth the number of units of the Bundled Solutions on or in which copies of the Software were incorporated (regardless of whether any unit of Bundled Solution is actually placed into use) during the previously completed calendar quarter. This statement must be accompanied by payment in full of the fees shown above. Buyer shall use its best efforts to meet the Expected Quantity listed above. PLEASE REMIT PAYMENT FOR INVOICES TO: OR FOR PAYMENT VIA ELECTRONIC FUNDS TRANSFER TO: ScanSoft, Inc. ScanSoft, Inc. Attn: Accounts Receivable C/O Bank of Boston 9 Centennial Drive 100 Federal Street Peabody, MA 01960 USA Boston, MA 02110 USA Account Number: 522-89765 *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 9 SCANSOFT GOLD DISK BUNDLING AGREEMENT EXHIBIT B BUYER'S PRODUCTS BUYER'S PRODUCT: DESCRIPTION: EXPECTED FCS: Page 10 SCANSOFT GOLD DISK BUNDLING AGREEMENT EXHIBIT C STANDARD END-USER SOFTWARE LICENSE AGREEMENT SCANSOFT, INC. A SCANSOFT COMPANY END-USER LICENSE AGREEMENT - ------------------------------------------------------------------------------- THE SOFTWARE IS LICENSED, NOT SOLD, AND AVAILABLE FOR USE ONLY UNDER THE TERMS OF THIS LICENSE AGREEMENT. PLEASE READ THIS AGREEMENT CAREFULLY. BY INSTALLING, COPYING, OR OTHERWISE USING THE SOFTWARE, YOU AGREE TO BE BOUND BY THE TERMS AND CONDITIONS OF THIS AGREEMENT. - ------------------------------------------------------------------------------- This ScanSoft, Inc. ("SCANSOFT") End User License Agreement accompanies a ScanSoft software product and related explanatory written materials ("SOFTWARE"). The term "Software" shall also include any modified versions or updates of the Software licensed to you by ScanSoft, but does not include source code for the ScanSoft software product. This copy of the Software is licensed to you as the end user. 1. LICENSE GRANT. Provided that you agree to the following terms and conditions, ScanSoft grants to you a nonexclusive license to: Install and use one copy of the Software on a single computer; Store or install a copy of the Software on a storage device such as a network server, used only to install or run the Software on your other computers over an internal network, however, you must acquire and dedicate a license for each separate computer on which the Software is installed or run from the storage device. A license for the Software may not be shared or used concurrently on different computers; and Make a single copy of the Software solely for archival purposes. MULTIPLE LICENSE PACK. If you have paid for a Multiple License Pack, you may make additional copies of the Software up to the number of licenses purchased, and you may use each copy in the manner specified above. 2. TERMINATION. Without prejudice to any other rights, ScanSoft may terminate this Agreement if you fail to comply with the terms and conditions of this Agreement. In such event, you must destroy all copies of the Software. 3. RENT/TRANSFER. You may not rent, lease, or sublicense the Software. You may, however, transfer all your rights to use the Software to another person or entity, provided (1) the third party receives a copy of this Agreement and agrees to be bound by its terms and conditions, and (2) you erase or destroy all other copies of the Software, (3) you at all times comply with all applicable United States export control laws and regulations, and (4) if the Software is an upgrade, any transfer must include all prior versions of the Software. 4. COPYRIGHT. The Software is owned by ScanSoft and its suppliers, and the Software structure, organization and code are the valuable assets of ScanSoft and its suppliers. The Software is also protected by United States Copyright Law (Title 17, U.S. Code) and certain International Treaty provisions. You agree not to modify, adapt, translate, reverse engineer, decompile, disassemble or otherwise attempt to discover the source code of the Software. Except as stated in Section 1 above, this Agreement does not grant you any intellectual property rights in the Software. Therefore, you must treat the Software like any other copyrighted material. You may not copy the printed materials accompanying the Software. 5. NO WARRANTY. The Software is being delivered to you "AS IS". SCANSOFT AND ITS SUPPLIERS DO NOT AND CANNOT WARRANT THE PERFORMANCE OR RESULTS YOU MAY OBTAIN BY USING THE SOFTWARE OR DOCUMENTATION. SCANSOFT AND ITS SUPPLIERS MAKE NO WARRANTIES, EXPRESS OR IMPLIED, AS TO NONINFRINGEMENT OF THIRD PARTY RIGHTS, MERCHANTABILITY, OR FITNESS FOR ANY PARTICULAR PURPOSE. IN NO EVENT WILL SCANSOFT OR ITS SUPPLIERS BE LIABLE TO YOU FOR ANY CONSEQUENTIAL, INCIDENTAL OR SPECIAL DAMAGES, INCLUDING ANY LOST PROFITS OR LOST SAVINGS, EVEN IF A SCANSOFT REPRESENTATIVE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, OR FOR ANY CLAIM BY ANY THIRD PARTY. Some states or jurisdictions do not allow the exclusion or limitation of incidental, consequential or special damages, or the exclusion of implied warranties or limitations on how long an implied warranty may last, so the above limitations may not apply to you. 6. GOVERNING LAW AND GENERAL PROVISIONS. This Agreement will be governed by the laws of the State of Massachusetts U.S.A., excluding the application of its conflicts of law rules. This Agreement will not be governed by the United Nations Convention on Contracts for the International Sale of Goods, the application of which is expressly excluded. If any part of this Agreement is found void and unenforceable, it will not affect the validity of the balance of the Agreement, which shall remain valid and enforceable according to its terms. You agree that the Software will not be shipped, transferred or exported into any country or used in any manner prohibited by the United States Export Administration Act or any other export laws, restrictions or regulations. This Agreement shall automatically terminate upon failure by you to comply with its terms. This Agreement may only be modified in writing signed by an authorized officer of ScanSoft. 7. U.S. GOVERNMENT RESTRICTED RIGHTS. The Software and documentation are provided with RESTRICTED RIGHTS. If this product is acquired under the terms of a: GSA contract- Use, reproduction or disclosure is subject to the restrictions set forth in the applicable ADP Schedule contract; DoD contract- Use, duplication or disclosure by the Government is subject to restrictions as set forth in subparagraph (c) (1) (ii) of 252.227-7013; Civilian agency contract- Use, reproduction, or disclosure is subject to 52.227-19 (a) through (d) and restrictions set forth in the accompanying end user agreement. Unpublished-rights reserved under the copyright laws of the United States. ScanSoft, Inc., 9 Centennial Drive, Peabody, MA 01960 USA ScanSoft, , TextBridge and Pagis are trademarks of either ScanSoft, Inc. or Xerox Corporation and may be registered in certain jurisdictions. (c) 1997 ScanSoft, Inc. All rights reserved. 0697-td-license\scansoft_lics1.
Page 11 SCANSOFT GOLD DISK BUNDLING AGREEMENT EXHIBIT D LABEL INFORMATION & MATERIALS SPECIFICATIONS FOR CD VERSION (TO BE PROVIDED) Page 12 SCANSOFT GOLD DISK BUNDLING AGREEMENT EXHIBIT E LOGO USAGE GUIDELINES (TO BE PROVIDED) Page 13 SCANSOFT GOLD DISK BUNDLING AGREEMENT EXHIBIT F TRADEMARK USAGE GUIDELINES The following footnote should appear on all material which bear ScanSoft Trademarks. Pagis(TM) is a Trademark of the ScanSoft Corporation. AMENDMENT #1 TO THE GOLD DISK BUNDLING AGREEMENT: PAGIS(TM) SE & PAGIS PRO AMENDMENT NO. 1 to the GOLD DISK BUNDLING AGREEMENT: PAGIS(TM) SE & PAGIS PRO ("THE AGREEMENT"), dated, July 10, 1997 between Xerox Corporation through its Channels Group ("XEROX"), having offices at East Rochester, New York, and SCANSOFT, INC. ("SCANSOFT"), having offices at 9 Centennial Drive, Peabody, MA, 01960. Terms not otherwise defined herein are used herein as defined in the GOLD DISK BUNDLING AGREEMENT: PAGIS (TM) SE & PAGIS PRO. WHEREAS, ScanSoft and Xerox desire to provide certain modification to the Agreement. NOW, THEREFORE, in consideration of the foregoing and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1.0 PREMISES. ScanSoft and Xerox agree to incorporate into the Agreement the addition of new licensed software (TextBridge Pro 98) and its corresponding royalty schedule listed below. The TextBridge Pro 98 software shall be bound by the same terms and conditions and will be collectively referred to as the ("SOFTWARE") in both the Agreement and this Amendment unless specifically called out. Xerox may bundle TextBridge Pro with any Xerox's scanners models. 2.0 TERM. This Amendment is effective upon the date of execution by ScanSoft and Xerox. The term covered by License Grant in this Amendment shall be consistent with, and subject to, the Term and Termination provisions outlined in the Agreement. 3.0 LICENSE GRANT. During the term of this Amendment, ScanSoft hereby grants to Xerox, under ScanSoft's applicable patents, copyrights and other intellectual property rights, a nonexclusive worldwide license to use the Software and reproduce copies in object code format only, onto the media upon which a Product is distributed and to distribute such copy within the Products sold, leased and/or licensed by Xerox. 4.0 ROYALTY FEES. Prepaid Royalties: In consideration of the above License Grant and upon the execution of this Amendment, Xerox shall pay to ScanSoft a **** in the amount of $****, for **** units, as prepaid royalties according to the Royalty Schedule set forth below. ROYALTY SCHEDULE: Xerox shall pay a per-copy royalty on each copy of the Software made by Xerox according to the following schedule: - ------------------------------------------------------------------------------ SOFTWARE PLATFORM EXPECTED ANNUAL QUANTITY UNIT FEE ($US) - ------------------------------------------------------------------------------ TextBridge Pro 98 PC **** $**** - ------------------------------------------------------------------------------ Except as specified herein, the Agreement shall remain as stated. In the event of a conflict between the terms and conditions of the Agreement and this Amendment, the Amendment shall control. IN WITNESS WHEREOF, duly authorized representatives of ScanSoft and Xerox have executed this Amendment. SCANSOFT, INC. XEROX CORPORATION By: /S/ WAYNE CRANDALL By: /S/ SUSAN BYRD ---------------------------- --------------------------------- Name: WAYNE CRANDALL Name: SUSAN BYRD -------------------------- ------------------------------- Title: VICE PRESIDENT Title: V.P./G.M. ------------------------- ------------------------------ Date: OCTOBER 23, 1998 Date: OCTOBER 22, 1998 -------------------------- ------------------------------- *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 15 AMENDMENT #2 TO THE GOLD DISK BUNDLING AGREEMENT: PAGIS(TM) SE & PAGIS PRO AMENDMENT NO. 2 to the GOLD DISK BUNDLING AGREEMENT: PAGIS(TM) SE & PAGIS PRO ("THE AGREEMENT"), dated, July 10, 1997 between Xerox Corporation through its Channels Group ("XEROX"), having offices at East Rochester, New York, and SCANSOFT, INC. ("SCANSOFT"), having offices at 9 Centennial Drive, Peabody, MA, 01960. Terms not otherwise defined herein are used herein as defined in the GOLD DISK BUNDLING AGREEMENT: PAGIS (TM) SE & PAGIS PRO. WHEREAS, ScanSoft and Xerox desire to provide certain modification to the Agreement and Amendment No. 1 dated October 23, 1998. NOW, THEREFORE, in consideration of the foregoing and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1.0 PREMISES. ScanSoft and Xerox agree to incorporate into the Agreement the addition of new Xerox Products and their corresponding royalty schedule listed below. For purposes of this Amendment, ("PRODUCTS") shall be specifically defined as the Xerox models ****. Xerox may add other hardware devise models to the Products listed upon prior written notice to ScanSoft. 2.0 TERM. This Amendment is effective upon the date of execution by ScanSoft and Xerox. The term covered by License Grant in this Amendment shall be consistent with, and subject to, the Term and Termination provisions outlined in the Agreement. 3.0 LICENSE GRANT. During the term of this Amendment, ScanSoft hereby grants to Xerox, under ScanSoft's applicable patents, copyrights and other intellectual property rights, a nonexclusive worldwide license to use the Software and reproduce copies in object code format only, onto the media upon which a Product is distributed and to distribute such copy within the Products sold, leased and/or licensed by Xerox. 4.0 ROYALTY FEES. In consideration of the above License Grant and upon the execution of this Amendment, Xerox shall pay to ScanSoft a **** in the amount of $****, as prepaid royalties according to the Royalty Schedule set forth below. ROYALTY SCHEDULE: - ---------------- Xerox shall pay a per-copy royalty on each copy of the Software made by Xerox according to the following schedule:
- ---------------------------------------------------------------------------------------------- SOFTWARE PLATFORM EXPECTED ANNUAL QUANTITY UNIT FEE ($US) - ---------------------------------------------------------------------------------------------- Pagis Pro 2.0 and TextBridge Pro 3.0 PC **** $**** for Win 3.x users (see detail below) - ----------------------------------------------------------------------------------------------
SOFTWARE DESCRIPTION: **** shall contain: **** and **** for **** and **** and **** and ****. **** shall contain: **** **** shall contain: **** in **** (**** per ****. DELIVERY: **** PAYMENT TERMS: **** *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 16 NOTE: Unit Fee royalty rates stated above are applicable to the specific product models listed in section 1.0. For all other models the royalty shall remain as stated in the Agreement. Except as specified herein, the Agreement shall remain as stated. In the event of a conflict between the terms and conditions of the Agreement or Amendment No. 1 and this Amendment, this Amendment (Amendment No. 2) shall control. IN WITNESS WHEREOF, duly authorized representatives of ScanSoft and Xerox have executed this Amendment. SCANSOFT, INC. XEROX CORPORATION By: /S/ WAYNE CRANDALL By: /S/ GEORGE HERBERT ---------------------------- -------------------------------- Name: WAYNE CRANDALL Name: GEORGE D. HERBERT -------------------------- ------------------------------ Title: V.P. SALES Title: V.P./G.M. ------------------------- ----------------------------- Date: DECEMBER 22, 1998 Date: DECEMBER 22, 1998 -------------------------- ------------------------------ Page 17 AMENDMENT #3 TO THE GOLD DISK BUNDLING AGREEMENT: PAGIS(TM) SE & PAGIS PRO AMENDMENT NO. 3 to the GOLD DISK BUNDLING AGREEMENT: PAGIS(TM) SE & PAGIS PRO ("THE AGREEMENT"), dated, July 10, 1997 between Xerox Corporation through its Channels Group ("XEROX"), having offices at East Rochester, New York, and SCANSOFT, INC. ("SCANSOFT"), having offices at 9 Centennial Drive, Peabody, MA, 01960. Terms not otherwise defined herein are used herein as defined in the GOLD DISK BUNDLING AGREEMENT: PAGIS (TM) SE & PAGIS PRO. WHEREAS, ScanSoft and Xerox desire to provide certain modification to the Agreement, Amendment No. 1 dated October 23, 1998, Amendment No. 2 dated December 22, 1998. NOW, THEREFORE, in consideration of the foregoing and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1.0 PREMISES. ScanSoft and Xerox agree to incorporate into the Agreement the addition of new Xerox Products and their corresponding royalty schedule listed below. For purposes of this Amendment, ("PRODUCTS") shall be specifically defined as the Xerox model: ****. Xerox may add other hardware devise models to the Products listed upon prior written notice to ScanSoft. 2.0 TERM. This Amendment is effective upon the date of execution by ScanSoft and Xerox. The term covered by License Grant in this Amendment shall be consistent with, and subject to, the Term and Termination provisions outlined in the Agreement. 3.0 LICENSE GRANT. During the term of this Amendment, ScanSoft hereby grants to Xerox, under ScanSoft's applicable patents, copyrights and other intellectual property rights, a nonexclusive worldwide license to use the Software and reproduce copies in object code format only, onto the media upon which a Product is distributed and to distribute such copy within the Products sold, leased and/or licensed by Xerox. 4.0 ROYALTY FEES. In consideration of the above License Grant and upon the execution of this Amendment, Xerox shall pay to ScanSoft a **** in the amount of $****, as prepaid royalties according to the Royalty Schedule set forth below. ROYALTY SCHEDULE: - ---------------- Xerox shall pay a per-copy royalty on each copy of the Software made by Xerox according to the following schedule:
- ----------------------------------------------------------------------------------------------------- SOFTWARE PLATFORM EXPECTED ANNUAL QUANTITY UNIT FEE ($US) - ----------------------------------------------------------------------------------------------------- Pagis Pro 2.0 and TextBridge Pro 3.0 PC **** $**** for Win 3.x users (see detail below) - -----------------------------------------------------------------------------------------------------
SOFTWARE DESCRIPTION: **** shall contain: **** and **** for **** and **** and **** and **. **** shall contain: **** **** shall contain: **** in **** (**** per ****. DELIVERY: **** PAYMENT TERMS: **** NOTE: Unit Fee royalty rates stated above are applicable to the specific product models listed in section 1.0. For all other models the royalty shall remain as stated in the Agreement. *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 18 Except as specified herein, the Agreement shall remain as stated. In the event of a conflict between the terms and conditions of the Agreement, Amendment No. 1 or Amendment No. 2 and this Amendment, then this Amendment (Amendment No. 3) shall control. IN WITNESS WHEREOF, duly authorized representatives of ScanSoft and Xerox have executed this Amendment. SCANSOFT, INC. XEROX CORPORATION By: /S/ WAYNE CRANDALL By: /S/ SUSAN BYRD ----------------------------------- ------------------------------- Name: WAYNE CRANDALL Name: SUSAN BYRD --------------------------------- ----------------------------- Title: V.P. SALES Title: -------------------------------- ---------------------------- Date: JANUARY 5, 1998 Date: DECEMBER 18, 1998 --------------------------------- ----------------------------- Page 19 AMENDMENT #4 TO THE GOLD DISK BUNDLING AGREEMENT: PAGIS(TM) SE & PAGIS PRO AMENDMENT NO. 4 to the GOLD DISK BUNDLING AGREEMENT: PAGIS(TM) SE & PAGIS PRO ("THE AGREEMENT"), dated, July 10, 1997 between Xerox Corporation through its Channels Group ("XEROX"), having offices at East Rochester, New York, and SCANSOFT, INC. ("SCANSOFT"), having offices at 9 Centennial Drive, Peabody, MA, 01960. Terms not otherwise defined herein are used herein as defined in the GOLD DISK BUNDLING AGREEMENT: PAGIS (TM) SE & PAGIS PRO. WHEREAS, ScanSoft and Xerox desire to provide certain modification to the Agreement, Amendment No. 1 dated October 23, 1998, Amendment No. 2 dated December 22, 1998, and Amendment No.3 dated January 5, 1999. NOW, THEREFORE, in consideration of the foregoing and the mutual promises hereinafter set forth, the parties hereto agree as follows: 1.0 PREMISES. ScanSoft and Xerox agree to incorporate into the Agreement the addition of new ScanSoft licensed Software (**** as an **** of **** software) and its corresponding royalty schedule listed below. For purposes of this Amendment, ("PRODUCTS") shall be specifically defined as the Xerox model: ****. Xerox may add other hardware devise models to the Products listed upon prior written notice to ScanSoft. Xerox **** the **** except as **** of **** software combined with the Product. 2.0 TERM. This Amendment is effective upon the date of execution by ScanSoft and Xerox. The term covered by License Grant in this Amendment shall be consistent with, and subject to, the Term and Termination provisions outlined in the Agreement. 3.0 LICENSE GRANT. During the term of this Amendment, ScanSoft hereby grants to Xerox, under ScanSoft's applicable patents, copyrights and other intellectual property rights, a nonexclusive worldwide license to use the Software and reproduce copies in object code format only, onto the media upon which a Product is distributed and to distribute such copy within the Products sold, leased and/or licensed by Xerox. 4.0 ROYALTY FEES. In consideration of the above License Grant and upon the execution of this Amendment, Xerox shall pay to ScanSoft a **** in the amount of $****, as prepaid royalties according to the Royalty Schedule set forth below. ROYALTY SCHEDULE: - ---------------- Xerox shall pay a per-copy royalty on each copy of the Software made by Xerox according to the following schedule:
- -------------------------------------------------------------------------------------------------------------------- SOFTWARE PLATFORM EXPECTED ANNUAL QUANTITY UNIT FEE ($US) - -------------------------------------------------------------------------------------------------------------------- TextBridge API as provided within the PC **** $**** WordCraft Fax Software Application - --------------------------------------------------------------------------------------------------------------------
PAYMENT TERMS: **** Except as specified herein, the Agreement shall remain as stated. In the event of a conflict between the terms and conditions of the Agreement, Amendment No. 1, Amendment No. 2 and Amendment No. 3 and this Amendment, then this Amendment (Amendment No. 4) shall control. IN WITNESS WHEREOF, duly authorized representatives of ScanSoft and Xerox have executed this Amendment. SCANSOFT, INC. XEROX CORPORATION By: /S/ WAYNE CRANDALL By: /S/ SUSAN P. BYRD ---------------------------- --------------------------------- Name: WAYNE CRANDALL Name: SUSAN P. BYRD -------------------------- ------------------------------- Title: VICE PRESIDENT SALES Title: VPMG, XCG ------------------------- ------------------------------ Date: JANUARY 12, 1999 Date: JANUARY 12, 1999 -------------------------- ------------------------------- *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 20 EX-10.16 7 GOLD DISK BUNDLING AGREEMENT CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE BEEN REDACTED --------------------------------------------------------- AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION -------------------------------------------------- SCANSOFT - XEROX GOLD DISK BUNDLING AGREEMENT This Agreement is between XEROX CORPORATION, OFFICE DOCUMENT PRODUCTS GROUP and such Xerox Affiliates as defined below ("XEROX"), and SCANSOFT, INC. ("SCANSOFT") a Xerox company as agreed in writing to be bound by the terms and conditions hereof, and shall be effective as of March __, 1998 ("Effective Date"), upon the terms and conditions set forth below. 1.0 PREMISES & DEFINITIONS 1.1 This Agreement applies only to the ScanSoft-brand software product(s) listed in Section 3.2 (referred to collectively as the "SOFTWARE"). 1.2 "XEROX AFFILIATES" shall mean Xerox Canada Inc., Xerox Limited, and Fuji Xerox Co. Ltd., and any entity, which is 50% or more, owned directly or indirectly by Xerox Corporation or Xerox Limited but shall not include ScanSoft, Inc. 1.3 Xerox wishes to acquire a master copy of the Software and its documentation on disk (the "GOLD DISK"), to produce copies of the Software and its associated documentation, combine such Software with multi-function devices ("DOCUMENT CENTRE SYSTEMS" AND SIMILAR HARDWARE) to create "BUNDLED SOLUTIONS" and to distribute such Bundled Solutions to Xerox Affiliates, resellers and end users. Xerox shall not distribute the Software except as part of the Bundled Solutions. 1.4 A Bundled Solution will include **** (****) Software licenses for each Document Centre System sold, **** (****) Software licenses for individual users and one (1) license for a server based OCR application. Customers that require more than **** per multi-function device installation may order additional copies of Software directly from ScanSoft. 2.0 ADDITIONAL RESPONSIBILITIES OF XEROX 2.1 MARKETING. "TextBridge Pro" and/or the ScanSoft Software logo, provided to Xerox upon signing of this Agreement, may be displayed in all advertising, product literature, and in a conspicuous location on the Bundled Solutions packaging. ScanSoft will provide the artwork for the logo. 2.1.1 Xerox agrees to provide ScanSoft with access to all registered customers of Xerox' Bundled Solution through the ScanSoft software support registration process if a registration process is used and database is available 2.1.2 Xerox shall provide ScanSoft, at no charge, one (1) unit each of the Bundled Solutions to be used for support training, QA testing and promotional activities. 3.0 ROYALTIES 3.1 The Software shall be licensed at the Bundled Solution license fee set forth below. A Bundled Solution license fee is payable to ScanSoft based on the calculated number of Bundled Solutions. The parties agree that in order to calculate the Bundled Solution royalty payable to ScanSoft, Xerox shall not less than quarterly, submit to ScanSoft a statement showing the net number of royalty bearing units of Software licensed to third parties which shall be calculated by subtracting the number of units of Software returned by third parties in conjunction with the return of a unit of the multi-function device from the total number of units of the Software licensed to a third party during such period. Xerox may use a reasonable number of copies for demonstration and promotion purposes without paying a license fee. The TextBridge Pro component of the Software shall be distributed by Xerox with ****, in an earlier version if possible. Xerox may license additional units of Software at the Unit License Fee below for customers who *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 1 request additional Software units. Such Software license shall not exceed **** (****) licenses per sale of each Document Centre Systems and/or similar hardware. 3.2 Upon the execution of this Agreement, Xerox shall pay to ScanSoft royalties according to the schedule set forth below:
- ------------------------------------------------------------------------------------------------------------ SOFTWARE PLATFORMS PRE-PAID UNIT LICENSE FEE BUNDLED SOLUTION (FOR ****) SUPPORTED LICENSES ($US) LICENSE FEE (EXTENDED SYSTEM FEE) - ------------------------------------------------------------------------------------------------------------ TEXTBRIDGE PRO (TEXTBRIDGE PRO FOR WINDOWS 3.1) PC-Win95, WinNT **** $**** $**** (TEXTBRIDGE PRO 98 FOR WINDOWS and Win 3.11 95/NT 4.0) See ATTACHMENT II - TEXTBRIDGE PRO LANGUAGE SPECIFICATIONS for complete list of User Interfaces and Recognized Languages supported. - ------------------------------------------------------------------------------------------------------------
3.3 Xerox shall provide to ScanSoft, within **** (****) days after the end of each calendar quarter, a detailed statement setting forth the net number of the Bundled Solutions on which copies of the Software were licensed or sublicensed to third parties during the previously completed calendar quarter. The statement shall be accompanied by payment in full for license fees due to ScanSoft. 4.0 SECOND LEVEL TECHNICAL SUPPORT 4.1 The details of training delivery by ScanSoft and the TextBridge Pro training material are listed in Attachment III - TEXTBRIDGE PRO TECHNICAL SUPPORT AND TRAINING. 4.2 ScanSoft will provide Second and Third Level Support to Xerox' Customer Support, as it may be reasonably requested by Xerox, to fulfill its maintenance obligations to its resellers and end users. The details of technical support responsibilities of ScanSoft and Xerox are listed in Attachment III - TEXTBRIDGE PRO TECHNICAL SUPPORT AND TRAINING. 4.3 If customer problem was determined to be caused by a defect in media, Xerox shall issue a replacement media to a customer and Xerox agrees to pay for all associated costs incurred by such replacement. 5.0 TITLE Title and all rights of ownership to the Software, and all copies of all or any part thereof, are and remain with ScanSoft at all times. Xerox agrees to place Xerox-ScanSoft's copyright notice (using the international copyright symbol) on each copy of Software made by Xerox. 6.0 LICENSE 6.1 LICENSE GRANT. ScanSoft hereby grants to Xerox, under ScanSoft's applicable patents, copyrights and other intellectual property rights, a perpetual, nonexclusive, worldwide right and license to use, market, maintain, reproduce, (in any medium including firmware) translate, prepare, display, lease, and sub-license the Software and reproduce copies in object code format only, onto the media form contained within a Bundled Solution and to distribute such copies with the Bundled Solutions sold, leased and/or licensed by Xerox. *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 2 6.2 Xerox shall ensure that each copy of the Software is marketed with (1) the Software's user documentation, (2) the Software License Agreement, and (3) Electronic Warranty Registration Process. Xerox shall adhere to ScanSoft's specifications (in Attachment I) for the Software's user documentation when manufacturing such documentation. Any deviations from such specifications will require advance written approval from ScanSoft. ScanSoft may require samples reflecting such deviations for review prior to issuing its approval. 6.3 ScanSoft shall ensure compatibly between the Software and Xerox' Products. Xerox shall test such Software compatibility in their standard end-user configuration. If the Software and Xerox' Products are not compatible then Xerox may use the options stated in 7.03 as a remedy. 7.0 WARRANTY AFTER APPROVAL 7.01 The Software provided to Xerox herein is licensed without any modification or customization. ScanSoft shall warrant the Gold Disk to be free from known viruses and material program defects for a period of thirty (30) days from the date of delivery of the master Gold Disk. 7.02 If any material program errors with the Software are discovered by Xerox, ScanSoft shall use reasonable efforts to correct such errors at no charge to Xerox within a correction period of thirty (30) days following receipt of written notice from Xerox of such errors. 7.03 If the program errors of 7.02 cannot be eliminated by ScanSoft in the thirty (30) day correction period, then as Xerox' remedy and at its option Xerox may: (a) extend the correction period by an amount of time as may be determined by Xerox; or (b) approve the Software with an equitable reduction in any Fee as materially determined by the parties; or (c) reject the Software by notifying ScanSoft of such in writing and promptly returning all Software to ScanSoft with all copies made thereof and ScanSoft shall refund the License Fee paid by Xerox for such units of Software returned to Xerox by its customers within the warranty period stated in section 7.01. 7.04 EXCEPT FOR THE EXPRESS WARRANTIES SET FORTH HEREIN, SCANSOFT HEREBY DISCLAIMS AND XEROX HEREBY EXPRESSLY WAIVES ANY AND ALL OTHER EXPRESS WARRANTIES OR REPRESENTATIONS OF ANY KIND OR NATURE, AND ANY AND ALL IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. 7.05 END-USER WARRANTY. In the event any end user makes a warranty claim against ScanSoft or which is outside of the warranty set forth in Section 7.01, ScanSoft shall honor such warranty but Xerox shall hold ScanSoft harmless from and against such warranty claims and Xerox shall pay ScanSoft the actual costs incurred by ScanSoft in honoring such warranty claim. 8. 0 TERMINATION 8.01 This Agreement is effective upon the date of execution by ScanSoft and Xerox ODPG. Subject to the termination provisions set forth in this Agreement, the initial term shall commence on the Effective Date and run for an eighteen (18) month period. This Agreement may be renewed for successive one-year periods by mutual written consent of the parties. Upon termination or expiration, Xerox shall stop production and distribution of the Software. 8.02 Either ScanSoft or Xerox may terminate this Agreement by written notice of termination to the other party upon a material breach by ScanSoft or Xerox which has not been cured within thirty (30) days of written notice of such breach. Confidential Obligations (the obligations as to Confidential Information) herein shall not be waived and shall survive termination. 8.03 BREACHES PROVIDING GROUNDS FOR IMMEDIATE TERMINATION. ScanSoft shall have the right to immediately terminate this Agreement if Xerox breaches the provisions of this Agreement regarding: (1) ScanSoft confidential information; (2) the unauthorized license or marketing of ScanSoft Software. Page 3 8.04 Xerox reserves the right, in whole or in part, in the exercise of its discretion, to terminate this Agreement upon not less than thirty (30) days written notice to ScanSoft. In the event of termination or upon expiration of this Agreement, ScanSoft shall return to Xerox any and all documents, materials, work product and all copies made thereof, which were obtained by ScanSoft from Xerox. 9.0 EFFECT OF TERMINATION 9.01 Termination or nonrenewal shall not relieve either party of obligations incurred prior to termination or expiration or of obligations which by their nature or term survive termination or expiration. All monies due to ScanSoft from Xerox shall become immediately due and payable upon any termination. 9.02 Upon termination or expiration, Xerox shall (1) immediately stop production and distribution of the Software and (2) cease using the name "ScanSoft" or "TextBridge Pro". Xerox shall destroy any ScanSoft software contained in all types of computer memory and all relevant materials and shall so warrant in writing to ScanSoft within thirty (30) days of termination or expiration, except that Xerox may retain a reasonable quantity of the Software only for the purposes of providing its customers with ongoing support. Xerox may distribute any paid-for Software in its possession after termination or expiration. 9.03 Additionally, each party shall return to the other party any and all confidential documents or materials. 10.0 INDEMNIFICATION 10.01 ScanSoft represents and warrants that it has sufficient right, title and interest in and to the Software to enter into this Agreement and further warrants that it is not aware that Software infringes any patent, copyright or other proprietary right of a third party and that it has not been notified by a third party of a possibility that the Software might infringe any patent, copyright or other proprietary right of a third party. 10.02 ScanSoft shall defend Xerox and Xerox Affiliates from, and pay any judgment for, any claim, action or other proceeding brought against Xerox or Xerox Affiliates arising from the use of the Software, providing that such Xerox or Xerox Affiliates promptly notifies ScanSoft in writing of any action or claim, allows ScanSoft, at ScanSoft's expense, to direct the defense, gives ScanSoft full information and reasonable assistance required to defend such suit, claim or proceeding, at no out-of-pocket expense to Xerox, and allows ScanSoft to pay any judgment, provided further that ScanSoft shall have no liability for any claim, action or other proceeding based upon acts or omissions by Xerox, the combination of the Software with hardware or software not provided by ScanSoft if the claim relates to such combination, or for settlements or costs incurred without the knowledge of ScanSoft. To avoid infringement, ScanSoft may, at its option, and at no charge to Xerox, obtain a license or right to continue the use of the Software, or modify the Software so it no longer infringes, but is still a functional equivalent of the Software, or substitute a functional equivalent of the Software. If none of the foregoing are commercially practicable, ScanSoft may, as Xerox' remedy under this Section 10.02 accept the return of all infringing Software and refund to Xerox all applicable License Fees therefore. 10.03 The foregoing indemnity does not apply, and Xerox agrees to indemnify ScanSoft (including reasonable costs and attorneys' fees), with respect to any claim brought against ScanSoft concerning patent or copyright infringement allegedly arising from: (1) the unauthorized combination or utilization by Xerox of any Software or (2) the unauthorized modification of any Software by Xerox; (3) any Software manufactured by ScanSoft to Xerox' specifications; (4) the production of images in violation of the proprietary rights of third parties. 11.0 DISCLAIMER 11.01 IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER FOR LOST CONTRACTS OR LOST PROFITS OR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES IN ANY WAY ARISING OUT OF THE USE OF THE SOFTWARE OR RELATING TO THIS AGREEMENT HOWEVER CAUSED UNDER A CLAIM Page 4 OF ANY TYPE OR NATURE BASED ON ANY THEORY OF LIABILITY (INCLUDING CONTRACT, TORT OR WARRANTY) EVEN IF THE POSSIBILITY OF SUCH DAMAGES HAS BEEN COMMUNICATED. THIS DISCLAIMER DOES NOT APPLY TO THE AFORESAID INDEMNIFICATION. 12.0 FORCE MAJEURE 12.01 Neither party shall be liable to the other for its failure to perform any of its obligations hereunder during any period in which such performance is delayed by circumstances beyond its reasonable control, provided that the party experiencing such delay promptly notifies the other party of the delay. 13.0 CONFIDENTIAL INFORMATION 13.01 This Agreement supersedes any prior agreement with Office Document Products as to the Software (with respect to Confidential Information). 13.02 Each party agrees not to intentionally disclose or intentionally make available to any third party information received from the other party (hereinafter referred to as "Information" or "Confidential Information") in any form without the express written approval of the disclosing party. 13.03 Receiving party shall not use such Information except to the extent necessary to perform under this Agreement and shall not intentionally circulate the Information within its own organization except to those with a specific need to know such Information. If written approval by disclosing party is given to receiving party to disclose Information to a third party, receiving party shall impose similar confidential restrictions on such third party to whom it discloses such Information. 13.04 The obligations on receiving party recited herein shall terminate with respect to any particular portion of such Information when and to the extent that it is or becomes: (a) part of the public domain through no fault of receiving party; (b) communicated by disclosing party to a third party free of any obligation of confidence; (c) independently developed by receiving party with-out any reference to the Information; (d) known to receiving party free of any obligation of confidence. 13.05 In no event shall the obligation of receiving party with respect to the Information extend beyond three (3)years from the date of disclosure. 13.06 Upon request by disclosing party or termination of this Agreement, whichever occurs first, receiving party agrees to promptly return the Information to the disclosing party. 14.0 ASSIGNMENT 14.01 This Agreement may not be assigned or transferred by either party without the prior written approval of the other party; provided that ScanSoft may assign its rights to any purchaser of all or substantially all of its business, and Xerox may assign its rights hereunder, or any portion thereof, to any subsidiary or affiliate of Xerox or to any purchaser of all or substantially all of its equipment business for which the Software is then licensed. Further, Xerox' or Xerox Affiliates' rights and obligations under this Agreement may be exercised and performed in whole or in part by any subsidiary or affiliate of Xerox, provided that Xerox shall continue to be responsible to ScanSoft for the performance of its obligations under this Agreement. Subject to the limitations heretofore expressed, this Agreement shall inure to the benefit of and be binding upon the parties, their successors, administrators, heirs and assigns. 15.0 MODIFICATION 15.01 This Agreement constitutes the entire Agreement of the parties as to the subject matter hereof and supersedes all prior and contemporaneous communications. This Agreement shall not be modified, except by a written Agreement signed by duly authorized representatives of ScanSoft and Xerox. Page 5 16.0 BANKRUPTCY OF SCANSOFT OR XEROX 16.01 To the extent permitted by applicable law (including II U.S.C. Section 365) the non-defaulting party may terminate this Agreement immediately by written notice to the other in the event the other party makes an assignment for the benefit of its creditors, admits in writing an inability to pay debts as they mature, a trustee or receiver is appointed respecting all or a substantial part of the other party's assets, or a proceeding is instituted by or against the other party under any provision of the Federal Bankruptcy Act and is acquiesced in or is not dismissed within sixty (60) days, or results in an adjudication of bankruptcy. To the extent applicable law prevents the non-defaulting party from terminating this Agreement, if it should wish to do so as described above, then the parties shall have only those rights and remedies permitted by applicable law, including the United States Bankruptcy Act, including but not limited to II U.S.C. Section 365. 17.0 COMPLIANCE WITH THE LAW 17.01 Each party represents and warrants compliance with all Federal, State and local laws, ordinances and regulations applicable to this Agreement including, but not limited to, (a) applicable requirements of (a)of the Fair Labor Standards Act, (b) Executive Order 11246(c) the Vietnam Era Veterans Readjustment Assistance Act and the Rehabilitation Act. 18.0 NONPUBLICITY 18.01 Without prior written consent of the other Party, a party shall not (a) make any news release, public announcement, denial or confirmation of this Agreement or its subject matter, or (b) advertise or publish any facts relating to this Agreement. 19.0 CONTROLLING LAW 19.01 This Agreement shall be governed and construed in accordance with the laws of the Commonwealth of Massachusetts. 20.0 GENERAL PROVISIONS 20.01 Waiver Failure of either party to require strict performance by the other party of any provision shall not affect the first party's right to require strict performance thereafter. Waiver by either party of a breach of any provision shall not waive either the provision itself or any subsequent breach. 20.02 No Agency It is agreed and understood that neither Xerox nor ScanSoft has any authority to bind the other with respect to any matter hereunder. Under no circumstances shall either Xerox or ScanSoft have the right to act or make any commitment of any kind to any third party on behalf of the other or to represent the other in any way as an agent. 20.03 Survival The provisions of this Agreement shall, to the extent applicable, survive the expiration or any termination hereof including, but without limitation, any perpetual license herein granted. 20.04 Headings The headings and titles of the Sections of the Agreement are inserted for convenience only, and shall not affect the construction or interpretation of any provision. 20.05 Severability If any provision of the Agreement is held invalid by any law, rule, order or regulation of any government, or by the final determination of any state or federal court, such invalidity shall not affect the enforceability of any other provisions not held to be invalid. 20.06 Entire Agreement This Agreement constitutes the entire Agreement of the parties as to the subject matter hereof and supersedes any and all prior oral or written memoranda, understandings and Agreements as to such subject matter. 21.0 YEAR 2000 WARRANTY ------------------ Page 6 21.01 ScanSoft represents and warrants that the Software and Third Party Software delivered under this Agreement is Year 2000 performance compliant and thus shall be able to accurately process date data (including, but not limited to, calculating, comparing, and sequencing) from, into, and between the twentieth and twenty-first centuries, including leap year calculations. The remedies available to Xerox for breach of this warranty shall include prompt repair or replacement of any Software and Third Party Software or part thereof whose non-compliance is discovered and made known to ScanSoft in writing. Nothing in this warranty shall be construed to limit any rights or other remedies Xerox may otherwise have under this Agreement with respect to uncorrected program errors or defects. IN WITNESS WHEREOF, the parties have executed this Agreement on the dates shown below. SCANSOFT, INC. XEROX CORPORATION, ODP By: /S/ WAYNE CRANDALL By: /S/ RAY VALUKONIS -------------------------- ---------------------------- Name: WAYNE CRANDALL Name: RAY VALUKONIS -------------------------- ---------------------------- Title: V.P. Title: V.P. FINANCE -------------------------- ---------------------------- Date: MARCH 25, 1998 Date: MARCH 19, 1998 -------------------------- ---------------------------- Address: 9 CENTENNIAL DRIVE Address: 200 CANAL VIEW BLVD, MS 831 --------------------------- ---------------------------- PEABODY, MA 01960 ROCHESTER, NY 14623 --------------------------- ---------------------------- USA USA --------------------------- ---------------------------- Phone: 978-977-2000 Phone: --------------------------- ---------------------------- Fax: 978-977-2425 Fax: --------------------------- ---------------------------- Page 7 SCANSOFT - XEROX GOLD DISK BUNDLING AGREEMENT ATTACHMENT I TEXTBRIDGE PRO MATERIALS SPECIFICATIONS 1) TEXTBRIDGE PRO SOFTWARE KIT (CD) A) SOFTWARE SPECS FORMAT CD-ROM QUANTITY 1 MASTER Provided as CD-R B) CD SCREENPRINT ARTWORK PROCESS To be printed on each CD COLOR Two color (red & black) ARTWORK Master artwork provided by MarCom in specified format C) TEXTBRIDGE CD TRAY INLAY DESCRIPTION Includes serial number PROCESS To included in rear cover of CD Jewel case ARTWORK Master artwork provided by MarCom in specified format SERIAL NUMBER Serial number scheme and range to be provided by Manufacturing D) TEXTBRIDGE CD JEWEL CASE DESCRIPTION Standard clear plastic CD Jewel Case with black tray 2) TEXTBRIDGE PRO USER'S GUIDE A) ELECTRONIC FOR ONLINE MANUAL MASTER Provides as PDF file on Master CD-R A) HARD COPY I) INTERNAL PAGE SPECIFICATIONS PAGE SIZE 7.25 x 8.375 inches - double-sided pages per provided masters (except where otherwise specified) PAGE COUNT 123 pages plus cover (WINDOWS); STOCK At least 50 lb. Opaque Smooth Paper (60 lb. preferred) TYPE COLOR One-color (Black) BINDING Perfectbind or equivalent II) COVER PAGE SPECS COLOR Two color with Clear Aqueous-based varnish finish STOCK 10 pt. coated White Carolina Paper BINDING Perfect Binding 4) TEXTBRIDGE WARRANTY REGISTRATION CARD SIZE 6.875 x 4.875 inches STOCK 10 pt. Coated COLOR Two Color FINISHING Scored and folded to finished size 5.5 x 4.25 inches TYPE One-color (Black) NOTE: ARTWORK WILL BE PROVIDED AS MACINTOSH POSTSCRIPT FILES. Page 8 SCANSOFT - XEROX GOLD DISK BUNDLING AGREEMENT ATTACHMENT II TEXTBRIDGE PRO LANGUAGE SPECIFICATIONS 1.) TEXTBRIDGE PRO 3.0 FOR USE WITH MICROSOFT WINDOWS(R) 3.1 NORTH AMERICA/UK Version: Page size default = letter Interface: English Recognizes: English, French, German, Italian, and Spanish FRENCH VersionPage size default = A4 Interface: French Recognizes: Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish GERMAN VersionPage size default = A4 Interface: German Recognizes: Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish ITALIAN Version Page size default = A4 Interface: Italian Recognizes: Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish SPANISH Version Page size default = A4 Interface: Spanish Recognizes: Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish BRAZILIAN PORTUGUESE Version Page size default = A4 Interface: Brazilian Portuguese Recognizes: Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish 2.) TEXTBRIDGE PRO 98 FOR USE WITH MICROSOFT WINDOWS(R)95 AND NT NORTH AMERICA/UK VERSION: Page size default = A4 Interface: English Recognizes: Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish FRENCH VersionPage size default = A4 Interface: French Recognizes: Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish GERMAN VersionPage size default = A4 Interface: German Recognizes: Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish Page 9 ITALIAN Version Page size default = A4 Interface: Italian Recognizes: Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish SPANISH Version Page size default = A4 Interface: Spanish Recognizes: Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish BRAZILIAN PORTUGUESE Version Page size default = A4 Interface: Brazilian Portuguese Recognizes: Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish Page 10 SCANSOFT - XEROX GOLD DISK BUNDLING AGREEMENT ATTACHMENT III TEXTBRIDGE PRO TECHNICAL SUPPORT AND TRAINING 1.) PRODUCT SUPPORT BY SCANSOFT AND XEROX ScanSoft will provide technical support to Xerox' Customer Support, as it may be reasonably requested by Xerox, to fulfill its maintenance obligations to its resellers and end users. Technical support shall include telephone support to Xerox' engineering staff on the operation, integration and utilization of the Software, and maintenance modifications and bug corrections for the Software to bring them into conformance with the specifications. There will be no charge to Xerox for this level of support. When a customer problem is determined by Xerox' Customer Support to be associated directly with the Software and resolution of the problem is not within the range of training received or knowledge accrued by Xerox' Customer Support, Xerox' Customer Support may either, contact ScanSoft's telephone support for assistance or refer the end user directly to ScanSoft's Customer Support. 2.) SUPPORT LEVELS 2.1 FIRST LEVEL SUPPORT Cases that can be immediately answered and require no callback to the customer. No assistance from Second Level Support is required. 2.2 SECOND LEVEL SUPPORT Cases that involve knowledge of the Software program, problem isolation or investigation by technical support technicians and may require a callback to the customer. Assistance from Third Level Support may be required. 2.3 THIRD LEVEL SUPPORT Cases that involve detailed knowledge of the Software program, problem isolation and investigation by Xerox engineers. Assistance and resolution may be required from the other party. 3.) SCANSOFT RESPONSE TO PROBLEMS RANKED BY SEVERITY 3.1 SEVERITY 1 PROBLEMS. Means this Software has a problem, defect or malfunction which renders the Software or a major component of the Software inoperative. With a Severity l Problem there is a significant and on-going interruption to the end user or customers business or there is an unrecoverable loss or corruption of data. No circumvention is available. ScanSoft agrees to commence an investigation of any "Severity 1 Problems" within **** (****) business day of notice by Xerox and initiate the development of corrections immediately thereafter. ScanSoft shall commit commercially reasonable efforts to provide Xerox with a fix, workaround or permanent fix within **** (****) business days. 3.2 SEVERITY 2 PROBLEMS. Means the Software has a problem, defect or malfunction where the Software or a major component or the Software is not working or is malfunctioning in a manner which restricts the end user or customers use of the Software. ScanSoft agrees to commence an investigation of any "Severity 2 Problems" within **** (****) business days of notice by Xerox and initiate the development of corrections immediately thereafter. ScanSoft shall commit commercially reasonable efforts to provide Xerox with a fix, workaround or permanent fix within **** (****) weeks. 3.3 SEVERITY 3 PROBLEMS. Means the Software has a problem. defect or malfunction where the Software or a component of the Software is not functioning as specified in the documentation and caused a minor impact on the end user or customers use of the Software. An acceptable circumvention or workaround is available. ScanSoft agrees to commence an investigation of any "Severity 3 Problems" within **** (****) business days of notice by Xerox and shall be corrected in future releases of the Software. 4.) SUPPORT CONTACTS 4.1 ScanSoft and Xerox will provide Warm Transfer (call forwarding) capabilities between Xerox Third Level Support and ScanSoft for support in the US, Canada and Europe. ScanSoft will make an OEM Hotline telephone line available to the same Xerox locations for warm transfer calls. At a minimum, this support will be provided by ScanSoft in the US during the business hours of 08:30 to 17:30 Eastern Time, Monday through Friday (ScanSoft holidays excluded). 4.2 ScanSoft will provide US-based OEM Hotline for calls from Xerox Customer Support Centers in Latin and South America during the same business hours as above. *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 11 4.3 ScanSoft will provide web and email based support (textbridge_support@xis.xerox.com) for Xerox Customer Support Centers on a worldwide basis. 4.1 4.4 Second and Third Level local language support for calls in Europe (XL) is provided by an office in the UK in German, French, and Italian; in Canada (XCI) support is provided by an office in the US in English only; and in Latin America (ACO) support is provided by an office in the US in English only, or via email in English. 4.5 ScanSoft and Xerox will each designate a technical support contact person responsible for overall communications between each company. 5.) SUPPORT RESPONSIBILITY ScanSoft will provide all levels of support for any TextBridge Pro Software scanner related questions other than those questions related directly to the Document Centre Systems scanning. In cases where Xerox receives call on any questions concerning TWAIN, or other scanner driver connectivity, it will be the responsibility of ScanSoft and will be forwarded from Xerox to ScanSoft. The customer may call the TextBridge support line at 800-880-8806 with in the USA, 978-977-0764 for outside of the USA and add UK phone numbers for European support for assistance with such questions. Xerox Customer Support will be responsible for all other calls related to the TextBridge Pro Software operation and the Document Centre Systems scan to file capabilities. ScanSoft will forward all calls related to the Document Centre Systems and the related scan to file capabilities to Xerox Customer Support Centers. If both parties agree to transfer responsibility for communicating with an individual customer to ScanSoft, ScanSoft will assume all further responsibility for that customer's support, including sending any pertinent bug fixes, if available, at ScanSoft's own expense. 6.) SOFTWARE LICENSE FOR XEROX SUPPORT CENTERS In order to address customer support issues, Xerox support centers or their subcontractors are permitted to use the Software solely for support and/or testing purposes for Xerox customers. Such installation is not licensed for operational use, and is for support purposes only. The Software is for internal use only and will not be distributed externally. 7.) SOFTWARE PROBLEM RESOLUTION PROCESS AND ESCALATION PROCESS The Software Problem Report (SPR) process includes the following steps: o SPR's are filed as needed. o SPR's are prioritized. o ScanSoft personnel are assigned to take direct responsibility for handling the SPR. o The timeline requirement is identified to resolve the SPR. o The strategy that will be taken to resolve the issue is identified. o Resolution to the problem or work-around is communicated. o As appropriate and where applicable, "patches" are posted on the web for download. o At Scansoft's discretion fixes may be rolled into a point release which can then be sent to customers experiencing a particular problem addressed in that version. o The patch or point release will be delivered to Xerox Third Level Support for fix verification at the same time as ScanSoft performs QA on the release. o Communication of the progress against the action plan is made on a daily basis for critical problems and on a weekly basis for normal problems. If this process is failing to satisfy either party, a review of the situation and the process to date should be made by ScanSoft and Xerox. 8.) REGULAR REPORTING 8.1 ScanSoft will provide Xerox with a "Solutions" database of known problems and solutions on a monthly basis in a format that is compatible with Xerox' DB IV database. The database information is expected to be available from ScanSoft beginning in June 1998, or sooner, and updates will be provided within twenty (20) days after the last day of each calendar month. The basis for this information is on the TextBridge Pro98 web page as FAQ's and technical information bulletins which Xerox has access to. 8.2 Xerox and ScanSoft recognize and acknowledge the importance to each other of Third Level technical support information regarding both individual cases and aggregate support statistics, and commit to provide each other with regular reports containing all pertinent technical support information. These reports will be provided as they become available. ScanSoft provides a comprehensive FAQ document and technical bulletins for TextBridge Pro 98 via the TextBridge Pro98 web page (at "www.textbridge.com"). Updates will be added to these on a regular basis Page 12 9.) TRAINING MATERIALS ScanSoft and Xerox recognize and acknowledge the importance of providing training to each other regarding the TextBridge Pro Software. 9.1 ScanSoft will develop training materials that cover the information required to adequately support the TextBridge Pro Software. At a minimum, ScanSoft will provide the same level of training that Xerox provides to its own support staff and ScanSoft will provide the same level of product training/materials to Xerox as they provide to other OEM's. The training materials will include robust troubleshooting and escalation procedures or guidelines. 9.2 Xerox will honor reasonable requests from ScanSoft to provide basic training on Xerox DCS Products to facilitate ScanSoft's customer support efforts. The scope and timing of such training will be mutually agreed upon by both companies' support representatives. 10.) LOCATION AND TIMING OF TRAINING To ensure adequate customer support, ScanSoft's training of Xerox personnel will be provided prior to Xerox' product introduction date. The training will be held in Rochester, NY at a Xerox location for a mutually agreeable period appropriate to the training program. 11.) SCOPE OF TRAINING 11.1 This training will include, but not be limited to, all TextBridge Pro Software features and functions, customer usability, and advanced troubleshooting based on customer support history. ScanSoft will be expected to train the trainers from each of the major Xerox Customer Support Functions that is using or supporting the TextBridge Pro Software. 11.2 Xerox may further request and ScanSoft shall provide additional training as reasonably necessary to inform all personnel of new program versions or enhancements. 11.3 ScanSoft will provide on-site training at their facility, when requested by Xerox, in order to provide an in-depth, hands-on customer support experience for a mutually agreed upon number of Xerox Third Level Support technicians. 11.4 All initial and subsequent training shall be provided at no charge to Xerox, however for any subsequent training sessions Xerox shall pay ScanSoft for reasonable travel and lodging expenses. 11.5 In the event ScanSoft releases new version of TextBridge Pro, ScanSoft shall provide Xerox with additional training at no additional charge. 12.) MATERIAL RIGHTS 12.1 ScanSoft grants Xerox the royalty-free rights to modify reproduce and use all training classes, methods and materials supplied ScanSoft or developed by Xerox pursuant to this Agreement. 12.2 ScanSoft restricts the use of such materials to training Xerox employees or to agents contracted by Xerox for the purpose of selling or supporting Xerox products. 13.) TRAINING DELIVERY PROCESS AND CONTENT 13.1 ScanSoft will provide training sessions, with back-up documentation, to Xerox Second Level support. The training will include robust troubleshooting for topics (such as Installation, Software Upgrade, Quality of OCR, OCR application interface, operability to optimize OCR), escalation procedures/guidelines and relationship building for those support personnel who will be involved in (bi-directional) escalation. 13.2 ScanSoft will provide training material (instructor notes, transparencies, lab exercises/lab specifications, and hand-out documentation) for training/customer demonstration/customer application testing purposes to Xerox trainers responsible for training field support people. 13.3 Training content (lecture, lab, and documentation) should focus on supported environments, installation procedure, application verification process, known issues/problems and troubleshooting procedures. 13.4 ScanSoft will provide pre-sales/installation support literature: customer collaterals describing strengths, positioning, customer benefits, and technical documentation (this information is available at the ScanSoft web site). Page 1 SCANSOFT - XEROX GOLD DISK BUNDLING AGREEMENT ATTACHMENT IV TEXTBRIDGE ODP SPECIFICATION Chuck Hudson 3/3/1998 1.1.1. Document Scope This document will describe the features of the TextBridge release for the ODP OEM client. 1.1.2. Project Scope This project will consist of a master CD created to support both 16-bit Windows(R) 3.x systems and 32-bit Windows 95(R) and NT(R) systems with the current TextBridge 3.0 (16-bit) and TextBridge 98 (32-bit) products. It is fully understood that the TextBridge 3.0 code base is at a "frozen" point and will not be updated for this product. 1.1.3. Project Schedule DATE 1st build delivered to QA (without updated help files) **** Updated help files delivered to Release Engineering **** 2nd build with updated help files and any necessary SPRs fixed **** First build of beta to be delivered **** Final build delivered to QA **** Final Gold Master with all languages **** Launch date for product 1.1.4. Code Base For Win 3.x the code used will be the existing released TextBridge 3.0 with the following UI languages - English US, French, German, Italian, Spanish, and Brazilian Portuguese. No changes will be made to this code and it will be incorporated on the final CD as is. Thus it will be copied on the project from the existing master cd. *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 2 For Win NT and 95 the code base will be the TextBridge Pro 98 release with the following UI languages - English US, English UK, French, German, Italian, Spanish, and Brazilian Portuguese. Note: The complete version of Brazilian Portuguese for TextBridge Pro 98 may not be included in the 1st build of the beta release to be delivered, as localization may not be complete. 1.1.5. UI Languages and the corresponding recognition languages TextBridge Pro 3.0 for use with Microsoft Windows(R) 3.1
VERSION PAGE SIZE INTERFACE RECOGNIZED LANGUAGES DEFAULT ENGLISH US Letter English English, French, German, Italian, Spanish FRENCH A4 French Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish GERMAN A4 German Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish ITALIAN A4 Italian Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish SPANISH A4 Spanish Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish BRAZILIAN A4 Brazilian Danish, Dutch, English, Finnish, French, German, Italian, PORTUGUESE Portuguese Norwegian, Portuguese, Spanish, Swedish
TEXTBRIDGE PRO 98 FOR USE WITH MICROSOFT WINDOWS(R) 95 AND NT
VERSION PAGE SIZE INTERFACE RECOGNIZED LANGUAGES DEFAULT ENGLISH US Letter English English, French, German, Italian, Spanish ENGLISH UK A4 English Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish FRENCH A4 French Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish GERMAN A4 German Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish ITALIAN A4 Italian Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish SPANISH A4 Spanish Danish, Dutch, English, Finnish, French, German, Italian, Norwegian, Portuguese, Spanish, Swedish BRAZILIAN A4 Brazilian Danish, Dutch, English, Finnish, French, German, Italian, PORTUGUESE Portuguese Norwegian, Portuguese, Spanish, Swedish
1.1.6. Installer Page 3 The autorun that automatically runs once the CD is placed in the user's machine will launch a setup.exe (also found at the root level : see CD Structure below). This executable will check the system for which operating system is installed (either Win 3.x or Win 95/NT). This `os checker' will have to be written in 16-bit code so that it can be launched on a Win 3.x system. Once it determines which operating system is installed it will in turn launch the corresponding setup from either the TextBridge 3.0 directory or the TextBridge Pro 98 directory (found at the root of the CD). This os checker has been written and used on the TextBridge Classic hybrid CD. [GRAPHIC OMITTED] TextBridge Pro 98 Issues o The normal **** will be used for TextBridge Pro 98 as is currently employed for the product. This includes all localized versions. o Language selector - US English and Brazilian Portuguese must be added to the selector which is launched in the TB Pro 98 setup. o Billboard 3 during file installation must be removed. (see below) *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 4 [GRAPHIC OMITTED] o The dialog in English and all localized versions of TextBridge Pro 98 that provides ScanSoft's toll free support number should be removed as ODP will be supporting the product. (see below) [GRAPHIC OMITTED] o The Release Notes must be checked and updated to correspond with all changes to TextBridge Pro 98. (see Appendix B) o Since ODP will be the support for this product all phone numbers must be changed to ODP's corresponding phone listings. (see appendix A) Page 5 1.1.6.1.1. CD STRUCTURE **** Structure of **** with **** then **** with the **** for **** *CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO CERTAIN INFORMATION CONTAINED IN THIS EXHIBIT. THROUGHOUT THIS EXHIBIT CONFIDENTIAL PORTIONS HAVE BEEN OMITTED FROM THE PUBLIC FILING AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION. Page 6 Appendix A ODP Support Phone Numbers TEXT BRIDGE PRO SUPPORT REQUIREMENTS Monica Kraft 2/18/98 The following table lists the contact telephone numbers for Customer Support within each TextBridge Pro Language. Please provide a statement on the user interface in the appropriate location with this information. Language Xerox Support Telephone Number - -------- ------------------------------ English US: 800-821-2797 UK/IRE: 01908 692 444 Canada: 800-939-3769 German Berlin ++ 49 30 / 78788 - 222 Bochum ++ 49 2327 / 941 - 441 Dusseldorf ++49 211 / 990 - 2555 Hamburg ++49 40 / 85360 - 444 Munchen ++49 89 / 99644 - 122 Neu Isenburg ++49 6102 / 734 - 123 Stuttgart ++49 711 / 7254 - 111 French Canada: 800-939-3769 France: "Contact Your local Xerox Support" Italian "Contact Your local Xerox Support" Spanish "Contact Your local Xerox Support" Brazilian Portuguese "Contact Your local Xerox Support" - ------------------------------------------------------------------------------- NOTE: THESE NUMBERS WILL ONLY EXIST IN THE HELP FILES OF TB PRO 98. Page 7 Appendix B Current TB Pro 98 English US Release Notes [GRAPHIC OMITTED] RELEASE NOTES FOR VERSION 1.0 Copyright (C) 1995-1997 ScanSoft, Inc., a Xerox Company Portions of this product copyright (C) 1990-1997 Pixel Translations, Inc. Portions of this product copyright (C) 1993-1997 Mastersoft Corp. Please read this document for up-to-date information about ScanSoft's TEXTBRIDGE PRO 98, VERSION 1.0 for Windows 95 and Windows NT operating systems. These release notes discuss the following topics: o What's New in TextBridge Pro 98 o Registration Information o Installation Instructions o If You Have Other Versions of Textbridge o Supported Scanners o Scanner Notes o Application Notes o Integration with Pagis Pro 97 WHAT'S NEW IN TEXTBRIDGE PRO 98 o IMPROVED OCR ACCURACY -- Dramatically saves time retyping. o INCREASED DOCUMENT RECOGNITION CAPABILITIES -- Easily and accurately recognize complex document components such as tables, line art, drop caps, insets, reverse text. o ENHANCED PROOFREADING CAPABILITIES -- Proofread and edit document text directly from within TextBridge Pro 98 for even more accurate output results. o INSTRUCTIONAL OCR WIZARD -- Assists you by stepping you through the OCR process. o ADVANCED ZONE EDITING -- Create, reshape, resize and renumber zones. Use highlighter pens to edit or adjust OCR components such as text, pictures, and tables enabling even greater control over the desired results. o SUPPORT FOR ADOBE ACROBAT PDF FORMAT -- With TextBridge Pro 98 you can now save the OCR results into PDF format. o BETTER RECOGNITION OF TABLES -- Easily convert tables into spreadsheets as well as word processing documents. Page 8 REGISTRATION INFORMATION Xerox provides unlimited, toll-free customer support to registered users of TextBridge Pro. When you register, you are provided with a toll-free number to call for support questions. There are 4 easy ways to register: o INTERNET - Go to the TextBridge web site at WWW.TEXTBRIDGE.COm. Select TextBridge Pro98, go to Customer Support and select Product Registration. You will receive the toll-free number by return e-mail. o MODEM - Fill out the registration form during software installation. Click on "TextBridge Pro98 Electronic Registration" in the TextBridge Pro98 Master Setup window to bring up the TextBridge Product Registration form. Follow the instructions to send your registration by modem. A dialog box appears with the toll-free number. Be sure to write it down. o FAX - Fill out the registration form during software installation. Click on "TextBridge Pro98 Electronic Registration" in the TextBridge Pro98 Master Setup window to bring up the TextBridge Product Registration form. When you print the registration form, a dialog box appears with the toll-free number. Be sure to write it down. Then FAX your registration to 888-979-7662 or 978-531-0675. o U.S. MAIL - Return the postage-paid Registration Card included with TextBridge Pro98. You will receive a postcard with the toll-free number. INSTALLATION INSTRUCTIONS Before you install or uninstall TextBridge Pro 98, exit from any open applications so that only Windows is running. There should be no applications listed in the task bar and no floating toolbars. For example, the Corel DAD and Office shortcut bar should not be running. (CTRL+ALT+DELETE to display Task List and 'End Task' on all applications except Explorer.) TextBridge uses autorun for installation. If autorun does not work on your system, use the following procedure to install this version: 1. Put CD in CD-ROM drive (D: or the letter assigned to your CD-ROM). 2. From the Start menu, select Run. 3. Type d:\autorun.exe 4. Follow the on-screen instructions. During installation, you select a type of installation. If you select Typical, TextBridge will install the English, French, German, Italian, and Spanish language packs. If you do not wish to install all five language packs, you must select Custom. IF YOU HAVE OTHER VERSIONS OF TEXTBRIDGE TextBridge Pro 98 is designed to be self-contained. Thus, if you have another version of TextBridge installed on your PC, you do not need to uninstall it before installing TextBridge Pro Pro 98. Note: You cannot run both versions of TextBridge simultaneously. APPLICATION NOTES This section discusses a number of points relating to using features in TextBridge and Instant Access. o The TEXTBRIDGE USER'S GUIDe is available in PDF format from the TextBridge CD-ROM in the Tb98_Doc directory. You can read documents in PDF files in the Adobe Acrobat Reader. A Readme file describes installing the Acrobat Reader in the Tb98_Doc directory and using the Acrobat Reader to read or print the TextBridge User's Guide. Another Readme file describes the Acrobat Reader. Page 9 o QUATTRO PRo is not supported by Instant Access OCR. o NETSCAPE NAVIGATOR 3.0 GOLd is not supported by Instant Access OCR. o WORDPRO 97 with Instant Access OCR imports ASCII text. To retain font and paragraph style information, use TextBridge as a standalone application. o LOTUS 1-2-3 SMARTSUITE 97 with Instant Access OCR works best if you use the Paste Special command in the Edit menu and select 1-2-3 format. o With earlier versions of LOTUS 1-2-3, use TextBridge as a standalone application for the best results. Save your results in the format for Lotus 1-2-3, and open the file in your Lotus 1-2-3 application. o PAGE COLLATIOn is not automatically supported for PDF. To process double-sided pages and output to PDF, select Process aScan Only, then select Auto Process. After the front sides of the pages are scanned, select Other Side from the Add Pages to Scanner dialog box. This will create a TIFF file with all pages collated in the correct order. Once the pages are all scanned, select Process aImage File, then select Auto Process or Get Page to process the image file you created. o While TextBridge is processing, if you click on any menu item, TextBridge processing will pause until the drop down menu is closed. INTEGRATION WITH PAGIS Pagis includes an earlier version of TextBridge. If you already have Pagis installed on your PC, installing TextBridge Pro 98 will update Pagis to use TextBridge Pro 98. Pagis is updated as follows: o INDEXING - Pagis will use TextBridge Pro 98 for indexing when pages are scanned. o SEND TO BAR - TextBridge Pro 98 is added to the Pagis Send To bar. The earlier version of TextBridge is not automatically removed. To remove that previous version of TextBridge, open the Send To folder in your Windows folder and delete that TextBridge shortcut. o IMAGE FILE CONTEXT MENU - TextBridge Pro 98 is added to the Send To options when you right-click on an image file icon. o DRAG AND DROP IMAGE FILES - When you drag an image file to a Pagis registered text application, TextBridge Pro 98 will be used to convert the image to text. o PAGIS START MENU - TextBridge Pro 98 is NOT automatically added to the Pagis group in the Windows Start menu. To add TextBridge Pro 98, in your Windows folder copy the shortcut to TextBridge Pro 98 from the Start Menu a Programs a TextBridge Pro 98 folder to the Start Menu a Programs a Pagis Pro 97 folder. If you uninstall TextBridge Pro 98, Pagis will revert to using the bundled TextBridge. The first time you drag and drop a TIF or XIF file onto the WORDPERFECT 8.0 entry in the Pagis SendTo bar, the file will not be recognized. Simply repeat the drag and drop process, and recognition will proceed as usual for this file and for any subsequent files. In other words, this only happens once during the first drag and drop activity. SUPPORTED SCANNERS Page 10 TextBridge Pro supports scanners that are controlled by ISIS and TWAIN scanner drivers. For the most current list of all supported scanners by model number and platform, please visit our web site at WWW.TEXTBRIDGE.COM. TWAIN SOURCE DRIVERS (.DS FILES) MUST BE PROVIDED BY THE SCANNER MANUFACTURER. When these are installed on your PC, they are located in Windows\TWAIN or TWAIN_32. TextBridge Pro provides a TWAIN interface that communicates with these TWAIN source drivers, supporting any fully TWAIN-compliant scanner or other input device that can supply a binary (black and white) image in a supported resolution (72 to 900 dots per inch). SCANNER NOTES This section discusses a number of points relating to using scanners with TextBridge Pro. o For most OCR jobs, scanning should be done at 300 DPi for best results. For documents with type smaller than 8 point, scanning at 400 dpi may provide improved recognition. o TEXTBRIDGE SCANNER SETUp allows you to use the native TWAIN INTERFACe or the TextBridge user interface. This option works well with some TWAIN drivers, such as MICROTEK and EPSON. However, some scanners may not work with the TextBridge user interface as well as with the native TWAIN interface. For example, MUSTEK, ARTEC, and CANON will not perform correctly unless they use their own native scanning settings dialogs. You can try each and decide which works best for you. o Some TWAIN SOURCE DRIVERs, when activated, display their user interface window behind TextBridge Pro's main window. To access the TWAIN interface, you need to ALT+TAB to the TWAIN screen. o In order to select a TWAIN driver, you must know the name of the driver. The NAME OF THE TWAIN DRIVEr may not be the same as the name or model of the scanner. Refer to your scanner documentation to find the driver name. (For example, if you want to choose the HP SCANJET 4C TWAIN driver, it is not listed with the other HP scanners. It is listed alphabetically under DESKSCAN.) o If the wrong TWAIN DRIVEr is selected, TextBridge may lockup while starting. In the event that TextBridge locks up, run the scnsetup program in the TextBridge Bin folder. Select the appropriate scanner driver. o Although TextBridge supports scanning BUSINESS CARDs through the scanner ADF, it is recommended that you use the scanner flatbed. o Many FLATBED SCANNERs do not have a platen large enough for a LEGAL PAGe. These scanners will scan to their platen length if you select "Legal" page size. To scan legal size pages on scanners whose platen's are smaller than legal page size, you must use an ADF. o TWAIN drivers may allow you to select LEGAL PAGe size in the Page Type tab of the Settings dialog box. However, if the ISIS ASPI SCANNER is selected, the legal size may not be available. o If you are using an ISIS driver under NT 4.0, you need to make sure you have an ASPI MANAGEr loaded and running so you can communicate with your scanner. To check if you have an ASPI manager running, check Control Panel->Devices for an ASPI32 device that has a status of "Started" and Startup of "Automatic." If you do not see this, you will need to get an ASPI manager from one of the following sources: a) Adaptec's EZ-SCSI 4.0 or higher CD Page 11 b) If you own an Adaptec SCSI card, download the ASPI32.EXE from Adaptec's website at: http://www.adaptec.com/support/BBS_EZSCSI.html#EZSCSI Follow Adaptec's instructions for installing this device. Your system administrator may have to perform these steps. o If you are using a SHEETFEd scanner, the Automatic Document Feeder (ADF) selection may be available. Make sure the ADF OPTION IS NOT SELECTED. ACERSCAN Use the 16-bit TWAIN driver and the native TWAIN interface with the ACERSCAN 300F. AVISION The AVISION AV360C TWAIN driver does not support scanning at 400 dpi or higher. CANON If you receive a scanner failure message with the CANON IX-4015 scanner, try removing the scanner driver \win95\pixtran\canon.pxw and reinstall TextBridge. EPSON When you use the Scan Only command with an EPSON ES-1000C WITH ADF, if the scanner jams, you do not get a message. The progress dialog box stays on scanning. If you press CTRL+ALT+DELETE to bring up the Close Program dialog box, you can see that Icrsrv32 is not responding. You must highlight lcrsrv32 and press the End Task button and follow the same procedure for TextBridge. Be sure to properly Shut Down your system and reboot your computer, and also turn your scanner off and then on again to get the scanner back. This does not happen with the Epson ES-1200C. HEWLETT-PACKARD HP ACCUPAGE scanner drivers are not supported. HP IIP AND IIC scanners will not work with certain host adapter/SCSI device software combinations. For instance, with the AHA154x series adapters, you need to be running the Adaptec version of AHA154x.mdp device driver (on the Win95 CD ROM) because it will not work with the Microsoft version of AHA154x.mdp that is installed by default when Win95 is installed on a system. It is not known if there is an equivalent replacement for the AHA294x.mdp driver. Check the Microsoft web page for device driver updates. LOGITECH The LOGITECH PAGESCAN incorporates the TextBridge OCR engine and also has built-in page sensing technology. To use the PageScan scanner with TextBridge Pro, and avoid conflicts with the PageScan software, you need to operate in a particular sequence. The key is to start up TextBridge Pro BEFORE putting a page in the scanner. Otherwise, the page sensing feature will activate the PageScan software. If you have not already set up the PageScan scanner as the TextBridge Pro scanner, use the Select Scanner/Source command under the File menu. Select TWAIN, then select PageScan in the TWAIN Select Source dialog. From TextBridge Pro, click the Go button. This should display the Logitech PageScan Color TWAIN interface should appear. From there, select Black Line Drawing. (You can also go into the Advanced ... options to view or change the scan resolution or scanner brightness settings.) At this stage, you can put a page in the scanner and click the Scan Now button. When you have finished scanning, TextBridge Pro recognizes the document, and you can save the recognized text to the file format of choice. Page 12 MICROTEK MICROTEK E3 scanner platen is short of the needed 14 inches for a LEGAL PAGE scan. If you use the TWAIN Scanwizard 2.3 (16 or 32 bit) and scan a legal size page with the document feeder, the preview image in TextBridge cuts off the bottom 3 inches of the page. If you select the ISIS ASPI scanner, the legal size is not available. MUSTEK When using a MUSTEK scanner, use the Mustek TWAIN user interface. Do not configure the scanner to use the TextBridge user interface. STORM EASY PHOTO SMARTPAGE When scanning multiple page documents, an extra warning dialog box is displayed after the last page has been scanned. Ignore the message and click OK. No information will be lost. VISIONEER PAPERPORT No scanner driver is required for VISIONEER PAPERPORT scanners. TextBridge does not drive the scanner; Visioneer's Paperport Software does. In the Select Scanner dialog box, select No Scanner. TextBridge provides an automatic link to the word processor icons on the Paperport desktop. To access TextBridge Pro98 from within the Paperport desktop: 1. Go to the Link Preferences command in the Edit menu. 2. Select your word processor's icon. 3. Click on the OCR Application down arrow. 4. Choose TextBridge OCR. 5. Click on OCR Settings. 6. Select a page type and any other options you want to use. 7. Click on OK to save changes. When you are done with settings, scan a document in PaperPort, as you normally would. Then, drag it to your word processor icon, and TextBridge Pro recognition will automatically be launched. When OCR is complete, the recognized document is automatically opened in your word processor. Please refer to the PAPERPORT USER'S GUIDE for complete information. NOTE: The link between the TextBridge and the Visioneer Paperport software will only work with Visioneer Paperport Version 4.0 or later. ISIS DRIVERS TextBridge Pro provides the following ISIS DRIVERS from Pixel Translations as a standard part of the software. WINDOWS 95 ISIS DRIVERS Abaton 300S (no ADF)=ABATON2 Version 1.21 Abaton 300S (with ADF)=ABATON Version 1.21 Abaton Color (no ADF)=ABATON2 Version 1.21 Abaton Color (with ADF)=ABATON Version 1.21 Abaton GS (no ADF)=ABATON2 Version 1.21 Abaton GS (with ADF)=ABATON Version 1.21 Abaton Transcribe (no ADF)=ABATON2 Version 1.21 Abaton Transcribe (with ADF)=ABATON Version 1.21 Agfa Arcus Plus w/Adaptec=AGFA Version 1.29 Agfa Arcus w/Adaptec=AGFA Version 1.29 Agfa StudioScan II w/ASPI=AGFAASPI Version 1.35 Agfa StudioScan II w/PCZ SCSI=AGFAPCZ Version 1.35 Page 13 Agfa StudioScan II w/PNR SCSI=AGFAPNR Version 1.35 Agfa StudioScan w/ASPI=AGFAASPI Version 1.35 Agfa StudioScan w/PCZ SCSI=AGFAPCZ Version 1.35 Agfa StudioScan w/PNR SCSI=AGFAPNR Version 1.35 Agfa StudioStar w/ASPI=AGFAASPI Version 1.35 Apple Color One 1200/30=APPLEONE Version 1.31 Apple Color One 600/27=APPLEONE Version 1.31 Apple OneScanner=APPLE Version 1.8 AVision Scanner Series=AVISION AVR scanner=AVR2 Version 1.30 Canofile 510=CANOFILE Version 1.9 Canofile 520=CANOFILE Version 1.9 Canon CanoScan 300 w/ASPI=CANON Version 1.32 Canon CanoScan 600 w/ASPI=CANON Version 1.32 Canon GP55F (w/Fax Board) w/SCSI=GP55 Version 1.3 Canon IX-12 Feeder=CAIX12FD Version 1.20 Canon IX-12 Flatbed (Adf Optional)=CAIX12FT Version 1.20 Canon IX-12=CAIX12 Version 1.20 Canon IX-12F=CAIX12 Version 1.20 Canon IX-3010 w/ASPI=CANON Version 1.32 Canon IX-3010 w/SI4=CANONSI Version 1.32 Canon IX-30F=CAIX30 Version 1.8 Canon IX-4015 w/ASPI=CANON Version 1.32 Canon IX-4015 w/SI4=CANONSI Version 1.32 Canon IX-4025 w/ASPI=CANON Version 1.32 Chinon DS-3000=CHINON Version 0.2 Complete PC Scanner (no detect)=CPCF Version 1.2 Complete PC Scanner=CPC Version 1.2 Envision 24 Pro=ENVISION Version 1.32 ENVISION 6600S w/ASPI=VISTASPI Version 1.29 ENVISION 6600S w/UMAX UDS-11=VISTA Version 1.29 ENVISION 8800S w/ASPI=VISTASPI Version 1.29 ENVISION 8800S w/UMAX UDS-11=VISTA Version 1.29 ENVISION Dynamic Pro 3.0 w/ASPI=VISTASPI Version 1.29 ENVISION Dynamic Pro 3.0 w/UMAX UDS-11=VISTA Version 1.29 Envision ENV 6100=ENVISION Version 1.32 Envision ENV 8100=ENVISION Version 1.32 Epson ES-1000C=EPSON Version 1.68 Epson ES-1200C=EPSON Version 1.68 Epson ES-1400C=EPSON Version 1.68 Epson ES-300C=EPSON Version 1.68 Epson ES-300GS=EPSON Version 1.68 Epson ES-600C=EPSON Version 1.68 Epson ES-800C=EPSON Version 1.68 Epson Expression 636=EPSON Version 1.68 Epson GT-4000=EPSON Version 1.68 Epson GT-6000=EPSON Version 1.68 Epson GT-6500=EPSON Version 1.68 Epson GT-8000=EPSON Version 1.68 Epson GT-8500=EPSON Version 1.68 Epson GT-9000=EPSON Version 1.68 Epson GT-9500=EPSON Version 1.68 Epson Scanner (Generic Model)=EPSON Version 1.68 Fujitsu M3093DG=FUJIGINE Version 1.141 Fujitsu M3093GX=FUJIGINE Version 1.141 Fujitsu M3096G=FUJIGINE Version 1.141 Fujitsu M3096GX=FUJIGINE Version 1.141 Fujitsu M3097G=FUJIGINE Version 1.141 Page 14 Fujitsu ScanPartner 10=FJSP Version 1.141 Fujitsu ScanPartner 10C=FJSP Version 1.141 Fujitsu ScanPartner 600C=FJSP Version 1.141 Fujitsu ScanPartner E.O.=FUJIGIN3 Version 1.141 Fujitsu ScanPartner Jr.=FJSP Version 1.141 Howtek Personal Color Scanner=HOWTEK Version 1.10 HP Scanjet 3c=SCANJET Version 1.40 HP Scanjet 4c=SCANJET Version 1.40 HP Scanjet 4p=SCANJET Version 1.40 HP Scanjet 5p=SCANJET Version 1.40 HP Scanjet IIc=SCANJET Version 1.40 HP Scanjet IIcx=SCANJET Version 1.40 HP Scanjet IIIp=SCANJET Version 1.40 HP Scanjet IIp=SCANJET Version 1.40 HP Scanjet Plus=SCANJET Version 1.40 HP Scanjet=SCANJET Version 1.40 IBM PageScanner, Adapter 3119/A=IBM_3119 Version 1.24 LeoScan Scanner=LEOSCAN Version 1.01 Microtek MS-II w/Page Detect=MSII Version 1.44 Microtek ScanMaker E3 w/ASPI=MKTKASPI Version 1.35 Microtek ScanMaker E3 w/Microtek PCZ SCSI=MKTKPZ Version 1.35 Microtek ScanMaker E3 w/Microtek PNR SCSI=MKTKPNR Version 1.35 Microtek ScanMaker E6 w/ASPI=MKTKASPI Version 1.35 Microtek ScanMaker E6 w/Microtek PCZ SCSI=MKTKPZ Version 1.35 Microtek ScanMaker E6 w/Microtek PNR SCSI=MKTKPNR Version 1.35 Microtek ScanMaker II=SCNMKRII Version 1.53 Microtek ScanMaker IIhr w/ASPI=MKTKASPI Version 1.35 Microtek ScanMaker IIhr w/Microtek PCZ SCSI=MKTKPZ Version 1.35 Microtek ScanMaker IIhr w/Microtek PNR SCSI=MKTKPNR Version 1.35 Microtek ScanMaker III w/ASPI=MKTKASPI Version 1.35 Microtek ScanMaker III w/Microtek PCZ SCSI=MKTKPZ Version 1.35 Microtek ScanMaker III w/Microtek PNR SCSI=MKTKPNR Version 1.35 Microtek Scanner=MKTK_AT Version 1.47 Nikon SCANTOUCH Scanner=NIKON Version 1.9 Okidata DOC-IT 3000=DOCIT Version 1.30 Okidata DOC-IT 4000=DOCIT Version 1.30 Panasonic FX-RS 505, 506, and 307=PANA Version 1.3 Panasonic KV-SS25 w/SCSI=PANASCSI Version 1.47 Panasonic KV-SS50 w/SCSI=PANASCSI Version 1.47 Panasonic KV-SS50EX w/SCSI=PANASCSI Version 1.47 Panasonic KV-SS55 w/SCSI=PANASCSI Version 1.47 Panasonic KV-SS55EX w/SCSI=PANASCSI Version 1.47 Panasonic KV-SS60EX w/SCSI=PANASCSI Version 1.47 Panasonic KV-SS60N w/SCSI=PANASCSI Version 1.47 Panasonic KV-SS65EX w/SCSI=PANASCSI Version 1.47 Panasonic KV-SS65N w/SCSI=PANASCSI Version 1.47 Pentax IQ Scan (HP Emulation)=PENT Version 1.44 Photron w/ASPI=PHOTRON Version 1.10 Ricoh FS-2=RICOHFS2 Version 1.107 Ricoh IS-410 and IBM 2456 w/WINASPI=RICOH41W Version 1.105 Ricoh IS-410 and IBM 2456=RICOH410 Version 1.105 Ricoh IS-420=RICOH420 Version 1.133 Ricoh IS-430=RICOH420 Version 1.133 Ricoh IS-50=RICOH560 Version 1.107 Ricoh IS-510 and IS-520=RICOH520 Version 1.109 Ricoh IS-60=RICOH560 Version 1.107 Ricoh RS-2200=RS2200 Version 1.107 SAPHIR w/ASPI=VISTASPI Version 1.29 SAPHIR w/UMAX UDS-11=VISTA Version 1.29 Page 15 Sharp SCSI JX-300, JX-320, JX-325, JX-450, JX-610=SHRPSCSI Version 1.11 UMax Generic Scanner w/GSII-PC Card=UMAXGSII Version 1.29 UMax OA-I w/GSII-PC Card=UMAXGSII Version 1.29 UMAX Powerlook w/ASPI=VISTASPI Version 1.29 UMAX Powerlook w/UMAX UDS-11=VISTA Version 1.29 UMax UC1200S w/GSII-PC Card=UMAXGSII Version 1.29 UMax UC1200SE w/GSII-PC Card=UMAXGSII Version 1.29 UMax UC1260 w/GSII-PC Card=UMAXGSII Version 1.29 UMax UC300 w/GSII-PC Card=UMAXGSII Version 1.29 UMax UC630 w/GSII-PC Card=UMAXGSII Version 1.29 UMax UC840 w/GSII-PC Card=UMAXGSII Version 1.29 UMax UG630 w/GSII-PC Card=UMAXGSII Version 1.29 UMax UG80 w/GSII-PC Card=UMAXGSII Version 1.29 UMAX VISTA S-6 w/ASPI=VISTASPI Version 1.29 UMAX VISTA S-6 w/UMAX UDS-11=VISTA Version 1.29 UMAX VISTA S-8 w/ASPI=VISTASPI Version 1.29 UMAX VISTA S-8 w/UMAX UDS-11=VISTA Version 1.29 UMAX VISTA T-6 w/ASPI=VISTASPI Version 1.29 UMAX VISTA T-6 w/UMAX UDS-11=VISTA Version 1.29 Xerox 3002=X3002 Version 1.6 Xerox DocuImage 620S=DOCU620S Version 1.43 WINDOWS NT ISIS DRIVERS Apple Color One 1200/30=APPLEONE Version 1.30 Apple Color One 600/27=APPLEONE Version 1.30 Canon DR-3020=CANON_DR Version 1.19 Canon IX-3010 w/ASPI=CANON Version 1.31 Canon IX-4015 w/ASPI=CANON Version 1.31 Canon IX-4025 w/ASPI=CANON Version 1.31 Epson ES-1000C=EPSON Version 1.68 Epson ES-1200C=EPSON Version 1.68 Epson ES-1400C=EPSON Version 1.68 Epson ES-300C=EPSON Version 1.68 Epson ES-300GS=EPSON Version 1.68 Epson ES-600C=EPSON Version 1.68 Epson ES-800C=EPSON Version 1.68 Epson Expression 636=EPSON Version 1.68 Epson GT-4000=EPSON Version 1.68 Epson GT-6000=EPSON Version 1.68 Epson GT-6500=EPSON Version 1.68 Epson GT-8000=EPSON Version 1.68 Epson GT-8500=EPSON Version 1.68 Epson GT-9000=EPSON Version 1.68 Epson GT-9500=EPSON Version 1.68 Epson Scanner (Generic Model)=EPSON Version 1.68 Fujitsu M3093GX=FUJIGINE Version 1.130 Fujitsu M3096G=FUJIGINE Version 1.130 Fujitsu M3096GX=FUJIGINE Version 1.130 Fujitsu M3097G=FUJIGINE Version 1.130 Fujitsu M3192B=FUJIGIN3 Version 1.130 Fujitsu ScanPartner 10=FJSP Version 1.130 Fujitsu ScanPartner 10C=FJSP Version 1.130 Fujitsu ScanPartner 600C=FJSP Version 1.130 Fujitsu ScanPartner E.O.=FUJIGIN3 Version 1.130 Fujitsu ScanPartner Jr.=FJSP Version 1.130 HP Scanjet 3c=SCANJET Version 1.40 HP Scanjet 4c=SCANJET Version 1.40 HP Scanjet 4p=SCANJET Version 1.40 Page 16 HP Scanjet 5p=SCANJET Version 1.40 HP Scanjet IIc=SCANJET Version 1.40 HP Scanjet IIcx=SCANJET Version 1.40 HP Scanjet IIIp=SCANJET Version 1.40 HP Scanjet IIp=SCANJET Version 1.40 HP Scanjet Plus=SCANJET Version 1.40 HP Scanjet=SCANJET Version 1.40 Nikon SCANTOUCH Scanner=NIKON Version 1.12 Panasonic KV-SS25 w/SCSI=PANASCSI Version 1.42 Panasonic KV-SS50 w/SCSI=PANASCSI Version 1.42 Panasonic KV-SS50EX w/SCSI=PANASCSI Version 1.42 Panasonic KV-SS55 w/SCSI=PANASCSI Version 1.42 Panasonic KV-SS55EX w/SCSI=PANASCSI Version 1.42 Panasonic KV-SS60EX w/SCSI=PANASCSI Version 1.42 Panasonic KV-SS60N w/SCSI=PANASCSI Version 1.42 Panasonic KV-SS65EX w/SCSI=PANASCSI Version 1.42 Panasonic KV-SS65N w/SCSI=PANASCSI Version 1.42 Ricoh FS-2=RICOHFS2 Version 1.106 Ricoh IS-410 and IBM 2456=RICOH410 Version 1.58 Ricoh IS-420=RICOH420 Version 1.128 Ricoh IS-430=RICOH420 Version 1.128 Ricoh IS-50=RICOH560 Version 1.106 Ricoh IS-510 and IS-520=RICOH520 Version 1.109 Ricoh IS-60=RICOH560 Version 1.106 Ricoh RS-2200=RS2200 Version 1.107 EX-23.1 8 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-45425 and No. 333-74343) of ScanSoft, Inc. of our report dated January 27, 1999, except for Note 3, which is as of March 2, 1999, appearing on page 33 of ScanSoft, Inc.'s Annual Report on Form 10-K. We also consent to the incorporation by reference of our report on the Financial Statement Schedule, which appears on page 50 of this Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP San Jose, California April 1, 1999 EX-27.1 9 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the balance sheet, statement of operations and statement of cash flows included in the Company's Form 10-K for the twelve month period ended December 31, 1998, and is qualified in its entirety by reference to such financial statements and the notes thereto. 1000 12-MOS DEC-31-1998 JAN-1-1998 DEC-31-1998 7,721 402 17,683 4,171 4,777 27,341 5,560 4,521 28,445 20,772 0 20 0 0 7,562 28,445 79,070 79,070 59,370 59,370 23,558 0 454 (3,805) 0 (3,805) 0 0 0 (3,805) (0.19) (0.19)
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