-----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, H5o/oZNsPZSA7a7dWgvph93IO5SSXfK5tOppaAfqSZYRoIs0mVDeEjgdMJPi34z6 2RWheBP+uCTJDkX2EjCn7Q== 0000892569-99-002552.txt : 19991227 0000892569-99-002552.hdr.sgml : 19991227 ACCESSION NUMBER: 0000892569-99-002552 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990928 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KOFAX IMAGE PRODUCTS INC CENTRAL INDEX KEY: 0001045035 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 330114967 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-23119 FILM NUMBER: 99718690 BUSINESS ADDRESS: STREET 1: 16245 LAGUNA CANYON ROAD CITY: IRVINE STATE: CA ZIP: 92618 BUSINESS PHONE: 9497271733 MAIL ADDRESS: STREET 1: 3 JENNER ST CITY: IRVINE STATE: CA ZIP: 92618 10-K405 1 FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1999 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ------------ FORM 10-K ------------ [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended June 30, 1999 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____ to _____ Commission File Number 000-23119 KOFAX IMAGE PRODUCTS, INC. (Exact name of registrant as specified in its charter) Delaware 33-0114967 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 16245 Laguna Canyon Rd, Irvine, California 92618 (Address of principal executive offices) (Zip Code)
(949) 727-1733 (Registrant's telephone number, including area code) 3 Jenner Street, Irvine, California (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the closing sale price of $12.50 per share of Common Stock on September 17, 1999, as reported on the Nasdaq National Market, was approximately $8,740,000. The number of outstanding shares of the registrant's Common Stock, par value $.001 per share, was 5,254,206 on September 17, 1999. ================================================================================ 2 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY INDEX
ITEM PAGE NUMBER NUMBER - ------ ------ PART I. ITEM 1. Business............................................................................. 3 ITEM 2. Properties........................................................................... 19 ITEM 3. Legal Proceedings.................................................................... 19 ITEM 4. Submission of Matters to a Vote of Security Holders.................................. 19 PART II. ITEM 5. Market for the Registrant's Common Stock and Related Stockholder Matters............. 20 ITEM 6. Selected Financial Data.............................................................. 21 ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................................ 22 ITEM 8. Consolidated Financial Statements and Supplementary Data............................. 27 ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................. 27 PART III. ITEM 10. Directors and Executive Officers of the Registrant................................... 28 ITEM 11. Executive Compensation............................................................... 29 ITEM 12. Security Ownership of Certain Beneficial Owners and Management....................... 35 ITEM 13. Certain Relationships and Related Transactions....................................... 35 PART IV. ITEM 14. Exhibits, Consolidated Financial Statements, Financial Statement Schedule, and Reports on Form 8-K.................................................................. 36 SIGNATURES
2 3 PART I This Annual Report on Form 10-K contains forward-looking statements relating to future events or the future financial performance of the Company, including but not limited to statements contained in "Factors That May Affect Future Operating Results," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." Readers are cautioned that such statements, which may be identified by words including "anticipates," "believes," "intends," "estimates," "expects," and similar expressions, are only predictions or estimations and are subject to known and unknown risks and uncertainties. In evaluating such statements, readers should consider the various factors identified in this Annual Report on Form 10-K, including matters set forth in "Factors That May Affect Future Operating Results," which could cause actual events, performance or results to differ materially from those indicated by such statements. ITEM 1. BUSINESS GENERAL Kofax Image Products, Inc. ("Kofax" or the "Company") develops and markets products designed to manage the conversion of paper documents into electronic information. Kofax's business is focused on the process of scanning large volumes of documents, extracting both image and textual information from them, and then introducing the electronic information into workflow systems, document management systems and storage and retrieval systems. The Company's products are used in conjunction with industry standard personal computers and personal computer operating systems. The Company sells its products to a wide variety of document imaging, workflow and document management solution providers including value-added resellers, system integrators, independent software vendors and computer companies. RECENT DEVELOPMENTS Pursuant to a tender offer commenced on August 3, 1999, Imaging Components Corporation, a Delaware corporation (the "Purchaser") offered to purchase for cash, at a price of $12.75 per share, all outstanding shares of Common Stock of the Company. The tender offer was made pursuant to an Agreement and Plan of Merger, dated as of July 27, 1999 (the "Merger Agreement"), among the Company, the Purchaser and Imaging Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of the Purchaser ("Merger Sub"). The tender offer expired at 12:00 midnight, New York Time, on September 8, 1999. Purchaser accepted for payment and purchased 4,414,409 shares of the Company's Common Stock, or approximately 84% of the Company's outstanding shares of Common Stock, pursuant to the tender offer. Upon Purchaser's acceptance and purchase of the tendered shares, each of the Company's incumbent directors (other than David S. Silver) resigned and two of the vacancies created by such resignations were filled by the appointment of Arnold von Buren and Alexander P. Coleman, who were designated by the Purchaser for election to the Company's Board of Directors. The Merger Agreement provides that as soon as practicable after Purchaser's purchase of the shares tendered into the tender offer, Merger Sub will be merged with and into the Company, the separate corporate existence of the Merger Sub will cease and the Company will continue as the surviving corporation and will be a wholly-owned subsidiary of the Purchaser (the "Merger"). Purchaser currently owns approximately 84% of the Company's outstanding shares of Common Stock. Pursuant to the Merger Agreement, the Company has agreed to call a special meeting of the stockholders of the Company to approve the Merger Agreement and the Merger. Because the Purchaser will vote all shares it beneficially owns in favor of the Merger Agreement and the Merger, approval of the stockholders of the Company is assured. 3 4 INDUSTRY BACKGROUND The electronic document management (EDM), workflow, and imaging industry--which addresses the need to organize and manage large volumes of corporate information--encompasses a wide variety of companies in several different technology areas. One of the most persistent problems in installations of document management systems has been the need to process paper-based documents as well as electronic documents. An estimated 80%-90% of corporate information still resides in paper form, including such things as invoices, purchase orders, faxes, contracts, and so forth, and these documents must be converted into searchable electronic documents in order to be properly managed by EDM and workflow systems. The growth of the Internet has made the document capture problem even more pressing--and has significantly increased the demand for automating the capture of paper-based information. Commercially available Internet/intranet tools have made it increasingly common (and easy) for organizations to make corporate knowledge accessible to their workers, but as they implement Internet-based solutions they find that they have solved only half the problem. Users of these systems quickly become accustomed to having electronic information almost instantly available to them, but they likewise become quickly frustrated when they are unable to access paper-based information with the same ease and convenience. Because of this, the value of converting paper documents into electronic form has grown. Unlike paper documents, electronic documents can be processed efficiently, are searchable, and are easy to make accessible through Internet technologies. Document and data capture is the most popular and efficient method of converting paper documents into searchable electronic files, and the growth of the Internet will be a key accelerator of growth in the capture market over the next five years. THE KOFAX SOLUTION Kofax's specialty -- document and data capture -- is a popular and efficient method of converting paper documents into searchable electronic files. Growth of the document and data capture market is dependent on the need for five primary applications of document and data capture: o DOCUMENT MANAGEMENT applications in which large repositories of active documents need to be controllable, versionable and accessible for collaborative use. o DATA CAPTURE applications in which text and data need to be automatically read from forms and exported to shared databases, mainframe systems and workflow processes. o WEB PUBLISHING applications in which original documents are made accessible via the Internet or a corporate intranet or extranet. o WORKFLOW applications in which documents are introduced into a business process typically initiated by a transaction. o ARCHIVAL applications in which permanently stored documents of record need to be accessed easily for viewing or demand printing. Converting paper documents into electronic files is generally accomplished by scanning the documents with a production document scanner that is designed to scan large volumes of paper at speeds from 20 pages per minute up to 200 pages per minute or more. These five applications have helped drive the growth of the production scanner market at an annual rate of approximately 20%. The production scanner market, in turn, is the primary driver of Kofax's growth, and the Company's business is focused exclusively on software and hardware related to scanning, enhancing, extracting data from, indexing, and long term storage of business documents. 4 5 Kofax's products cover the entire range of products required to perform these tasks, including hardware controllers that reside in high-speed production scanners (VirtualReScan or VRS), host controllers for PCs (Adrenaline), and application software that manages the complex document and data capture process (Ascent Capture). PRODUCTS Kofax currently markets three families of products: o DOCUMENT AND DATA CAPTURE SOFTWARE under the Ascent Capture brand name. o OPTICAL STORAGE MANAGEMENT SOFTWARE under the Ascent Storage brand name. o SCANNING AND IMAGE PROCESSING HARDWARE under the Adrenaline and VRS brand names. All three of these product families are designed to improve either the capture of paper documents (including scanning, data extraction, and image processing) or the mass storage of these documents (including optical storage, archiving, and retrieval). Document and Data Capture Software - Ascent Capture 3 Ascent Capture 3, introduced in March 1999, scans large volumes of forms and documents and converts them into images, text and data for introduction into a variety of document management and workflow systems. It has three primary benefits for organizations that deal with large volumes of paper as part of their daily business routine: o It converts paper documents into electronic images and then indexes them so that they can be managed by a workflow or document management system. o It extracts text and data from forms and writes the data to a backend database, mainframe, or line of business application. o It reduces the ongoing labor costs of operating a capture system by employing advanced technologies in the areas of batch management, image enhancement, optical character recognition or OCR, data validation, and integration with leading EDM and workflow systems. Ascent Capture's unique DDI (Document-Data-Internet) architecture allows it to address all three of the primary types of production capture in use today: o Document capture, in which images are scanned and indexed for later retrieval. o Data capture, or forms processing, in which information is automatically read from forms to replace manual data entry. o Internet-based distributed capture, which allows inexpensive capture stations to be located around the world and connected to a central processing site via the Internet. Since 1995, we have sold over 8,000 Ascent Capture licenses in use at over 2,000 installations worldwide. Integration modules are available for virtually all leading workflow and document management systems, including: o IBM EDMSuite o Eastman Software Imaging for Windows NT o Documentum 4i o Optika eMedia o OpenText LiveLink o Keyfile o PC DOCS, DOCS Open and DOCS Fusion o IMR Alchemy o Adobe Acrobat Capture o Excalibur RetrievalWare
5 6 Ascent Capture is priced from $895 to $14,000 per license and is sold worldwide through authorized resellers of the Company. In July 1999, Kofax acquired exclusive rights to advanced data capture technologies from RAF Technologies and will use this as the basis for expanding further into the high end of the data capture market. Optical Storage Management Software - Ascent Storage 4 Ascent Storage 4 is an optical storage manager for Windows NT networks. It allows an optical jukebox to be attached to a Windows NT server and manage large volumes of document images or other data. Ascent Storage solves two problems associated with using optical jukeboxes on Windows NT networks: o The jukebox must emulate a magnetic disk perfectly so that it can work with standard applications. o The jukebox must provide reasonable performance. Ascent Storage combines the ease of use of a drive emulator with the high performance of a custom toolkit. It installs in minutes on any NT network and provides true NT drive emulation, automatic backup capability, and reliable disaster recovery. In addition, it allows value-added resellers or VARs and end users to write simple macros that can link the storage system more tightly to their back end EDM and workflow systems, thus providing higher performance and faster retrieval times. Ascent Storage is priced from $495 to $30,000 per license and is sold worldwide through authorized distributors and resellers of the Company. Scanning and Image Processing Hardware - Adrenaline and VRS The Adrenaline and VRS hardware products are designed to improve the quality of document images produced by high-speed production scanners: o Adrenaline controller boards are installed in the PCI slot of any standard Windows PC and then connected to a high-speed scanner. In addition to controlling the basic operation of the scanner, Adrenaline boards perform pixel-intensive image enhancement operations such as image deskewing and despeckling, line removal, convolution, and more at speeds up to 400 pages per minute, significantly improving the quality, readability, and OCR accuracy of scanned images. Adrenaline boards are available for both video and SCSI interface scanners and support production scanners from Fujitsu, Bell+Howell, Kodak, Ricoh, Panasonic, and others. o VRS is an original equipment manufacturer (OEM) hardware product that is installed in a scanner and performs image processing on raw grayscale images before they are delivered to the PC. VRS provides two unique capabilities: 1) grayscale deskew and adaptive thresholding (conversion of the image from grayscale to bitonal) that are far superior to anything performed by software or by an Adrenaline board by itself, and 2) intelligent monitoring of images as they are scanned, allowing scanner operators to manually adjust occasional images that do not meet their quality standards. Both Adrenaline and VRS are supported by most imaging and document capture applications on the market, including products from Kofax, IBM, FileNET, Optika, BancTec, Cardiff, Captiva, Microsystems, Datacap, Keyfile, and others. Adrenaline controller boards are priced from $1,395 to $3,595 and are available through Kofax's worldwide network of distributors. VRS is sold on an OEM basis and VRS-enabled scanners are currently available from Fujitsu. 6 7 TECHNOLOGY/RESEARCH AND DEVELOPMENT As of June 30, 1999, the Company's research and development group consisted of 70 employees, of which 57 people manage, develop or test the Company's software products. During the fiscal years ended June 30, 1999, 1998, and 1997, research and development expenses were $8.6 million, $7.8 million, and $6.7 million, respectively. The Company anticipates that it will continue to commit substantial resources to product development in the future. See "Factors That May Affect Future Operating Results -- Rapid Technological Change." As is common in the imaging, workflow and document management industry, the Company licenses various software from third parties and includes or uses such software in certain of the Company's application software products. Currently, royalties payable under such license arrangements are not significant in relation to the selling price of the software products. Algorithm Development An important aspect of the Company's research and development effort involves developing proprietary, state-of-the-art image processing algorithms. These algorithms are highly specialized and depend on a detailed knowledge of advanced mathematics and computational processes. These algorithms are encapsulated in proprietary ASICs, digital signal processor code and traditional C and assembly language code. The Company's library of algorithms covers two basic areas: Recognition. This includes algorithms such as bar code recognition, patch code detection and automatic forms recognition. These algorithms are widely used to automate the indexing of scanned documents, thus lowering the ongoing labor cost of the imaging operation. Image enhancement. These algorithms are used to clean up scanned images so that recognition operations run with greater accuracy. Image enhancement is used to improve both the Company's recognition functions and recognition functions performed by third party products, such as OCR and handprint recognition. This is a key area of development, as very small increases in OCR accuracy can save substantial amounts in annual operating costs for an imaging installation. A key part of this development is tuning the Company's algorithms for maximum speed. Customers typically prefer to perform image processing during scanning, which can only be done if all required algorithms execute in less time than it takes to scan a page (usually one second or less). The Company believes that its ability to perform image processing in real time is one of its key competitive advantages. The software development group includes engineers with significant design experience in applied and theoretical image processing, real-time operating systems, Microsoft operating systems, user interfaces, and embedded systems and firmware. The software development group was an early adopter of object oriented software development tools and now maintains an expanding base of reusable code. The hardware design group includes engineers with significant design experience in high-speed digital electronics, ASICs, field programmable gate arrays, computer buses, complex computer systems and design for manufacturability. SALES AND DISTRIBUTION Kofax pursues a two-tier distribution strategy, the first tier being stocking distributors while the second tier are solution providers such as system integrators and value-added resellers (VARs). During fiscal 1999, Kofax had 65 stocking distributors in 38 countries who accounted for 80% of net sales. Most of the Company's distributors specialize in document image processing as either their sole business or as a major component of their business. In fiscal 1999, three of these distributors, Law-Cypress Distributing Co., Tech Data Corporation, and Cranel, Inc. accounted for 18%, 14%, and 11%, respectively, of the Company's total net sales. See "Factors That May Affect Future Operating Results -- Dependence Upon Distribution Channels." 7 8 In addition, the Company has a field sales force that works closely with its distributor and reseller channel. In the Ascent Software Business Unit, Kofax maintains six sales offices in the U.S. staffed by technical sales managers and application engineers. The Company's European headquarters in Brussels covers Western Europe, Eastern Europe, Africa and the Middle East, and two full-time sales people based in the Irvine, California office cover Asia and South America. In the Image Processing Business Unit, a separate sales force is used to cover North America. In fiscal 1999, approximately 69% of net sales were generated in the United States, 23% in Europe and 8% in Asia, South America and the rest of the world. Kofax products generally reach the end user through the Company's two distribution channels. Each of these sales channels plays a different role in the Company's overall distribution strategy: Distributors. Most Kofax products flow initially through one of the Company's distributors. Distributors service a large base of VARs and system integrators and are responsible for handling credit issues and stocking product to provide quick shipping turnaround. The Company's distributors generally do not stock significant amounts of inventory of the Company's products, as these products are typically incorporated by resellers into complete imaging, workflow and document management systems which are configured shortly before scheduled delivery to end-user customers. VARs/Resellers. VARs and resellers typically integrate Kofax products into a specific solution that they then sell to an existing base of customers in such markets as healthcare, banking, insurance, transportation and government. The Company has selected and trained over 500 Ascent Certified Resellers (ACRs) who incorporate the Company's Ascent software line into complete imaging, workflow and document management systems. The ACRs are the primary focus of the Company's Ascent software sales strategy and, accordingly, the Company is investing significantly in growing, training and supporting this base of resellers. END USER CUSTOMERS Although Kofax generally does not sell products directly to end users, the Company has an extensive and diverse list of end-user customers who are serviced and supported by its reseller partners. The list below, which was derived from the Company's database of warranty registration cards, is illustrative of the wide range of industries and organizations using the Company's products. There can be no assurance that any of the listed organizations have purchased a material amount of the Company's products or that they will purchase the Company's products in the future. MANUFACTURING FINANCIAL/BANKING SYSTEM INTEGRATORS Procter & Gamble GE Capital Services EDS Corp. BMW AG United Bank of Switzerland Lucent Technologies Dow Corning Chase Manhattan Bank Unisys Corporation NATIONAL GOVERNMENT OIL AND CHEMICALS STATE AND LOCAL GOVERNMENT U.S. Customs Service The British Petroleum Co. PLC Wisconsin Dept. of Justice U.S. Army Chevron Corporation Denver Water Dept. U.S. Dept. of Treasury The Dow Chemical Co. City of Minneapolis ELECTRONICS SERVICES/DISTRIBUTION EDUCATION Digital Equipment Corp. Automobile Club of So. Calif. Cal State University, Hayward General Electric Avis Rent A Car, Inc. University of Oklahoma Hewlett-Packard Company SYSCO Corp. University of Wisconsin PHARMACEUTICAL INSURANCE ENERGY Merck & Co., Inc. Equitable Life Assurance British Gas Transco Warner Lambert Co. Blue Cross/Blue Shield Petro-Canada Glaxo Wellcome PLC Delta Dental Plans Association Consolidated Edison, Inc.
MARKETING The bulk of the Company's marketing efforts are aimed at generating short-term leads for itself and its distribution partners. Promotional efforts are closely tracked and follow-up surveys help determine the effectiveness of various 8 9 marketing programs. This process is automated and is designed to ensure that leads are fulfilled promptly and by the appropriate channel partner. Longer term marketing efforts include education of end users via periodic roadshows, trend and opinion articles placed in key publications, and meetings with industry analysts. The Company actively uses its marketing efforts to position itself as both a technological leader and an active supporter of industry trade associations and standards committees. The Company has several specialized marketing programs designed to reach specific audiences. The first three of these programs are used to promote the Ascent product family and are considered important to the long-term success of Ascent: The Ascent Reseller Program is designed to attract qualified resellers for the Company's Ascent family of products. Resellers are accepted into the program if they meet a set of predefined criteria that include a minimum level of technical expertise, experience in the imaging channel and payment of a $3,000 fee. Benefits of the program include demonstration software, free training, collateral materials, lead support and cooperative marketing funds. The Component Application Partner Program is aimed at other software vendors in the document management and workflow market who make products complementary to Ascent Capture and Ascent Storage. Companies are accepted into the program if they support the engineering work required to write an interface between Ascent and their products. Benefits include extensive technical support, cooperative marketing opportunities and reference sales. Training is provided for the Ascent product family to all qualified resellers and, for a fee, to interested end users. The basic training class is three days long and costs $1,495. The ImageControls ISV Program is targeted at independent software vendors and provides incentives for these vendors to use Kofax toolkits and support Kofax accelerators. Benefits of this program include reduced price software and hardware, lead support, and cooperative advertising. CUSTOMER SUPPORT The Company believes its ability to provide comprehensive service, support and training to its distributors, resellers and customers is an important factor in its business. A high level of continuing service and support is fundamental to helping developers, distributors and resellers be successful in selling and supporting the Company's products. The Company's customer support and training departments currently provide the following services: Technical Support. A support staff of 12 engineers provides telephone, fax and electronic mail support to the entire customer base. Additionally, authorized resellers and subscribers to the support service program have extended access to the Company's Internet support site, which contains technical articles, programming tips and source code samples. Ascent Certified Resellers are entitled to full support under their reseller program while Ascent end users may purchase an annual support contract for $1,495. For software developers who purchase toolkit products, the Company provides four months of free technical support, after which annual support costs are between $795 and $995. End users of the Company's software and hardware engines may contact this group at no charge for routine product installation and configuration questions. Software Upgrades. Customers of the Company's developer toolkit products receive free software upgrades as part of their subscription to the Company's technical support program. Customers of the Ascent application software purchase new versions when they become available (typically every 15-18 months) and are normally offered these upgrades at a reduced price. Maintenance upgrades of Ascent software are made available to existing customers at no charge. Customer Education. The Company provides comprehensive product training to authorized resellers of the Company's Ascent family of application software products. 9 10 Hardware Repair or Replacement. The Company provides a warranty on all of its hardware products for up to two years after installation. Customers with hardware problems during the warranty period may return their hardware directly to the Company, or in some cases to their local authorized distributor, for free repair or replacement. Customers with hardware problems not covered under warranty may purchase hardware repair service for a flat fee plus shipping costs. The Company maintains sales and support offices in the United States and Europe. The Company believes that existing field sales and support facilities are adequate to meet its current requirements. The Company plans to continue to expand its field sales and support facilities worldwide where appropriate to further penetrate existing and new market opportunities. COMPETITION In the imaging, workflow and document management industry, the market for scanner enhancement hardware and software application components is highly competitive and is characterized by rapid changes in technology and frequent introductions of new platforms and features. The Company expects competition to increase as other companies introduce additional and more competitive products in the emerging imaging, workflow and document management market. In its accelerator board and developer toolkit business, the Company competes primarily with a number of small private companies. In its Ascent business, Kofax competes indirectly against suppliers of turnkey systems as well as directly with other component software vendors, more of whom are expected to enter the market over the next few years. Some of the Company's existing competitors, as well as a number of potential competitors, in the document imaging application software segment of the market have larger technical staffs, greater brand name recognition and market presence, more established and larger marketing and sales organizations and substantially greater financial resources than the Company. There can be no assurance that the Company will be able to compete successfully against current and future competitors or that competitive pressures faced by the Company will not have a material adverse effect on the Company's business, operating results, cash flows and financial condition. The Company believes that the competitive factors affecting the market for the Company's products include product performance, price and quality; product functionality and features; the availability of products for existing and future platforms; the ease of integration of the products with other hardware and software components of document imaging systems; and the quality of customer support services, documentation and training. The relative importance of each of these factors depends upon the specific end user involved. There can be no assurance that the Company will be able to compete effectively with respect to any of these factors. The Company's present or future competitors may be able to develop products comparable or superior to those offered by the Company or adapt more quickly than the Company to new technologies or evolving customer requirements. In order to remain successful in the imaging, workflow and document management market, the Company must respond to technological change, customer requirements and competitors' current products, product enhancements and innovations. In particular, the Company is currently developing additional products and product enhancements in an effort to address customer requirements in response to technological changes. However, there can be no assurance that the Company will successfully complete the development or introduction of these products on a timely basis or that these products will achieve market acceptance. Accordingly, there can be no assurance that the Company will be able to continue to compete effectively in its market, that competition will not intensify or that future competition will not have a material adverse effect on the Company's business, operating results, cash flows and financial condition. See "Factors That May Affect Future Operating Results -- Impact of Competition." INTELLECTUAL PROPERTY The Company believes that its success is strongly related to its reputation for technology, product innovation, technical competence, technical customer support and the response of management to customers' needs. The Company currently holds no patents and relies on a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements, licensing arrangements and other security measures (which afford only limited protection) to establish and protect its software, proprietary algorithms and other proprietary technology. Despite these precautions, there can be no assurance that the Company will be successful in protecting 10 11 its proprietary technology, or that the Company's competitors will not independently develop products or technologies that are substantially equivalent or superior to the Company's products and technologies. It is possible that unauthorized third parties will copy or reverse engineer portions of the Company's products or otherwise obtain and use information which the Company regards as proprietary. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as the laws of the United States. The failure or inability of the Company to protect its intellectual property rights could have a material adverse effect on its business, operating results, cash flows and financial condition. The PC hardware and software industry is characterized by vigorous protection of intellectual property rights, which has resulted in significant and often protracted and expensive litigation. Litigation may be necessary to protect the Company's intellectual property rights and trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. There can be no assurance that infringement, invalidity, right to use or ownership claims by third parties will not be asserted against the Company in the future. The Company expects that it will increasingly be subject to such claims as the number of products and competitors in the imaging, workflow and document management market grows and the functionality of such products overlaps with other industry segments. If any claims or actions are asserted against the Company, the Company may seek to obtain a license under a third party's intellectual property rights. There can be no assurance, however, that a license will be available upon reasonable terms, if at all. In addition, should the Company decide to litigate such claims, such litigation could be expensive, protracted and time consuming, could divert management's attention from other matters, could cause product shipment delays and could materially adversely affect the Company's business, operating results, cash flows and financial condition, regardless of the outcome of the litigation. Kofax(R), KIPP(R), ImageControls(R), Ascent(R), Ascent Capture(R), StorageControls(R), and Adrenaline(R) are registered trademarks of the Company. Ascent Storage(TM), VirtualReScan(TM), VRS(TM), and Ascent Capture Internet Server(TM) are trademarks of the Company and are the subject of pending trademark registration applications. Alliance(SM) is a servicemark of the Company and is the subject of a pending servicemark registration application. MANUFACTURING AND SUPPLIERS The Company manufactures its products at its headquarters facility in Irvine, California. The Company's manufacturing strategy focuses on producing high quality products while controlling costs and maintaining the flexibility necessary to introduce new products quickly and react to changing customer demand. The Company's manufacturing operations consist primarily of materials and procurement management, functional testing and final assembly of products, burn-in, quality assurance and shipping. The Company employs one local independent subcontractor to perform printed circuit board level assembly. The Company purchases all components and raw materials and consigns them to its assembly subcontractor. Cable assemblies are purchased complete from a company that specializes in cable assembly manufacture. The Company has in-house software duplication capability, but also uses subcontractors for software duplication. Each of the Company's products undergoes thorough testing and quality inspection at the final assembly stages of production. The Company purchases circuit boards, integrated circuits and other components from third parties. The Company's dependence on third-party suppliers involves several risks, including limited control over pricing, availability, quality and delivery schedules. The Company is dependent on sole-source suppliers for ASICs and certain critical components used in its products. The Company generally purchases sole-sourced components pursuant to purchase orders placed in the ordinary course of business and has no guaranteed supply arrangements with any of its sole-source suppliers. There can be no assurance that the Company will not experience quality control problems or supply shortages for these components in the future. Although the Company has attempted to mitigate these risks by identifying alternate sources of sole-sourced components and buying significant safety stocks, any quality control problems or interruptions in supply with respect to one or more components could have a material adverse effect on the Company's business, operating results, cash flows and financial condition. Because of the Company's reliance on these vendors, the Company may also be subject to increases in component costs which could materially adversely affect its business, operating results, cash flows and financial condition. The Company relies on third-party subcontractors for the manufacture of certain of its products and components such as cable assemblies and circuit boards. Reliance on third-party subcontractors involves several risks, including the 11 12 potential inadequacy of capacity, the unavailability of or interruptions in access to certain process technologies and reduced control over product quality, delivery schedules, manufacturing yields and costs. Shortages of raw materials to or production capacity constraints at the Company's subcontractors could negatively affect the Company's ability to meet its production obligations and result in increased prices for affected parts. Any such factor may result in delays in shipments of the Company's products or increases in the prices of components, either of which could have a material adverse effect on the Company's business, operating results, cash flows and financial condition. See "Factors That May Affect Future Operating Results -- Dependence on Suppliers and Subcontractors." BACKLOG The Company typically ships its products within a short period after acceptance of purchase orders from distributors and other customers. Accordingly, the Company typically does not have a material backlog of unfilled orders, and net sales in any quarter are substantially dependent on orders booked in that quarter. Any significant weakening in customer demand would therefore have an almost immediate adverse impact on the Company's operating results and on the Company's ability to maintain profitability. EMPLOYEES As of June 30, 1999, the Company employed 173 individuals, including 70 in research and development, 65 in sales, marketing and customer support, 14 in manufacturing and 24 in administration, finance and information systems. The Company regularly seeks to identify skilled engineering and other potential employee candidates, and has found that competition for qualified personnel in the computer software industry is intense. The Company believes that its ability to recruit and retain highly skilled technical and other management personnel will be critical to its ability to execute its business plans. None of the Company's employees is represented by a labor union or is subject to a collective bargaining agreement. The Company believes that its relations with its employees are good. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), regarding the Company, its business, prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause the Company's actual results to differ from those that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below as well as those discussed elsewhere in this Annual Report. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by the Company in this Annual Report and in the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. Probable Fluctuations in Quarterly Operating Results The Company's operating results have been, and its future operating results are expected to be, subject to fluctuations due to a number of factors, including the timing of orders from, and shipments to, major customers; the timing of new product introductions by the Company or its competitors; variations in the mix of products sold by the Company; changes in pricing policies by the Company, its competitors or its suppliers, including possible decreases in average selling prices of the Company's products in response to competitive pressures; product returns or price protection charges from customers; market acceptance of new and enhanced versions of the Company's products; the availability and cost of key components; the availability of manufacturing capacity; delays in the introduction of new products or product enhancements by the Company, the Company's competitors or other providers of hardware, software and components for the imaging, workflow and document management market; dependence upon capital spending budgets; dependence on suppliers of scanners and their ability to supply scanners to the marketplace; 12 13 fluctuations in general economic conditions; and the unpredictability of all of the foregoing. In addition, the Company has at times experienced quarter-to-quarter declines in net sales. The Company believes that these fluctuations in net sales result primarily from the budgeting and purchasing cycles of its customers and, during the summer months, from European holiday closures. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as indications of future performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Company's expense levels are relatively fixed in the short term and are based on the Company's sales forecasts; however, because substantially all of the Company's net sales in each quarter result from orders received and shipped in that quarter, net sales are difficult for the Company to forecast accurately. The Company operates with little product backlog because its products are typically shipped shortly after orders are received. In addition, a significant portion of the Company's sales are made through indirect channels and are difficult to predict. Any significant reduction in customer demand in a particular quarter would therefore have an almost immediate adverse effect on the Company's operating results. If significant shortfalls were to occur between forecasted and actual orders, as has occurred in the past and as may occur in the future, the Company might not be able to reduce its expenses proportionately and in a timely manner. This could compound the resulting adverse effect on operating results. In addition, in order to promptly fill orders, the Company maintains inventories of finished goods and components with long lead times, which could result in writedowns of inventory in the future and could contribute to quarterly fluctuations in operating results. The Company's gross profit margins may be adversely affected by the introduction of new products and changes in product mix. Accordingly, there can be no assurance that the Company will be able to sustain its current gross profit margins. The Company also may reduce prices or increase spending in response to competition or to pursue new market opportunities, which may adversely affect the Company's operating results. Due to the foregoing factors, the Company's operating results may be below the expectations of public market analysts and investors in some future quarters, which would likely result in a decline in the trading price of the Common Stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence on a Limited Number of Products for Current and Future Operating Results The Company focuses exclusively on document imaging hardware and software. Historically, the Company has derived substantially all of its net sales from its family of accelerator boards, software development tools and accessories. This family of products is expected to continue to account for a majority of the Company's net sales for the foreseeable future. The Company believes that as its family of accelerator boards and related products continues to mature, sales of these products will grow at slower than historical rates, and there can be no assurance that the Company will be able to sustain the current level of growth of such sales. Any reduction in the demand for the Company's family of accelerator boards and related products due to introductions by the Company's competitors of products based on new technologies or new industry standards, a decline in the demand for computer systems or document imaging products, product obsolescence or any other reason would have a material adverse effect on the Company's business, operating results, cash flows and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Products." In January 1995, the Company introduced its Ascent line of document image processing application software for Microsoft Windows. The Company is directing a significant amount of its research and development expenditures to the development of its Ascent products and plans to devote significant marketing efforts to promotion of its Ascent products. The Company believes that its Ascent products, together with other products under development, will contribute an increasing share of the Company's net sales in the future as the market for accelerator boards and related products continues to mature. Accordingly, the Company believes that its operating results will in the future become substantially dependent on the Company's ability to increase sales of its Ascent products, achieve market acceptance of new products under development and develop future products. There can be no assurance that the Company will be successful in increasing sales of its Ascent products, achieving market acceptance of its new products under development or developing additional products. Failure to increase sales of the Company's Ascent products, achieve market acceptance of products under development or develop additional products would have a material adverse effect on the Company's business, operating results, cash flows and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business -- Products." 13 14 Dependence on Imaging, Workflow and Document Management Market and Component Software Strategy Substantially all of the Company's net sales have been attributable to sales of document imaging products, and these products are currently expected to account for substantially all of the Company's future net sales. The imaging, workflow and document management market is a rapidly evolving market. If this market fails to grow or grows more slowly than the Company currently anticipates, the Company's business, operating results and financial condition would be materially adversely affected. In addition, the Company has focused its product development efforts on a component software strategy rather than seeking to develop a complete turnkey imaging solution. If the component software approach does not continue to achieve significant market acceptance, the Company's business, operating results, cash flows and financial condition could be materially adversely affected. See "Business -- Industry Background." Rapid Technological Change The market for the Company's document image processing products is characterized by rapid technological advances, changes in end user requirements, frequent new product introductions and enhancements and evolving industry standards. The introduction of products embodying new technologies and the emergence of new industry standards could render the Company's existing products and products under development obsolete and unmarketable. For example, increasing speeds of future generation Pentium-class microprocessors in standard PCs could reduce demand for the Company's hardware accelerator products, which could have a material adverse effect upon the Company's business, operating results, cash flows and financial condition. The Company's future success will depend upon its ability to address the increasingly sophisticated needs of its customers by enhancing its current products and by developing and introducing on a timely basis new products that lead or keep pace with technological developments and emerging industry standards, respond to evolving end user requirements and achieve market acceptance. Any failure by the Company to anticipate or adequately respond to technological developments or end user requirements, or any significant delays in product development or introduction could result in a loss of competitiveness or net sales. In the past, the Company has experienced delays in the introduction of new products and product enhancements. There can be no assurance that the Company will be successful in developing and marketing product enhancements or new products on a timely basis or at all, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and sale of these products, or that any of its new products or product enhancements will adequately meet the requirements of the marketplace and achieve market acceptance. If the Company is unable, for technological or any other reasons, to develop, introduce and sell its products in a timely manner, the Company's business, operating results, cash flows and financial condition would be materially adversely affected. From time to time, the Company or its present or future competitors may announce new products, capabilities or technologies that have the potential to replace or shorten the life cycles of the Company's existing products. There can be no assurance that announcements of currently planned or other new products will not cause customers to delay or alter their purchasing decisions in anticipation of such products, which could have a material adverse effect on the Company's business, operating results, cash flows and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business -- Products," "-- Competition" and "-- Technology/Research and Development." Impact of Competition The market for imaging, workflow and document management hardware and software components is highly competitive and is characterized by rapid changes in technology and frequent introductions of new platforms and features. The Company expects competition to increase as other companies introduce additional and more competitive products in this developing market. In its accelerator board and developer toolkit business, the Company competes primarily with a number of small private companies. In its Ascent business, to which the Company is a relative newcomer, Kofax competes indirectly against large suppliers of turnkey systems, as well as directly with other component software vendors, more of whom are expected to enter the market over the next few years. Some of the Company's existing and potential competitors in the application software segment of the document imaging market have larger technical staffs, greater brand name recognition and market presence, more established and larger marketing and sales organizations and substantially greater financial resources than the Company. There can be no 14 15 assurance that the Company will be able to compete successfully against current or future competitors or that competitive pressures faced by the Company will not have a material adverse effect on the Company's business, operating results, cash flows and financial condition. The Company believes that the competitive factors affecting the market for the Company's products include product performance, price and quality; product functionality and features; the availability of products for existing and future platforms; the ease of integration of the products with other hardware and software components of document imaging systems; and the quality of support services, product documentation and training. The relative importance of each of these factors depends upon the specific customer involved. There can be no assurance that the Company will be able to compete effectively with respect to any of these factors. The Company's present or future competitors may be able to develop products comparable or superior to those offered by the Company or adapt more quickly than the Company to new technologies or evolving customer requirements. In order to remain competitive in the document imaging market, the Company must respond to technological change, customer requirements, and competitors' current products, product enhancements and innovations. The Company introduced its Ascent line of application software products in January 1995, has recently developed its new generation of accelerator boards and is currently developing additional product enhancements to these products in an effort to address customer requirements and respond to technological changes. However, there can be no assurance that the Company will successfully complete the development or introduction of these products on a timely basis or that these products will achieve market acceptance. Accordingly, there can be no assurance that the Company will be able to continue to compete effectively in the document imaging market, that competition will not intensify or that future competition will not have a material adverse effect on the Company's business, operating results, cash flows and financial condition. See "Business -- Competition." Dependence on Scanner Manufacturers The Company's accelerator boards and Ascent Capture software are used in conjunction with high-end production scanners which are manufactured and supplied by several domestic and Japanese scanner manufacturers and vendors. The Company's sales of these products are dependent on the number of scanners that are produced and distributed by these scanner manufacturers and vendors. Any decrease in the number of scanners in the marketplace may decrease the number of accelerator boards sold by the Company. Manufacturers and distributors of scanners may encounter a variety of difficulties that may reduce the number of scanners produced and shipped to consumers during the period of such difficulty, all of which are beyond the Company's control. There can be no assurance that manufacturers and distributors will not experience difficulties in producing or shipping scanners or, if such difficulties arise, that they will be resolved in a timely manner, resulting in a lower than expected number of scanners in the marketplace. Any decrease in the number of scanners produced and shipped to consumers could materially adversely effect the Company's business, operating results, cash flows and financial condition. Dependence Upon Distribution Channels The Company relies heavily on its distributors and resellers for the marketing and distribution of its products. In fiscal 1999, three of the Company's distributors, Law-Cypress Distributing Co., Tech Data Corporation, and Cranel, Inc. accounted for 18%, 14%, and 11%, respectively, of the Company's total net sales. The concentration of sales to a limited number of distributors increases the credit risk of sales to such distributors. If one or more of the Company's principal distributors became insolvent or otherwise terminated its relationship with the Company, the Company's business, operating results, cash flows and financial condition could be materially adversely affected. The Company's products are hardware and software components of complete imaging, workflow and document management systems. As such, sales of the Company's products depend, in significant part, upon purchases of imaging, workflow and document management systems, which include products supplied by vendors other than the Company. As a result, sales of the Company's products are subject to a variety of factors outside of the Company's control, including the ability of its resellers to successfully sell their complete solutions to end users. The Company's agreements with resellers and distributors do not require minimum purchases, are generally not exclusive and in many cases may be terminated by either party without cause. There can be no assurance that these resellers and distributors will continue to carry the Company's products or that they will give a high priority to the marketing of 15 16 the Company's products. In addition, there can be no assurance that the Company will retain any of its current resellers or distributors or that, if the Company were to lose any reseller or distributor, the Company would be successful in recruiting replacement organizations to represent it. Any changes in the Company's distribution channels could materially adversely affect the Company's business, operating results, cash flows and financial condition. See "Business - -- Sales and Distribution." Dependence on Intellectual Property and Proprietary Rights The Company currently holds no patents and relies on a combination of copyright, trademark and trade secret laws, employee and third-party nondisclosure agreements, licensing arrangements and other security measures (which afford only limited protection) to establish and protect its software, proprietary algorithms and other proprietary technology. There can be no assurance that the Company will be successful in protecting its proprietary technology, or that the Company's competitors will not independently develop products or technologies that are substantially equivalent or superior to the Company's products and technologies. It is possible that third parties will copy or reverse engineer portions of the Company's products or otherwise obtain and use information which the Company regards as proprietary. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to the same extent as the laws of the United States. The failure or inability of the Company to protect its intellectual property rights could have a material adverse effect on its business, operating results, cash flows and financial condition. The PC hardware and software industry is characterized by vigorous protection of intellectual property rights, which has resulted in significant and often protracted and expensive litigation. Litigation may be necessary to protect the Company's intellectual property rights and trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity. There can be no assurance that infringement, invalidity, right to use or ownership claims by third parties will not be asserted against the Company in the future. The Company expects that it will increasingly be subject to such claims as the number of products and competitors in the document image processing market grows and the functionality of such products overlaps with other industry segments. If any claims or actions are asserted against the Company, the Company may seek to obtain a license under a third party's intellectual property rights. There can be no assurance, however, that a license will be available upon reasonable terms, if at all. In addition, should the Company decide to litigate such claims, such litigation could be expensive, protracted and time consuming, could divert management's attention from other matters, could cause product shipment delays and could materially adversely affect the Company's business, operating results, cash flows and financial condition, regardless of the outcome of the litigation. See "Business -- Intellectual Property." Dependence on Suppliers and Subcontractors The Company purchases circuit boards, integrated circuits and other components from third parties. The Company's dependence on third-party suppliers involves several risks, including limited control over pricing, availability, quality and delivery schedules. The Company is dependent on sole-source suppliers for ASICs and certain other components used in its products. The Company generally purchases sole-sourced components pursuant to purchase orders placed in the ordinary course of business and has no guaranteed supply arrangements with any of its sole-source suppliers. There can be no assurance that the Company will not experience quality control problems or supply shortages with respect to these components in the future. Any quality control problems or interruptions in supply with respect to one or more components could have a material adverse effect on the Company's business, operating results, cash flows and financial condition. Because of the Company's reliance on these suppliers, the Company may also be subject to increases in component costs, which could materially adversely affect its business, operating results, cash flows and financial condition. See "Business -- Manufacturing and Suppliers." The Company relies on third-party subcontractors for the manufacture of certain of its products and components, such as cable assemblies and circuit boards. Reliance on third-party subcontractors involves several risks, including the potential inadequacy of capacity, the unavailability of or interruptions in access to certain process technologies and reduced control over product quality, delivery schedules, manufacturing yields and costs. Shortages of raw materials or production capacity constraints at the Company's subcontractors could negatively affect the Company's ability to meet its production obligations and result in increased prices for, or unavailability of, affected parts. Any 16 17 such reduction, constraint or unavailability could result in shipment delays of the Company's products or increases in the prices of components, either of which could have a material adverse effect on the Company's business, operating results, cash flows and financial condition. See "Business -- Manufacturing and Suppliers." Dependence on Key Personnel The Company's success depends on the continued service of key management personnel, including David S. Silver, Chief Executive Officer. None of the Company's personnel is subject to an employment agreement with the Company. In addition, the competition to attract, retain and motivate qualified technical, sales and operations personnel is intense. The Company has at times experienced, and continues to experience, difficulty in recruiting qualified personnel, particularly in software development and customer support. The Company's ability to compete effectively and to manage future anticipated growth will also require the Company to recruit additional qualified personnel. There can be no assurance that the Company can retain its key personnel or attract other qualified personnel in the future. The failure to attract or retain such persons could have a material adverse effect on the Company's business, operating results, cash flows and financial condition. See "Business -- Employees". Dependence on Capital Spending Substantially all of the Company's net sales are derived from the sale of hardware and software components for use in imaging, workflow and document management systems purchased by end users such as large corporations and domestic and foreign governmental agencies. The decision to purchase an imaging, workflow and document management system generally involves a significant commitment of capital, with the attendant delays associated with significant capital expenditures. The Company's future success is directly dependent upon the capital expenditure budgets of its customers and the continued demand by such customers for imaging, workflow and document management systems. Certain industries that utilize imaging, workflow and document management systems, such as the financial services industry, are highly cyclical, and companies in such industries may experience economic downturns, which could lead to significant reductions in capital expenditures. In addition, many domestic and foreign governmental agencies have experienced budget deficits that have also led to significant reductions in capital expenditures. The Company's operations may in the future be subject to substantial period-to-period fluctuations as a consequence of such industry patterns and such factors affecting capital spending. There can be no assurance that any such decrease in capital spending will not have a material adverse effect on the Company's business, operating results, cash flows and financial condition. Risks Associated with International Sales In fiscal 1999, 1998, and 1997, international sales represented approximately 31%, 33%, and 34%, respectively, of the Company's net sales, and the Company believes that its future growth is dependent in part upon its ability to increase sales in international markets. The Company intends to attempt to continue to expand its operations outside of the United States and enter additional international markets, which will require significant management attention and financial resources. There can be no assurance, however, that the Company will be able to successfully maintain or expand its international sales. International sales are subject to inherent risks, including changes in regulatory requirements, tariffs and other barriers, fluctuating exchange rates, difficulties in staffing and managing foreign sales and support operations and the possibility of greater difficulty in accounts receivable collection. To date, the Company has avoided the risk of fluctuating exchange rates associated with international sales by selling its products in United States currency, however, there can be no assurance that the Company will be able to continue to do so. There can be no assurance that any of these factors will not have a material adverse effect on the Company's future international sales and, consequently, on the Company's business, operating results, cash flows and financial condition. See "Management's Discussion and Analysis of Financial Conditions and Results of Operations -- Overview" and "-- Results of Operations - -- Net Sales." Risk of Defects The Company has occasionally discovered errors or defects in its products after their commercial shipment. Although to date such defects and errors have not been significant, there can be no assurance that significant defects 17 18 and errors will not be discovered in new products, existing products or in new versions or enhancements of existing products, and if discovered, will be successfully and timely corrected. Discovery of errors or defects in the Company's products after commercial shipment could result in adverse customer reaction, negative publicity regarding the Company or its products, a delay in or failure to achieve market acceptance or a diversion of management and product development resources, any of which could have a material adverse effect on the Company's business, operating results, cash flows and financial condition. Potential Effect of Anti-Takeover Provisions The Company's Board of Directors has the authority to issue up to 5,000,000 shares of Preferred Stock and to determine the price, rights, preferences, qualifications, limitations and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of Preferred Stock could have the effect of delaying or preventing a change of control. Further, Section 203 of the General Corporation Law of Delaware prohibits the Company from engaging in certain business combinations with interested stockholders. These provisions may have the effect of delaying or preventing a change in control of the Company without action by the stockholders, and could therefore adversely affect the price of the Common Stock. Risks Associated with Acquisitions From time to time, the Company expects to make acquisitions of, or significant investments in, businesses that offer complementary products and technologies. Such future acquisitions or investments would expose the Company to the risks commonly encountered in acquisitions of businesses. Such risks include, among others, difficulty of assimilating the operations, information systems and personnel of the acquired businesses; the potential disruption of the Company's ongoing business; the inability of management to maximize the financial and strategic position of the Company through the successful incorporation of acquired employees and customers; the maintenance of uniform standards, controls, procedures and policies; and the impairment of relationships with employees and customers as a result of any integration of new management personnel. There can be no assurance that any potential acquisition will be consummated or, if consummated, that it will not have a material adverse effect on the Company's business, financial condition and results of operations. Possible Volatility of Stock Price The trading price of the Company's Common Stock is subject to significant fluctuations in response to variations in quarterly operating results, the gain or loss of significant orders, changes in earning estimates by analysts, announcements of technological innovations or new products by the Company or its competitors, general conditions in the software and computer industries and other events or factors. In addition, the stock market in general has experienced extreme price and volume fluctuations which have affected the market price for many companies in industries similar or related to that of the Company and which have been unrelated to the operating performance of these companies. These market fluctuations may adversely affect the market price of the Company's Common Stock. See "Market for Registrant's Common Stock and Related Stockholder Matters". Year 2000 Issues It is possible that the currently installed computer systems, software products or other business systems of the Company's distributors, resellers, suppliers, manufacturers or customers, working either alone or in conjunction with other software systems, will not accept input of, store, manipulate and output dates in the Year 2000 or thereafter without error or interruption (the "Year 2000 Problem"). The Company has tested its software products and is unaware of any material Year 2000 Problems. In addition, the Company has completed a review of its business systems, including its computer systems, and based on information gathered to date, believes that such systems are also not subject to any material Year 2000 Problems. The Company has queried its distributors, resellers, suppliers, manufacturers and customers as to their progress in identifying and addressing Year 2000 Problems. Substantially all of the Company's primary distributors, resellers, suppliers, manufacturers, and customers have indicated that they 18 19 are Year 2000 compliant. Based on the Company's review of its products and business systems and responses from its significant third party vendors, the Company believes that total costs due to the Year 2000 Problem will not exceed $100,000. The Company believes under a worse case scenario, it could continue the majority of its normal business activities on a manual basis. The Company has not developed a contingency plan to address the Year 2000 Problem in the event that the Company or its distributors, resellers, suppliers, manufacturers or customers fail to become Year 2000 compliant. The failure of the Company or its distributors, resellers, suppliers, manufacturers and customers to complete the conversions or upgrades necessary to fully address the Year 2000 Problem in a timely manner could have material adverse effect on the Company's business, results of operations, cash flows and financial condition. ITEM 2. PROPERTIES The Company currently leases approximately 59,000 square feet of space in Irvine, California, which serves as its headquarters. This space is used for research and development, manufacturing, sales and marketing, customer support and administration. The Company's lease expires in March, 2004, and has two three-year options to extend the lease. Rent expense will increase annually during the term of this lease. The Company also leases approximately 10,000 square feet of space in Tyngsboro, Massachusetts, which is occupied by the Ascent Storage development team. This lease expires in August 2000. The Company also maintains a number of sales and support offices in the United States and Europe. The Company believes that existing field sales and support facilities are adequate to meet its current requirements. The Company plans to continue to expand its field sales and support facilities worldwide where appropriate to further penetrate existing and new market opportunities. ITEM 3. LEGAL PROCEEDINGS On September 26, 1997, VisionShape, Inc. ("VisionShape") filed suit against the Company in the Superior Court of Orange County, California. VisionShape claims that the Company's Adrenaline accelerator boards prevent the use of software other than the Company's software, which, the complaint alleges, creates a monopoly or otherwise constitutes a tying arrangement in violation of state and federal antitrust laws. VisionShape seeks unspecified monetary damages and costs as well as equitable remedies, including an order enjoining the Company from selling its Adrenaline accelerator boards. VisionShape also seeks treble damages and attorneys' fees. On May 27, 1998, the Superior Court held that VisionShape failed to state a cause of action against the Company and ordered the suit dismissed on July 15, 1998. VisionShape filed an appeal on March 31, 1999. Based upon information currently available to the Company, the Company believes VisionShape's claims are without merit and intends to contest vigorously any action against the Company. However, it is too early to determine the outcome of such appeal and there can be no assurance as to the eventual outcome of such actions. Any determination against the Company in the litigation or the settlement of such claims could have a material adverse effect on the Company's business, results of operation, cash flows and financial condition. The Company is not a party to any other material legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended June 30, 1999. 19 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is traded on the Nasdaq National Market under the symbol "KOFX". The Company completed its initial public offering of its Common Stock on October 10, 1997 at an offering price of $11.00 per share. The following table sets forth, for the periods indicated, the high and low sale prices for the Common Stock as reported by the Nasdaq National Market.
High Low ---- --- Fiscal 1998: Second Quarter (from October 10, 1997) $11.75 $4.00 Third Quarter $ 8.00 $5.00 Fourth Quarter $ 8.25 $6.125 Fiscal 1999: First Quarter $ 7.625 $6.25 Second Quarter $ 8.75 $5.875 Third Quarter $10.50 $7.375 Fourth Quarter $10.00 $7.875
As of September 17, 1999, the number of stockholders of record was 57. This number does not account for Common Stock registered in street name. Accordingly, the actual number of holders of record of the Company's Common Stock may be significantly greater than the number indicated above. The Company has never declared or paid any cash dividends on shares of its Common Stock. The Company currently intends to retain all available funds for use in the operation of its business, or to acquire or invest in complementary businesses or products or obtain the right to use complementary technologies, and does not intend to pay any cash dividends in the foreseeable future. Future cash dividends, if any, will be determined by the Board of Directors. The payment of cash dividends by the Company is restricted by the Company's current bank credit facilities, which contain restrictions prohibiting the Company from paying any cash dividends without the bank's prior approval, and future borrowings may contain similar restrictions. On April 27, 1998, the Company announced that its board of directors had authorized a program for repurchase of up to 500,000 shares, or approximately 9.5%, of the Company's outstanding Common Stock, to be used to fund stock option exercises, employer equity compensation plans, and an employee stock purchase plan. The Company repurchased 274,000 and 100,000 shares of its common stock during fiscal 1999 and 1998 for approximately $2.1 million and $0.6 million, respectively. 20 21 ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data set forth below as of and for each of the five years in the period ended June 30, 1999, have been derived from the audited consolidated financial statements and notes thereto audited by Deloitte & Touche LLP, independent auditors, of which the consolidated financial statements and notes thereto as of June 30, 1999 and 1998 and for each of the three years in the period ended June 30, 1999 are included elsewhere in this Annual Report on Form 10-K. The data set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K.
FISCAL YEARS ENDED JUNE 30, ----------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) STATEMENT OF OPERATIONS DATA: Net sales $ 38,095 $ 33,375 $ 29,266 $ 24,964 $ 21,085 Cost of sales 8,794 7,819 7,720 7,926 7,218 -------- -------- -------- -------- -------- Gross profit 29,301 25,556 21,546 17,038 13,867 Operating expenses: Sales and marketing 11,389 10,706 9,565 7,456 5,977 Research and development 8,642 7,826 6,653 5,090 3,693 General and administrative 3,112 2,672 1,936 1,748 1,554 Acquired in-process research and development costs -- -- -- 4,177 -- -------- -------- -------- -------- -------- Total operating expenses 23,143 21,204 18,154 18,471 11,224 -------- -------- -------- -------- -------- Income (loss) from operations 6,158 4,352 3,392 (1,433) 2,643 Other income, net 1,050 759 69 200 264 -------- -------- -------- -------- -------- Income (loss) before provision (benefit) for income taxes 7,208 5,111 3,461 (1,233) 2,907 Provision (benefit) for income taxes 2,514 1,968 1,326 (500) 1,096 -------- -------- -------- -------- -------- Net income (loss) $ 4,694 $ 3,143 $ 2,135 $ (733) $ 1,811 ======== ======== ======== ======== ======== Basic net income (loss) per share $ 0.89 $ 0.75 $ 1.37 $ (0.82) ======== ======== ======== ======== Diluted net income (loss) per share $ 0.87 $ 0.62 $ 0.52 $ (0.82) ======== ======== ======== ======== Basic weighted average common shares(1) 5,282 4,197 1,319 1,305 ======== ======== ======== ======== Diluted weighted average common shares(1) 5,421 5,073 4,126 1,305 ======== ======== ======== ======== Net income (loss) applicable to common stockholders $ 4,694 $ 3,143 $ 1,801 $ (1,067) ======== ======== ======== ======== BALANCE SHEET DATA: Cash, cash equivalents, and investments $ 25,279 $ 20,865 $ 5,404 $ 3,514 $ 6,759 Working capital 27,542 24,149 8,676 6,949 9,382 Total assets 37,085 32,115 16,327 14,141 13,018 Long-term notes payable -- -- 427 799 -- Total stockholders' equity(1) 31,131 27,625 12,254 10,106 10,832
- ---------- (1) Includes amounts attributable to the outstanding shares of the Company's Redeemable Convertible Preferred Stock, which was converted into common stock at the time of the Company's initial public offering. 21 22 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion contains forward-looking statements regarding the Company, its business, prospects and results of operations that are subject to certain risks and uncertainties posed by many factors and events that could cause the Company's actual business, prospects and results of operations to differ materially from those that may be anticipated by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed herein as well as those discussed under the caption "Factors That May Affect Future Operating Results". Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. The Company undertakes no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made by the Company in this Annual Report and in the Company's other reports filed with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect the Company's business. OVERVIEW Kofax Image Products was founded in 1985 to develop image processing accelerator boards that could be added to PCs and other desktop workstations to facilitate high-speed scanning, compression, manipulation and printing of document images. The products were targeted at the emerging market of document image processing. Today, Kofax develops, markets, and supports three product lines for imaging, workflow, and document management applications. The fastest growing products are software applications that manage the capture and long-term storage of documents for production level workflow and document management systems. The original image processing hardware and development tools business, which is in its fourth generation, currently generates gross margins of approximately 70% and continues to generate significant profit for investment into the faster growing software businesses. Fiscal year 1999 total software revenue was $12.7 million, or about 33% of revenue. This was a 25% increase over fiscal 1998 software revenue. Substantially all of this increased software revenue was generated from the Company's Ascent software business. During fiscal 1999, the Company signed and trained over 130 new Ascent resellers focused on document management and workflow solutions. Revenue from the Company's family of image processing boards and development tools has grown modestly over the past three years, and the Company expects that to continue for the foreseeable future. The Company believes that the accelerator board and development tools business will continue to account for a majority of the Company's net sales for the next two to three years. The Company also expects that its Ascent software products, together with other products under development, will contribute an increasing share of the Company's net sales in the future. Net sales represent gross sales less discounts, returns, and adjustments. The Company's net sales have grown from $287,000 in fiscal 1987 to $38.1 million in fiscal 1999. The Company's revenue growth has resulted from the expansion of the document image processing market, as well as from the growing market acceptance of the Company's products. The Company typically ships its products within a short period after acceptance of purchase orders from distributors and other customers. Accordingly, the Company typically does not have a material backlog of unfilled orders at the end of any quarter. Net sales of image processing products amounted to 70.0% of fiscal 1999 revenue. Net sales of Ascent component software products amounted to 30.0% of fiscal 1999 revenue compared to 25.5% in fiscal 1998 and 17.7% in fiscal 1997. International sales (primarily to western European countries) accounted for approximately 31%, 33%, and 34% of net sales during fiscal 1999, 1998, and 1997, respectively. Approximately 3%, 4%, and 5% of international sales during fiscal 1999, 1998, and 1997, respectively, were attributable to countries in Asia and the Pacific Rim. Sales to Asia and Pacific Rim countries declined in absolute dollars from fiscal 1998 to fiscal 1999. Some of this decrease is attributable to not having local language versions of Ascent Capture available for the Japanese, Korean, and other Asian markets. The Company is currently working on providing a version of Ascent Capture in Japanese which may improve sales in this region. The Company has not had any sales from Russia or China to date, and the Company 22 23 has no current sales or marketing plans for Russia or China. Management expects that the Company's international operations will continue to provide a significant portion of total net sales; however, international sales could be adversely affected if the U.S. dollar continues to strengthen against international currencies. To date the Company has not yet had any foreign currency translation adjustments. The adoption of the "Euro" by the European community in 1999 may lead the Company to transact its European sales in "Euros," which may result in the realization of foreign exchange gains or losses in the future. The Company sells its products primarily through a two-tier channel of stocking distributors and solution providers, such as system integrators and value-added resellers (VARs). Net sales through stocking distributors amounted to 80% of fiscal 1999 revenue. The Company has six domestic and three European sales offices to support its distributors and resellers. Revenue from hardware and software sales is recognized at the time of shipment in accordance with AICPA Statement of Position 97-2, "Software Revenue Recognition." Distributors have certain rights of return and exchange privileges. The Company's distributors generally do not stock significant amounts of inventory of the Company's products, as these products are typically incorporated by resellers into complete imaging, workflow, and document management systems which are configured shortly before scheduled delivery to end-user customers. The Company records estimates for such rights of return and exchange privileges based on historical experience. The Company provides a warranty for its products against defects in materials and workmanship. A provision for estimated warranty costs is recorded at the time of sale. The Company has been profitable for the last 32 quarters, with the exception of the quarter ending December 1995, when $4,158,500 was charged to acquired in-process research and development expenses in connection with the acquisition of certain net assets of LaserData, Inc. ("LaserData"). Cost of sales primarily consists of the costs of components and subassemblies, labor and manufacturing overhead and, with respect to the Company's software products, software duplication and royalty expenses. The Company believes that its gross margins reflect the high content of proprietary firmware in the Company's hardware accelerator boards as well as the increasing percentage of total software revenue in the Company's product mix. Sales and marketing expenses consist primarily of salaries and commissions, customer support, trade shows, advertising, and other promotional expenses. General and administrative expenses consist of personnel costs for administration, finance, information systems, human resources, and general management, as well as professional services. Research and development expenses consist primarily of personnel costs and overhead costs relating to occupancy. Despite the fact that the Company's net sales have increased, research and development expenses as a percentage of net sales are relatively high because of the high software content of the Company's Adrenaline family of image processing products and the development of its Ascent application software products. The Company expects that research and development expenses will continue to increase in absolute amounts and will fluctuate as a percentage of net sales, depending upon the timing of material research and product development projects. As of June 30, 1999, the Company did not have any capitalized software development expenses. See Note 2 of Notes to Consolidated Financial Statements. 23 24 RESULTS OF OPERATIONS The following table sets forth certain income and expense items as a percentage of net sales for the periods indicated.
FISCAL YEARS ENDED JUNE 30, ---------------------------------- 1999 1998 1997 ------ ------ ------ Net sales 100.0% 100.0% 100.0% Cost of sales 23.1 23.4 26.4 ------ ------ ------ Gross profit 76.9 76.6 73.6 Operating expenses: Sales and marketing 29.9 32.1 32.7 Research and development 22.7 23.5 22.7 General and administrative 8.2 8.0 6.6 ------ ------ ------ Total operating expenses 60.8 63.6 62.0 ------ ------ ------ Income from operations 16.1 13.0 11.6 Other income, net 2.8 2.3 0.2 ------ ------ ------ Income before provision for income taxes 18.9 15.3 11.8 Provision for income taxes 6.6 5.9 4.5 ------ ------ ------ Net income 12.3% 9.4% 7.3% ====== ====== ======
Net Sales. Net sales were $38.1 million, $33.4 million and $29.3 million in fiscal 1999, 1998, and 1997, respectively. Net sales increased 14.1%, 14.0%, and 17.2% in fiscal 1999, 1998, and 1997, respectively. The increases in fiscal 1999 and 1998 net sales were primarily attributable to increases in sales of the Company's Ascent software products. Revenues from the Ascent software business were $11.4 million, $8.5 million, and $5.1 million in fiscal 1999, 1998, and 1997, respectively. Gross Profit. As a percentage of net sales, gross profit represented 76.9%, 76.6% and 73.6% in fiscal 1999, 1998 and 1997, respectively. The increases in the gross profit percentage in fiscal 1999 and 1998 were primarily attributable to increasing sales of Ascent software products which have higher gross profit rates. Sales and Marketing. Sales and marketing expenses were $11.4 million, $10.7 million, and $9.6 million in fiscal 1999, 1998, and 1997, respectively. As a percentage of net sales, sales and marketing expenses represented 29.9%, 32.1%, and 32.7% in fiscal 1999, 1998, and 1997, respectively. The increase in absolute dollars in fiscal 1999 was primarily attributable to approximately $0.3 million for additional marketing personnel, and approximately $0.4 million for increased marketing related expenses related to the launch of Ascent Storage 4.0 and Ascent Capture 3.0 products. The increase in fiscal 1998 was primarily attributable to approximately $0.7 million for additional marketing personnel and increased costs of compensation. The Company expects that sales and marketing expenses will continue to increase in absolute dollar amounts and will fluctuate as a percentage of net sales. Research and Development. Research and development expenses were $8.6 million, $7.8 million, and $6.7 million in fiscal 1999, 1998, and 1997, respectively. As a percentage of net sales, research and development expenses represented 22.7%, 23.5%, and 22.7% in fiscal 1999, 1998, and 1997, respectively. Approximately $0.6 million and $1.2 million, respectively, of the fiscal 1999 and fiscal 1998 increases in research and development expenditures were primarily due to increased compensation costs for personnel, consultants, and contract labor working on Ascent Capture, Ascent Storage, Adrenaline and ImageControls product development. The Company expects that research and development expenses will continue to increase in absolute dollar amounts and will fluctuate as a percentage of net sales depending upon the timing of material research and development projects. General and Administrative. General and administrative expenses were $3.1 million, $2.7 million, and $1.9 million in fiscal 1999, 1998, and 1997, respectively. As a percentage of net sales, general and administrative expenses were 8.2%, 8.0%, and 6.6% in fiscal 1999, 1998, and 1997, respectively. The increase in fiscal 1999 was primarily attributable to increased compensation expenses. The increase in fiscal 1998 was primarily attributable to increased information systems expenses for compensation and infrastructure additions, and the increased accounting, legal, and other expenses related to the Company becoming a public company. The Company anticipates that it will incur increased general and administrative costs in the future. 24 25 Other Income, Net. Other Income, net is primarily interest income earned on short-term investments and investments held to maturity, less interest expense on long-term notes payable. Other Income, net was $1.1 million, $0.8 million, and $0.1 million in fiscal 1999, 1998, and 1997, respectively. As a percentage of net sales, other income, net was 2.8%, 2.3%, and 0.2% in fiscal 1999, 1998, and 1997, respectively. The increase in fiscal 1999 was due to interest income on the increase in cash and short-term investments provided by operating activities. The increase in fiscal 1998 was due to interest income from the $11.9 million increase in short-term investments from the proceeds of the Company's initial public offering and a reduction in interest expense from repayment of long-term notes payable. Provision for Income Taxes. The Company's effective tax rate was 35%, 38%, and 38% in fiscal 1999, 1998, and 1997, respectively. The decline in the effective tax rate in fiscal 1999 is a result of increased research and development expenditures in fiscal 1999, resulting in a larger federal and state R&D tax credit. The Company expects the effective tax rate to increase in fiscal year 2000, if the federal R&D tax credit is not extended in its current form. LIQUIDITY AND CAPITAL RESOURCES The Company financed its operations and capital requirements from 1986 through 1989 from the sale of approximately $4.0 million of preferred stock and, thereafter, through cash flow from operations. In October 1997, the Company completed its initial public offering selling 1,300,000 shares of its common stock, and received net proceeds, after subtracting expenses incurred in the offering, of approximately $12.6 million. The Company's primary sources of funds at June 30, 1999 consisted of approximately $25.3 million of cash, cash equivalents and investments. As of June 30, 1999 cash and cash equivalents totaled $25.3 million, an increase of $8.7 million from June 30, 1998. Net cash provided by operating activities during fiscal 1999 was approximately $7.2 million, and was generated primarily from net income, depreciation, and amortization and an increase in other accrued liabilities and deferred revenue. Net cash provided by investing activities during fiscal 1999 was approximately $2.8 million, and was generated primarily from the classification of the Company's investments to cash equivalents in anticipation of their liquidation as required by the Merger Agreement with Purchaser. Net cash used in financing activities during fiscal 1999 of approximately $1.3 million was primarily for the repurchase of 274,000 shares of Common stock for use in the employee stock option and stock purchase plans. The Company had an unsecured $2.0 million revolving credit line with Silicon Valley Bank (the "Bank") with no outstanding balance at June 30, 1999. The revolving line of credit was terminated September 9, 1999 in connection with the closing of the tender offer. To obtain the funds required to purchase the shares tendered in the tender offer and complete the merger, the Purchaser incurred borrowings of $50.0 million under a Credit Agreement for senior secured facilities and $10.0 million under Senior Subordinated Notes. As a condition to these financings, the Company entered into guarantee and collateral agreements pursuant to which the lenders under the Credit Agreement and Senior Subordinated Notes obtained a security interest in the Company's assets, including its cash balances, and the Company guaranteed the obligations of Purchaser. Upon consummation of the Merger, the Company will assume the obligations of Purchaser and become the borrower under the Credit Agreement and Senior Subordinated Notes. On April 24, 1998, the Company's board of directors authorized a program for repurchase of up to 500,000 shares, or approximately 9.5%, of the Company's outstanding Common Stock, to be used to fund stock option exercises, employer equity compensation plans, and an employee stock purchase plan. The Company repurchased 274,000 shares and 100,000 shares of its common stock during fiscal 1999 and 1998 for approximately $2.1 million and $0.6 million, respectively. Aside from this program, the Company currently has no significant capital spending or purchase commitments other than normal purchase commitments and commitments under facilities leases. It is expected that a portion of the Company's cash balances will be used to repay debt incurred in connection with its assumption of Purchaser's obligations under the Credit Agreement and Senior Subordinated Notes. The Company believes that its existing cash balances, available bank financing and the cash flows generated from operations, if any, will be sufficient to meet its anticipated cash needs for working capital and capital expenditures for at least the next 12 months. A portion of the Company's cash could be used to acquire or invest in 25 26 complementary businesses or products or obtain the right to use complementary technologies. The Company is currently evaluating, in the ordinary course of business, potential investments such as businesses, products or technologies. See "Factors That May Affect Future Operating Results -- Risks Associated with Acquisitions." Quantitative and Qualitative Disclosures about Market Risk At June 30, 1999, the Company had an investment portfolio of fixed income securities, including those classified as cash equivalents, of approximately $25.3 million. These securities are subject to interest rate fluctuations. An increase in interest rates could adversely affect the market value of the Company's fixed income securities. As of June 30, 1999, the weighted average maturity of the Company's portfolio was 17 days. The market value changes for increases in short-term treasury security yields are not material due to the overall short-term maturity of the Company's portfolio. The Company limits its exposure to interest rate and credit risk by establishing and strictly monitoring clear policies and guidelines for its fixed income portfolios. At the present time, the maximum average maturity of the Company's overall investment portfolio is limited by policy to 36 months. The guidelines also establish credit quality standards, limits on exposure to one issue or issuer, as well as the type of instrument. Due to the limited duration and credit risk criteria established in the Company's guidelines, the exposure to market and credit risk is not expected to be material. The Company does not use derivative financial instruments in its investment portfolio to manage interest rate risk. EUROPEAN MONETARY UNION Within Europe, the European Economic and Monetary Union introduced a new currency, the Euro, on January 1, 1999. The new currency is in response to the European Union's policy of economic convergence to harmonize trade policy, eliminate business costs associated with currency exchange and to promote the free flow of capital, goods and services. On January 1, 1999, the participating countries adopted the Euro as their local currency, initially available for currency trading on currency exchanges and non-cash transactions such as banking. The existing local currencies, or legacy currencies, will remain legal tender through January 1, 2002. Beginning on January 1, 2002, Euro-denominated bills and coins will be issued for cash transactions. For a period of up to six months from this date, both legacy currencies and the Euro will be legal tender. On or before July 1, 2002, the participating countries will withdraw all legacy currencies and exclusively use the Euro. Our transactions are currently recorded in U.S. Dollars only. Future transactions may be recorded in the Euro. We have not incurred and do not expect to incur any significant costs from the continued implementation of the Euro. However, the currency risk of the Euro could harm our business. RECENT ACCOUNTING PRONOUNCEMENTS For the year ended June 30, 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". There was no difference between the net income and the comprehensive net income for the years ended June 30, 1999, 1998 and 1997. For the year ended June 30, 1999, the Company also adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosure about products and services, geographic areas and major customers. (See Note 9) In February 1998, the Financial Accounting Standard Board (FASB) issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". This statement revises and standardizes employers' disclosure requirements about pension and other postretirement benefit plans, requires additional information on changes in the 26 27 benefit obligations and fair values of plan assets that will facilitate financial analysis and eliminates certain disclosures that are no longer useful. The Company does not maintain an employee pension plan or any other postretirement benefit plans. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which the Company is required to adopt effective in its fiscal year 2000. SFAS No. 133 will require the Company to record all derivatives on the Balance Sheet at fair market value. The Company does not currently engage in hedging activities but will continue to evaluate the effect of adopting SFAS No. 133. YEAR 2000 ISSUES It is possible that the currently installed computer systems, software products or other business systems of the Company's distributors, resellers, suppliers, manufacturers or customers, working either alone or in conjunction with other software systems, will not accept input of, store, manipulate and output dates in the Year 2000 or thereafter without error or interruption (the "Year 2000 Problem"). The Company has tested its software products and is unaware of any material Year 2000 Problems. In addition, the Company has completed a review of its business systems, including its computer systems, and based on information gathered to date, believes that such systems are also not subject to any material Year 2000 Problems. The Company has queried its distributors, resellers, suppliers, manufacturers and customers as to their progress in identifying and addressing Year 2000 Problems. Substantially all of the Company's primary distributors, resellers, suppliers, manufacturers, and customers have indicated that they are Year 2000 compliant. Based on the Company's review of its products and business systems and responses from its significant third party vendors, the Company believes that total costs due to the Year 2000 Problem will not exceed $100,000. The Company believes under a worse case scenario, it could continue the majority of its normal business activities on a manual basis. The Company has not developed a contingency plan to address the Year 2000 Problem in the event that the Company or its distributors, resellers, suppliers, manufacturers or customers fail to become Year 2000 compliant. The failure of the Company or its distributors, resellers, suppliers, manufacturers and customers to complete the conversions or upgrades necessary to fully address the Year 2000 Problem in a timely manner could have material adverse effect on the Company's business, results of operations, cash flows and financial condition. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this Item is included in Part IV Item 14. ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None 27 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company, and their ages as of September 17, 1999, are as follows:
NAME AGE POSITION - ---- --- -------- David S. Silver 41 Chief Executive Officer, President and Chairman of the Board Richard M. Murphy 52 Vice President and General Manager - Image Processing Business Unit Ronald J. Fikert 51 Vice President, Finance, Chief Financial Officer and Secretary Kevin Drum 40 Vice President, Marketing - Ascent Software Business Unit Arnold von Buren 47 Director Alexander P. Coleman 32 Director
- ---------- David S. Silver co-founded the Company in August 1985 and has served as President and Chief Executive Officer and a director of the Company since its inception. From 1982 to 1985, Mr. Silver was employed by FileNet Corporation, a manufacturer of document image processing systems, as a member of the development team for the FileNet imaging system. Prior to 1982, Mr. Silver held various engineering positions with MAI Basic Four Corporation, a manufacturer of computer equipment and associated application software programs. Richard M. Murphy joined the Company as a Vice President, Sales in November 1989. From 1984 to 1989, Mr. Murphy held various sales management positions with Emulex Corporation, a manufacturer of computer storage, communications, graphics and peripheral products, where he served as Vice President, Domestic Sales from September 1987 to January 1989 and as Vice President, North American Sales from January 1989 to November 1989. Prior to 1984, Mr. Murphy held various sales positions with Hamilton-Avnet Electronics, Kierulff Electronics and Telefile Computer Products. Ronald J. Fikert joined the Company as Vice President, Finance in February 1990. From March 1989 to February 1990, Mr. Fikert worked as an independent management consultant. From 1984 to 1989, Mr. Fikert was employed by General Monitors, a manufacturer of sensing, monitoring and detection equipment, where he served as Controller. From 1979 to 1984, he was employed by Modular Command Systems, a manufacturer of electronic communications hardware and software, as Vice President, Finance and Secretary. Prior to joining Modular Command Systems, Mr. Fikert was Director of Finance for Esterline Electronics, a manufacturer of electronic products, and was an accountant with Arthur Andersen & Co. Mr. Fikert is a Certified Public Accountant. Kevin Drum joined the Company in November 1992 and was promoted to Vice President, Marketing in July 1995. Prior to that time, his positions with the Company included Director of Marketing and Senior Product Manager. From 1984 to 1992, Mr. Drum was employed by Emulex Corporation, where he served as a senior product manager from 1988 to 1992. Arnold von Buren was appointed to the Board of Directors concurrently with Purchaser's purchase of shares accepted in the tender offer. Mr. Von Buren is Secretary of Purchaser and served as Deputy Chief Executive of DICOM GROUP plc since November 1996. He joined ACU Informatick AG in Switzerland in 1983, working in sales and administration, and co-founded and became general manager of Computerway in 1989. Mr. Von Buren is a Swiss citizen with a degree in Economics and Business Administration. He has worked in the computer industry since 1978, including three years in the USA. 28 29 Alexander P. Coleman was appointed to the Board of Directors concurrently with Purchaser's purchase of shares accepted in the tender offer. Mr. Coleman is Vice President of Purchaser. He is also an Investment Partner of Dresdner Kleinwort Benson Private Equity LLC and a Vice President of Dresdner Kleinwort Benson North America LLC. Mr. Coleman joined Dresdner Kleinwort Benson in January 1996, and has been involved in management buyouts, cross-border equities, expansion financings and venture capital since joining Citicorp originally in 1989. Mr. Coleman is an active board member with a number of companies. Mr. Coleman holds an MBA from the University of Cambridge and a BA in economics from the University of Vermont. Mr. Coleman is a United States citizen. COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES ACT OF 1934 Based upon its review of the copies of reporting forms furnished to the Company, the Company believes that all filing requirements under Section 16(a) of the Securities Exchange Act of 1934 applicable to its directors, officers, and any persons holding ten percent or more of the Company's Common Stock during the Company's fiscal year ended June 30, 1999, were satisfied. ITEM 11. EXECUTIVE COMPENSATION COMPENSATION OF EXECUTIVE OFFICERS The following table sets forth compensation received for the fiscal years ended June 30, 1999, 1998 and 1997 by the Company's Chief Executive Officer and its other most highly compensated executive officers (collectively, the "Named Executive Officers") whose aggregate salary and bonus exceeded $100,000 for the fiscal year ended June 30, 1999. SUMMARY COMPENSATION TABLE
LONG TERM COMPENSATION ANNUAL COMPENSATION AWARDS ----------------------------------------- --------------------- NAME AND FISCAL YEAR SECURITIES UNDERLYING ALL OTHER PRINCIPAL POSITION ENDING JUNE 30 SALARY($) BONUS($)(1) OPTIONS/SARS COMPENSATION($)(1) ------------------ -------------- --------- ----------- --------------------- ------------------ David S. Silver........ 1999 $ 160,008 $ 69,300 60,000 $ 750 President and Chief 1998 145,000 59,458 - 750 Executive Officer 1997 135,000 64,893 - 750 Dean A. Hough(2)....... 1999 $ 125,004 23,520 20,000 750 Vice President - 1998 118,000 19,806 - 750 Engineering 1997 114,078 21,083 - 750 Ronald J. Fikert....... 1999 118,004 24,990 20,000 750 Vice President - 1998 109,000 23,250 - 750 Finance, Chief 1997 103,843 23,908 - 750 Financial Officer and Secretary Richard Murphy(3)...... 1999 109,008 80,161 20,000 750 Vice President - 1998 104,000 60,405 - 750 Sales 1997 100,000 76,761 - 750 Kevin Drum............. 1999 115,008 25,137 20,000 750 Vice President - 1998 109,000 21,528 - 750 Marketing 1997 102,290 22,295 - 750
- -------------------- (1) Consists of matching payments made under the Company's 401(k) Plan. (2) Mr. Hough resigned as Vice President of Engineering as of September 3, 1999. (3) Bonus amounts for Mr. Murphy include $59,948, $43,547 and $59,895 in sales commissions earned by Mr. Murphy during fiscal years 1999, 1998 and 1997, respectively. 29 30 STOCK OPTIONS The following table sets forth certain information concerning grants of options to each of the Named Executive Officers during the year ended June 30, 1999. In addition, in accordance with the rules and regulations of the Commission, the following table sets forth the hypothetical gains or "option spreads" that would exist for the options. Such gains are based on assumed rates of annual compound stock appreciation of 5% and 10% from the date on which the options were granted over the full term of the options. The rates do not represent the Company's estimate or projection of future Common Stock prices, and no assurance can be given that any appreciation will occur or that the rates of annual compound stock appreciation assumed for the purposes of the following table will be achieved. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS ----------------------------------------------------------------- POTENTIAL REALIZED VALUE NUMBER OF PERCENTAGE OF AT ASSUMED ANNUAL RATES SECURITIES TOTAL OPTIONS OF STOCK PRICE UNDERLYING GRANTED TO EXERCISE OR APPRECIATION OPTIONS EMPLOYEES IN BASE EXPIRATION ----------------------- NAME GRANTED(#)(1) FISCAL YEAR(2) PRICE($/SH) DATE 5% 10% - ------------------ ------------- -------------- ----------- --------------- --------- --------- David S. Silver... 60,000 20.9% $6.94 August 25, 2003 $ 115,010 $ 254,143 Dean A. Hough..... 20,000 7.0 $6.94 August 25, 2003 38,337 84,714 Ronald J. Fikert.. 20,000 7.0 $6.94 August 25, 2003 38,337 84,714 Richard Murphy.... 20,000 7.0 $6.94 August 25, 2003 38,337 84,714 Kevin Drum........ 20,000 7.0 $6.94 August 25, 2003 38,337 84,714
- ------------------ (1) The options vest over a four year period with 25% becoming exercisable on each anniversary of the grant date such that the options are 100% vested four years after the grant date. (2) Options to purchase an aggregate of 286,900 shares of Common Stock were granted to employees, including the Named Executive Officers, during the fiscal year ended June 30, 1999. OPTION EXERCISES AND FISCAL YEAR-ENDED VALUES The following table sets forth certain information concerning all option exercises, and the number of shares covered by both exercisable and unexercisable stock options for the Named Executive Officers as of June 30, 1999. Also reported are the values for "in the money" options that represent the positive spread between the exercise prices of any of such existing stock options and the closing sale price of the Company's Common Stock on June 30, 1999. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY SHARES OPTIONS AT JUNE 30, 1999 OPTIONS AT JUNE 30, 1999(1) ACQUIRED ON VALUE ------------------------------- ---------------------------- NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE(2) EXERCISABLE UNEXERCISABLE - ------------------ ----------- ----------- ----------- ---------------- ----------- ------------- David S. Silver... -- -- -- 60,000 -- $168,750 Dean A. Hough..... -- -- -- 20,000 -- 56,250 Ronald J. Fikert.. -- -- 3,750 21,250 $27,188 65,313 Richard M. Murphy. -- -- -- 20,000 -- 56,250 Kevin Drum........ 32,500 $141,634 -- 22,500 -- 74,375
- ------------------ (1) Calculated based on a fair market value equal to the reported closing price of the Company's Common Stock on The Nasdaq National Market at June 30, 1999, of $9.75 per share, less the applicable exercise price, and does not take into account the tender offer or any grants of options made after June 30, 1999. (2) Options that are not exercisable as of June 30, 1999 became fully exercisable upon consummation of the tender offer on September 9, 1999. 30 31 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the fiscal year ended June 30, 1999, the Company's Board of Directors, based upon recommendations of the Compensation Committee, established the levels of compensation for the Company's executive officers. David S. Silver, the Chairman of the Board, President and Chief Executive Officer of the Company participated in the deliberations of the Board regarding executive compensation, but did not participate in the process or decisions of the Board of Directors regarding his compensation. COMPENSATION OF DIRECTORS 1997 Stock Option Plan for Non-Employee Directors. Pursuant to the Company's 1997 Stock Option Plan for Non-Employee Directors, as amended, each non-employee director receives an initial grant of options to purchase 10,000 shares of the Company's Common Stock upon commencement of service as a director which option vests and becomes exercisable at a rate of twenty five percent per year over the four year period following the grant date. In addition, upon each anniversary of the initial grant of options during a non-employee director's term of office, such non-employee director shall receive an additional option covering 2,500 shares of the Company's Common Stock, with the same vesting schedule as the initial grant. The exercise price of options granted under this plan is 100% of the fair market value on the date of grant. During the fiscal year ended June 30, 1999, options were granted to each of William E. Drobish, David C. Seigle, B. Allen Lay and Alexander P. Cilento to purchase an aggregate of 10,000 shares of the Company's Common Stock. Director Fees. The Company's Board of Directors has approved the payment of the following fees to non-employee directors for attendance at meetings of the Board of Directors, the Annual Meeting of Stockholders and committee meetings: $1,250 for each scheduled meeting of the Board of Directors attended, $1,000 for the Annual Meeting of Stockholders and $750 plus travel expenses for each committee meeting that is not scheduled on the same day as a meeting of the Board of Directors. 31 32 REPORT OF THE COMPENSATION COMMITTEE The following report is submitted by the Compensation Committee of the Board of Directors with respect to the executive compensation policies established by the Compensation Committee and recommended to the Board of Directors and compensation paid or awarded to executive officers for the fiscal year ended June 30, 1999. The Compensation Committee determines the annual salary, bonus and other benefits, including incentive compensation awards, of the Company's senior management and recommends new employee benefit plans and changes to existing plans to the Company's Board of Directors. The Compensation Committee met one (1) time in the fiscal year ended June 30, 1999 and, during the fiscal year ended June 30, 1999, was comprised of B. Allen Lay, William E. Drobish and David C. Seigle, none of which was, and was not formerly, an officer or employee of the Company. Each of Messrs. Lay, Drobish and Seigle resigned as directors of the Company upon Purchaser's acceptance and purchase of the tendered shares. The Company has not yet designated new members of the Compensation Committee. COMPENSATION POLICIES AND FISCAL 1999 COMPENSATION In establishing and evaluating the effectiveness of compensation programs for executive officers, as well as other employees of the Company, the Compensation Committee is guided by three basic principles: o The Company must offer competitive salaries to be able to attract and retain highly-qualified and experienced executives and other management personnel. o Annual executive compensation in excess of base salaries should be tied to individual and Company performance. o The financial interests of the Company's executive officers should be aligned with the financial interest of the stockholders, primarily through stock option grants which reward executives for improvements in the market performance of the Company's Common Stock. The salaries of the Named Executive Officers increased slightly over the salaries paid in the fiscal year ended June 30, 1998 as a result of cost of living increases. The Company is required to disclose its policy regarding qualifying executive compensation deductibility under Section 162(m) of the Internal Revenue Code of 1986, as amended, which provides that, for purposes of the regular income tax and the alternative minimum tax, the otherwise allowable deduction for compensation paid or accrued with respect to a covered employee of a public corporation is limited to no more than $1 million per year. The compensation paid to the Company's executive officers for the fiscal year June 30, 1999 does not exceed the $1 million limit per officer. The Company's 1992 Amended and Restated Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan and the Company's 1996 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock Purchase Plan are structured so that any compensation deemed paid to an executive officer when he exercises an outstanding option under the plan, with an exercise price equal to the fair market value of the option shares on the grant date, will qualify as performance-based compensation that will not be subject to the $1 million limitation. Salaries and Employee Benefit Programs. In order to retain executives and other key employees, and to be able to attract additional well-qualified executives when the need arises, the Company strives to offer salaries, and health care and other employee benefit programs, to its executives and other key employees that are comparable to those offered to persons with similar skills and responsibilities by competing businesses in the local geographic area. In recommending salaries for executive officers, the Compensation Committee (i) reviews the historical performance of the executives and (ii) informally reviews available information, including information published in secondary sources, regarding prevailing salaries and compensation programs offered by competing businesses that are comparable to the Company in terms of size, revenue, financial performance and industry group. Some, though not all, of these competing 32 33 businesses, that have securities which are publicly traded, are included in the Peer Group Index used in the Stock Performance Graph on page 34. Another factor which is considered in recommending salaries of executive officers is the cost of living in Southern California where the Company is headquartered, as such cost generally is higher than in other parts of the country. Performance-Based Compensation. The Board of Directors believes that the motivation of executives and key employees increases as the market value of the Company's Common Stock increases. Nevertheless, the Company provides a merit bonus in cash or stock options to executives and key employees which is dependent on the Company's achievements and the direct contributions made by each executive and other key employees. Accordingly, at the beginning of each fiscal year, the Company establishes short term and long term plans, and at the end of the fiscal year, the collective and individual contributions of the executives to the Company's achievements are evaluated. Cash bonuses are awarded based on revenue and earnings performance for the fiscal year, and achievement of management's business objectives. The earnings goal is established on the basis of the annual operating plan developed by management and approved by the Board of Directors. The annual operating plan, which is designed to maximize profitability within the constraints of economic and competitive conditions, some of which are outside the control of the Company, is developed on the basis of (i) the Company's performance for the prior fiscal year; (ii) estimates of sales revenue for the plan year based upon recent market conditions, trends and competition and other factors which, based on historical experience, are expected to affect the level of sales that can be achieved; (iii) historical operating costs and cost savings that management believes can be realized; (iv) competitive conditions faced by the Company; and (v) additional expenditures beyond prior fiscal years in expansion or research and development toward growth of the Company's business in future fiscal years. By taking all of these factors into account, including market conditions, the revenue and earnings goals in the annual operating plan are determined. In certain instances, bonuses are awarded not only on the basis of the Company's overall profitability, but also on the achievement by an executive of specific objectives within his or her area of responsibility. For example, a bonus may be awarded for any executive's efforts in achieving greater than anticipated cost savings, or completing a new product on target. As a result of this performance-based merit bonus program, executive compensation, and the proportion of each executive's total cash compensation that is represented by incentive or bonus income, may increase in those years in which the Company's profitability increases. Stock Options and Equity-Based Programs. In order to align the financial interests of executive officers and other key employees with those of the stockholders, the Company grants stock options to its executive officers and other key employees on a periodic basis, taking into account the size and terms of previous grants of equity-based compensation and stock holdings in determining awards. Stock option grants, in particular, reward executive officers and other key employees for performance that results in increases in the market price of the Company's Common Stock, which directly benefit all stockholders. Moreover, the Compensation Committee generally has followed the practice of granting options on terms which provide that the options become exercisable in cumulative annual installments, generally over a three to five-year period. The Compensation Committee believes that this feature of the option grants not only provides an incentive for executive officers to remain in the employ of the Company, but also makes longer term growth in share prices important for the executives who receive stock options. The Board of Directors David S. Silver Arnold von Buren Alexander P. Coleman 33 34 PERFORMANCE GRAPH Set forth below is a line graph comparing the cumulative stockholder return on the Company's Common Stock with the cumulative total return of the Russell 2000 Index and an industry peer group index for the period commencing October 10, 1997, the date on which the Company's Common Stock first began trading and was first registered under the Securities and Exchange Act of 1934, as amended, and ended on June 30, 1999. COMPARISON OF CUMULATIVE TOTAL RETURN* AMONG KOFAX IMAGE PRODUCTS, INC., THE RUSSELL 2000 INDEX AND AN INDUSTRY PEER GROUP INDEX
Cumulative Total Return -------------------------------- 10/10/97 6/30/98 6/30/99 -------- ------- ------- KOFAX IMAGE PRODUCTS, INC. 100.00 58.53 88.64 PEER GROUP 100.00 147.12 116.25 RUSSELL 2000 100.00 103.38 103.36
- ------------ * $100 INVESTED ON 10/10/97 IN STOCK OR ON 9/30/97 IN INDEX - INCLUDING REINVESTMENT OF DIVIDENDS, FISCAL YEAR ENDING JUNE 30. 34 35 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the beneficial ownership of Common Stock of the Company as of September 15, 1999, as to (a) all directors, (b) the Named Executive Officers identified in the Summary Compensation Table located at page 29, (c) all directors and executive officers as a group, and (d) each person known to the Company to be the beneficial owner of more than 5% of the Company's voting securities. Except as otherwise indicated, the Company believes, based on information furnished by such owners, that the beneficial owners of the Common Stock have sole investment and voting power with respect to such shares, subject to applicable community property laws.
Amount and Nature of Beneficial Name and Address of Beneficial Owners Ownership(1) Percent - ------------------------------------------------- ------------------------------- ------- David S. Silver(2)............................... 99,216 1.9% Dean A. Hough(3)................................. 43,530 * Ronald J. Fikert(3).............................. 30,000 * Kevin Drum(4).................................... 30,343 * Richard Murphy(3)................................ 35,686 * Arnold von Buren................................. - * Business Building Forren West Grundstrasse 14 CH-6343 Rotkreuz (zug) Switzerland Alexander P. Coleman............................. - * 75 Wall Street, 24th Floor New York, New York 10005 Imaging Components Corporation................... 4,414,409 84.0 751 Wall Street New York, New York 10005-2889 All Named Executive Officers and directors as a 238,775 4.4 group (7 persons) (2) (3) (4)...............
- ------------------- * Less than 1% (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of Common Stock beneficially owned include all stock options held by each beneficial owner, including those that will become or have become exercisable in connection with the tender offer and the Merger. (2) Includes 60,000 Shares issuable upon the exercise of the stock options as described in footnote (1). (3) Includes 20,000 Shares issuable upon the exercise of the stock options as described in footnote (1). (4) Includes 22,500 Shares issuable upon the exercise of the stock options as described in footnote (1). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company did not enter into any transactions with its executive officers, directors and principal stockholders during the period from July 1, 1998 to the date of this Annual Report on Form 10-K. 35 36 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this Form:
1. Consolidated Financial Statements PAGE ---- Independent Auditors' Report F-1 Consolidated Balance Sheets as of June 30, 1999 and 1998 F-2 Consolidated Statements of Operations for the years ended June 30, 1999, 1998 and 1997 F-3 Consolidated Statements of Stockholders' Equity for the years ended June 30, 1999, 1998 and 1997 F-4 Consolidated Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997 F-5 Notes to Consolidated Financial Statements F-6 2. Financial Statement Schedule for the three years ended June 30, 1999 Schedule II - Valuation and Qualifying Accounts All schedules not listed above have been omitted because they are either not applicable or the required information is shown in the financial statements or the notes thereto. 3. Exhibits: See accompanying Index to Exhibits. The Exhibits listed in the accompanying Index to Exhibits are filed or incorporated by reference as part of this Form.
(b) Reports on Form 8-K The Company filed no Current Reports on Form 8-K during the last quarter of the period covered by this Report. 36 37 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KOFAX IMAGE PRODUCTS, INC. Dated: September 27, 1999 /s/ Ronald J. Fikert ------------------------------------ Ronald J. Fikert Chief Financial Officer POWER OF ATTORNEY We, the undersigned directors and officers of Kofax Image Products, Inc., do hereby constitute and appoint David S. Silver and Ronald J. Fikert, or either of them, with full power of substitution and resubstitution, our true and lawful attorneys and agents, to do any and all acts and things in our name and behalf in our capacities as directors and officers and to execute any and all instruments for us and in our names in the capacities indicated below, which said attorneys and agents, or either of them, or their substitutes, may deem necessary or advisable to enable said corporation to comply with the Securities Exchange Act of 1934, as amended, and any rules, regulation, and requirements of the Securities and Exchange Commission in connection with this Annual Report on Form 10-K, including specifically, but without limitation, power and authority to sign for us or any of us in our names and in the capacities indicated below, any and all amendments; and we do hereby ratify and confirm all that the said attorneys and agents, or either of them, shall do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities and Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated on the 27th day of September, 1999.
Signature Title --------- ----- /s/ David S. Silver Chairman, President, Chief Executive Officer - ---------------------------------- (principal executive officer) David S. Silver /s/ Ronald J. Fikert Vice President, Chief Financial Officer, Treasurer and - ---------------------------------- Secretary (principal financial and accounting officer) Ronald J. Fikert /s/ Alexander P. Coleman Director - ---------------------------------- Alexander P. Coleman /s/ Arnold von Buren Director - ---------------------------------- Arnold von Buren
37 38 INDEPENDENT AUDITORS' REPORT To the Board of Directors of Kofax Image Products, Inc.: We have audited the accompanying consolidated balance sheets of Kofax Image Products, Inc. and its subsidiary (the Company) as of June 30, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended June 30, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Kofax Image Products, Inc. and its subsidiary as of June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. Deloitte & Touche LLP Costa Mesa, California August 9, 1999, (except for paragraph 2 of Note 5 and Note 12 as to which the date is September 9, 1999) F-1 39 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, ----------------------------- 1999 1998 ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 25,260,500 $ 16,522,200 Investments (Note 3) 18,300 4,342,800 Accounts receivable, net of allowance for doubtful accounts and sales returns of $642,000 in 1999 and $458,600 in 1998 (Note 5) 5,315,800 5,260,800 Inventories, net (Note 4) 1,562,500 1,565,000 Deferred income taxes (Note 6) 965,700 606,000 Prepaid expenses and other current assets 373,500 342,000 ------------ ------------ Total current assets 33,496,300 28,638,800 PROPERTY: Machinery and equipment 5,418,100 5,343,900 Furniture and fixtures 898,200 905,500 Leasehold improvements 388,600 379,800 ------------ ------------ 6,704,900 6,629,200 Less accumulated depreciation and amortization (4,586,800) (4,889,000) ------------ ------------ Property, net 2,118,100 1,740,200 NONCURRENT DEFERRED INCOME TAXES (Note 6) 1,285,000 1,342,900 OTHER ASSETS, net 185,700 393,200 ------------ ------------ $ 37,085,100 $ 32,115,100 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 1,200,000 $ 1,207,200 Accrued compensation and related costs 1,651,000 1,237,000 Accrued warranty costs 165,100 148,400 Accrued cooperative marketing (Note 8) 475,300 445,200 Deferred revenue (Note 2) 718,400 588,200 Other accrued liabilities (Note 6) 1,744,600 863,800 ------------ ------------ Total current liabilities 5,954,400 4,489,800 COMMITMENTS AND CONTINGENCIES (Notes 8 and 11) STOCKHOLDERS' EQUITY (Notes 1 and 7): Preferred stock, $.001 par value; 5,000,000 shares authorized; no shares issued and outstanding in 1999 and 1998 Common stock, $.001 par value; 40,000,000 shares authorized; 5,243,656 and 5,307,416 shares issued and outstanding in 1999 and 1998 17,236,600 17,125,700 Retained earnings 15,327,400 11,135,900 Treasury stock, 177,085 and 100,000 shares at cost in 1999 and 1998 (1,433,300) (636,300) ------------ ------------ Total stockholders' equity 31,130,700 27,625,300 ------------ ------------ $ 37,085,100 $ 32,115,100 ============ ============
See accompanying notes to consolidated financial statements. F-2 40 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30, ----------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Net sales (Notes 8 and 9) $38,095,200 $33,375,100 $29,265,700 Cost of sales 8,794,100 7,818,700 7,720,100 ----------- ----------- ----------- Gross profit 29,301,100 25,556,400 21,545,600 Operating expenses (Note 8 and 10): Sales and marketing 11,389,000 10,706,400 9,565,300 Research and development 8,641,700 7,825,900 6,652,500 General and administrative 3,112,200 2,672,000 1,935,900 ----------- ----------- ----------- Total operating expenses 23,142,900 21,204,300 18,153,700 ----------- ----------- ----------- Income from operations 6,158,200 4,352,100 3,391,900 Other income, net 1,050,000 758,800 69,300 ----------- ----------- ----------- Income before provision for income taxes 7,208,200 5,110,900 3,461,200 Provision for income taxes (Note 6) 2,514,200 1,967,700 1,325,900 ----------- ----------- ----------- Net income $ 4,694,000 $ 3,143,200 $ 2,135,300 =========== =========== =========== Basic net income per share $ 0.89 $ 0.75 $ 1.37 =========== =========== =========== Diluted net income per share $ 0.87 $ 0.62 $ 0.52 =========== =========== =========== Basic weighted average common shares 5,281,900 4,197,100 1,319,100 =========== =========== =========== Diluted weighted average common shares (Note 2) 5,421,000 5,072,600 4,125,800 =========== =========== =========== Net income applicable to common stockholders (Note 2) $ 4,694,000 $ 3,143,200 $ 1,801,300 =========== =========== ===========
See accompanying notes to consolidated financial statements. F-3 41 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the Years Ended June 30, 1999, 1998, and 1997
COMMON STOCK TREASURY STOCK ------------------------- ----------------------- RETAINED SHARES AMOUNT SHARES AMOUNT EARNINGS TOTAL --------- ------------ ------- ------------ ------------ ------------ BALANCES, July 1, 1996 1,311,419 $ 159,400 -- $ -- $ 3,134,800 $ 3,294,200 Issuance of common stock 15,837 12,600 -- -- -- 12,600 Accretion to current liquidation or redemption value of preferred stock -- -- -- -- (334,000) (334,000) Net income -- -- -- -- 2,135,300 2,135,300 --------- ------------ ------- ------------ ------------ ------------ BALANCES, June 30, 1997 1,327,256 172,000 -- -- 4,936,100 5,108,100 Issuance of common stock for stock option plan 81,100 92,500 -- -- -- 92,500 Issuance of common stock for employee stock purchase plan 32,058 153,900 -- -- -- 153,900 Issuance of common stock for initial public offering 1,300,000 12,617,700 -- -- -- 12,617,700 Repurchase of common stock (100,000) -- 100,000 (636,300) -- (636,300) Accretion to current liquidation or redemption value of preferred stock -- -- -- -- (83,500) (83,500) Conversion of redeemable convertible preferred stock to common stock 2,667,002 4,089,600 -- -- 3,140,100 7,229,700 Net income -- -- -- -- 3,143,200 3,143,200 --------- ------------ ------- ------------ ------------ ------------ BALANCES, June 30, 1998 5,307,416 17,125,700 100,000 (636,300) 11,135,900 27,625,300 Issuance of common stock for stock option plan 98,051 34,100 (84,726) 553,600 (375,300) 212,400 Issuance of common stock for employee stock purchase plan 112,189 -- (112,189) 722,600 (127,200) 595,400 Repurchase of common stock (274,000) -- 274,000 (2,073,200) -- (2,073,200) Tax benefit related to stock option exercises and the sale of shares purchased under the employee stock purchase plan -- 76,800 -- -- -- 76,800 Net income -- -- -- -- 4,694,000 4,694,000 --------- ------------ ------- ------------ ------------ ------------ BALANCES AT JUNE 30, 1999 5,243,656 $ 17,236,600 177,085 $ (1,433,300) $ 15,327,400 $ 31,130,700 ========= ============ ======= ============ ============ ============
See accompanying notes to consolidated financial statements. F-4 42 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30, ---------------------------------------------- 1999 1998 1997 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,694,000 $ 3,143,200 $ 2,135,300 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,313,500 1,511,400 1,496,500 Provision for doubtful accounts and sales returns, net 183,400 35,700 41,400 Provision for inventory reserves, net 441,300 (74,600) 189,600 Loss on disposal of property 33,300 97,500 900 Deferred income taxes (301,800) 81,500 (130,000) Changes in operating assets and liabilities: Accounts receivable (238,400) (1,162,700) (82,300) Inventories (438,800) 521,300 (331,800) Prepaid expenses and other current assets (31,500) (137,500) (14,200) Accounts payable (7,200) 435,300 58,700 Accrued compensation and related costs 414,000 192,900 325,900 Accrued warranty costs 16,700 (37,000) 30,700 Accrued cooperative marketing 30,100 109,700 82,200 Other accrued liabilities and deferred revenue 1,087,800 537,700 (131,100) ------------ ------------ ------------ Net cash provided by operating activities 7,196,400 5,254,400 3,671,800 CASH FLOWS FROM INVESTING ACTIVITIES: Decrease (increase) in investments 4,324,500 260,100 (1,829,800) Acquisition of property, net (1,609,900) (1,156,100) (1,532,200) Decrease (increase) in other assets 92,700 (44,100) 66,400 ------------ ------------ ------------ Net cash provided by (used in) investing activities 2,807,300 (940,100) (3,295,600) CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable -- (821,400) (328,600) Net proceeds from issuance of common stock 807,800 12,864,100 12,600 Repurchase of common stock (2,073,200) (636,300) -- ------------ ------------ ------------ Net cash (used in) provided by financing activities (1,265,400) 11,406,400 (316,000) ------------ ------------ ------------ NET INCREASE IN CASH AND CASH EQUIVALENTS 8,738,300 15,720,700 60,200 CASH AND CASH EQUIVALENTS, beginning of year 16,522,200 801,500 741,300 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of year $ 25,260,500 $ 16,522,200 $ 801,500 ============ ============ ============ SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Interest paid $ -- $ 27,100 $ 108,800 ============ ============ ============ Income taxes paid $ 2,098,700 $ 1,396,000 $ 1,427,800 ============ ============ ============
NONCASH ACTIVITY -- During the years ended June 30, 1998 and 1997, the Company recorded accretion of $83,500 and $334,000, respectively, for the increase in the liquidation or redemption value of the redeemable convertible preferred stock (Note 7). During the year ended June 30, 1999, the Company recorded a tax benefit of $76,800, related to stock option exercises and the sale of shares purchased under the employee stock purchase plan. See accompanying notes to consolidated financial statements. F-5 43 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. GENERAL AND NATURE OF OPERATIONS Kofax Image Products (the Company) was incorporated in California on August 13, 1985 and reincorporated in the State of Delaware on February 13, 1996. The reincorporation resulted in a change in the Company name from Kofax Image Products to Kofax Image Products, Inc., a change in the authorized number of shares of common stock from 10,000,000 to 40,000,000, and a change in the par value of both the Company's common stock and preferred stock from no par value to $.001 par value. All share amounts have been restated to reflect the reincorporation of the Company. The Company is a leading supplier of application software, developers toolkits, and image processing hardware for the imaging, workflow and document management market. The Company specializes primarily in the area of document capture, which involves converting paper documents into electronic images, indexing the documents, and then compressing and routing the images across a network for permanent storage. The Company's products are all designed for use on Windows-based PC platforms and industry standard network operating systems. The Company sells its products through a worldwide network of distributors, value added resellers, systems integrators, and Original Equipment Manufacturers (OEMs). NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation -- The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All intercompany transactions and balances have been eliminated in consolidation. Cash and Cash Equivalents -- Short-term investments which have an original maturity of three months or less are considered cash equivalents. Investments -- The Company accounts for its investments under the provisions of Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires investments to be classified into one of three categories: held-to-maturity securities, trading securities and available-for-sale securities. At June 30, 1999, all of the Company's investments were considered to be held-to-maturity securities, which are reported at amortized cost. The Company has the positive intent and ability to hold these securities to maturity. Accounts Receivable -- Accounts receivable arise in the normal course of granting trade credit terms to customers. The Company performs credit evaluations of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses. At June 30, 1999 and 1998, 35.1% and 32.3%, respectively, of the Company's accounts receivable were due from two distributors. Inventories -- Inventories are stated at the lower of first-in, first-out cost or market. Property -- Property is stated at cost. Depreciation and amortization are computed using the straight-line method over the shorter of the estimated useful lives of the related assets, which are generally between two and five years, or the term of the related lease agreement, if applicable. Other Assets -- Other assets include intangible assets and prepaid license and royalty fees. Intangible assets represent the estimated value of developed technology acquired in fiscal year 1996. Such intangibles are amortized on a straight-line basis over three years, the estimated useful life. Prepaid license and royalty fees are recorded at cost and amortized based on estimated total revenue for the related product with an annual minimum equal to the straight-line amortization over a maximum period of two years. Software Development Costs -- Software development costs incurred subsequent to establishing the technological feasibility of a product would be capitalized and amortized over the life of the related product, which typically ranges from 12 to 24 months in accordance with SFAS No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or otherwise Marketed." Because the Company F-6 44 believes that its current process for developing new software products is essentially completed concurrently with the establishment of technological feasibility, no costs are capitalized as of June 30, 1999 and 1998. Long-Lived Assets -- The Company accounts for the impairment and disposition of long-lived assets in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In accordance with SFAS No. 121, long-lived assets to be held are reviewed for events or changes in circumstances which indicate that their carrying value may not be recoverable. There was no impairment of the value of such assets for the year ended June 30, 1999. Income Taxes -- The provision for income taxes is determined in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements that will result in taxable or deductible amounts in future years. Revenue Recognition and Right of Return -- Revenues from software and hardware sales are recognized upon the later of shipment of the related product or transfer of title which is in accordance with Statement of Position 97-2, "Software Revenue Recognition," as there are no significant vendor obligations or post-contract support at the time of delivery. The Company also offers its distributors certain rights of return, price protection and exchange privileges on sales. The Company records estimates for such rights of return, price protection and exchange privileges at the time of product sale, based on historical experience. Revenue from service and post-contract customer support is recorded as deferred revenue and recognized ratably over the term of the contract. Revenues from software upgrades are recognized upon shipment of the related product. Product Warranty -- The Company provides a warranty for its products against defects in materials and workmanship. A provision for estimated warranty costs is recorded at the time of sale and periodically adjusted to reflect actual experience. Net Income per Share -- Effective December 15, 1997, the Company adopted SFAS No. 128, "Earnings per Share," which changed the method used to calculate earnings per share and required restatement of all prior periods. The new requirements include a calculation of basic earnings per share, from which the dilutive effect of stock options is excluded, and a calculation of diluted earnings per share. Diluted net income per share amounts are based upon the weighted average number of common shares and dilutive common equivalent shares using the treasury stock method for each period presented. The Company believes that diluted net income per share provides the most meaningful comparison between periods. F-7 45 The following table reconciles the weighted average shares outstanding for basic and diluted earnings per share for the periods presented.
Year ended June 30, ------------------------------------------ 1999 1998 1997 ----------- ----------- ----------- Net income $ 4,694,000 $ 3,143,200 $ 2,135,300 Accretion to current redemption value of preferred stock -- -- (334,000) ----------- ----------- ----------- Net income applicable to common stockholders $ 4,694,000 $ 3,143,200 $ 1,801,300 =========== =========== =========== Basic net income per common share: Weighted average of actual common shares outstanding 5,281,900 4,197,100 1,319,100 =========== =========== =========== Basic net income per common share $ 0.89 $ 0.75 $ 1.37 =========== =========== =========== Diluted net income per common share: Net income $ 4,694,000 $ 3,143,200 $ 2,135,300 =========== =========== =========== Weighted average of actual common shares outstanding 5,281,900 4,197,100 1,319,100 Conversion of preferred stock into common stock -- 745,300 2,667,000 ----------- ----------- ----------- Weighted average of common shares outstanding 5,281,900 4,942,400 3,986,100 Weighted average of common shares equivalents: Weighted average options outstanding 139,100 343,800 383,800 Shares assumed to be repurchased using the treasury stock method -- (213,600) (244,100) ----------- ----------- ----------- Weighted average number of common and common equivalent shares 5,421,000 5,072,600 4,125,800 =========== =========== =========== Diluted net income per common share $ 0.87 $ 0.62 $ 0.52 =========== =========== ===========
Net Income Applicable to Common Stockholders -- Net income applicable to common stockholders represents net income less the accretion attributable to the preferred stock redemption value (Note 7). Use of Estimates -- The preparation of the consolidated financial statements in conformity with generally accepted accounting principles necessarily requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock-Based Compensation -- The Company accounts for stock-based awards to employees using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" (Note 7). Supplier and Subcontractor Concentration -- The Company purchases circuit boards, integrated circuits and other components from third parties. The Company's dependence on third-party suppliers involves several risks, including limited control over pricing, availability, quality and delivery schedules. The Company is dependent on sole-source suppliers for ASICs and certain other critical components used in its products. The Company generally purchases sole-sourced components pursuant to purchase orders placed in the ordinary course of business and has no guaranteed supply arrangements with any of its sole-source suppliers. There can be no assurance that the Company will not experience quality control problems or supply shortages for these components in the future. Any quality control problems or interruptions in supply with respect to one or more components could have a material adverse effect on the Company's business, operating results and financial condition. Because of the Company's reliance on these suppliers, the Company may also be subject to increases in component costs which could materially adversely affect its business, operating results and financial condition. The Company relies on third-party subcontractors for the manufacture of certain products and components such as cable assemblies and circuit boards. Reliance on third-party subcontractors involves several risks, including the potential inadequacy of capacity, the unavailability of or interruptions in access to certain process technologies and reduced control over product quality, delivery schedules, manufacturing yields and costs. Shortages of raw materials to or production capacity constraints at the Company's subcontractors could negatively affect the Company's ability F-8 46 to meet its production obligations and result in increased prices for affected parts. Any such reduction or constraint could result in shipment delays of the Company's products or increases in the prices of components, either of which could have a material adverse effect on the Company's business, operating results and financial condition. Recently Issued Accounting Standards -- For the year ended June 30, 1999, the Company adopted SFAS No. 130, "Reporting Comprehensive Income". There was no difference between the net income and the comprehensive net income for the years ended June 30, 1999, 1998 and 1997. For the year ended June 30, 1999, the Company also adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information". This statement establishes standards for the way companies report information about operating segments in annual financial statements. It also establishes standards for related disclosure about products and services, geographic areas and major customers. (See Note 9) In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". This statement revises and standardizes employers' disclosure requirements about pension and other postretirement benefit plans, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis and eliminates certain disclosures that are no longer useful. The Company does not maintain an employee pension plan or any other postretirement benefit plans. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which the Company is required to adopt effective in its fiscal year 2000. SFAS No. 133 will require the Company to record all derivatives on the Balance Sheet at fair market value. The Company does not currently engage in hedging activities but will continue to evaluate the effect of adopting SFAS No. 133. NOTE 3. INVESTMENTS Held-to-maturity investments were comprised of the following:
GROSS UNREALIZED MATURITY AMORTIZED ----------------- ESTIMATED DESCRIPTION DATES COST GAINS LOSSES FAIR VALUE - --------------------------- ---------------- ------------ ----- -------- ------------ June 30, 1999 Mortgage-backed securities Five years through ten years $ 18,300 $ -- $ 1,300 $ 17,000 ------------ ----- --------- ----------- $ 18,300 $ -- $ 1,300 $ 17,000 ============ ===== ========= ===========
GROSS UNREALIZED MATURITY AMORTIZED ----------------- ESTIMATED DESCRIPTION DATES COST GAINS LOSSES FAIR VALUE - --------------------------- ---------------- ------------ ----- -------- ------------ June 30, 1998 U.S. Treasury securities and obligations of U.S. government authorities and agencies Within one year $ 4,313,400 $ 600 $ 7,200 $ 4,306,800 Mortgage-backed securities Five years through ten years 29,400 -- 1,100 28,300 ------------ ----- -------- ------------ $ 4,342,800 $ 600 $ 8,300 $ 4,335,100 ============ ===== ======== ============
NOTE 4. INVENTORIES Inventories, which include material, labor and manufacturing overhead, are stated at the lower of cost (first-in, first-out) or market net of inventory reserves of $729,800 and $288,500 in 1999 and 1998, respectively:
1999 1998 ----------- ----------- Raw materials $ 751,700 $ 826,600 Work-in-process 535,300 511,200 Finished goods 275,500 227,200 ----------- ----------- $ 1,562,500 $ 1,565,000 =========== ===========
F-9 47 NOTE 5. LINE OF CREDIT The Company has a financing agreement with a bank expiring in January 2000, providing for borrowings under a line of credit up to the lesser of $2,000,000 or 80% of eligible accounts receivable (as defined) at the bank's prime rate (7.75% at June 30, 1999). Borrowings under the line of credit are unsecured. There were no borrowings outstanding under the financing agreement at June 30, 1999 and 1998. The financing agreement contains certain restrictive covenants, including certain tangible net worth levels, current ratio percentages, profitability levels and the nonpayment or declaration of cash dividends, with which the Company was in compliance at June 30, 1999. The revolving line of credit was terminated September 9, 1999, as a condition of the merger agreement with Imaging Components Corporation (Note 12). NOTE 6. INCOME TAXES The components of the Company's income tax provision (benefit) are as follows:
1999 1998 1997 ----------- ----------- ----------- Current $ 2,816,000 $ 1,886,200 $ 1,455,900 Deferred (301,800) 81,500 (130,000) ----------- ----------- ----------- Total $ 2,514,200 $ 1,967,700 $ 1,325,900 =========== =========== ===========
Reconciliations between the provision for income taxes for fiscal 1999, 1998, and 1997 and the amounts computed by applying the federal statutory tax rate to income before the provision for income taxes are as follows:
1999 1998 1997 -------------------- ------------------- -------------------- AMOUNT % AMOUNT % AMOUNT % ----------- --- ----------- --- ----------- --- Provision for income taxes at statutory rate $ 2,522,900 35% $ 1,788,800 35% $ 1,211,400 35% State income taxes, net of federal income tax benefit 193,600 3 163,400 3 140,100 4 Benefit of foreign sales corporation subsidiary (178,100) (2) (108,900) (2) (97,500) (3) Federal and state R&D tax credit and other (24,200) (1) 124,400 2 71,900 2 ----------- --- ----------- --- ----------- --- Provision for income taxes $ 2,514,200 35% $ 1,967,700 38% $ 1,325,900 38% =========== === =========== === =========== ===
F-10 48 At June 30, the Company's net deferred tax assets consisted of the following:
1999 1998 ----------- ----------- Bad debt and sales return reserves $ 261,100 $ 188,000 Inventory reserves 299,200 118,300 Uniform capitalization of inventories 53,300 57,700 Accrued vacation and bonus 175,800 95,900 Warranty reserves 67,700 60,800 State taxes 55,900 14,800 Other reserves 52,700 70,500 ----------- ----------- Current deferred tax asset 965,700 606,000 State taxes (93,200) (97,600) Depreciation 161,800 166,600 Difference between book and tax basis of acquired in-process research and development and other intangible assets 1,171,400 1,226,200 Credit carryforward 45,000 47,700 ----------- ----------- Long-term deferred tax asset 1,285,000 1,342,900 ----------- ----------- Net deferred tax assets $ 2,250,700 $ 1,948,900 =========== ===========
NOTE 7. STOCKHOLDERS' EQUITY On October 16, 1997, the Company completed its initial public offering of 2,000,000 shares of common stock at $11.00 per share. 1,300,000 shares were sold by the Company resulting in net proceeds of approximately $12.6 million. The remaining 700,000 shares were sold by certain selling stockholders. The Company has authorized 5,000,000 shares of $.001 par value preferred stock, 2,667,002 shares of which have been designated as Series A, B or C preferred stock. The Company issued 750,000 shares of its Series A redeemable convertible preferred stock in exchange for $482,400, 1,117,002 shares of its Series B redeemable convertible preferred stock in exchange for $1,628,800, and 800,000 shares of its Series C redeemable convertible preferred stock in exchange for $1,978,400. The preferred stock had preference in liquidation and was redeemable at any time at the election of the stockholders, in each case at $.6667 per share for Series A, $1.50 per share for Series B and $2.50 per share for Series C. The preferred stock had voting rights and entitled the holder to an 8% cumulative dividend upon liquidation or redemption. The value of the preferred stock has been accreted to reflect the current redemption or liquidation value, which includes cumulative dividends in arrears amounting to $3,056,600 as of June 30, 1997. The preferred stock was converted into 2,667,002 shares of common stock at the completion of the Company's initial public offering and the amount previously accreted was credited to stockholders' equity. During 1986, the Company adopted a stock purchase plan for key employees, directors and consultants. The plan was later amended in 1992 (the "Amended Plan") to include the granting of incentive stock options and nonqualified stock options. The Amended Plan provides for the granting of options to purchase or the right to purchase up to an aggregate of 1,250,000 shares of the Company's common stock at the fair market value at the date of grant or not less than 85% of the fair market value at the date of grant for nonqualified options and stock purchases (110% of fair market value if sold to individuals holding 10% or more of the voting power of the then outstanding shares). Shares sold or options granted under the plan generally vest over a four-year period, starting with the date of employment or the respective vesting date as determined by the Board of Directors, and terminate no later than ten years from the date of grant. The Amended Plan also provides that, upon termination of employment of a stockholder, the Company may repurchase any sold but unvested restricted shares at the original purchase price, plus 5% interest per year. The Amended Plan was terminated in November 1996, on the tenth anniversary of the plan, and no options or rights to purchase may be granted under the plan, but option agreements, stock purchase agreements and rights to purchase then outstanding shall continue in effect in accordance with their respective terms. F-11 49 On June 19, 1996, the Company adopted an incentive stock option, nonqualified stock option, and restricted stock purchase plan (the "1996 Plan") for qualified employees, officers, directors (including nonemployee directors) and consultants. The 1996 Plan provides for the granting of options to purchase or the right to purchase up to an aggregate of 800,000 shares, as amended, of the Company's common stock at the fair market value at the date of grant for an incentive stock option or not less than 85% of the fair market value at the date of grant for nonqualified options (110% of fair market value if an option is granted to a 10% stockholder on the date of grant). The purchase price per share of restricted stock covered by each right to purchase shall not be less than 85% of the fair market value on the date the right to purchase is granted (110% of fair market value at the date of grant if the right to purchase is granted to a 10% stockholder on the date of grant). The following is a summary of stock option activity and weighted average exercise prices for each of the three years in the period ended June 30, 1999:
WEIGHTED AVERAGE NUMBER OF SHARES PROVIDED FOR PRICE RANGE PER SHARE EXERCISE PRICE ----------------------------- -------------------------- -------------------- NONQUALIFIED NONQUALIFIED NONQUALIFIED OPTIONS OPTIONS OPTIONS OPTIONS OPTIONS OPTIONS ------- ------------ ------------- ------------ ------ ------------ BALANCES, July 1, 1996 304,750 13,000 $0.50 - 5.00 $ 5.00 $ 2.27 $ 5.00 Granted (weighted average fair value of $1.10) 123,400 -- 5.00 - 5.00 -- 5.00 -- Exercised (15,837) -- 0.50 - 5.00 -- 0.80 -- Canceled (40,500) -- 0.50 - 5.00 -- 3.22 -- ------- ------- BALANCES, June 30, 1997 371,813 13,000 $0.50 - $5.00 $ 5.00 $ 3.13 $ 5.00 Granted (weighted average fair value of $2.85) 111,350 -- 5.00 - $7.50 -- 6.59 -- Exercised (81,100) -- 0.50 - $5.00 -- 1.81 -- Canceled (48,563) -- 0.60 - $7.50 -- 6.18 -- ------- ------- BALANCES, June 30, 1998 353,500 13,000 $0.50 - $7.50 $ 5.00 $ 4.19 $ 5.00 Granted (weighted average fair value of $3.32) 284,500 2,400 6.38 - 9.63 6.94 7.50 6.94 Exercised (94,920) (3,131) 0.50 - 7.50 5.00 2.09 5.00 Canceled (24,000) (7,994) 1.20 - 7.50 5.00 5.63 5.00 ------- ------- BALANCES, June 30, 1999 519,080 4,275 $0.50 - 9.63 $ 5.00 $ 6.32 $ 5.53 ======= ======= Exercisable as of June 30, 1999 126,847 1,875 ======= =====
At June 30, 1999, 857,430 shares of common stock were available for issuance under the Company's stock option and purchase plan. Additional information regarding options outstanding as of June 30, 1999, is as follows:
WEIGHTED NUMBER AVERAGE WEIGHTED NUMBER WEIGHTED OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE RANGE OF AS OF CONTRACTUAL EXERCISE AS OF EXERCISE EXERCISE PRICES JUNE 30,1999 LIFE IN YEARS PRICE JUNE 30,1999 PRICE --------------- ------------ ------------- ------------ ------------ ---------- $1.20 - 2.50 27,730 0.98 $ 2.27 20,185 $ 2.20 $5.00 - 5.00 155,225 2.37 $ 5.00 85,337 $ 5.00 $5.50 - 6.38 49,075 3.59 $ 5.64 12,275 $ 5.58 $6.44 - 6.44 26,700 4.00 $ 6.44 6,675 $ 6.44 $6.94 - 6.94 141,500 4.15 $ 6.94 -- -- $7.00 - 8.50 68,625 4.37 $ 7.72 4,250 $ 7.32 $8.81 - 9.31 21,000 4.74 $ 9.10 -- -- $9.50 - 9.50 31,500 4.69 $ 9.50 -- -- $9.63 - 9.63 2,000 4.99 $ 9.63 -- -- ------- ------- $1.20 - 9.63 523,355 3.48 $ 6.32 128,722 $ 4.77 ======= =======
F-12 50 On August 27, 1997 the Company adopted its 1997 Stock Option Plan for Non-Employee Directors (the "Director Plan"), covering an aggregate of 100,000 shares of common stock. Under the Director Plan, each non-employee director of the Company who was a director of the Company on August 27, 1997, or who is thereafter elected as a director during the term of the Director Plan, shall be granted an option consisting of 10,000 shares of common stock, which option shall vest and become exercisable at the rate of 25% per year over the four-year period following the grant date. The exercise price of all options granted under the Director Plan shall be 100% of the fair market value of the common stock on the date of grant, and all such options shall have a term of 10 years. In addition, at each anniversary during such non-employee director's term of office such non-employee director shall receive an additional option covering 2,500 shares of common stock, with the same vesting schedule, subject to the limitations set forth in the Director Plan. The following is a summary of stock option activity and weighted average exercise prices for the Non-Employee Directors for the period ended June 30, 1999:
Number of Shares Weighted Average Provided For Price Range Per Shares Exercise Price Nonqualified Nonqualified Nonqualified Options Options Options ---------------- ---------------------- ---------------- BALANCES, July 1, 1998 50,000 $11.00 - 11.00 $11.00 Granted (weighted average fair value of $2.48) 10,000 $ 6.13 - 6.13 $6.13 Canceled (10,000) $11.00 - 11.00 $11.00 -------- BALANCES, June 30, 1999 50,000 $ 6.13 - 11.00 $10.03 ====== Exercisable as of June 30, 1999 10,000 ======
At June 30, 1999, 100,000 shares of common stock were available for issuance under the Company's Director Plan. Additional information regarding Non-Employee Directors options outstanding as of June 30, 1999, is as follows:
Weighted Average Remaining Weighted Number Weighted Range of Number Outstanding contractual Average Exercisable Average Exercise Prices as of June 30, 1999 life Exercise Price as of June 30, 1999 Exercise Price - --------------- ------------------- ----------- -------------- ------------------- -------------- $ 6.13 - 6.13 10,000 9.28 $ 6.13 -- -- $11.00 - 11.00 40,000 8.28 $11.00 10,000 $11.00 ------ ------ $ 6.13 - 11.00 50,000 8.48 $10.03 10,000 $11.00 ====== ==== ====== ====== ======
The Company has adopted an Employee Stock Purchase Plan (the "Purchase Plan"), which was amended during fiscal 1999 to cover an aggregate of 350,000 shares of common stock. The Purchase Plan, which is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code, will be implemented by calendar year offerings with purchases occurring at three-month intervals commencing on the date of the Company's initial public offering. The Purchase Plan permits eligible employees to purchase common stock through payroll deductions, which may not exceed 15% of an employee's compensation. The price of stock purchased under the Purchase Plan will be 85% of the lower of the fair market value of the common stock at the beginning of the calendar year offering period or on the applicable purchase date. During the year ended June 30, 1999, 112,189 shares of treasury stock were reissued under the Purchase Plan with a weighted average price per share of $5.31 and weighted average fair value per share of $1.88. During the year ended June 30, 1998, 32,058 shares of common stock were issued under the Purchase Plan with a weighted average price per share of $4.80 and weighted average fair value per share of $1.64. At June 30, 1999, 205,753 shares were reserved for issuances under the Purchase Plan. As discussed in Note 2, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with APB Opinion No. 25, and its related interpretations. No compensation expense has been recognized in the financial statements for employee stock arrangements. F-13 51 SFAS No. 123, "Accounting for Stock-Based Compensation," requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of the beginning of fiscal 1996. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option-pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option-pricing model with the following weighted average assumptions: Expected life, 48 months; stock volatility of 0.47 in fiscal 1999, 0.40 in fiscal 1998 and 0.00 in fiscal 1997; risk-free interest rates, 4.91% in fiscal 1999, 5.69% in fiscal 1998, and 6.40% in fiscal 1997 and no dividends during the expected term. The Company's calculations are based on a single-option valuation approach and forfeitures are recognized as they occur. If the computed fair values of the fiscal 1999, 1998, and 1997 awards had been amortized to expense over the vesting period of the awards, net income and earnings per share would have been reduced to the pro forma amounts indicated below:
1999 1998 1997 ----------- ----------- ----------- Pro forma net income $ 4,200,872 $ 2,970,650 $ 2,091,393 Pro forma basic net income per share $ 0.80 $ 0.71 $ 1.33 Pro forma diluted net income per share $ 0.77 $ 0.59 $ 0.51
On April 24, 1998 the Company's Board of Directors authorized a program for repurchase of up to 500,000 shares, or approximately 9.5%, of Kofax's outstanding common stock, to be used to fund stock option exercises, employer equity compensation plans, and an employee stock purchase plan. Repurchases may be made from time to time by the Company in the open market or in block purchases in compliance with Securities and Exchange Commission guidelines. The Company repurchased 274,000 and 100,000 shares of its common stock during fiscal 1999 and 1998 for approximately $2.1 million and $0.6 million, respectively. NOTE 8. COMMITMENTS The Company leases its production and office facilities under operating leases, expiring on various dates through fiscal 2004. The leases require the Company to pay certain building operating costs. Rent, which is recognized ratably over the terms of the leases, and related building maintenance costs was $1,017,600, $887,500, and $744,300 during fiscal 1999, 1998 and 1997, respectively. Future minimum annual lease commitments at June 30, 1999 under noncancelable facility and other operating leases that have initial or remaining terms in excess of one year are as follows: Fiscal year ending June 30: 2000 $1,049,100 2001 889,700 2002 903,900 2003 926,300 2004 688,100 ---------- Total minimum payments required $4,457,100 ==========
The Company has also entered into various licensing agreements which require per unit fees or royalties between 3.5% and 8.0% of net sales of certain products. The agreements are generally in effect over the life of the products. Royalty expense for fiscal 1999, 1998 and 1997 was $856,600, $671,900, and $390,400, respectively. Royalty fees of $236,500, and $146,900 were accrued for as of June 30, 1999 and 1998. The Company has agreements with various domestic distributors which are cancelable at specified dates defined in the agreements. The agreements allow for one or more of the following: certain price protection provisions, the right to exchange inventories provided that subsequent purchases are made and/or the right to return Company inventories for refunds of between 80% and 100% of the actual net invoice price paid by the distributor upon termination of the distribution agreement. F-14 52 The Company offers a program to certain distributors to provide for reimbursement of qualified cooperative marketing costs (as defined). Amounts reimbursed under such programs were $606,800, $434,100, and $372,900 in fiscal 1999, 1998 and 1997, respectively. NOTE 9. SEGMENT REPORTING, CONCENTRATION OF REVENUE AND CREDIT RISK Operating segments is defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company's chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company's reportable revenue segments include Image Processing (scanning and image processing hardware and software) and Ascent Software (document and data capture software and optical storage management software). The Company does not allocate cost of goods sold or operating expenses to these segments, nor does it allocate specific assets to these segments. Therefore, segment information reported includes only revenues from external customers. Operating segment data for the fiscal years ended June 30, 1999, 1998, and 1997 was as follows:
1999 1998 1997 ------------ ------------ ------------ Image Processing $ 26,685,000 $ 24,903,000 $ 24,122,000 Ascent Software 11,410,000 8,472,000 5,144,000 ------------ ------------ ------------ Total Revenues $ 38,095,000 $ 33,375,000 $ 29,266,000 ============ ============ ============
The Company had export sales as a percentage of net sales for each of the three years ended June 30, as follows:
1999 1998 1997 ---- ---- ---- Europe: United Kingdom 10% 10% 9% Germany 5 5 5 Other 8 9 11 Asia 3 4 5 Other 5 5 4 --- --- --- 31% 33% 34% === === ===
The Company had sales to certain distributors as a percentage of net sales for the three years ended June 30, as follows:
1999 1998 1997 ---- ---- ---- Law-Cypress Distributing Co. 18% 17% 14% Tech Data Corporation 14% 13% 14% Cranel, Inc. 11% -- 10%
A decision by a significant customer to decrease the amount purchased from the Company could have a material adverse effect on the Company's financial condition and results of operations. NOTE 10. 401(k) SAVINGS PLAN The Company has a 401(k) savings plan (the "Plan"). The Plan is a defined contribution plan for all full-time employees (participants) of the Company who have reached age 21 and have met the required service of 90 days. The Plan permits a participant to contribute up to the lesser of 15% of the participant's compensation for that calendar year or $10,000 for 1999. The Plan provides for employer discretionary contributions determined by the Board of Directors on an annual basis. Participant contributions are fully vested at all times. Employer contributions vest at a rate of 20% per year after the second year of participation. Employer contributions of $94,600, $90,000, and $67,500 were made to the Plan in fiscal 1999, 1998, and 1997 respectively. F-15 53 NOTE 11. CONTINGENCIES On September 26, 1997, VisionShape, Inc. ("VisionShape") filed suit against the Company in the Superior Court of Orange County, California. VisionShape claims that the Company's Adrenaline accelerator boards prevent the use of software other than the Company's software, which, the complaint alleges, creates a monopoly or otherwise constitutes a tying arrangement in violation of state and federal antitrust laws. VisionShape seeks unspecified monetary damages and costs as well as equitable remedies, including an order enjoining the Company from selling its Adrenaline accelerator boards. VisionShape also seeks treble damages and attorneys' fees. On May 27, 1998, the Superior Court held that VisionShape failed to state a cause of action against the Company and ordered the suit dismissed on July 15, 1998. VisionShape filed an appeal on March 31, 1999. Based upon information currently available to the Company, the Company believes VisionShape's claims are without merit and intends to contest vigorously any action against the Company. However, it is too early to determine the outcome of such appeal and there can be no assurance as to the eventual outcome of such actions. Any determination against the Company in the litigation or the settlement of such claims could have a material adverse effect on the Company's business, results of operation, cash flows and financial condition. The Company is also involved from time to time in litigation or claims arising in the ordinary course of its business. While the ultimate liability, if any, arising from these claims cannot be predicted with certainty, the Company believes that the resolution of these matters will not likely have a material adverse effect on the Company's financial statements. NOTE 12. SUBSEQUENT EVENT In July 1999, the Company acquired exclusive rights to advanced data capture technologies from RAF Technologies (for $2.4 million) and will use this as the basis for expanding further into the high end of the data capture market. This technology will be integrated into the Company's Ascent Capture product. The Company will begin to amortize this cost over three years when the new product starts shipping. A tender offer commenced on August 3, 1999, by Imaging Components Corporation, a Delaware corporation (the "Purchaser") offered to purchase for cash, at a price of $12.75 per share, all outstanding shares of the common stock, par value $0.001 per share, of the Company. The tender offer was made pursuant to an Agreement and Plan of Merger, dated as of July 27, 1999 (the "Merger Agreement"), among the Company, the Purchaser and Imaging Acquisition Corporation, a Delaware corporation and wholly-owned subsidiary of the Purchaser ("Merger Sub"). The tender offer expired at 12:00 midnight, New York Time, on September 8, 1999. On September 9, 1999, the Purchaser accepted for payment and purchased 4,414,409 shares of the Company's common stock, or approximately 84% of the Company's outstanding shares of common stock. The Merger Agreement provides that as soon as practicable after Purchaser's purchase of the shares tendered into the tender offer, Merger Sub will be merged with and into the Company, the separate corporate existence of the Merger Sub will cease and the Company will continue as the surviving corporation and will be a wholly-owned subsidiary of the Purchaser. At the effective time of such merger, each outstanding share of the Company's common stock (other than shares held by the Company, Purchaser, Merger Sub or any of their respective subsidiaries, the 140,608 shares retained by management to be exchanged for shares of capital stock of the Purchaser and any shares with respect to which appraisal rights are available under the Delaware General Corporation law) will be canceled and converted into and shall become the right to receive a cash payment of $12.75, without interest. As a result, Purchaser will own all of the outstanding shares of common stock of the Company. NOTE 13. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA The following table sets forth certain unaudited quarterly consolidated financial information for the fiscal years ended June 30, 1999 and 1998. In the opinion of management, this information has been presented on the same basis as the audited Consolidated Financial Statements appearing elsewhere in this report, and includes all adjustments, consisting only of normal recurring adjustments and accruals, that the Company considers necessary for a fair presentation. The operating results for any quarter are not necessarily indicative of the results to be expected for any F-16 54 future period. The unaudited quarterly information should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto appearing elsewhere in this document. Quarterly net income per share has been restated to comply with SFAS No. 128. The Company believes that diluted net income per share provides the most meaningful comparison between periods.
QUARTER ENDED --------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, ------------- ------------ --------- -------- (in thousands, except per share data) Fiscal 1999 Net sales $ 8,653 $ 9,615 $ 9,824 $10,003 Gross profit 6,697 7,359 7,651 7,594 Income from operations 1,119 1,580 1,660 1,799 Net income 866 1,222 1,259 1,347 Basic net income per share $ 0.16 $ 0.23 $ 0.24 $ 0.26 Diluted net income per share $ 0.16 $ 0.23 $ 0.23 $ 0.25 Fiscal 1998 Net sales $ 7,851 $ 8,074 $ 8,509 $ 8,941 Gross profit 5,990 6,099 6,564 6,903 Income from operations 1,018 1,041 1,124 1,169 Net income 657 760 834 892 Basic net income per share $ 0.43 $ 0.15 $ 0.16 $ 0.17 Diluted net income per share $ 0.16 $ 0.14 $ 0.15 $ 0.16
F-17 55 KOFAX IMAGE PRODUCTS, INC. AND SUBSIDIARY SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Additions Balance at charged to beginning costs and Balance at of year expenses Deductions end of year --------- ---------- ---------- ----------- Year ended June 30, 1997: Allowance for doubtful accounts and sales returns $381,500 155,800 (114,400) $422,900 Obsolete inventory reserve $173,500 376,500 (186,800) $363,200 Year ended June 30, 1998: Allowance for doubtful accounts and sales returns $422,900 124,400 (88,700) $458,600 Obsolete inventory reserve $363,200 369,200 (443,900) $288,500 Year ended June 30, 1999: Allowance for doubtful accounts and sales returns $458,600 252,400 (69,000) $642,000 Obsolete inventory reserve $288,500 645,500 (204,200) $729,800
56 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION LOCATION ----------- ----------- -------- 3.1 Restated Certificate of Incorporation of the Company (1) 3.2 Bylaws of the Company, as amended (1) 3.3 Certificate of Amendment of Certificate of Incorporation of the Company (1) 4.1 Specimen Certificate of Common Stock (1) 10.1 Amended and Restated Incentive Stock Option, Nonqualified Stock Option and (1) Restricted Stock Purchase Plan (the "1992 Plan"), as amended on September 11, 1992 10.2 Form of Incentive Option Agreement pertaining to the 1992 Plan (1) 10.3 Form of Nonqualified Option Agreement pertaining to the 1992 Plan (1) 10.4 Form of Restricted Stock Agreement pertaining to the 1992 Plan (1) 10.5 1996 Incentive Stock Option, Nonqualified Stock Option and Restricted Stock (1) Purchase Plan (the "1996 Plan") 10.6 Form of Stock Option Agreement pertaining to the 1996 Plan (1) 10.7 Intentionally omitted 10.8 Kofax Image Products, Inc. 1997 Stock Option Plan for Non-Employee Directors (1) (the "Director Plan") 10.9 Form of Stock Option Agreement pertaining to the Director Plan (1) 10.10 Kofax Image Products, Inc. 1997 Employee Stock Purchase Plan (1) 10.11 Form of Indemnification Agreement for Officers and Directors of the Company (1) 10.12 Loan and Security Agreement, dated February 28, 1992, between the Company and (1) Silicon Valley Bank; Amendment to Loan Agreement, dated March 9, 1993; Amendment to Loan and Security Agreement, dated October 10, 1994; Amendment to Loan and Security Agreement, dated October 5, 1995; Amendment to Loan and Security Agreement, dated January 26, 1996; and Amendment to Loan and Security Agreement, dated October 31, 1996 10.13 First Restated Registration Rights Agreement, dated as of March 6, 1989, by (1) and among the Company and the Purchasers identified therein 10.14 Lease, dated March 31, 1988, between The Irvine Company, as Landlord, and the (1) Company, as Tenant, relating to the Company's Irvine, California offices; First Amendment to Lease, dated March 7, 1990; Second Amendment to Lease, dated May 4, 1990; Third Amendment to Lease, dated August 22, 1991; Fourth Amendment to Lease, dated March 15, 1994; and Fifth Amendment to Lease, dated September 25, 1996 10.15 Net Lease, dated February 24, 1989, between LaserData, Inc. and Vesper (1) Properties I Trust; Amendment 1, dated September11, 1991; Amendment No. 2, dated August 31, 1994; and Amendment No. 3, dated July 24, 1997 10.16 Asset Purchase Agreement, dated December 30, 1995, between the Company and (1) LaserData, Inc. 10.17 Distributor Agreement, dated August 16, 1990, between the Company and (1) Law-Cypress Distributing 10.18 Distributor Agreement, dated March 1, 1993, between the Company and Tech Data (1) Corporation; Modification Agreement, dated September 24, 1996; Letter Amendment, dated October16, 1996; Addendum, dated October 23, 1996 (6) 10.19 Distributor Agreement, dated July 25, 1990, between the Company and Cranel (1) Inc.
57
EXHIBIT NO. DESCRIPTION LOCATION ----------- ----------- -------- 10.20 License Agreement, dated September 10, 1996, between the Company and CAERE (1) Corporation (6) 10.21 Software License Agreement, dated October 1, 1993, between the Company and (1) Softbridge Inc. (6) 10.22 Software License Agreement, dated June 1, 1993, between the Company and Pixel (1) Translations, Inc.; Modification to Software License Agreement, dated July 1, 1995; and Modification to Software License Agreement, dated June 1, 1996 (6) 10.23 Services Contract, dated September 25, 1995, between the Company and (1) Midcontinent Business Systems, Inc. (6) 10.24 License Contract, dated July 1, 1996, between the Company and Midcontinent (1) Business Systems, Inc. (6) 10.25 NEST SDK Developer Product Distribution License Exhibit, dated July 31, 1996, (1) between the Company and Novell, Inc. 10.26 Temporary Distribution License, dated October 17, 1996, between the Company (1) and Novell, Inc. 10.27 Silicon Valley Bank Amendment to Loan and Security Agreement dated September (2) 18, 1997 10.28 Silicon Valley Bank Amendment to Loan and Security Agreement dated January 6, (3) 1998 10.29 Technology Agreement, dated February 25, 1998, between the Company and (4) Eastman Kodak Company (6) 10.30 Amendment to Software License Agreement between the Company and Pixel (4) Translations, Inc., dated June 1, 1998 10.31 Lease, dated June __, 1998, between Magellan Irvine Oaks Limited Partnership, (4) as Landlord, and the Company, as Tenant 10.32 Silicon Valley Bank Amendment to Loan and Security Agreement dated January 6, (5) 1999 10.33 OEM Purchase Agreement between the Company and Fujitsu Computer Products of (5) America, Inc., dated January 27, 1999 23.1 Consent of Deloitte & Touche LLP * 24.1 Power of Attorney (included on the Signature Page of this Annual Report on * Form 10-K) 27.1 Financial Data Schedule *
- ------------- * Filed herewith (1) Incorporated by reference to the referenced exhibit number to the Company's Registration Statement on Form S-1, Reg. No. 333-34531. (2) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. (3) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. (4) Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 1998 (5) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999. (6) Registrant has sought confidential treatment pursuant to Rule 24b-2 for portions of the referenced exhibit. EX-23.1 2 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE To the Board of Directors and Stockholders of Kofax Image Products, Inc. We consent to the incorporation by reference in Registration Statement No. 333-40325 on Form S-8 of our report dated August 9, 1999, (except for paragraph 2 of Note 5 and Note 12, as to which the date is September 9, 1999) appearing in this Annual Report on Form 10-K of Kofax Image Products, Inc. for year ended June 30, 1999. Our audits of the financial statements referred to in our aforementioned report also included the financial statement schedule of Kofax Image Products, Inc., listed in Item 14(a). This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Costa Mesa, California September 27, 1999 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS JUN-30-1999 JUL-01-1998 JUN-30-1999 25,261 18 5,958 642 1,563 33,496 6,705 4,587 37,085 5,954 0 0 0 15,803 15,327 37,085 0 38,095 0 8,794 23,143 120 0 7,208 2,514 4,694 0 0 0 4,694 0.89 0.87
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